Crowding out Informal Care? Evidence from a Social Experiment in Germany

During the next decades, western societies at a varying speed face a demographic transition that more than doubles the number of elderly individuals in need of long-term care and that at the same time decreases the number of informal caregivers. As a consequence, public responsibility for the provision of long-term care will continue to grow. In the German context, the demographic transition fuels doubts about the fiscal sustainability of the Long-Term Care Insurance (LTCI). According to several forecasts, contribution rates to LTCI would have to triple in the next decades to maintain the current level of support. Since institutionalized care tends to be costly, one way of mitigating the impact of the demographic transition on public expenditures is to strengthen the provision of home care. The legislator therefore passed an amendment of the LTCI law in 2002 as the legal basis for testing a professionally assisted consumer directed home care program, Personal Budgets, as an alternative to the provision of agency-directed home care. Agency care is restricted to a legally approved and limited catalogue of care services that are provided by authorized agencies only. Personal budgets correspond to the monetary value of agency care, but extend the use of these funds beyond the restrictive catalogue to any care-related services. Due to the extended coverage and the additional assistance of a care manager, personal budgets are likely to produce better care outcomes compared to agency care. However, in case of supplementing the LTCI home care scheme by personal budgets, personal budgets would also compete with cash payments, an unassisted consumer-directed home care program of the LTCI that grants only half the monetary value of personal budgets, but can be spent for any desired services or goods. Cash recipients whose care needs are mainly met by informal care may now choose the more generous personal budget in order to substitute informal by formal care. Personal budgets were tested in a long-run social experiment that was carried out in seven German counties between 2004 and 2008. Based on the random assignment of participants into a treatment group of personal budget recipients and a control group of standard home care recipients, this paper evaluates the impact of personal budgets on the extent of support by four different types of formal and informal caregivers. The results show that personal budgets increase the amount of care for former recipients of agency care. For former recipients of cash payments the overall time spent on care remains unchanged due to a crowding out of informal by formal care. Since we observe a relevant share of cash recipients who switch to personal budgets without any traceable impact on care outcomes, the crowding out induced by the consumer-directed personal budget seems to exceed those of agency-directed home care.

Arntz, Melanie and Stephan L. Thomsen (2008), Crowding out Informal Care? Evidence from a Social Experiment in Germany, ZEW Discussion Paper No. 08-113, Mannheim.