The risk protection and redistribution effects of long-term care co-payments

Co‐payments for long‐term care (LTC) can impose a substantial financial burden on the elderly. How this burden is distributed across income groups depends on the design of the co‐payment. We estimate the lifecycle dynamics of LTC using Dutch administrative data. These estimates are inputs in a stochastic lifecycle decision model. Using the model, we analyze the welfare effects of the Dutch income‐ and wealth‐ dependent co‐payment system and compare it to alternative systems. We find that the Dutch co‐payment system redistributes income to low‐income groups, who use the most care over their life but contribute the least co‐payments, from high‐income groups, who pay the most. Moreover, the Dutch system protects the middle‐income groups relatively well against financial risk: although alternative co‐payment systems hardly affect these groups average payments, they induce welfare losses of 2% to 4% due to an increased risk of very high co‐payments.