Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Eliciting the demand for long term care insurance: a discrete choice modeling approach Rinaldo Brau, Università di Cagliari-Department of Economics and CRENoS Matteo Lippi Bruni, Dipartimento di Scienze Economiche, Università di Bologna Anna Maria Pinna, Università di Cagliari-Department of Economics and CRENoS European Conference on Long-Term Care : ZEW Mannheim, October , 2005

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Aim and main results of the paper Aim: To study the suitability of stated preference (namely choice modeling) approaches for the evaluation of health insurance services To study the demand and assess the WTP for insurance coverage against the risk of expenses related to long-term care (in the Italian region Emilia-Romagna) Main results: High significancy of control variables for ; –The propensity to choose an LTC cover vis à vis the present (uncovered) situation – The determinants of WTP (attributes of the choice experiment) Marginal WTP of 10,5 euros for 1 % reduction in copayment rate: –Significant preference for public provision –High evaluation of options to cover residential care expenses

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Reasons for analysing demand and WTP with “stated preferences”. Private LTC insurance markets are poorly developed and affected from several (supply) biases  –Individual-level data on use of LTC policies poorly available and usable. –Real needs are not represented by the demand of risk coverage “revealed” from market transactions. Need of exploring non-market (publicly provided) coverage solutions. Need for policy-makers to minimize “politics risk” about public opinion support: What kind of services are to be financed out? Mainly rely on voluntary-selective or on compulsory-universal programs? What the more likely behaviour by households? “ Mainstream evaluation methods”: –Expenditure projections based on epidemiological and demographic trends This study: survey centred on a hypothetical framework (“stated preferences methods”), namely “choice modelling” for studying a multiplicity of alternative solutions.

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna The choice modelling approach (namely choice experiments) for consumer’s preferences evaluation The method reposes on random utility models, where the “stated” preference for a good is determined by the sum of the utility arising from a set of basic characteristics Choice experiments (CE): –Respondents are asked to choose their own preferred alternative within a collection of possible hypothetical solutions (the choice set). Within a choice set, each alternative, represented through a series of components (attributes), is varied according to several levels. Parameters of indirect utility functions are recovered from the estimation of a choice probability model. They provide: – Information on the relative importance of each composing characteristics (attribute or attribute level), –WTP evaluation for hypothetical scenarios

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna An example of the show-card used in the choice experiments:

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Description of the choice experiment: attributes and levels Levels of the main characteristics of the hypothetical policies: Financing scheme: –Public(general taxation/compulsory participation) –Private (insurance premium/voluntary participation) Degree of coverage: –Low coverage (70% copayment rate) –Medium coverage (50% copayment rate) –High coverage (25% copayment rate) –Total coverage (0% copayment rate) Option for covering additional costs of residential care: –Included –Not included Yearly cost of coverage: –(Euros):

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Description of the choice experiment: more on the hypothetical scenario Insurance coverage anchored to a specific health status described as “a condition in which people need help for several hours per day for activities of daily living”, for which “both home and residential care can be considered appropriate from a clinical point of view”. Additional coverage with respect to the present situation (basically, 50% of average residential care costs and 450 Euros of money transfer for home care paid by the NHS; then a variety of interventions at the level of single municipalities) Level of care need expressed in monetary terms –1550 euro per month (for residential care) –1033 euro per month (for home care) Insurance coverage only referred to the respondent of the household

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Econometric approach: Multinomial Logit Model and the IIA hypothesis. In the McFadden’s MNL model, the probability to choose solution A wrt solution B depends on the difference in the levels of the characteristics which define the two alternatives MNL easy to compute, but implies Independence of Irrelevant Alternatives hypothesis (IIA): –the relative probability of choosing k instead of l is independent of the availability of attributes or alternatives other than k and l –There should be no specific correlation within a subset of alternatives, i.e. between the two profiles of LTC coverage in each choice set as compared to the “preference for the status quo” alternative. –When there is a “status quo” alternative (whose specificity is controlled for with a “ASC” dummy) the assumption seems implausible, but it has rarely been tested for in applied health economics ( Ryan-Skatun, 2004 )

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Econometric approach : a model consistent with the violation of the IIA hyp. The McFadden-Hausmann test on the MNL estimation rejects the IIA property with a very high significance level. Alternative assumption: the respondent’s decisional process follows a Nested Logit specification: : The respondent faces two decisional processes –Whether to ensure or not against the risk of LTC (first “nest”) –The choice of the preferred alternative conditional on the decision on whether to ensure or not (second nest). LTC coverage decision No insuranceInsurance Status quoAlternative AAlternative B

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Econometric approach: implementation of the NL model The Nested Logit is a FIML of a joint probability: –Marginal probability (insurance choice): function of a vector Z composed of individual specific variables; –Conditional probability (choice between the alternatives): function of a vector X composed of the attributes of the cover schemes. Groups of individual-specific variables : –Demographic: age, sex, household size, young and adult children –Socio-economic:family income,education, work status –“Health related”:chronic disease, smoker, self-assessed health status, health insurance,recently at hospital, LTC problem in the family –Opinion: Priority of health for new public expenditures, negative opinion of NHS, Preference for “cash” LTC coverage, when state should pay for LTC services.

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Main results 1: Multinomial Logit estimations.

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Main results 2: NL estimates: Status quo vs insurance choice

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Main results 2: NL estimates: choice of alternative insurance schemes.

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna Main results 3: Monetary evaluations of the attributes. The coefficient estimates allow us to evaluate marginal prices (value of level changes) for each attribute, and to obtain WTP estimates for any coverage scheme arising from the combination of attribute levels. Monetary evaluation are given by: Results:

Università degli Studi di CagliariDipartimento di Scienze Economiche- Università di Bologna A few conclusions: The choice modelling approach seems able to provide consistent information in spite of the complexity of the scenario IIA does not hold: the decision process cannot be totally simplified (although the simple MNL estimates are not far from NL when considering the single attributes). Main “stated preference” information : –1 % additional coverage against the LTC-related expenditures has a marginal price between 10 and 11 Euros. People from Emilia-Romagna “appreciates” public provision Estensions: Technicalites, other methods to deal with violation of IIA. Analysis on subsamples (after checking if the survey design is not hampered)