Maggie's Farm

The major media has neglected to examine one of the major sections of ObamaCare, its long term care program CLASS, the Community Living Assistance Services and Supports Act.

The New York Times’ chosen "New Old Age" guru, wrote on March 24 that,

I’ve read so little about the Class Act in recent weeks that when President Obama signed the health care bill yesterday, surrounded by a gaggle of happy Democrats, I had to call the National Council on Aging to reassure myself that yes, this often overlooked but potentially transformational program remained part of the package.

Of course, the Wall Street Journal did manage an op-ed, last December, “Congress’s Long Term Care Bomb,” written by a professor of health-care management and insurance and risk management at the University of Pennsylvania's Wharton School.

But CBO and the Centers for Medicare & Medicaid Services (CMS) have identified parts of the program that will subject it to considerable financial risk.

First, those who enroll would likely be more apt to need care and will be more expensive to cover than those who buy private insurance. To cover its costs, the program would have to charge more than private insurers.

The best objective and factual summary and analysis of CLASS I’ve found is that by one of the preeminent global consulting firms on benefits, Towers Perrin.

The Senate version is projected to bring in $72 billion, with an average monthly premium of $123. The initial positive cash flows come, of course, from the five-year period before participants vest, when premiums are paid but benefits are not. Tens of billions are foreseen to flow into the trust fund during those five years. In later decades, however, the flows would turn negative and increase the federal deficit.

(Note that $72-billion is over half of the highly doubtful supposed first 10-year federal budget deficit reduction of ObamaCare, which itself ignores the tens of $billions of mandates in Medicaid imposed on the states from the majority of ObamaCare’s increased coverage of the uninsured and the tens of $billions of extra costs imposed on private firms that continue retiree prescription benefits.)

Let’s look closer at that estimated 2011 average premium of $123 per month, or $1476 per year.

I checked the standard risk premiums charged in most states by one of the largest top-rated long term care insurers for an individual to have a lifetime benefit period, as in CLASS.

Insurers cover working and non-working applicants. CLASS will only enroll working participants, who are more likely to be of reasonable health if working.  As the CBO points out, non-working spouses are more likely to have impaired health and are more likely to enroll than are workers, which increases the actuarially required premiums. Insurers will cover seriously impaired risks at about a 50% higher premium than standard risks, and only for a 6-year benefit period versus the lifetime benefit period in CLASS (average benefits actually needed by all insurer claimants is about 3-years), while insurers reject some applicants with severely impaired health. The CBO did not reveal the details of its analysis, but one may expect that these factors and others were considered.

To get at an apples-to apples comparison of a $50 dollar a day benefit, I further adjusted the insurer rates downward by 30%, as would be charged for a joint policy with spouse from that insurer, to estimate efficiencies of marketing and administration to a larger pool mostly garnered via the workplace in CLASS. Further, CLASS will not be paying commissions to agents as does insurers, so I subtract another 5% from the adjusted insurer premiums below, for a total reduction of 35%. The elimination period, or time to have the qualifying inabilities to manage activities of daily living, by the insurer is 30-days. In parentheses I include the insurer’s annual premium for a preferred risk. CLASS has substantially more liberal reinstatement provisions for non-payment of premiums than this or any insurer, for example, along with other provisions which increase the cost of the program. CLASS subsidizes those of low income, but claws back part of their benefit if qualified for Medicaid, which private insurers don’t.

CBO estimate of average premium for CLASS in the Senate version enacted: $1476

Adjusted Insurer Premium: Age 25 $373.93 ($317.84); Age 40 $483.91 ($411.33); Age 60 $978.82 ($832.00).

Unadjusted Insurer Premium: Age 25 $575.28 ($488.99); Age 40 $744.48 (632.81); Age 60 $1505.88 ($1280)

An $80/day benefit insurer premium is higher, but still below the CLASS initial estimated premium, which includes a $75/day benefit for nursing home care which is much less preferred or used by claimants than the $50/day for home health care.

The House version of CLASS included non-working spouses, according to the CBO more likely to have impaired health and more likely to enroll than are workers, at the following estimated annual premiums: Age 18-39 $1632, Age 40-49 $1728, Age 50-59 $1824, Age 60-69 $2772. The actuaries estimate anticipates that those older are much more likely to enroll than those younger.  One may expect political pressure in coming years to open CLASS to non-working spouses.

So, first of all, it does seem that CBO and actuaries did a reasonable job of estimating initial CLASS premiums, though the Medicare chief actuary did warn that, as the WSJ op-ed indicates,

[P]remiums would be set so high they would discourage healthier people from buying in. As the healthy stayed on the sidelines, the program would have to charge more to those who did enroll. This in turn would price more people out of the program, risking what the memo called an "insurance death spiral."

An insurance death-spiral occurs as due to adverse selection, when the healthier don’t join or leave the program, and the costs of the remaining less healthy escalate future premiums, leading even more of the healthier to leave or find other alternatives. The death-spiral leads to the program’s costs rising to bankruptcy, otherwise.  Although CLASS says they won’t have to, one may expect a future Congress to bail it out with taxpayer funds rather than abandon this new entitlement.

Private long term care insurers have not opposed CLASS.  Of course, they expect that the added consciousness of the need for long term care insurance prompted by CLASS marketing at workplaces will, together with insurers’ lower premiums, increase their own sales.  Similarly, life and annuity insurers may expect increased sales of their products that contain a long term care component.

That just leaves taxpayers on the future financial hook for CLASS, and disappointed ObamaCare supporters on the hook for letdown.

As Ed Morrissey points out from the latest Washington Post poll on ObamaCare, opposition continues to mount.  Relatively few are aware of the details of the CLASS failure, so more should be expected to become disappointed in the non-classy failure of Democrats to be responsible.