Sozialökonomisches Institut der Universität Zürich
Hottingerstrasse 10, CH-8032 Zürich · Tel +41 1 634 22 70 · Fax +41 1 634 49 87 ·
http://www.soi.unizh.ch /
Prof. Dr. Peter Zweifel
Tel. direkt 01 634 37 20 · E-mail [email protected]
The Economics of Long-Term Care:
A Survey
prepared for the
European Conference on Long-Term Care
ZEW, Mannheim, 21-22 October 2005
P. Zweifel,
Mannheim
1
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
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Mannheim
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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
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Mannheim
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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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Mannheim
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2. A stylized LTC episode I
POLITICIAN
Gaining votes
INDIVIDUAL
Health, consumption
Health,
consumption
expenditure
RELATIVE
Own health,
consumption;
patient’s health
Labor
supply
Refer?
N
Y
Disclose
?
Y
N
LAY HELPER
Own health,
consumption;
patient’s health
Labor
supply
Refer?
N
Regulation,
taxes,
subsidies
Y
Ambulatory
HCE
Refer?
N
Public
LTCE
Refer?
Hospital
HCE
NURSINGHOME
Profit; patient’s
health
Refer?
LTCE
N
N
Y
Y
HOSPITAL
Volume of
services, quality
Legend:
HCE = Health Care Expenditure
LTCE = Long Term Care
Expenditure
PUBLIC SERVICE
Budget
maximization;
patient’s health
PHYSICIAN
Income, leisure;
patient’s health
Y
Y
N
Refer?
Y
P. Zweifel,
Mannheim
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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
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Mannheim
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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
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Mannheim
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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-ofpocket price relative to the price of close substitutes“
• Counter-claim: Demand for LTC is far more complex!
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Mannheim
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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
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Mannheim
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3.2 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:
U Z
dM
dL  U L 
 w Z A  

dA
U C C X dA  U C C X 
P. Zweifel,
Mannheim
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3.2 Relatives and friends as providers of LTC services II
• Reservation wage of child:
U Z
dM
dL  U L 
 w Z A  

dA
U C C X dA  U C C X 
• Benchmark is the market wage rate w
• dM/dA > 0 if UZ  0 (sufficient, since dL/dA  – 1 by assumption)
• dM/dA  0 if UZ >> 0, i.e. if caregiver strongly altruistic
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Mannheim
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3.2 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
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3.2 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
ZH
UL
j
 ZH a 
 w j  pH
1
UC


ZH: marginal productivity of caregiving (= ZA above); (1 – ): level
of coverage of LTC insurance; Z H : marginal productivity of total
LTC provided by family; H   a j H j , a productivity-weighted
total; Uw: marginal utility of wealth ( UC above); pH: opportunity
cost of providing LTC
• Increase of (1 – ) predicted to strengthen the bargaining power
of parent  moral hazard effect!
P. Zweifel,
Mannheim
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3.3 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
ZA  lower compensation required
 Net effect ambiguous!
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Mannheim
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3.4 Physicians as providers of LTC services I
• Crucial: decision to refer a case
• Modeled as a critical severity level c in Zweifel (1981, 1988):
1
EU  E U Y , I , L     U Y  s  , I  s  , L  s   F  s , s  ds  max.S .T .
0
Y  qtP
c
P   h  qr , w, s   F  s, s  ds
0
c
I    p  s,0   p  s, t    h  qr , w, s   F  s, s  ds
0
L  T  tP
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Mannheim
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3.4 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
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Mannheim
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3.4 Physicians as providers of LTC services III
• Modification for LTC cases:
Define  > 0 symbolizing transition towards LTC
  p  s,0   p  s, t  /   0
• 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
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Mannheim
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3.5 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 c  fewer referrals of LTC cases
• If the decision is to refer, the day care center and the nursing
home becomes the most frequent destinations
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Mannheim
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3.6 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
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Mannheim
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3.7 Nursing homes as providers of LTC services I
• Model by Gertler (1989) and Norton (2000) assumes profit
maximization,
max   px  p, q   r  x  x  p, q    c  q x 
p ,q
r: Medicaid reimbursement, x : capacity determined by
certificate-of-need regulation
• FOC are

 0   p  r  xp  x  0
p

 0   p  r  xq  cq  0
q
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Mannheim
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3.7 Nursing homes as providers of LTC services II
• FOC for price

 0   p  r  xp  x  0
p
• Using the elasticity of demand w.r. to private price, one has

xp
1 
r  p  x p   p 1 
,  xp :
  
x/ p
xp 

 LHS is marginal revenue of a Medicaid case
 RHS is opportunity cost in terms of marginal revenue forgone
• Solving for private price,
  xp 
p
r
 1   
xp 

 If ex,p  – 1, p exceeds r by far
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Mannheim
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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!)
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Mannheim
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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
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Mannheim
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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
P. Zweifel,
Mannheim
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