Income and the Utilization of Long-Term Care Services: Evidence from the Social Security

Benefit Notch

Gopi Shah GodaStanford University

Ezra GolbersteinHarvard Medical School

David C. GrabowskiHarvard Medical School

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

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

Morethan

5years

$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.

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

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

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

3) Strong preference for care in less restrictive settings

• Income may be an important determinant of LTC utilization patterns among elderly recipients

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

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)

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”…

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

SS Benefits Notch (cont.)

Note: Each cohort’s benefits computed with identical real earnings history using the SSA’s ANYPIA program

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

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)

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

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

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

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

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 X

Independent VariablesXh 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

Methods: IV ModelAssume 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 X

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…

Specification Tests: First-Stage Estimates

11-14% increase in income for notch cohorts (relative to $9,960 mean)

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

Summary Statistics

Results: Any Paid Home Care Use for ADL/IADL Assistance (past 4 weeks)

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%)

Results: Any Informal Care Use (past year)

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%)

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

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)

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

Results: Substitution between Types of Care

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

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

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

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)

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