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  • 1. Income and the Utilization of Long-Term Care Services: Evidence from the Social Security Benefit Notch Gopi Shah Goda Stanford University Ezra Golberstein Harvard Medical School David C. Grabowski Harvard Medical School
  • 2. Talk Overview
    • Research Objective : Income -> LTC Utilization
    • Overview
    • Why this relationship is important
    • Potential endogeneity issue
    • Benefit “notch” as an instrument
    • Data/Methods
    • Results
    • Implications
  • 3. Projected Lifetime Need and Spending for Long-Term Care, at Age 65 Source: Kemper P, Komisar HL, and Alecxih L.  Dollar values present discounted values for individuals turning 65 in 2005. Bottom line : most people will need some LTC during their lives, but there is wide variation in how extensive these needs will be.
  • 4. Coverage for LTC
    • No universal coverage for LTC
      • Means-tested Medicaid
      • Medicare covers post-acute rehabilitative care but not long-term supportive services
    • Few people purchase private insurance
      • fewer than 10% of individuals 55+ have LTC insurance
    • Implications of coverage gap:
    • Substantial role of care from family and friends
      • at least equal in value to ALL formal spending
    • Prominent role for out-of-pocket payments
    • Medicaid as primary public payer (safety net) when private resources are exhausted
  • 5. LTC Settings/Providers
    • Potential LTC providers include family and friends, paid home care, assisted living and nursing homes
    • Individuals generally prefer services in least restrictive setting possible, suggesting large welfare effects as individuals transition across settings
      • Mattimore et al. (1997) found 30% of elderly survey respondents would rather die than enter a nursing home and an additional 26% indicated they were very unwilling to move to an institutional setting
  • 6. Role of Income
    • Many elderly individuals require some LTC assistance and some elderly individuals require many services
    • However, due to incomplete coverage, LTC represents the largest source of out-of-pocket health care costs for the elderly
      • Medicaid is a safety net
    • Strong preference for care in less restrictive settings
    • Income may be an important determinant of LTC utilization patterns among elderly recipients
  • 7. Conceptual Framework
    • Higher income is expected to lead to:
      • More paid home care
      • More nursing home care
      • Less informal care
    • However, alternate hypothesis that NH care is an inferior good. Thus, higher income would lead to:
      • Less nursing home care
  • 8. Prior Research
    • Using baseline Channeling data, higher income associated with greater probability of formal home care use and a lower probability of informal care (Kemper 1992)
    • Using NLTCS data, income statistically unrelated to NH entry, but positively related to paid home care use and negatively related to informal care (Ettner 1994)
    • Using the CPS, greater (instrumented) income was found to increase the likelihood of living alone, implying that privacy is a valued good among elderly individuals (Engelhardt et al. 2005)
  • 9. Potential Endodeneity of Income
    • Income and LTC use may be jointly determined
      • E.g., an individual in poorer health may have both lower income and higher LTC use
    • We rely on a natural experiment that generated plausibly exogenous variation in income
      • The Social Security benefits “notch”…
  • 10. Social Security Benefits Notch
    • Social Security payments are based on lifetime earnings
    • Pre-1972: neither lifetime earnings nor post-retirement payments were indexed for inflation, but rather periodically adjusted by the Congress
    • 1972: Congress provided automatic indexation of credited earnings for workers not yet retired
      • However, due to an error, earnings were doubly indexed for inflation, leading to a huge windfall for retirees from certain birth cohorts due to high rate of inflation over next several years
    • 1977: Congress passed another law to eliminate double indexation for future retirees, but those cohorts born before 1917 (near retirement in 1977) retained doubly indexed benefits under a grandfather provision
  • 11. SS Benefits Notch (cont.) Note: Each cohort’s benefits computed with identical real earnings history using the SSA’s ANYPIA program
  • 12. SS Benefits Notch (cont.)
