The welfare effects of co-payments in long term care

Insight in the lifecycle dynamics of long term care costs is important to understand the effect of policy changes, such as the design of co-payments, on the costs and welfare across income and wealth groups. Modeling long term care expenditures over the lifecycle is challenging because of their very uneven distribution. We use a flexible non-parametric nearest-neighbor approach to estimate lifecycle paths of long term care spending. We apply this approach to an extensive administrative data set for the entire Dutch elderly population. The estimated paths are used as inputs in a stochastic lifecycle decision model for singles at the retirement age. We use the model to analyze the Dutch co-payment system. In this system, co-payments are income- and wealth-dependent. To analyze the effects on the distribution of LTC payments and welfare across income and wealth groups, we perform two counter-factual analyses. We replace the current system by either a co-payment that only depends on income, or a flat-rate co-payment, independent of financial means.
We find that the low and middle income and wealth groups use substantially more long term care over their life than the high income and wealth groups. The Dutch system of income- and wealth-dependent co-payments offers substantial protection against high costs for these groups, especially compared to a flat-rate co-payment. The middle groups benefit the most from the current system: as they do not qualify for income support, a flat-rate co-payment system would mainly burden them. Only the group with the highest financial means would benefit from the introduction of a flat-rate co-payment. The main findings are robust to a number of sensitivity tests, such as excluding a bequest motive and including health-state dependent utility.