Long-term care for the elderly involves helping individuals...

Name: Problem 8, Chapter 11: Economics
Uploaded: 2021-09-17T13:54:39-08:00
Duration: 1 min 14 s
Channel: Kaylee Mcclellan
Description: Long-term care for the elderly involves helping individuals with activities (such as bathing, dressing, and toileting) that they cannot perform for themselves. How were these needs taken care of a century ago? Explain why moral hazard and adverse selection make long-term-care insurance so expensive today that few people choose to buy it.

Long-term care for the elderly involves helping individuals with activities (such as bathing, dressing, and toileting) that they cannot perform for themselves. How were these needs taken care of a century ago? Explain why moral hazard and adverse selection make long-term-care insurance so expensive today that few people choose to buy it.

Key Concepts

Historical Informal Care

Historically, care for the elderly was largely provided by family members and local community networks. This informal caregiving system meant that relatives, neighbors, or community groups stepped in to help older adults with daily activities, in the absence of formalized or paid long-term care services or insurance products. The cultural and familial obligations of the time often meant that relying on extended family was both a social norm and an economic necessity.

Long-Term Care Insurance

Long-term care insurance is designed to cover expenses associated with care services that assist individuals with everyday activities when they are no longer able to do so independently. It represents a financial product intended to protect individuals from the high costs of extended care. However, creating affordable and sustainable insurance products for long-term care has proven challenging due to inherent risks and market dynamics.

Moral Hazard

Moral hazard in the context of long-term care insurance occurs when individuals adjust their behavior because they feel protected by insurance coverage. Knowing that some or all of their long-term care costs are covered, people might be less vigilant about health maintenance or might overuse available services, thereby increasing the overall risk and claims faced by insurers. This potential for increased utilization drives up the cost for everyone in the pool.

Adverse Selection

Adverse selection refers to the tendency for individuals who expect to need long-term care, often because of pre-existing conditions or advanced age, to be more likely to purchase long-term care insurance. Conversely, healthier individuals may forgo coverage. This imbalance results in a pool of insured individuals who are more likely to file claims, increasing the risk and the cost burden on insurance providers, and leading to higher premiums that further discourage healthy individuals from joining the pool.

Transcript

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