P. Zweifel, Mannheim1 Sozialökonomisches Institut der Universität Zürich Hottingerstrasse 10, CH-8032 Zürich · Tel · Fax · / Prof. Dr. Peter Zweifel Tel. direkt · The Economics of Long-Term Care: A Survey prepared for the European Conference on Long-Term Care ZEW, Mannheim, October 2005

P. Zweifel, Mannheim2 Outline 1.Introduction and motivation 2.A stylized LTC episode 3.The decision makers involved in an LTC episode 4.Perspectives on LTC policy 5.Summary and conclusion

P. Zweifel, Mannheim3 1. Introduction and motivation I Health care expenditure (HCE) has been rising fast in industrial countries But long-term care (LTC) expenditure has been rising even faster:  In Germany, 0.4 percent of the wage bill was earmarked for LTC insurance in 1996  Now, this rate stands at 1.7 percent  In the United States, LTC as a part of HCE was 10% in 1992 and is 9.3% as of 2003, i.e. ca. 1.3% of GDP This (growing) importance of LTC may motivate analysis

P. Zweifel, Mannheim4 1. Introduction and motivation II In addition: LTC poses a theoretical challenge  Contrary to „normal“ health care, disclosure of the condition is a problem  LTC has two aspects, (1) physical limitations (2) inability to make decisions (Alzheimer)  consistent ranking of alternatives!

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6 2. A stylized LTC episode II Organizing principle like in Zweifel and Breyer (19997) Case of LTC far more complex! (1) Individual must decide on disclosure (2) One potential caregiver is a family member (typically a daughter) (3) Another informal caregiver is a lay helper

P. Zweifel, Mannheim7 2. A stylized LTC episode III (4) The first provider of formal LTC services is a physician (5) The physician may refer the „patient“ to a hospital (6) Public service institutions also provide formal LTC services (7) The main provider of formal LTC services is the nursing home

P. Zweifel, Mannheim8 3. The decision makers involved in an LTC episode 3.1 The individual as potential demander of LTC I Norton (2000): „The theory of demand for LTC is straightforward. The most important factor is health status,..., and the out-of-pocket price relative to the price of close substitutes“ Counter-claim: Demand for LTC is far more complex!

P. Zweifel, Mannheim9 3.1 The individual as potential demander of LTC II Definition: LTC is a problem of loss of non-market productivity and/or of accountability  LTC is not a medical problem Loss of accountability calls for „choice“ of agent Family members (possibly family physicians) are best able to interpret scrambled statements of preference However, even family members are imperfect agents of „patients“  Disclosure of status risky! König and Zweifel (2005) find that willingness-to-pay of „patients“ for relief of caregiver exceeds that of “patients” for a cure

P. Zweifel, Mannheim Relatives and friends as provider of LTC services I Utility function U = U{C(L,X), L,Z} C: consumption services, C = C(X,L); X: consumption goods, L: leisure time, Z: informal care provided, Z = Z(A), A: caregiving time Income generation: Y = w(T – L – A) + M M: lump-sum payment to compensate for caregiving A Reservation wage of child:

P. Zweifel, Mannheim Relatives and friends as providers of LTC services II Reservation wage of child: Benchmark is the market wage rate w dM/dA > 0 if U Z  0 (sufficient, since dL/dA  – 1 by assumption) dM/dA 0 if U Z >> 0, i.e. if caregiver strongly altruistic

P. Zweifel, Mannheim Relatives and friends as providers of LTC services III LTC insurance likely to induce substitution of informal LTC by formal LTC (moral hazard on the part of caregiving children) Bequests can be used by parents to control child behavior Zweifel and Strüwe (1996a) show that bequests and LTC insurance provide conflicting incentives  When the introduction of compulsory LTC insurance was debated in Germany, “beneficiaries” were opposed! In Switzerland, LTC insurance (to be financed by a CHF 50 contribution by the 50 + old) Also, Zweifel and Strüwe (1996b) show that trust saving dominates LTC insurance

