Publications by Year: 1996

Cutler, David M, and Jonathan Gruber. 1996. “Does Public Insurance Crowd Out Private Insurance?” Quarterly Journal of Economics 111 (2): 391-430 . Website
Cutler, David M, and Jonathan Gruber. 1996. “The Effect of Medicaid Expansions on Public Insurance, Private Insurance, and Redistribution.” American Economic Review 86 (2): 378-383. Website
Cutler, David M, and Jonathan Gruber. 1996. “Restructuring Medicare for the Future.” Setting National Priorities, edited by Robert Reischauer, 197-234. Washington, D.C. The Brookings Institution. Website
Cutler, David M. 1996. “Re-Examining the Three-Legged Stool of Retirement Income Support.” Social Security: What Role for the Future?, edited by Peter Diamond, David Lindeman, and Howard Young, 125-149. Washington, D.C. National Academy of Social Insurance. Website

This paper examines the apparent failure of private markets to adequately insure long-term risks. I argue that the key to long-term insurance is the importance of intertemporal risk. Long-term risks are difficult to insure because much of the risk concerns variability in the average cost of services used, rather than cross-section heterogeneity in service use. When intertemporal risk is large, insurance will provide indemnity benefits rather than a service benefit, and this in turn will limit demand for insurance. Analysis of long-term care insurance supports this view. An insurer underwriting full long-term care insurance would have a standard deviation of average costs for its pool of policies of 13 percent. Full insurance is essentially non-existent, however. Rather, insurers offer an indemnity payment conditional on use. While I cannot directly test whether this indemnity payment limits demand, I show that other common theories of market failure cannot explain all of the low rate of insurance purchase.