Stanford Professor Addresses Elder Care Crisis


Stanford’s Graduate School of Business recently published an article by Lee Simmons about the tenuous state of elder care, which can only serve 10 percent of the elderly American population who have insurance.

Stanford Economics professor Chris Tonetti recently co-authored a paper that pushes back against the perception that people don’t save for retirement because they don’t care about their quality of life in old age. He and his co-authors argue that this enormous coverage gap actually demonstrates a huge “unmet demand for long-term care insurance.”

Tonetti surveyed nearly 1,000 Vanguard Research Initiative (a collaborative project with the University of Michigan and New York University) clients about a “simple insurance product” he and his fellow researchers concocted. In this “state-contingent asset,” customers would pay fixed premiums, and if they ever needed help with daily activities, they’d get a certain amount of money each month to pay for it.

What they discovered was that 60 percent of surveyed consumers would snap up their fictitious plan in a heartbeat because available insurance policies “don’t eliminate the financial risk of late-in-life care.” The concerns, often, don’t become too obvious until later in life. One in three Americans, on average, enter into a nursing home at some point in life, which costs around $92,000 per year.

The article mentions two major concerns with regard to common insurance policies:

  1. Premiums are too high relative to benefits.
  2. They don’t eliminate risk. Tonetti says these common policies “work on a reimbursement model. You pay for the care yourself and then hope to get your money back.” Insurance companies are notoriously combative about claims. “It can get adversarial and you might be in no shape to fight back or might be dying and have a short horizon.”

Tonetti explains, “The demand is there for good long-term care insurance. The problem is, the industry isn’t offering it.”


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