Impacts of long-term elderly health care funding system reforms on behavioural and health outcomes.

The main objective of the proposed project is to study detailed economic and health outcomes resulting from governmental provision of financial support to assist the elderly pay for their long-term care. The long-term care is defined as the care for individuals who require support in many aspects of their lives for a prolonged time period.
The elderly in the UK often face financial risks caused by expensive long-term elderly care. Individuals often fail to accumulate a sufficient amount of assets due to the high levels of uncertainty regarding when and in what way they would develop the need for care. It is also impossible to predict for how long one would need care. To make the matter more complex, the long-term healthcare insurance market is virtually non-existent. These circumstances often present the elderly with the need to finance their care by selling their own properties (Dilnot commission proposals, 2012).
In response to growing concerns, the UK recently announced the Dilnot commission proposals (2012). The two main pillars of the proposals include i) capping the long-term care cost at (approximately 35,000 pounds) for everybody and ii) increasing the asset threshold for the means tested help from the current value of 23,250 pounds to 100,000 pounds. This means that for every individual in UK, the highest cost one needs to pay out of their pocket is 35,000 pounds. Once they spend 35,000 pounds on care, an individual essentially receives care for free. The only cost one would need to pay includes daily living expenditures. The commission estimate the cost at 1.7 billion pounds.
On the one hand, these measures would provide financial assistance to the elderly themselves or families who are providing the care. On the other hand, however, the increasing financial support from the government could generate various unintended responses, which in turn may drastically increase the cost of elderly care above and beyond that which is currently estimated. In other words, if the elderly in the UK are currently limiting their use of long-term care due to its high cost, increased cost coverage may increase their usage beyond what the commission members had expected. This is a classical moral hazard problem in the insurance literature. Not being able to take account of all the behavioural effects seems to be a valid concern. The Dilnot commission indeed raises this issue and clearly states in their report that their simulated cost fails to address these potential behavioural responses.
Despite their importance, evidence for these potential responses is scarce. The current research proposes exactly to fill this gap in the literature by studying other regions/countries that have implemented funding systems that allow us to study these behavioural responses, then applying these to the UK to estimate changes in overall resource use and health benefits, both of which may increase or decrease. Examples of these responses include i) the probability of using formal care provided by people other than family members, ii) the duration of stay at elderly residences may also increase, perhaps as they start using the service earlier on. iii) We are also uncertain as to whether length of life would be affected by the usage of formal care. At the same time, however, having affordable care may reduce the physical and emotional burden faced by informal care takers, who typically are family members. This, therefore, implies that additional potential effects include those on labour supply as well as health outcomes of family members.
The proposed research will mainly be undertaken at Lancaster University, with mentors Professor Bruce Hollingsworth, Professor Ian Walker and the Division of Health Research.

In order to carry out the project, a natural experimental approach will be employed by exploiting the exogenous variation in the price of long-term formal elderly care induced by the introduction of policies in Scotland and Germany.
The identification strategy involves comparing a group of affected individuals (i.e. treatment group) to another group of otherwise very similar individuals who are not under the influence of the policy (i.e. control group).
The econometric specifications that are likely to be used during the project include OLS, probit/logit models as well as single-spell and multiple-spell duration analysis framework.
The two policies that will be used for the analysis are the 2002 Community Care and Health Act in Scotland and the 1995 German policy that introduced a universal long-term health insurance system. The Scottish policy enforced that the cost for personal care, which was previously paid by the elderly themselves, be abolished completely regardless of the care settings. This implies that cost incurred for personal care provided in residential care homes as well as individual houses are all covered. Available datasets include Home care, which is collected by Scottish Executive, as well as Scottish Health Survey and Scottish Household Survey commissioned by Scottish government.
The German policy introduced mandatory public or private LTC insurances for the entire population of 82 million. 90% of the population belong to the public system and their employers each pay contributions equal to 0.85% of each employee's gross wages or salary. Introduction of long-term care insurance protects individuals from having to face large sum of cost at the end of their lives. Such a system may ensure individuals to accumulate needed care cost throughout their working lives, reducing the potential cost for the government. Datasets for the analysis is German Socio Economic Panel Study is provided by the German Institute for Economic Research.

The proposed project directly contributes to the current debate in the UK on how to create a sustainable long-term care funding system that preserves the quality of formal care and the integrity of the UK elderly.
When designing a new and successful funding system, it is essential that the policy makers are aware of all the unintended consequences on behavioural and health outcomes. This is because these outcomes may potentially increase the cost of providing long-term care to the population beyond what the commission members had expected.
The contribution of the project is not limited to the UK audience. Many OECD countries are currently facing the need to reform their funding systems. This is due to the rapidly aging population as we as low fertility rates experienced in many countries. Moreover, female labour supply has been increasing since the 1970s and this induces women to delayed giving birth. All these factors contribute to increasing demand for formal long-term care, but reduced supply of formal, and more importantly, informal care takers, who are usually the family members of the elderly.
Despite the urgent need for evidence, hardly any studies are conducted on how financial incentives related to long-term elderly care affects individual behaviour and health outcomes. The limited evidence mainly investigates the US cases. It is essential that studies be conducted outside of the US to ensure applicability of findings to the other countries that operate very different funding and health care systems to those of the US.
In addition to the contributions discussed above, the interdisciplinary nature of the proposed project contributes to the literature in many academic fields. Please see the "Academic Beneficiaries" section for a more detailed discussion.