    • The 1977 law raised the covered earnings maximum such the fraction of earnings used to calculate Average Indexed Monthly Earnings (AIME) was greater for high-income workers (with no change for low-income workers)
    • This law introduced earnings-level-by-year-of-birth variation in SS benefits
      • Notch more powerful for low-wage workers
  • 13. SS Benefits Notch as an Instrument?
    • Benefits changes under the Notch were:
      • Large and permanent
      • Unanticipated
      • Otherwise outside the control of the beneficiaries
    • Well-utilized by other economists to study the effect of income on labor supply (Krueger & Pishcke 1992), prescription drug use (Moran & Simon 2006), mortality (Snyder & Evans 2006), obesity (Cawley, Moran & Simon in press), and elderly living arrangements (Engelhardt, Gruber & Perry 2005)
  • 14. Our Contribution
    • Using the notch to instrument for Social Security income, examine the effect of income on:
      • Paid home care use
      • Informal care use
      • Nursing home use
  • 15. Data
    • AHEAD is a longitudinal survey of community-dwelling elderly born in 1923 or earlier and their spouses regardless of age
    • Baseline data were collected between October 1993 and July 1994
      • 8,222 individuals from 6,047 households
      • Due to variable concordance issues, we only use the first AHEAD wave to examine paid home care and informal care use
    • Follow-up AHEAD survey in 1995
      • Exit interviews conducted with family members for AHEAD respondents who died before follow-up
  • 16. Estimation Sample
    • Unit of analysis is person but we have multiple obs for certain households
    • SS income measured at the household level
      • We assigned household SS income based on primary beneficiary using a series of rules (Krueger & Pischke 1992; Moran & Simon 2006)
    • Sample restricted to individuals born between 1901 and 1930
    • Excluded individuals with SS income less than $100/month
    • Ultimately, our sample had 5,592 individuals from 4,146 households
  • 17. Outcomes
    • Nursing home care
      • Any use between 1993 and 1995 AHEAD waves
    • Paid home care
      • Any help related to ADL/IADL limitation over previous 4 weeks prior to 1993 AHEAD
      • Any medically-trained assistance over past 12 months prior to 1993 AHEAD survey
    • Informal care
      • Any unpaid care related to ADL/IADL limitation over 4 weeks prior to 1993 AHEAD survey
  • 18. Base Specification
    • Where:
    • U = LTC utilization for individual i in household h
    • I = annual household Social Security income
    • X = intercept and a set of exogenous controls
    • ε = residual.
  • 19. Independent Variables
    • X h encompasses:
    • Type of household
      • Male head, married or cohabiting
      • Male head, single
      • Female head, never married
      • Female head, widowed
      • Female head, divorced
    • Age of head
      • Due to collinearity with presence in notch, we enter age as a polynomial function ranging from one (linear) to three (cubic)
    • Race of the head
      • White
      • African American
      • Other race
    • Hispanic ethnicity of the head
    • Whether household located in an MSA
    • Household location based on 9 census regions
  • 20. Methods: IV Model
    • Assume SS income has the following reduced form:
    • Identifying assumption is that the Notch variable N is correlated with SS income, but not ε, the error term in the LTC utilization equation
    • Instrument:
    • Presence in the benefits notch is defined by birth during the years 1915-1917
  • 21. Methods: IV Model (cont.)
