The impact of state tax subsidies for private long-term care insurance on coverage and Medicaid expenditures

In spite of the large expected costs of needing long-term care, only 10–12% of the elderly population has private insurance coverage. Medicaid, which provides means-tested public assistance and pays for almost half of long-term care costs, spends more than $100 billion annually on long-term care. In this paper, I exploit variation in the adoption and generosity of state tax subsidies for private long-term care insurance to determine whether tax subsidies increase private coverage and reduce Medicaid's costs for long-term care. The results indicate that the average tax subsidy raises coverage rates by 2.7 percentage points, or 28%. However, the response is concentrated among high income and asset-rich individuals, populations with low probabilities of relying on Medicaid. Simulations suggest each dollar of state tax expenditure produces approximately $0.84 in Medicaid savings, over half of which funnels to the federal government.

Research Highlights►Tax subsidies for private long-term care insurance were implemented to promote coverage and reduce Medicaid expenditures for long-term care. ►The presence of tax subsidies increases coverage rates by 2.7 percentage points, or 28%. ►The response is concentrated among high income and asset-rich individuals. ►Simulations suggest each dollar of state tax expenditure produces approximately $0.84 in Medicaid savings.