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David Grabowski
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.
None
None
1 year
or
less
Under
$10K
1-2
years
$10-
25K
2-5
years
$25-
100K
More
than
5
years
$100K+
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Duration of LTC Need Total LTC Spending
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
1) Many elderly individuals require some LTC assistance
and some elderly individuals require many services
2) 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
1) 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.
hi h hU I Xβ δ ε= + +
19. Independent Variables
Xh 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
h h h hI N Xλ γ µ= + +
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…
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
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
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