Estate recovery and long‐term care insurance

• Published date: 01 August 2020
• Author: Guillem Montoliu‐Montes,Christophe Courbage
• Date: 01 August 2020
• DOI: http://doi.org/10.1111/jpet.12428

J Public Econ Theory. 2020;22:949–972. wileyonlinelibrary.com/journal/jpet © 2020 Wiley Periodicals, Inc.

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949

Received: 3 May 2019

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Accepted: 16 January 2020

DOI: 10.1111/jpet.12428

ORIGINAL ARTICLE

Estate recovery and long‐term care insurance

Christophe Courbage

1

|Guillem Montoliu‐Montes

1,2

1

Geneva School of Business

Administration, University of Applied

Sciences Western Switzerland (HES‐SO),

Geneva, Switzerland

2

Department of Actuarial Science, Faculty

of Business and Economics (HEC),

University of Lausanne, Lausanne,

Switzerland

Correspondence

Christophe Courbage, Geneva School of

Business Administration, University of

Applied Sciences Western Switzerland

(HES‐SO), Geneva 1127, Switzerland.

Email: christophe.courbage@hesge.ch

Funding information

Schweizerischer Nationalfonds zur

Förderung der Wissenschaftlichen

Forschung, Grant/Award Number:

100018_169662

Abstract

Estate recovery is a policy under which the state

recovers part of long‐term care (LTC) subsidies from

the estates of deceased beneficiaries. This paper stu-

dies the effect of estate recovery on LTC insurance

demand. This effect strongly relies on the bequest

motive since the main purpose behind purchasing

LTC insuranceis to protect bequests from the financial

costs of LTC. We find that the impact of estate

recovery on LTC insurance depends on the level of

parental bequests and on whether and how the parent

anticipates the child's preferences with respect to

informal care. More specifically, we show that estate

recovery encourages the parent to purchase LTC

insurance when his child is considered selfish or to

like providing care. However, this policy could provide

disincentives toLTC insurance purchase by the parent

if his child is considered to dislike providing informal

care. Our results also show that estate recovery

reduces and may even eliminate public support

crowding out of private LTC insurance demand.

Finally, we characterize the welfare implications of

financing LTC public support by estate recovery.

1|INTRODUCTION

The ageing of populations and, in particular, the growing number of elderly individuals in most

industrialized countries are accompanied by an increased need for long‐term care (LTC).

1

Apart

1

LTC is defined as “a range of services required by individuals with a reduced degree of functional capacity, physical or cognitive, and who are consequently

dependent for an extended period of time on help with basic activities of daily living”(Colombo, Llena‐Nozal, Mercier, & Tjadens, 2011).

from their own resources, individuals can count on three main sources for supporting and

financing these increasing LTC needs: the government, the family, and insurance.

LTC costs are, to a large extent, financed by public expenditures (Colombo, 2012, Chapter 2)

which represented on average about 1.7% of Gross Domestic Product (GDP) across Organisation

for Economic Co‐operation and Development (OECD) countries in 2015 (OECD, 2017). Pro-

jections suggest that this share is expected to at least double by 2060 (OECD, 2017). Family

plays also a major role in LTC funding. Not only does it often contribute financially to help

dependent relatives, but also a large part of LTC needs is met in the form of informal care

provided by family members, in particular children (Norton, 2016, Chapter 16). Finally, LTC

insurance markets covering the financial risks linked to LTC needs have developed but with

limited success. Explanations for this low development include the issue of long‐term risks

insurability, asymmetric information, LTC risk pricing, bias in risk perception, and crowding

out effects of public support (Brown & Finkelstein, 2009).

As a way to ensure the sustainability of public LTC financing, many policy makers and

scholars support the idea of linking LTC public budgets to the taxation of estates (e.g., Cremer,

Pestieau, & Roeder, 2016). This is especially the case as the share of inherited wealth in overall

capital accumulation has been rising since the 1970s and is expected to continue rising in the

future (Piketty & Zucman, 2014, Chapter 15). In this respect, some countries have implemented

estate recovery policies with an aim to recover public LTC subsidies from the estates of deceased

beneficiaries. These policies exist in the US and France and their implementation is currently

under discussion in Switzerland, England, and Wales.

2

Estate recovery differs from inheritance

taxation in the sense that while the later consists of a direct tax on bequests, estate recovery can

be seen as a copayment on publicly subsidized LTC, paid from the beneficiary's bequest at the

end of his life.

Another rationale for estate recovery pointed out in this paper is that it could be a mean

to enhance the purchase of private LTC insurance, and therefore a potential solution to

incomplete LTC insurance markets (Frank, 2012). In particular, estate recovery is very likely to

impact the demand for LTC insurance through a bequest motive since the main purpose behind

purchasing LTC insurance is to protect bequests from the financial costs of LTC (Pauly, 1990).

Estate recovery could also enhance LTC insurance purchase as it could attenuate the crowding

out of LTC insurance by public support. Indeed, Pauly (1990) suggests that the demand for

private LTC insurance is undermined by the availability of public support because it replaces

insurance benefits. However, estate recovery, which increases following a more generous public

support, together with parental altruism, might attenuate public support crowding out of pri-

vate LTC insurance.

Scant literature exists on the effect of estate recovery on LTC financing. Thiébaut et al.

(2012) theoretically study the impact of a hypothetical estate recovery program financing the

Allocation Personalisée d'Autonomie, the French main public LTC benefit, on informal care

supply. They show that it depends on the level of altruism of the offspring. Kapp (2006)

discusses the public policy implications of the US recovery program as an alternative for the

financing of LTC, also identifying some of the main ethical issues raised by this program. Dick

(2007) addresses the effect of the estate recovery program on discouraging potential Medicaid

beneficiaries from asking for public help. Yet, we are not aware of any work addressing the

2

See, respectively, Greenhalgh‐Stanley (2012) and Thiébaut, Ventelou, Garcia‐Peñalosa, and Trannoy (2012) for an overview of the estate recovery programs in

the US and France. See ATS (2018) and Cremer et al. (2016) for more details about the discussions in Switzerland, England, and Wales.

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COURBAGE AND MONTOLIU‐MONTES