Substitute services: a barrier to controlling long-term care expenditures

In many developed countries, long-term care expenditures are a major source of concern, leading policy makers to consider interventions to reduce costs. However, long-term care financing is highly fragmented in most countries, and hence reducing overall costs can lead to spillover effects: spending reductions on one type of care may be offset elsewhere in the system when consumers shop around for substitutes. These spillovers may be substantial, as we show using a budget change by municipalities for the most common type of publicly financed home care in the Netherlands, namely domestic help. We show that this reform led to lower consumption of this care type, but that this reduction was mitigated by offsetting changes in the consumption of three other types of home care, as these are financed through another public scheme and organized through regional single payers. Hence, the total spending reduction is far less than the effect on domestic help would suggest. This finding leads us to conclude that the fragmentation of long-term care financing limits the ability to control expenditure growth.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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