Tax Incentives and the Decision to Purchase Long-Term Care Insurance

Abstract

This paper studies the impact of the tax incentive prescribed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) on people's long-term care (LTC) insurance purchasing behavior. Using data from the Health and Retirement Study, we find that the tax incentive in HIPAA increased the take-up rate of private LTC insurance by 3.2 percentage points, or 25%, for those eligible. Nonetheless, we calculate that even an above-the-line tax deduction would not increase the overall coverage rate of seniors beyond 13%. We therefore conclude that tax incentives alone are unlikely to expand the market substantially. We also present, to our knowledge, the first estimate of the price elasticity of demand for LTC insurance of around -3.5, suggesting that demand is highly elastic, at least at the current low ownership rate.

Keywords: Long-term care, long-term care insurance, tax incentive, HIPAA, medical expenses, itemization, demand elasticity

JEL Classification: I10, I18, H20