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AbstractThis paper empirically analyzes how often and why individuals drop their long‐term care insurance (LTCI) coverage, using data from the 2002‐2008 Health and Retirement Study. It finds that over a two‐year period 13% of LTCI policies lapse. It also finds that the probability of an LTCI lapse increases with a lack of consumer knowledge about their policy's benefit provisions, with prior encounters with the long‐term care system, with less expensive policies, and with less generous policies. These findings raise the possibility that some policyholders may not understand their coverage limitations, and learn about them only after actually using long‐term care services. Greater consumer awareness of LTCI policy features and limitations may help reduce lapse rates and increase the stability of the LTCI market.

Employers' willingness to control costs is a critical aspect of pro‐competition strategies for the health‐care market. Here, we present some of the first quantitative evidence of what employers do to control health‐care costs. Our sample is 44 large private and public employers in Minnesota.We develop a theoretical model in which the employer chooses cost‐control "innovations"—along with wages, fringe benefits, and labor‐force size—to maximize profits. The role of innovations is to reduce unit costs of offering fringe benefits.Our data are from a 1982 survey. Eighty percent of the surveyed employers, representing nearly 200,000 employees, responded. Most respondents offer both indemnity insurance plans and health‐maintenance organizations (HMOs). Many firms and individual health‐insurance plans conduct cost‐control activities, but less than half of the firms which offer HMOs have adopted level‐dollar premium contributions for their family health‐insurance policies. Few plans have increased their coinsurance and deductible requirements in the past five years.We use probit equations to estimate the probability that a firm or a health plan will adopt cost‐control activities. Our analysis suggests that many firms may soon make major plan‐design changes to control health‐care costs, although they have not yet done so.