Substitute services: a barrier to controlling long-term care expenditures

Abstract

In many developed countries, long-term care expenditures are a major source of concern, which has urged policy makers to reduce costs. However, long-term care financing is highly fragmented in most countries and hence reducing total costs might be complicated by spillover effects: spending reductions on one type of care may be offset elsewhere in the system if consumers shop around for substitutes. These spillovers may be substantial, as we show using a reform in the budget for municipalities for the most common type of publicly financed home care in the Netherlands, domestic help. This reform generated an exogenous change in the grant for domestic help that does not depend on changes in its demand. We show that the change in budget affected consumption of this care type, but that this effect was mitigated by offsetting changes in the consumption of three other types of home care that are financed through another public scheme and are organized through regional single payers. We find that a 10 euro increase in the grant for domestic help increased use of domestic help and nursing by 0.13 and 0.03 h per capita (4.4 and 5.2% of use in 2007), whereas it decreases use of individual assistance and personal care by 0.03 and 0.05 h per capita (4.1 and 2.9% of use in 2010 and 2007, respectively). As a result, the total spending effect is closer to zero than the effect on domestic help suggests. This finding means that the fragmentation of long-term care financing limits the ability to control expenditure growth.