EUROPEAN PAPERS ON THE NEW WELFARE

Health and Ageing: The Case for Long-Term Care

5. Nature of Long-term Care Risk

The insurability of a risk depends on the nature of the risk, especially on the insurer’s ability to correctly price this risk. From this point of view, long-term care carries three major risks.
Firstly, it involves the risk of escalating costs. According to some experts, an extension of lifespan goes hand in hand with an extension of the amount of life spent with a disability, i.e. in a situation of total or partial loss of autonomy. Long-term care is an emerging risk whose total cost will increase more rapidly than national wealth. However, empirical studies do not currently confirm this risk:
• work based on a comparison of several French statistical sources by the INED and INSERM research institutes nonetheless shows that this fear has not been realised, and that we are not actually experiencing a pandemic of disability, particularly severe disability ; in actual fact, over the past 20/25 years we see that life expectancy without loss of autonomy has continued to rise; this is more distinct for life expectancy without severe loss of autonomy than for life expectancy without loss of ongoing functional autonomy, more distinct for men than for women and more distinct for the less elderly than for the very elderly13;
• moreover, prolonging current trends, forecasts concerning nursing of dependent persons point to a potential source of reduced demand because of the larger increase in longevity of men compared to women, which will diminish the number of women standing alone and increase the number of dependent women benefiting from the support of their spouse14;
• the same behaviours are observed at international level: there are as many countries where the number of old disabled people grows more quickly (cf. Belgium, Japan, Sweden) as countries where it grows less quickly (cf. Italy, France, USA)15.
The second major risk of long term care is the risk of adverse selection. In fact, the risk is real that the only people taking out long-term care insurance policies are people who know that they have a high risk of losing their autonomy. This risk of adverse selection is not abstract. It has been observed that people buying long-term care insurance contracts have a higher probability of becoming disabled than those who do not buy such contracts16, and people who discontinue their contracts have a much lower probability of becoming disabled than those who do not17.
The third major risk of long term care is that of moral hazard. The perception of long-term care as a risk is a very recent phenomenon. It has less to do with the increasing wealth of society than with the rural exodus and the desire for autonomy of both parents and children, with the result that elderly parents are less and less likely to live under the same roof as their children. This development is certainly nearing its end, but it highlights the point to which the idea of loss of autonomy is determined by the social and individual perception that we have of such loss. There is no reason why this perception should stabilise over the next few years. It is even less likely to settle down given that the criteria for loss of autonomy are relatively vague and susceptible to widely varying interpretations depending on the social climate — in future we may consider that having trouble taking a bath constitutes a loss of autonomy in bathing etc. The major escalation in handicap allowances, which are still seeing double-digit growth in developed countries, independently of the actual state of health of the populations involved, is a good illustration of what could happen in the future with long-term care. If this risk has not yet tended to materialise for long-term care, it is because the stakes until now have been low. Once long-term care becomes a challenge for society and has its own dedicated rights and laws etc., the risk of ex post escalation of the content of long-term care insurance contracts signed years before, especially through court decisions, will clearly become a reality. This will happen on three levels:
• the point at which one is considered to have lost autonomy,
• how severe the loss of autonomy is considered to be,
• the level of assistance considered to be normal in relation to a certain degree of loss of autonomy.
In cases where the condition involved is not physiological (e.g. severe rheumatism, physical handicap etc.), the development of neuropsychiatric criteria may eventually reduce the extent of this moral hazard, because they would better anchor the ability to carry out activities of daily life to objective pathological data.

6. Insurance Products Tailored to this Risk

Economic theory teaches us that, in order to reduce the risk of anti-selection where information is not complete, the principal, which in this case is the insurer, should either:
• obtain private information regarding the agent, in this case the policyholder, in order to be able to distinguish between policyholders and vary prices accordingly,
• encourage the agent to come forward himself with a credible indication of his quality as a policyholder, on the basis of which it will be possible to distinguish a price,
• put a quantitative ceiling on individual risks in order to contain the overall amount of risk and to use a single price that does not dissuade good risks too much,
• offer non selective contracts only to insurees who accept contracting when the risk of losing autonomy is still random (for example before retirement),
• adopt a law making long term care insurance compulsory.
As current experiences around the world have shown, all five techniques are used around the world, sometimes at the same time in the same country. Medical questionnaires to identify substandard risks, to which an extra premium is applied depending on the long-term prognosis of the condition, are current practices. Fixed age limits for purchasing policies are often included, generally set at 75 in France for example. Waiting periods are also imposed, lasting one year in the case of loss of autonomy following an illness and three years in the case of neurodegenerative disease in France for example. Furthermore, insurers are putting ceilings on their individual commitment. Finally, compulsory policies are being attentively considered, especially in Europe: Germany has adopted a public compulsory scheme and France is discussing a compulsory scheme.
As for the risk of moral hazard, this probably constitutes the greatest challenge for long-term care insurance. The classic solutions recommended by economic theory, namely the sharing of the risk with the agent, control checks, comparative competition, underwriting renewable contracts and merging with the agent, are either not efficient enough (cf. control checks) or prove difficult or even impossible in practice (cf. renewable contracts or merging with the agent) for long-term care. The most recent economic theory developed by Laffont-Tirole18 nevertheless shows that in such a case it is optimal for the principal, i.e. the insurer, if he does not want to be the residual claimant, to use “fixed-price” contracts that attribute a fixed sum to the agent, leaving him to spend it on the necessary care at his own discretion. This contrasts with “cost-plus” type contracts, which reimburse all of the costs exhibited by the agent and which are in fact suboptimal because of the incentive they provide for moral hazard.
The two types of contracts, ‘fixed price’ versus ‘cost plus’ contracts are well illustrated respectively by the French and the American models whose characteristics are set out in the table below. It seems that the dynamism and the profitability of the French model confirm the superiority of the ‘fixed price’ contracts.

