• The CLASS Act, ctd.

    For those who don’t read comments, I’m just reiterating some of the content of one I submitted a little while ago to my earlier post on the CLASS Act. If you want to see opposing, credible views on the actuarial soundness–or lack thereof–of the CLASS Act, read the April 22, 2010 letter from Richard Foster, CMS Chief Actuary (page 14) and the July 22, 2009 letter by the American Academy of Actuaries. The latter was written before the legislation passed so I don’t know if it accurately reflects the final law.

    I am not going to arbitrate between competing claims of the soundness of the CLASS Act. It is not something I can do with any confidence. However, if one believes it to be a fiscal disaster waiting to happen, the sensible position to take is to advocate to amend or repeal it, and it alone. One need not repeal the entire ACA to address problems in the CLASS Act, if any.

    Finally, the CBO is the official non-partisan arbiter of federal legislation. They may not get everything right. They may make different assumptions than some think they should. But they do work hard and honestly to do the best they can within the rules and conditions under which they operate. I do not condemn any member of Congress who wishes to use the CBO’s work to claim fiscal soundness, even that of the CLASS Act. The CBO is a credible source and the official one.

    By the same token, I do not think it inappropriate for a member of Congress to seek to modify legislation so as to increase the chances that it produce an actuarially stable program. I do object to any implication some might make that the entire ACA and the CBO’s score of it are suspect due to a few provisions, the CLASS Act among them. If you’ve got a concern about the CLASS Act, seek to address it. It can be, and perhaps should have been, separated from the rest of the law.

    The provisions of the ACA should be modified for cost control and budgetary reasons as we move forward. I will leave it to others, and the political process, to decide if the CLASS Act should be among the first to be addressed (as if I had a choice in that matter).

    UPDATE: There’s a second American Academy of Actuaries document on the CLASS Act.

    UPDATE 2: See this comment and my response.

    • I fully agree with your penultimate paragraph, the CLASS Act ought to be evaluated on its own, and the rest of the ACA is basically irrelevant in that regard. And by that same reasoning, we ought to stop claiming that the $70B premium surplus in the early years of the CLASS Act is deficit reduction for the ACA.

    • Hi Austin, the CBO clearly believes that CLASS is fiscally unsound — it’s not credible for advocates to argue otherwise. Here’s a quote from Elmendorf about the CLASS Act in its earlier (July 2009) form ):

      “Beyond the 10-year budget window, the effects of the program could be quite different, and CBO expects that the HHS Secretary would need to reduce benefit payments and increase premiums to maintain the program’s solvency. Assuming that the premiums and daily benefit amounts were $65 and $75, respectively, CBO estimates that benefit payments would exceed premium income within the first decade after 2019, leading to depletion of previously accumulated premium reserves (and accumulated interest on those reserves). Although outcomes in the distant future are very uncertain, CBO expects that actions by the Secretary to reduce all benefits to the real daily minimum of $50 and raise the real average monthly premium for new enrollees to roughly $85 sometime during the first decade after 2019 would be adequate to ensure that the program could pay benefits through 2050.

      “Overall, CBO estimates, if the Secretary did not modify the program to ensure its actuarial soundness, the program would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window.”

      It’s pretty clear from that statement that Elmendorf sees CLASS as actuarially unsound, and that he sees it as adding to the deficit.

      As you suggest above, the CBO letter your commenter cites is equally unfavorable:

      “In general, voluntary, unsubsidized, and non-underwritten insurance programs such as CLASS face a significant risk of failure as a result of adverse selection by participants. Individuals with health problems or who anticipate a greater risk of functional limitation would be more likely to participate than those in better-than-average health. Setting the premium at a rate sufficient to cover the costs for such a group further discourages persons in better health from participating, thereby leading to additional premium increases. This effect has been termed the ‘classic assessment spiral’ or ‘insurance death spiral.’ The problem of adverse selection is intensified by requiring participants to subsidize the $5 premiums for students and low-income enrollees. Although Title VIII includes modest work requirements in lieu of underwriting and specifies that the program is to be ‘actuarially sound’ and based on ‘an actuarial analysis of the 75-year costs of the program that ensures solvency throughout such 75-year period,’ there is a very serious risk that the problem of adverse selection will make the CLASS program unsustainable.”

      As a general comment, given the immense importance of actuarial soundness to health reform (e.g., mandates and regulation of private insurers), it’s subject worth spending time on.

      • @Avik – That’s very helpful. I am glad to see that there really is no major disagreement on the fiscal soundness of the CLASS provisions. It seems like they should be modified and, in the face of overwhelming evidence and apparent consensus, I would not argue against it.

