Tax incentives and the decision to purchase long-term care insurance

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34 Scopus citations


This paper studies the impact of the tax incentive prescribed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) on individuals' long-term care insurance purchasing behavior. Using data from the Health and Retirement Study, we find that the tax incentive in HIPAA increased the take-up rate of private LTC insurance by 3.3 percentage points, or 25%, for those eligible. Despite this seemingly strong response, our results imply that even an above-the-line tax deduction would not increase the coverage rate of seniors beyond 13%, indicating that tax incentives alone are unlikely to expand the market substantially. We also present, to our knowledge, the first estimate of the price elasticity of demand for LTC insurance of around - 3.9, suggesting that demand is highly elastic at the current low ownership rate. Finally, we evaluate the net fiscal impact of the tax incentive and find that the tax deductibility of LTC insurance premiums leads to a net revenue loss for the government, as the reduced tax revenue from granting the tax incentive exceeds the savings in Medicaid's LTC expenditures.

Original languageEnglish
Pages (from-to)296-310
Number of pages15
JournalJournal of Public Economics
Issue number1-2
StatePublished - Feb 2009

Bibliographical note

Funding Information:
The authors are grateful to the editor, an anonymous referee, Sebastian Galiani, Lee Benham, Marcus Berliant, Steve Buccola, Edward Greenberg, Jeremy Jackson, Mindy Marks, Bruce Petersen, Michael Plotzke and Paul Rothstein for helpful comments and suggestions. All errors are our own. Partial financial support from the CRES, Washington University is acknowledged.


  • Demand elasticity
  • Fiscal impact
  • Itemization
  • Long-term care
  • Long-term care insurance
  • Medical expenses
  • Tax incentive

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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