Table 4
trainar-tab-4.gif

Of course, the respective performances of the French and the American models are related not only to type of contract (‘fixed price’ or ‘cost plus’) but also to the design of the contracts (‘simple’ or ‘open’). In this respect one may argue that the successful experience of the French market is to be related to the simplicity of the supplied products. Intellectually, the openness of American contracts, with their multiple options, seems more attractive because of their being better able to adapt to individual needs of insurees. But, commercially, the simplicity of the French contracts, with their limited options but their payments proportional to premiums and loss of autonomy, cover the risks the risks better while making the choice of insurees easier. The aim of these products is to be simple and clearly comprehensible to all potential policyholders while the multiple contract options providing for reimbursement of assistance costs are difficult to understand, because they are difficult to imagine for clients who are, by definition, in good health and totally autonomous when they are making their choice. In fact, as the German experience has shown the large majority of policyholders prefer a fixed-sum payment to a cost reimbursement, even if the fixed-sum payment is twice as low as the reimbursement limit for assistance costs.
Long-term care insurance is a potentially expanding market, even if expansion does not always occur universally. It is important that governments do not pre-empt this market, by offering public guarantees for the future, and that sufficient room for manoeuvre is left to insurance companies to allow them to be innovative and to design products tailored to this very specific demand.

13 Cf. Cambois, E., Clavel, A. and Robine, J.M. (2006): “L’espérance de vie sans incapacité continue d’augmenter”, Solidarité et Santé, No. 2.
14 For the case of France, cf. Duée, M. and Rebillard, C. (2004) : “La dependence des personnes âgées : une projection à long terme”, INSEE Working Paper, No. G2004/02.
15 Cf. Lafortune, G. and Balestat, G. (2007) : “Trends in Severe Disability Among Elderly People”, OCDE, document de travail sur la santé No. 26, et Jacobzone, S. (2000): “Santé et vieillissement: les perspectives de prise en charge de la dépendance”, ISUMA, Vol. 1, No. 2.
16 Cf. Finkelstein, A. and McGarry, K. (2003): “Private Information and its Effect on Market Equilibrium: Evidence from Long Term Care Insurance”, document de travail du NBER No. 9957.
17 Cf. Finkelstein, A., McGarry, K. and Sufi, A. (2005): “Dynamic Inefficiencies in Insurance Markets: Evidence from Long Term Care Insurance”, document de travail du NBER No. 11039.
18 Cf. Laffont, J-J. and Tirole, J. (1993): A Theory of Incentives in Procurement and Regulation, MIT Press.

References
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Becker, G., Philipson, T.J. and Soares, R.R. (2005): “The Quantity and Quality of Life and the Evolution of World Inequality”, American Economic Review, March.

Becker, G. and alii (2005) and Bourguignon, F. and Morrisson, C. (2002) : “Inequality Among World Citizens: 1820-1992”, American Economic Review, September.

Cambois, E., Clavel, A. and Robine, J.M. (2006): “L’espérance de vie sans incapacité continue d’augmenter”, Solidarité et Santé, No. 2.

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European Commission (2006): The Impact of Ageing on Public Expenditures (2004-2050), Economic Policy Committee.

Finkelstein, A. and McGarry, K. (2003): “Private Information and its Effect on Market Equilibrium: Evidence from Long Term Care Insurance”, document de travail du NBER No. 9957.

Finkelstein, A., McGarry, K. and Sufi, A. (2005): “Dynamic Inefficiencies in Insurance Markets: Evidence from Long Term Care Insurance”, document de travail du NBER No. 11039.

Laffont, J-J. and Tirole, J. (1993): A Theory of Incentives in Procurement and Regulation, MIT Press.

Lafortune, G. and Balestat, G. (2007): “Trends in Severe Disability Among Elderly People”, OCDE, document de travail sur la santé No. 26, et Jacobzone, S. (2000): “Santé et vieillissement: les perspectives de prise en charge de la dépendance”, ISUMA, Vol. 1, No. 2.

Lakdawalla, D.N. and Philipson, T. (2002): “The Rise in Old-Age Longevity and the Market for Long-Term Care”, American Economic Review, Vol. 92, No. 1.

Lakdawalla, D.N., Bhattacharya, J. and Goldman, D.P. (2004): “Are the Young Becoming More Disabled? Rates of Disability Appear to Be on the Rise Among People Ages Eighteen to Fifty-Nine, Fuelled by a Growing Obesity Epidemic”, Health Affairs, Vol. 23, No. 1, January/February.

Robine, J.M. (2007): current issue.

United Nations (2006): World Population Prospects: 2006 Revision.


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