P. Zweifel, Mannheim Relatives and friends as providers of LTC services IV Eisen and Mager (1996) focus on strategic interactions between several family members Assuming maximization of distances from threat points, they obtain Z H : marginal productivity of caregiving (= Z A above); (1 –  ): level of coverage of LTC insurance; marginal productivity of total LTC provided by family;, a productivity-weighted total; U w : marginal utility of wealth (  U C above); p H : opportunity cost of providing LTC Increase of (1 –  ) predicted to strengthen the bargaining power of parent  moral hazard effect!

P. Zweifel, Mannheim Lay helpers as providers of LTC services Similar to family members, with two exceptions (1) Lay helpers usually do not have claim to the bequest  higher compensation required (2) Lay helpers may have higher productivity Z A  lower compensation required  Net effect ambiguous!

P. Zweifel, Mannheim Physicians as providers of LTC services I Crucial: decision to refer a case Modeled as a critical severity level c in Zweifel (1981, 1988):

P. Zweifel, Mannheim Physicians as providers of LTC services II Tradeoffs:  Increase c: Hurts the ethical objective as long as p(s,t) > p(s,0); reduces leisure time because member of patients P increases; enhances income  Increase implicit wage rate q: Hurts the ethical objective; enhances leisure because demand for first contact h(·) depends on qr, where w rate of coinsurance; enhances income since price elasticity of demand is low  Increase time spent per case t: Enhances ethical objective and income but hurts leisure

P. Zweifel, Mannheim Physicians as providers of LTC services III Modification for LTC cases: Define  > 0 symbolizing transition towards LTC Thus, the physician can do less for an LTC “patient” than a regular medical one This hurts the ethical objective  lower critical severity level c predicted

P. Zweifel, Mannheim Hospitals as providers of LTC services Dual objectives (Newhouse, 1971): (1) capacity utilization/volume; (2) quality of services provided When capacity utilization important, hospitals are expected to increase their  fewer referrals of LTC cases If the decision is to refer, the day care center and the nursing home becomes the most frequent destinations

P. Zweifel, Mannheim Public service institutions as providers of LTC services Judging from public choice literature, budget maximization is a likely objective Reputation effects may also make health outcomes of clients important Little researched because financial impact limited

P. Zweifel, Mannheim Nursing homes as providers of LTC services I Model by Gertler (1989) and Norton (2000) assumes profit maximization, r: Medicaid reimbursement, : capacity determined by certificate-of-need regulation FOC are

P. Zweifel, Mannheim Nursing homes as providers of LTC services II FOC for price Using the elasticity of demand w.r. to private price, one has  LHS is marginal revenue of a Medicaid case  RHS is opportunity cost in terms of marginal revenue forgone Solving for private price,  If e x,p  – 1, p exceeds r by far

P. Zweifel, Mannheim22 4. Perspectives on LTC policy To be clarified: are there externalities that might justify public intervention? Yes, to the extent that rich members of the society may free-ride on donations of other to prevent poverty among the old However, this does not call for public production of LTC (such as public nursing homes) It may call for public (compulsory) finance However, mandatory LTC insurance may not be the preferred solution (moral hazard!)

P. Zweifel, Mannheim23 5. Summary and conclusion I Demand and supply of LTC services is more complex than commonly acknowledged One reason is the initial node of figure 1, where the potential LTC case decides about disclosure Family members are far from perfect agents but still may have a high critical severity level governing referral Physicians as agents have two more decision variables, viz. the implicit wage rate, and time spent per case The prediction is that for LTC cases, their critical severity level is lower than for regular patients

P. Zweifel, Mannheim24 5. Summary and conclusion II Physicians’ referral decisions are crucial for LTC expenditure because LTC “patients” may end up in hospital Nursing homes may react to changes in public payment in counter-intuitive ways Whether mandatory LTC insurance dominates e.g. a voucher solution is a matter of future research