UC San Diego

We use novel Medicare data that link spouses to examine how one spouse's sudden incapacitation affects their partner's need for formal care. A spouse's health shock causes their partner to be 18% more likely to visit a skilled nursing facility. That pattern reflects both a change in health and a shift from informal care to formal care. After one spouse is incapacitated, the other spouse becomes less sensitive to the price of formal care. We explore the implications for optimal health insurance contracts, showing that these within-household spillovers imply that the optimal health insurance contract should provide more generous coverage to those whose spouses are incapacitated relative to those whose spouses are available to provide care.