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Article

Norman Bannenberg, Martin Karlsson, and Hendrik Schmitz

Long-term care (LTC) is arguably the sector of the economy that is most sensitive to population aging: its recipients are typically older than 80 years whereas most care providers are of working age. Thus, a number of ongoing societal trends interact in the determination of market outcomes in the LTC sector: trends in longevity and healthy life expectancy interact with changing family structures and norms in shaping the need for services. The supply side is additionally affected by changes in employment patterns, in particular regarding the transition into retirement, as well as by cross-regional imbalances in demographic and economic conditions. The economic literature on long-term care considers many of these issues, aims at understanding this steadily growing sector, and at guiding policy. Key economic studies on long-term care address determinants of the demand for long-term care, like disability and socio-economic status; the two most important providers: informal family caregivers and nursing homes; and the financing and funding of LTC.

Article

Martin Karlsson, Tor Iversen, and Henning Øien

An open issue in the economics literature is whether healthcare expenditure (HCE) is so concentrated in the last years before death that the age profiles in spending will change when longevity increases. The seminal article “aging of Population and HealthCare Expenditure: A Red Herring?” by Zweifel and colleagues argued that that age is a distraction in explaining growth in HCE. The argument was based on the observation that age did not predict HCE after controlling for time to death (TTD). The authors were soon criticized for the use of a Heckman selection model in this context. Most of the recent literature makes use of variants of a two-part model and seems to give some role to age as well in the explanation. Age seems to matter more for long-term care expenditures (LTCE) than for acute hospital care. When disability is accounted for, the effects of age and TTD diminish. Not many articles validate their approach by comparing properties of different estimation models. In order to evaluate popular models used in the literature and to gain an understanding of the divergent results of previous studies, an empirical analysis based on a claims data set from Germany is conducted. This analysis generates a number of useful insights. There is a significant age gradient in HCE, most for LTCE, and costs of dying are substantial. These “costs of dying” have, however, a limited impact on the age gradient in HCE. These findings are interpreted as evidence against the red herring hypothesis as initially stated. The results indicate that the choice of estimation method makes little difference and if they differ, ordinary least squares regression tends to perform better than the alternatives. When validating the methods out of sample and out of period, there is no evidence that including TTD leads to better predictions of aggregate future HCE. It appears that the literature might benefit from focusing on the predictive power of the estimators instead of their actual fit to the data within the sample.

Article

Jun Li and Edward C. Norton

Pay-for-performance programs have become a prominent supply-side intervention to improve quality and decrease spending in health care, touching upon long-term care, acute care, and outpatient care. Pay-for-performance directly targets long-term care, with programs in nursing homes and home health. Indirectly, pay-for-performance programs targeting acute care settings affect clinical practice for long-term care providers through incentives for collaboration across settings. As a whole, pay-for-performance programs entail the identification of problems it seeks to solve, measurement of the dimensions it seeks to incentivize, methods to combine and translate performance to incentives, and application of the incentives to reward performance. For the long-term care population, pay-for-performance programs must also heed the unique challenges specific to the sector, such as patients with complex health needs and distinct health trajectories, and be structured to recognize the challenges of incentivizing performance improvement when there are multiple providers and payers involved in the care delivery. Although empirical results indicate modest effectiveness of pay-for-performance in long-term care on improving targeted measures, some research has provided more clarity on the role of pay-for-performance design on the output of the programs, highlighting room for future research. Further, because health care is interconnected, the indirect effects of pay-for-performance programs on long-term care is an underexplored topic. As the scope of pay-for-performance in long-term care expands, both within the United States and internationally, pay-for-performance offers ample opportunities for future research.

Article

Courtney Van Houtven, Fiona Carmichael, Josephine Jacobs, and Peter C. Coyte

Across the globe, the most common means of supporting older disabled adults in their homes is through “informal care.” An informal carer is a family member or friend, including children or adults, who help another person because of their illness, frailty, or disability. There is a rich economics literature on the direct benefits of caregiving, including allowing the care recipient to remain at home for longer than if there was no informal care provided. There is also a growing literature outlining the associated costs of care provision. Although informal care helps individuals with disabilities to remain at home and is rewarding to many carers, there are often negative effects such as depression and lost labor market earnings that may offset some of these rewards. Economists have taken several approaches to quantify the net societal benefit of informal care that consider the degree of choice in caregiving decisions and all direct and indirect benefits and costs of informal care.

