Old, frail, and uninsured: Accounting for puzzles in the U.S. long-term care insurance market

Half of U.S. 50-year-olds will experience a nursing home stay before they die, and a sizable fraction will incur out-of-pocket expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI) and many applicants are denied coverage by insurers because they are frail. This paper proposes an equilibrium optimal contracting framework that features demandside frictions due to Medicaid and supply-side frictions due to adverse selection, market power and administrative costs of paying claims. We find that low LTCI take-up rates and rejections among poor individuals are due to Medicaid. Supply-side frictions, however, are responsible for rejections among frail affluent individuals and both types of frictions matter for those in the middle class.