    • Hello:
      I appreciate the efforts here to be factual and have a reasonable discussion about CLASS, about which misinformation abounds. For starters, you should be aware the the July, 2009, CBO document quoted above was done before there were substantial changes to the plan, which are now part of the final, adopted legislation. Among other things, the bill (as passed) no longer contains even a “starter” figure for premiums (as in the original bill), but now says simply that premiums must be set to be “actuarialy sound out 75 years.” In addition, as the bill moved though Congress, changes were made that reduced adverse selection risk and enhanced long range fiscal solvency. For example, in the House version, that was the key subject of Rick Foster’s comments, non-working spouces of working spouces were eligible to enroll. The final law says these are not eligible, limiting enrollment to “workers,” as some private insurance Grioup Plans (that don’t exclude people with re-existing conditions) do.

    • “I fully agree with your penultimate paragraph, the CLASS Act ought to be evaluated on its own, and the rest of the ACA is basically irrelevant in that regard.”

      That certainly is not how my corporation is run. I need to make sure that the bottom line is good, not each individual part. Some area pay well, some lose money, but taken as a whole, I need to make sure we meet out goals. The CLASS Act is part of the ACA. The ACA needs to not add to deficits as a whole. I have no problem with making it clear which parts of the ACA work better than others and adjusting them as they go along, but I dont think that each individual part needs to score positively.


    • hello again

      is there a way I can email a document to you? I notce that Avik has inadvertently added misinformation about CLASS, quoting from an out of date C BO analysis and then also attributing to CBO something that Foster wrote which also is not focused on the law as passed. it would be better for this fine discussion to have access to the accurate references and full arguments. it is certainly NOT true that there is “overwhelming evidence and consensus” that CLASS is unsound. the truth is quite the contrary

    • steve, the government does not account like a corporation, if they did this entire charade with the CLASS Act would not be allowed. I’m a health actuary, and at the moment my primary responsibility is setting reserves, the amount of the current premiums that you set aside for future claims. If you sell a product with front-loaded premiums you cannot spend that money on something else, you have to hold it in reserves to remain solvent. So if you want to analogize this to the way a private business is run the entire thing falls apart. If I launched a new LTC product and took all those early premiums straight to the bottom line the state insurance regulators would shut us down and the Academy of Actuaries would strip me of my credentials.

      And to your point about some things making money and others losing money, this is acceptable if the money loser is legally required, is needed to remain competitive, leads to sales of other products, helps to amortize fixed expenses, or is financially useful in some other way that makes up for the expense. This is not the case with the CLASS Act. The only reason it is in the bill is because the government uses cash accounting and they can call it deficit-reducing.

      And finally, I think you may have misunderstood my comment anyway. The sentence you quoted was merely alluding to and agreeing with Austin’s point in that 2nd to last paragraph, that whether or not the CLASS Act is sound is a separate issue from the rest of PPACA. If it is not actuarially sound this says nothing about the rest of PPACA.

    • “or is financially useful in some other way that makes up for the expense”

      Is there any other are of health care which is more poorly funded or paid for than long term care? Have you somehow missed all the ads about how you can hide your assets and have Medicaid pay for your long term care? Given that private insurers do not seem especially interested in this product, providing an insurance program that covers this needs seems like a reasonable, even necessary to a comprehensive approach to health care reform.

      From my POV, it looks like you want to treat this as a self contained insurance program. I see it as a necessary piece of increasing coverage in a needed area AND getting people to pay for their own care.


    • If a federal LTC program could make a significant dent in the money Medicaid is spending on LTC, there would be some value in that. But why speculate? That is exactly what the CBO should have been quantifying. I don’t recall reading anything in the various CBO publications indicating that CLASS would have a sizable impact on Medicaid spending.

      “From my POV, it looks like you want to treat this as a self contained insurance program. I see it as a necessary piece of increasing coverage in a needed area AND getting people to pay for their own care.”

      I’d be thrilled to have people paying for more of their own care rather than charging it all to Medicaid, if we can do it in a reasonable and sustainable way. And as designed, this program is meant to be break-even, so there is potential for it to work out that way. My problem here is not with the CLASS Act itself (though as I’ve said I do have serious concerns about the design of the program and whether it can remain solvent), but with people claiming that the program improves the federal budget. Whether the program will fall victim to an adverse selection spiral is a legitimate concern, but it’s an entirely separate issue from the fallacy of claiming it reduces the deficit.