Formal Long-Term Care Subsidies, Informal Care, and Medical Expenditures∗

This paper provides empirical evidence on the impacts of government reimbursement of longterm care. We apply a regression discontinuity design using administrative data from South Korea to estimate the impact of subsidies for formal home and institutional care on informal care use and medical expenditures. These subsidies lead to increases in formal long-term care utilization, even accounting for crowd out of private spending. Our main finding is that the benefits of home and facility care are heterogeneous across physical function level and therefore setting policy accordingly has the potential to dramatically reduce medical expenses. We also find that formal long-term care is not a strong substitute for informal long-term care at the extensive margin. Specifically, among individuals who are partially dependent for some activities of daily living (ADLs), we find that increased use of formal home care has no impact on the use of informal care at the extensive margin or on medical expenses. Among individuals who are partially dependent for several ADLs, we find that increased use of institutional care leads to reductions in informal care and medical expenses. Among individuals who are completely dependent for several ADLs, we find that substitution of home care for institutional care leads to substantial decreases in medical spending. From a policy perspective, these results suggest that publicly financed long-term care may have limited impact among the more able, and that home care may be both more cost effective and beneficial than institutional care for the least able. ∗We would like to thank Douglas Almond, Bentley MacLeod, and Cristian Pop-Eleches for their invaluable guidance and support. We also thank Janet Currie, Olle Folke, Wojciech Kopczuk, Soonman Kwon, Benjamin Marx, Christine Pal, Miguel Urquiola, Till von Wachter and seminar participants at Columbia University, Seoul National University, and Yonsei University for useful comments. We thank Taewha Lee of Yonsei University for the opportunity to participate in the project “Impact Analysis of Long-Term Care Insurance,” initiated and funded by the Ministry of Health and Welfare, Korea, of which this research is a part. Wilfredo Lim gratefully acknowledges support from the Sasakawa Young Leaders Fellowship Fund during the initial stages of this research. All errors are our own. †Kim: Department of Economics, Columbia University, 420 West 118th Street, New York, NY 10027 (email: [email protected]); Lim: Department of Economics, Columbia University, 420 West 118th Street, New York, NY 10027 (email: [email protected]).