How Will Long Term Care Facilities Adapt to Wildfire Induced PM2.5 Air Pollution Spikes?
I just received the following email.
Here is a recent paper on the economics of Long Term Care (LTC). Great economists are thinking about the supply and demand for this product. As America ages and grows richer, ever more Americans will demand this product.
As I understand it, LTC represents type of University for old people. Matthew agrees to give the provider $ Z in return for a lifetime promise that I can stay at their facility until I die. The facility will lose future customers if the LTC treats me badly. My children could sue the LTC or give them a bad “Yelp Rating” and use Social Media to tarnish their reputation. Reputational concerns gives the for profit LTC provider an incentive to treat me well. I equate a LTC with an urban restaurant. Both want to do repeat business.
LTCs are differentiated products. They differ with respect to their location, their staff, their campus, their equipment, and their price.
To keep this column short, let’s focus on for profit LTCs.
Suppose the author of the email I presented above is correct that for a subset of LTCs that they will face PM2.5 spikes for a few weeks each year. Here is my prediction of how these dynamics will unfold;
Prediction #1
Using basic GIS mapping of where LTCs are located and where the PM2.5 Spikes are taking place, the LTCs at risk will be pinpointed. For example, LTCs in rural Oregon may be exposed to more PM2.5 days. Call these LTCs; “Climate Vulnerable LTCs” (or CVLTC)
Prediction #2 If an CVLTC fails to adapt to this new risk, then its revenue will decline as fewer customers will send an aging parent to live there and the price the LTC can charge will decline because its service quality will decline.
Prediction #3; As a CVLTC’s revenue declines, it will take proactive steps to adapt to the new pollution threat. For example, it will install better windows and it will monitor indoor PM2.5 and it will install more air filters inside. As it takes these steps, it will advertise that it has taken these steps.
Prediction #4 CVLTCs that fail to adapt to the PM2.5 threat will lose market share. Note that the average LTC will be resilient. Darwin would understand climate change adaptation as another example of “survival of the fittest”. Those firms that fail to adapt lose customers. Such competition protects the vulnerable.
Note that the profit motive drives the CVLTC’s investments in resilience. This simple point is what is missing in so many environmental economics studies of the climate damage function.
As more LTCs seek solutions to protect their vulnerable customers, more entrepreneurs will devise solutions and this accelerates endogenous innovation.
NOW, much of my optimism is based on the assumption that LTC is a competitive market. If the LTC market features local monopolies such that Portland has one provider and Boston has one provider, then these LTCs could allow quality to decline (i.e the PM2.5 penetrates the facility and injures the vulnerable elderly) without the monopolist losing market share. But, the monopolist will compare its marginal revenue to its marginal cost of investing in quality enhancements. If people inelastically demand quality care for their parents then the monopolist may also choose to upgrade the facilities as local PM2.5 gets worse.
This is free market adaptation at work. Read my 2021 book!