HEARING - U.S. Senate Special Committee on Aging

107
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1. Work with the private sector to educate the public
about the costs of long-term care and the limitations
of coverage under Medicare and medigap supplement
insurance (p. 105);
2. Encourage personal savings for long-term care through
a tax-favored Individual Medical Account (IMA) (p.
107);
3. Encourage the development of the private market for
long-term care insurance through the establishment of
a 50% refundable tax credit for long-term care
insurance premiums for persons over age 65 (up to an
annual maximum of $100) (p. 109).
The analysis and recommendations contained in the Report
with regard to long-term care coverage for the elderly suffer
from the failure to consider the adequacy of the private market
to serve consumers well and from the failure to consider the
complete array of options available. The Report asserts that
the key reason a private market for long-term care insurance had
not developed until recently is because of the absence of
consumer demand (p. 104). This explanation does not reveal the
whole story. The private market probably can not work well for
this product because of the twin concerns that have deterred the
insurance industry from offering long-term care insurance:
adverse selection and moral hazard. "Adverse selection" would
occur to the extent that those who choose to insure will have a
better-than-average chance of needing long-term care services.
A very healthy 65-year-old is far less likely to choose to
invest in long-term care insurance than an unhealthy 65-year-old
of the same financial status. Insurance companies,
understandably from a profit viewpoint, aim to select the most
healthy for coverage. "Moral hazard" occurs to the extent that
people who have long-term care coverage are less likely to