Monday, January 24, 2011

CLASS Discussion

Austin Frakt has two posts up this morning on the CLASS provisions of the Affordable Care Act. The discussion of CLASS has focused on the actuarial soundness of the program (the goal is to create a self-sustaining long term care insurance plan, meaning paid for by individually paid premiums) and the contribution of the CLASS provisions to the 10 year CBO score (it accounts for around half of the 10 year deficit reduction of the ACA). I wrote this column on CLASS in Dec. 2009, and CLASS is instructive in helping folks understand how scoring works. My column says, in part:

"CLASS is designed to be self-financing, meaning premiums plus interest must pay for future benefits. The 10-year deficit reduction occurs because benefits are not paid out for the first five years, but premiums are paid in. Proponents claim that CLASS is self-financing over the long term, and opponents say it will increase the deficit in later years. Both are correct.

It is hard to project what will happen with CLASS, mostly because of uncertainties regarding disability rates 30-plus years from now, but there are numerous provisions designed to ensure that the program is self-financing. Regarding the long-term deficit, when a program runs a surplus, it buys federal securities that pay interest. When interest is later used to pay for care, it is counted as a transfer instead of revenue. Therefore, CLASS will inevitably increase the deficit in years 30 to 75 even if it pays for itself totally through premiums and interest earned on premiums, given current budget accounting rules."

The most important discussion of the CLASS provisions is what are the policy goals it is trying to accomplish, what are the other options, how successful is it likely to be given the law that actually passed, what tweaks might be made to it, etc.

  • The big idea of CLASS is to make thinking about long term care a normal part of being a young adult. It is not today, and this means many do not plan well for LTC. Keep in mind that Medicaid is the current default payer of nursing home care in the U.S.
  • CLASS is designed to be 'age in place' insurance with benefits on the order of $50/day, so not enough to cover a nursing home. You would expect such benefits to have a very high moral hazard effect, certainly higher than insurance that covers nursing home admission would have (I have never met anyone who hoped to some day live in a nursing home). This is good in that it holds out the chance to slow admission to a nursing home, but also means people will be interested in claiming benefits.
  • Private long term care insurance is fairly rare, on the order of 7-10% of the population age 50 and over, depending on the sample used to measure it. There are lots of reasons people don't purchase private long term care insurance, and this paper I wrote with colleagues in the January 2010 issue of Health Affairs on the use of genetic markers as LTC insurance underwriting variables lists 6 major ones. In short, there is no reason to expect the private insurance market is likely to take off any time soon. It is likely going the other way. MetLife announced in Nov. 2010 they were stopping the sale of such policies.
  • The CLASS provisions needed a conference committee bill more than many parts of the ACA, in my opinion. Some aspects of the law are viewed as too vague, while with CLASS there is a fair amount of detail that may box in implementation in a way that makes it hard for the program to be self sustaining due to adverse selection. Notably, the definition of work is quite generous (I believe less than $2,000 per quarter in earnings) which means that those who are now disabled may be able to qualify. [you must be working to sign up for CLASS] I am not saying those now disabled are not worthy of support and help, but CLASS is not the vehicle to help them. The idea of CLASS is to get young, healthy people to plan ahead. Adverse selection is the biggest risk to any such a plan.
  • The part of HHS that is primarily implementing CLASS is the Agency of Aging. I am not privy to why this is the place it is being done, and obviously there are many things to do to implement the law, but putting CLASS into AoA seems an odd place if the goal is to get younger, healthier folks to sign up. This isn't proof of a problem, it just seems odd to me. At one point ASPE was to be the main place, but they typically do policy and analysis and not as much on implementation.
  • There is extreme danger of a self-fulfilling prophecy with CLASS. If the American Academy of Actuaries says the final implemented version of CLASS is unsound and will fail, then healthy people aren't going to sign up and it will fail.
I strongly support the idea of CLASS--to get young adults to think about long term care before they need it. And risk pooling is the way to handle the problem of long term care. In fact, if ever there were a risk that called for social insurance, it is long term care. Around 7 in 10 people will use some LTC, with around half of those using some doing so for less than a year, but 10 percent using it for more than 5 years. 30% will die prior to using LTC, and if you are sitting around a table, I bet the person to your left, to your right and across the table from you think they will be among the 30%. However, more social insurance is not going to happen any time soon, and a self-sustaining insurance pool is theoretically possible if you work hard to get young people to sign up.

I think that with some tweaks, CLASS could work well. It is unclear to me whether the tweaks can be made in the implementation of the provisions that have passed into law, or whether new legislation is needed. CLASS has mostly been a political football in discussions of CBO scores, and the notion of budget gimmicks in the ACA. In my view, this is incorrect, and a good deal more attention should be paid to the policy goals that CLASS is seeking to advance. And the problems that it is intended to address. We can repeal CLASS, but we certainly cannot repeal the reality of disability. It would be better if we tried to make it work.

Update Jan. 25: @IncidentalEcon posted this Jan. 2011 CRS report on CLASS that I have yet to read.

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