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The cost of Informal Elder Care

Many adults spend significant time caring for sick, elderly parents.  What is the cost of providing this informal care?  Would it be better to have family members outsource the care to formal caregivers?

A paper by Chari, Engberg, Ray and Mehrotra (2014) attempt to answer this question.  They use data from the  American Time Use Survey (ATUS), a time motion survey that tracks how individuals spend their day.  The opportunity cost of care is calculated s the product of the time spent providing care for an elderly parent and their wage.  For non-working adults, wages are imputed based on age, education, race and number of children.  To address the sample selection bias in the wage regression, a Heckman correction in which the propensity of working (the inverse mills ratio) is included as one of the regressors in the wage equation.

The authors compare the cost of informal care with the cost of unskilled care ($7.25, the federal minimum wage) and skilled care ($21, the wage of a home health aide).  Using this approach, the authors estimate that Americans spent 30 billion hours annually caring for elderly relatives.  The total annual opportunity cost of informal care was $522 billion.  The authors estimate the cost of replacing this care with unskilled workers is $221 billion, but the cost of replacing informal care with skilled workers (i.e., home health aides) is $642 billion.

The authors summarize their results as follows:

We find that informal care is mainly provided by working-age adults, who consequently bear most of the economic burden in terms of opportunity costs. Our findings underscore the importance of workplace flexibility policies being considered by a number of states that provide paid time off from work for caregivers, as well as programs such as Medicaid’s Cash and Counseling program that allows family caregivers to be paid for their assistance. Our estimates indicate that, in the aggregate, although the economic value of informal caregiving is substantially greater than what it would cost to replace this care with paid unskilled care, informal caregiving remains more economical than paid skilled care, suggesting that if the beneficiaries enrolled in Cash and Counseling programs prefer to receive care from family members, this may result in cost savings to Medicaid relative to a situation in which the care is provided by skilled replacements.

It is unclear whether informal caregivers provide superior or inferior care to formal caregivers. Elderly parents likely appreciate being cared for by people they know and adult caregivers may know the preferences of their parents much better. On the other hand, formal care givers–especially skilled caregivers–can draw on their experience caring for a variety of adults and could provide higher quality care. Thus, while this paper focuses on cost, much of the decision for using formal versus informal care will depend on the quality informal caregivers can provide and the preferences of adults and their elderly parents.


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