    • Previous research has suggested notch instrument much stronger for low-income beneficiaries
      • The 1977 law raised the covered earnings maximum such that greater fraction of earnings entered into AIME calculation for high-wage workers (low-wage workers unaffected)
    • Can show this by splitting sample based on education of household head…
  • 22. Specification Tests: First-Stage Estimates 11-14% increase in income for notch cohorts (relative to $9,960 mean)
  • 23. Analyses
    • We estimate probit and ivprobit models for low education group (N=2,429)
      • IV probit results robust to two-stage residual inclusion (2SRI) models
    • All analyses are weighted using the AHEAD person-level weights
    • Standard errors are adjusted for clustering based on year of birth of household head
  • 24. Summary Statistics
  • 25. Results: Any Paid Home Care Use for ADL/IADL Assistance (past 4 weeks)
  • 26. Results: Any Paid Home Care Use (past year) $1,000 increase in SS income raises likelihood of home care by 3.4 percentage pts (or 30.3%)
  • 27. Results: Any Informal Care Use (past year)
  • 28. Results: Any Nursing Home Use (past 2 yrs) $1,000 increase in SS income decreases likelihood of NH care by 3 percentage pts (or 33.6%)
  • 29. Intensive Margin
    • We also examined the amount of LTC use
      • “ NH days” outcome is unavailable for AHEAD respondents who died before follow-up (not asked in the interviews with family members)
    • Results generally consistent with results from previous slides in sign and magnitude but lack statistical precision
  • 30. Robustness Checks
    • Results generally robust to a number of alternate specifications:
      • Exclude widowed and divorced household heads with imputed birth years
      • Exclude cohorts born during the flu pandemic in 1918 and 1919
      • Limit the range of cohorts included in the study (1910-1920)
  • 31. Substitution between Types of Care
    • We found higher income decreases NH use but increases home care use
    • It is possible that individuals substitute one for the other in the context of an income shock
    • Using first two AHEAD waves, we categorize individuals into one of four categories: no LTC use, only home care use, only NH use, and both NH & home care use
    • We estimate a multinomial logit regression using the 2SRI method
  • 32. Results: Substitution between Types of Care
  • 33. Summary of Results
    • Probit and IV probit models suggest dramatically different results
    • After accounting for endogenous income, we find that an increase in income:
      • Decreases nursing home use
      • Increases the utilization of paid home care
      • Has no consistent statistically significant effect on informal care
      • Leads to some substitution away from NH care and towards paid home care
  • 34. Summary (cont.)
    • Intuition underlying the direction of bias across probit and IV probit?
      • Probit findings of negative correlation between (endogenous) income and LTC use consistent with the idea that poorer health correlated with lower income/SS benefits AND greater LTC utilization
    • What is the mechanism for shift between home health and nursing home care?
      • More income -> better health -> less need for institutional LTC
      • More income -> less Medicaid -> greater access to HCBS
      • More income -> sub away from NH care and towards home care b/c NH care is an inferior good and home care is a normal good
  • 35. Implications
    • A $1,000 increase in annual household SS income (in 2009$) leads to a 2.3 percentage point increase in the use of home care and a 2.9 percentage point decrease in the use of NH care
      • Caveat: the world has changed (PAC; ALFs, etc.), but these are meaningful estimates
  • 36. Implications (cont.)
    • The annuity value for a 65 year old male born in 1916 is 10.91, and for females is 13.33.  This value assumes a 2.9% interest rate and "Alternative 2" mortality probabilities (the middle scenario) that Social Security used in their 2007 Trustees Report
    • So a $1,200 annual increase amounts to a $13,092 lump sum for men and $15,996 for women
    • Because Social Security pays 100% of the primary earner's benefit to the surviving spouse, the correct annuity value is a joint, second-to-die annuity that pays until the second death
    • $16,000 is not a bad estimate
      • As a potential benchmark, average PDV of projected lifetime out-of-pocket LTC expenditures for individuals turning 65 in 2005 was $21,100 (Kemper et al., 2005)
  • 37. Implications (cont.)
    • Direct implications for potential Soc Sec reform…
    • Indirect implications
      • Pensions and asset income
      • Many households lost substantial dollars in the recent stock market crash
        • E.g., assisted living sector has been somewhat stagnant since crash
    • Given our piecemeal coverage of LTC and large reliance on private resources, any income shock will have major implications for long-term care utilization
      • Also may have implications for elderly health, Medicaid eligibility, LTC private insurance purchase