Article

Alexandrina Stoyanova and David Cantarero-Prieto

Long-term care (LTC) systems entitle frail and disabled people, who experience declines in physical and mental capacities, to quality care and support from an appropriately trained workforce and aim to preserve individual health and promote personal well-being for people of all ages. Myriad social factors pose significant challenges to LTC services and systems worldwide. Leading among these factors is the aging population—that is, the growing proportion of older people, the main recipients of LTC, in the population—and the implications not only for the health and social protection sectors, but almost all other segments of society. The number of elderly citizens has increased significantly in recent years in most countries and regions, and the pace of that growth is expected to accelerate in the forthcoming decades. The rapid demographic evolution has been accompanied by substantial social changes that have modified the traditional pattern of delivery LTC. Although families (and friends) still provide most of the help and care to relatives with functional limitations, changes in the population structure, such as weakened family ties, increased participation of women in the labor market, and withdrawal of early retirement policies, have resulted in a decrease in the provision of informal care. Thus, the growing demands for care, together with a lower potential supply of informal care, is likely to put pressure on the provision of formal care services in terms of both quantity and quality. Other related concerns include the sustainable financing of LTC services, which has declined significantly in recent years, and the pursuit of equity. The current institutional background regarding LTC differs substantially across countries, but they all face similar challenges. Addressing these challenges requires a comprehensive approach that allows for the adoption of the “right” mix of policies between those aiming at informal care and those focusing on the provision and financing of formal LTC services.

Article

Matteo Lippi Bruni, Irene Mammi, and Rossella Verzulli

In developed countries, the role of public authorities as financing bodies and regulators of the long-term care sector is pervasive and calls for well-planned and informed policy actions. Poor quality in nursing homes has been a recurrent concern at least since the 1980s and has triggered a heated policy and scholarly debate. The economic literature on nursing home quality has thoroughly investigated the impact of regulatory interventions and of market characteristics on an array of input-, process-, and outcome-based quality measures. Most existing studies refer to the U.S. context, even though important insights can be drawn also from the smaller set of works that covers European countries. The major contribution of health economics to the empirical analysis of the nursing home industry is represented by the introduction of important methodological advances applying rigorous policy evaluation techniques with the purpose of properly identifying the causal effects of interest. In addition, the increased availability of rich datasets covering either process or outcome measures has allowed to investigate changes in nursing home quality properly accounting for its multidimensional features. The use of up-to-date econometric methods that, in most cases, exploit policy shocks and longitudinal data has given researchers the possibility to achieve a causal identification and an accurate quantification of the impact of a wide range of policy initiatives, including the introduction of nurse staffing thresholds, price regulation, and public reporting of quality indicators. This has helped to counteract part of the contradictory evidence highlighted by the strand of works based on more descriptive evidence. Possible lines for future research can be identified in further exploration of the consequences of policy interventions in terms of equity and accessibility to nursing home care.

Article

Life-cycle choices and outcomes over financial (e.g., savings, portfolio, work) and health-related variables (e.g., medical spending, habits, sickness, and mortality) are complex and intertwined. Indeed, labor/leisure choices can both affect and be conditioned by health outcomes, precautionary savings is determined by exposure to sickness and longevity risks, where the latter can both be altered through preventive medical and leisure decisions. Moreover, inevitable aging induces changes in the incentives and in the constraints for investing in one’s own health and saving resources for old age. Understanding these pathways poses numerous challenges for economic models. The life-cycle data is indicative of continuous declines in health statuses and associated increases in exposure to morbidity, medical expenses, and mortality risks, with accelerating post-retirement dynamics. Theory suggests that risk-averse and forward-looking agents should rely on available instruments to insure against these risks. Indeed, market- and state-provided health insurance (e.g., Medicare) cover curative medical expenses. High end-of-life home and nursing-home expenses can be hedged through privately or publicly provided (e.g., Medicaid) long-term care insurance. The risk of outliving one’s financial resources can be hedged through annuities. The risk of not living long enough can be insured through life insurance. In practice, however, the recourse to these hedging instruments remains less than predicted by theory. Slow-observed wealth drawdown after retirement is unexplained by bequest motives and suggests precautionary motives against health-related expenses. The excessive reliance on public pension (e.g., Social Security) and the post-retirement drop in consumption not related to work or health are both indicative of insufficient financial preparedness and run counter to consumption smoothing objectives. Moreover, the capacity to self-insure through preventive care and healthy habits is limited when aging is factored in. In conclusion, the observed health and financial life-cycle dynamics remain challenging for economic theory.