Japan and Germany are both facing a rapidly aging population and have similar social insurance-based long-term care systems. However, there are significant differences in utilization and costs. This paper presents a microeconomic decision model validated by regression analysis, Blinder-Oaxaca decomposition, and Data Envelopment Analysis to contrast the utilization patterns in the Japanese and German long-term care sectors. The design of the welfare programs for low-income families has been identified as one of the main reasons. In Germany, the welfare system leads to a demand curve for nursing home care that is comparable to that of an inferior good which makes external long-term care in nursing homes the more attractive, the poorer the respective households are. In addition, the resulting inelastic demand of the population groups in need of social benefits seem to reduces competition among Germany's long-term care providers, which is associated with a loss of efficiency in how they use production factors. In Japan, this negative outcome is avoided by a comfort segmentation in the nursing home market.