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The Impact of Policy Incentives on LongTerm Care Insurance and Medicaid Costs: Does Underwriting Matter?

Objective: To test whether underwriting modifies the effect of statebased incentives on individuals’ purchase of longterm care insurance.

Data Source: Health and Retirement Study (HRS), 1996–2012.

Study Design: We estimated differenceindifference regression models with an interaction of state policy indicators with individuals’ probabilities of being approved for longterm care insurance.

Data Extraction: We imputed probabilities of underwriting approval for respondents in the HRS using a model developed with underwriting decisions from two U.S. insurance firms. We measured the elasticity response to longterm care insurance price using changes in simulated aftertax price as an instrumental variable for premium price.

Principal Findings: Tax incentives and Partnership programs increased insurance purchase by 3.62 percentage points and 1.8 percentage points, respectively, among those with the lowest risk (highest approval probability). Neither had any statistically significant effects among the highest risk individuals.


Conclusions: We show that ignoring the effects of underwriting may lead to biased estimates of the potential state budget savings of longterm care insurance tax incentives. If the private market is to play a role in financing longterm care, policies need to address the underlying adverse selection problems.

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