Advantages of Long Term Care Insurance Page 5

Finally, because such a large fraction of long- term care services are now performed voluntarily by relatives, use of paid services may increase significantly once third-party financing is available. The principal effect of insurance or other such financing mechanisms is to reduce the net cost of a service. People tend to buy more of a service when it costs less out-of-pocket. In designing and financing a long- term care program, both insurance companies and the government must take such “moral hazard” into account.

In this study moral hazard is considered in two ways: first, as it affects the estimated cost of both and public financing mechanisms and, second, as it affects program design. Increases in service use, and thus cost, can be limited by requiring beneficiary cost-sharing, restricting eligibility to the severely disabled, requiring preauthorization of services, and so on.

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