An Economic Analysis of Life Care

Jonathan S. FeinsteinLife care communities offer long term care to the elderly in the context of a residential community. Residents move into a life care community while still relatively young (though typically past age 65), initially occupying an independent living unit situated in a living complex similar to a retirement community. Later, when a resident requires more intensive care, she moves to an on-site nursing facility.

In this paper Professors Jonathan Feinstein and Edward Keating present an economic analysis of the life care industry. Their model includes a detailed specification of elderly couples' utility, a description of elderly morbidity and mortality experiences, and a formulation of the life care contract. Their results suggest that life care can offer considerable benefits to the elderly; in particular, they calculate that - based on the contractual terms which will be offered by a profit-maximizing life care operator - moving into a life care facility provides an elderly couple of age 65 with an expected surplus of $20,000 to $80,000 as compared with the alternative of remaining in their own home and utilizing (when necessary) a stand-alone nursing home. They also show that introducing into the model the risk of operator bankruptcy, which historically has been significant, substantially alters the equilibrium life care contract, and generates contractual terms which are quite close to those observed in practice.