Out-of-pocket payments for nursing home residents

Nursing homes are expensive: in some European countries, a one-year nursing home stay costs as much as three to four times the median income among retirees (OECD, 2023). No wonder there are various public programmes in place to protect people against these costs. The level of generosity, however, varies substantially: in Nordic countries and the Netherlands, over 90% of expenses are paid publicly, while this is only 65% in the UK and 45% in Portugal (Mueller and Morgan 2020). In countries that apply means-testing like the US, the UK, and France,1 individuals need to fully deplete their own financial resources before they gain access to public support. As a result, those who need care for a long time face out-of-pocket payments of tens of thousands of euros.

With population ageing, governments across Europe strive to limit public spending on care, while  offering protection against excessive out-of-pocket payments. It requires a careful design of the co-payments that nursing home residents have to pay, which should balance the benefits and costs of insuring older people against long-term care costs.

Out-of-pocket payments create a financial risk but may incentivise an efficient use of care

Insurance is valuable because it provides access to care that many individuals could otherwise simply not afford (Nyman 1999). Yet, even when people are able to meet their care costs, they are usually better off with an insurance (Cutler and Zeckhauser 2000). Why so? Whether someone will need care is not known in advance. In the Netherlands, about half of the 70-year-olds will not use any nursing home care over their life, but 5% will end up living in a nursing home for seven years or more (Wouterse et al. 2022). This makes it uncertain how much of their financial resources someone will have to allocate to their care – that is, it induces a financial risk. As a matter of fact, most people dislike being exposed to such a risk; they may respond by building precautionary savings, which may be inefficient at the macroeconomic level (De Nardi et al. 2016). The reduction in financial risk is therefore another reason why insurance is valuable.

Yet, insurance comes at a cost. Obviously, it needs to be paid for.2 Furthermore, it provides an incentive for people to use care beyond what is socially optimal, because what they pay for their care is below what it costs to society. One possible way to curb this moral hazard is to levy co-payments on care users, as those create an incentive to use care only when its benefits meet its true costs.

However, the case for co-payments on nursing home care is less compelling than for other types of health care. After all, most people would prefer to spend their golden years at home. If nursing homes are a last resort, the scope for moral hazard is small, and co-payments should not affect nursing home admissions. Yet empirical evidence is scarce.3 Kim and Lim (2015) establish that older people in South Korea spend fewer days in nursing homes when co-payments on nursing home and home care benefits simultaneously increase. Hackman et al. (2023) show that US residents postpone their return back home when facing lower co-payments. But this study includes many patients who need rehabilitative care after a hospitalisation; they are expected to recover, and get out. For people who are admitted with a permanent need for long-term care, the question is more whether co-payments affect their decision to enter in the nursing home in the first place. 

For the full article, please visit the CEPR.org website.