Effect of public long-term care insurance on consumption, medical care demand, and welfare

Many governments allocate public funds to individuals who need long-term care (LTC) services as a result of chronic illnesses and functional problems. In this paper, I investigate the effects of two common eligibility criteria of LTC programs: means-tested and health-based programs. I find that publicly provided health-based LTC crowds out the medical spending among low health individuals. Furthermore, means-tested programs lead to higher initial spending on medical care and consumption goods among middle-wealth individuals. The welfare implications of these programs also depend critically upon the individuals' initial wealth and health status. Interestingly, it is possible for health-based programs to be less costly than means-tested programs. (C) 2008 Elsevier B.V. All rights reserved.