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Mandatory aged care insurance: a case for Australia

Published online by Cambridge University Press:  13 November 2013

FRANCESCO PAOLUCCI
Affiliation:
Australian Centre for Economic Research on Health, Australian National University, Canberra, Australia. School of Health, Community and Education Studies, University of Northumbria at Newcastle, UK.
PRZEMYSLAW M. SOWA*
Affiliation:
Australian Centre for Economic Research on Health, Australian National University, Canberra, Australia.
MANUEL GARCÍA-GOÑI
Affiliation:
Departamento de Economía Aplicada II, Universidad Complutense de Madrid, Spain.
HENRY ERGAS
Affiliation:
SMART Infrastructure Facility, University of Wollongong, Australia.
*
Address for correspondence:Przemyslaw M. Sowa, Australian Centre for Economic Research on Health, Australian National University, Bldg 63a ANU, Canberra, ACT, Australia. E-mail: prem.sowa@anu.edu.au

Abstract

This paper assesses the feasibility and welfare-improving potential of an insurance market for aged care expenses in Australia. As in many other countries, demographic dynamics coupled with an upward trend in costs of personal care result in consumer co-contributions imposing a risk of expenses that could constitute a significant proportion of lifetime savings, in spite of the presence of a government-run aged care scheme. We explore issues around the development of an insurance market in this particular setting, considering adverse selection, moral hazard, timing of purchase, transaction costs and correlation of risks, as well as such contextual factors as longevity and aged care cost determinants. The analysis indicates aged care insurance is both feasible and welfare-enhancing, thus providing a gainful alternative to the aged care reform proposed by the Productivity Commission in 2011. However, while the insurance market would benefit the ageing Australian population, it is unlikely to emerge spontaneously because of the problem of myopic individual perceptions of long-term goals. Consequently, we recommend regulatory action to trigger the market development.

Type
Forum Article
Copyright
Copyright © Cambridge University Press 2013 

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