Public Financing and the Market for Long-Term Care

Concern about the effect of aging on long-term care has intensified, particularly because aging has been accompanied by several changes that spur long-term care output, including growth in demand subsidies, declining fertility rates, rising female labor-force participation, and the deregulation of entry barriers to the nursing home industry. This article summarizes our previous work on how economic forces govern the demand for and supply of care, and extends it by discussing how they are affected by public subsidies for long-term care. Aging many times may lower the demand for market care by increasing the supply of family-provided care, which substitutes for market care. This effect appears to explain important trends in the output of long-term care over the past thirty years. We document the exponential growth of public financing over the past several decades and use our previous framework to argue that part of this growth would have occurred even if eligibility for public subsidies had been held constant. Private demand growth, by raising the private price of nursing home care, provides incentives for people to qualify for public assistance and expands the share of total demand that is publicly financed. Endogenous eligibility and the private price pressure induced by aging have helped contribute to the explosion in Medicaid budgets.