The rise of consumer-directed retirement planning and increases in personal choice within the Medicare program have created an increasingly complex set of financial and insurance-related decisions for aging Americans. Choosing whether to insure against the cost of long-term care (LTC), which is not covered by any public entitlement program, is another example of the substantial responsibility placed on individuals to make prudent financial decisions. It is not clear, however, whether consumers have the necessary skills and competencies to make optimal, or even sufficient, economic choices in preparation for potential expenses that represent one of the largest uninsured financial risks facing retirees. Indeed, there is evidence to suggest that many retirees are financially ill-prepared to pay for LTC services should the need arise, often resulting in a heavy reliance on Medicaid coverage. Furthermore, considerable misinformation about the likelihood of needing LTC, the costs of such services, and the role of Medicaid and Medicare in financing this care has been documented, giving some indication that barriers to good decision making with regards to long-term care insurance (LTCI) purchase exist. As policy makers seek to improve individual preparation for future LTC expenses and reduce Medicaid spending in this area, it is important to understand the role of one s decision- making abilities in appropriately responding to market incentives and arriving at an optimal purchasing decision. The overall goal of this dissertation is to determine the effect of individual decision-making abilities, including inherent cognitive abilities and accumulated knowledge, on achieving optimal insuring behavior with regards to private LTCI policies. I will achieve this goal by utilizing a dual process theory of decision-making from the field of cognitive psychology to conceptualize how consumers make decisions and the individual competencies that may promote or inhibit optimal choices. Furthermore, I will evaluate the impact of such competencies on adherence to normative guidelines, derived from the economic theory of expected utility, with regards to LTCI purchase in a nationally representative sample of Americans aged 50 and older. The information generated by this dissertation will contribute to the scientific body of knowledge regarding how consumers make purchasing decisions in an insurance marketplace and the role of suboptimal decision- making in explaining the limited up-take of private LTCI. Furthermore, the results will inform policy makers about the potential impacts of policy approaches aimed at increasing LTCI purchase, particularly those that rely on consumer education.
The proposed dissertation will investigate the effect of individual decision-making abilities on the likelihood of achieving optimal LTCI 'insuring'behavior as defined by the economic theory of expected utility. The results of this research will inform policy-makers about the importance of these individual characteristics in making good insurance-related decisions and the potential impacts of education-based policy interventions aimed at increasing up-take of LTCI