Long-term care is expensive. In 2012, the average annual cost of a semi-private room in a nursing home was $81,030, while home health care averaged $21 an hour. Medicare--the health insurance program for the elderly--provides only limited coverage, while Medicaid only covers the long-term care costs of the indigent. Despite the substantial financial risk, few single individuals over 65 buy long-term care insurance--a behavior sometimes called the long-term care insurance puzzle. This brief summarizes a new study that models the lifetime risk of requiring long-term care. The model can be used to estimate how many single individuals should optimally buy long-term care insurance, yielding some surprising results. The first section describes the long-term care insurance puzzle. The second section explains the methodology. The third section presents the results. They show that previous research understates the risk of going into care but overstates the average duration of stay of those ever institutionalized. The use of corrected care status transition probabilities reduces estimates of the value of insurance and strengthens the claim of previous research that most single individuals should not buy insurance given the availability of Medicaid. Furthermore, many short-duration stays in nursing homes are covered by Medicare. Excluding such stays further reduces the value of insurance. The final section concludes that these findings partially solve the long-term care insurance puzzle.
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