• The CLASS Act

    I have not done anything like a thorough investigation of the CLASS Act. However, I just stumbled across the following. Given the source and references, I’m not as worried about the CLASS Act as some people seem to be. Naturally, I expect motivated, informed readers to share credible, relevant documents that may conflict with this.

    From The Center on Budget and Policy Priorities:

    Does CLASS create a big unfunded entitlement?

    No. Unlike some other recent programs, such as the Medicare drug benefit, CLASS is fully paid for by beneficiary premiums, not deficit-financed . The law specifically requires the Secretary of Health and Human Services to design the program’s benefits and set the premiums to assure that the program takes in as much money as it pays out for each generation of workers. The Congressional Budget Office (CBO) has affirmed CLASS’s solvency over the long term. Based on conservative assumptions — an initial average premium of $123 a month and an average daily benefit of $75 — CBO estimates that CLASS will be fully self-financing over the next 75 years.[3]

    Are premiums from CLASS being used to finance health reform?

    No. By its very nature, a premium-financed program such as CLASS reduces the federal budget deficit in its early years, when many people are paying premiums and few have yet become eligible for benefits. Congressional leaders, however, crafted the health reform legislation so that it is fully paid for without relying on premiums from CLASS. The CBO estimate clearly shows that if one excludes the $70 billion in premiums from CLASS that are expected to be paid over the first ten years, health reform still reduces the deficit by $73 billion over this period. [4] The effects of CLASS are also excluded in determining whether Congress has met the new statutory pay-as-you-go requirement for legislation affecting mandatory spending and revenues.[5]

    CLASS would begin to add slightly to the deficit after 2029, as the benefit payments made in those years would somewhat exceed the premiums collected in those years. The program is designed to be fully self-financing over 75 years without needing to have premiums precisely match benefit costs in each year. Moreover, CBO has determined that CLASS’s impact on the deficit after 2029 will be small and that the health reform legislation as a whole — including CLASS — will reduce deficits modestly in future decades. […]

    [3] Douglas W. Elmendorf, Director, Congressional Budget Office, Letter to the Honorable George Miller, November 25, 2009.

    [4] Douglas W. Elmendorf, Director, Congressional Budget Office, Letter to the Honorable Nancy Pelosi, March 20, 2010.

    [5] Statutory Pay-As-You-Go Act of 2010 (Public Law 111-139), section 4(d)(6).

    • OK, I will bite.

      I understand that folks of lesser means can buy in at a minimal cost (I think for $5 in 2011 dollars). There are many who are concerned that this will create an adversely selected pool of folks. Because the law allows the HHS Secretary to adjust premiums to keep the programs sound, many fear that rates will become prohibitive, and without employers opting in all workers, employees will balk and take a pass, ie, too costly.

      I have attended talks and dispassionate experts seem to concur that CLASS program is risky and potentially actuarially unsound. Of course, if the pool of individuals participating is deep and wide, all bets are off. However, given the usual behavior of us humanoids, I would not bet on it.

      I have gotten the same responses from policy experts on blog site postings btw, but dont have references handy.

      I hope the program succeeds, but IMHO it is uncertain right now. Looking forward to other responders to your query Austin.


    • You may wish to review the CMS Office of the Chief Actuary Memo from April 22, 2010 re: Estimated Financial Effects [of the PPACA], see especially pages 14-15, for another viewpoint.

    • Austin: I’m a frequent reader of the blog, though a slightly less-frequent agree-er. I am a long-term care pricing actuary working for a large insurer here in the Boston area.

      My concerns with the CLASS Act are two-fold: one of anti-selection and one of necessity.

      Anti-selection: A second American Academy of Actuaries paper that you do not cite is one published in Nov 2009. Here a number of LTC pricing actuaries with plenty of experience between them, estimate that – contrary to the CBO’s estimate of $123 / month being a reasonable premium, the amount should be closer to $160 for the $75 daily benefit, or about 30% higher.


      This premium was arrived at only assuming that many of the issues of anti-selection inherent in the current program (e.g. the opt-out and guaranteed issue provisions) are mitigated.

      Currently in the LTC insurance world many large insurers are filing with state regulators in order to raise premium rates on their in-force policies (not a standard practice –premiums are intended to be sufficient for the life of the policy) due to underestimating morbidity and lapse assumptions, among others. These (quite large) assumptions are moving targets and LTC is a relatively new product; we are constantly calibrating these assumptions. With such uncertainty even in the private market, I question the prudence of a Federal act which declares that this should be available to everyone, that the benefit level of $75 / day is appropriate (it seems low, actually), and that the $123 / month premium now arrived at will certainly be sufficient to pay all future benefits over a 75 year horizon.

      Which brings me to my second objection: necessity. I have always viewed LTC insurance as a sort of luxury good, for those who have substantial assets to buy some peace-of-mind to protect those assets in the future in case of a long-term debilitating illness. I don’t understand why this benefit must be deemed as ‘necessary’ and federally mandated that everyone must be given the opportunity to purchase it. Citizens can do so today, given that they can pass underwriting or that they are employed with a company that offers it guaranteed-issue as a group LTC policy. The industry currently has such a low participation rates that it seems foolish, risky, and imprudent to expand such a new and somewhat-volatile benefit to all with a government-backed guarantee.

    • I agree with the issues raised by the Academy and other commenters re: the likelihood of the CLASS Act being actuarially unsound. But as it relates to health reform, those quotes from CBPP are a bit misleading.

      On the first: the CLASS Act does in fact create an unfunded entitlement, though the means in which it does so is similar to other government programs. The premium surplus in early years goes into the CLASS Act trust fund. This is similar to the way a private company selling LTC insurance would hold reserves. Except instead of keeping the money in the trust fund, the government spends that money and replaces it with treasuries. This is why the CLASS Act increases the deficit in later years, because when claims start to exceed premiums there isn’t any money in the trust fund, so the government has to come up with that money from somewhere else. In fact, it is completely contradictory for CBPP to say that CLASS increases the deficit in later years but it is not an unfunded entitlement. That is the very definition of an unfunded entitlement. If the CLASS Act actually kept those premiums in the trust fund it would not be unfunded. But then you could not claim to have reduced the deficit by $70B in the next 10 years.

      And on the second quote: it is true that the CBO scores PPACA as reducing the deficit even without the CLASS Act premiums, but those savings are being inappropriately counted by anyone saying PPACA reduces the deficit by $143B, as CBPP does on a regular basis. They’re playing a clever word game by saying that CLASS is not paying for health reform, yet counting that $70B as “savings”.