Monday, December 14, 2009

More on CLASS

I wrote about the CLASS Act provisions last week in the News and Observer. Here is a NY Times story about CLASS. Sometimes I wonder if certain groups just think they should oppose certain things, without actually thinking much about it. Long Term Care Insurance companies have been opposed to is a Genworth action alert asking agents to contact Congress, etc.

The problem is that private insurance has not been able to sell a great deal of long term care insurance....less than 10 percent of persons age 55 and over. I have a paper on long term care insurance and the use of genetic markers as a potential risk adjustment/underwriting variable that is coming out in the January 2010 issue of Health Affairs, but I can't link it yet. My point here is not about genetic markers and long term care insurance, but the fact that there are all sorts of reasons that people don't buy long term care insurance that are good reasons. Put another way, the same industry that has managed to sell lots of life insurance can't sell lots of long term care insurance. I think something like CLASS could actually help boost coverage rates of private LTC insurance because (1) it helps people think about this happily avoided topic at younger ages; and (2) could let private insurance focuses on the truly big ticket costs of a nursing home with CLASS defraying earlier/lower costs that are typically community based.

In particular, the main argument against CLASS by private insurers seems to be that CLASS will give false security to people. But, now most people haven't got any insurance cover and/or lots actually think that Medicare covers a great deal of LTC.

Here are some of the main reasons that people don't buy long term care insurance.
1. premiums are low at young ages, but people don't think about LTC at young ages.
2. when premiums are low, the expected point of potential use of LTC is a long ways away. You can get a low premium at age 40, but your likely time of use of LTC insurance is 3 or 4 decades away.
3. The inflation risk of benefits to be used far down the road are extreme...and the paradox of the lower the premium at younger ages, the more extreme the time horizon problem.

*Points 1-3 are really problems with the the insurance product being short, they aren't passing the market test in large numbers.

4. Many don't have enough income to afford premiums, or enough wealth to protect to make purchas of such insurance make sense.
5. Medicaid, which serves as a de facto NH insurance insurer, with the deductible essentially being youn non housing wealth, likely crowds out private insurance.

If private insurers were selling lots of private LTC insurance, I would get their opposition to CLASS. But, given that they haven't figured out how to develop a product that lots of people want to buy, I don't see how something like CLASS wouldn't help them.


  1. I agree that many types of insurance are not perfect or don't fit to some groups of people. But I think that the offer is quite wide and it depends on us which type of insurance we will choose. However, if someone, especially young people, meet with LTC insurance for the first time it's good to go for an advice to some professional. But the problem is still that they don't think much about it in the young age also because of the low premiums.


  2. I agree with you that the CLASS Act would increase the sale of private long term care insurance.

    The biggest problem we face is that most Americans still think that Medicare or their medical insurance covers the cost of long term care. The CLASS Act addresses this problem by making a very clear statement:

    You have to pay for your own long term care.

    You either have to pay for your own long term care by using your savings, the $50 per day CLASS Act benefit, long term care insurance, or a combination of all three.

    Most of the ten million Americans who own long term care insurance, own it because they've seen friends or family have to spend down their assets before qualifying for Medicaid. The CLASS Act will help alert the rest of the country to the fact that they need to financially plan for their future long term care needs.

    Scott A. Olson

  3. Your article in the News & Observer is the most balanced and cogent descriptions of the CLASS Act. It was very well done.

    One point of clarification: The CLASS Act does allow the Secretary of HHS to increase premiums or decrease benefits in order to keep the program financially sound. In both versions of the bill, the premiums can be raised on anyone in the program who is not already retired and has paid premiums for at least 20 years.

    Scott A. Olson

  4. Yes there are provisions like these that could be invoked to keep the bill self sustaining...similar to increases in private LTC insurance premiums to make up for higher than expected losses, which of course can lead to dropping cover. The key is getting enough folks in the program in the first place. Something(s) are needed to get people to think about LTC at a younger age.