The private market for long-term nursing home care is small in the US – only about 10% of the elderly population hold a long-term care insurance policy, despite the substantial financial risk associated with needing such care. Jeffrey Brown and Amy Finkelstein (2007) argue in the Journal of Public Economics that market failure due to adverse selection cannot provide a complete explanation for the small fraction of the American population that is covered by long-term care insurance:

Long-term care represents one of the largest uninsured financial risks facing the elderly in the United States. We present evidence of supply-side market failures in the private long-term care insurance market. In particular, the typical policy purchased exhibits premiums marked up substantially above expected benefits.

It also provides very limited coverage relative to the total expenditure risk.

However, we present additional evidence suggesting that the existence of supply-side market failures is unlikely, by itself, to be sufficient to explain the very small size of the private long-term care insurance market. In particular, we find enormous gender differences in pricing that do not translate into differences in coverage, and we show that more comprehensive policies are widely available, if seldom purchased, at similar loads to purchased policies. This suggests that factors limiting demand for insurance are also likely to be important in this market.

a. How would adverse selection arise in the market for long-term care insurance?

How would moral hazard arise?

b. What is a typical substitute for long-term nursing care for the elderly population?

What might a family without the financial resources to pay for formal nursing home care do when an elderly member becomes unable to take care of herself?

Why might the grown children of an elderly person who is at risk for needing long-term care insurance want their parent to have long-term care insurance?

c. What government programs are available to cover long-term care expenditures?

Are these programs available to everyone in your country? Can the availability of such government programs affect the demand for private long-term care insurance by families who are currently ineligible for government-financed long-term care insurance?