The shortcomings of the CLASS Act (a long-term care social insurance proposal in the US)

Upon the late Senator Ted Kennedy's death, I briefly mentioned an analysis I did of a proposal that would provide insurance to people needing long-term care. 70% of Americans over age 65 will need some long-term care at some point in their lives. They will need an average of about 2 years, although 20% will need 2-5 years of care, and another 20% will need over 5 years of care. Not all of this 70% will need care in a nursing home. The majority (70+%) of people receive care solely from unpaid caregivers; these are mainly women. Unpaid caregivers incur substantial opportunity costs in helping their relatives, like lost earnings.

The Community Living And Social Supports Act (CLASS Act) is mainly targeted at unpaid caregivers. The Act's benefit would be insufficient by itself to fund a long nursing home or assisted living facility stay. It would play a role similar to Social Security, which is not sufficient to fund retirement by itself for most Americans (albeit most low income folks live solely on Social Security).

However, I strongly suspected that the late Senator was charging too little. The American Academy of Actuaries did an analysis that confirms this. The CLASS Act is structured as an opt-out provision; Sen. Kennedy's office felt that this would lead to much higher participation than a voluntary enrollment program, but AAA believes that only 6% of eligibles would enroll. They also believe that premiums would need to average $125 per month (as opposed to the $65 specified in the Act) for the program to be actuarially sound, and that the premium would need to increase with inflation yearly. The CLASS Act specified that people who enroll should pay the same premium for the rest of their lives; AAA estimates that people would need to pay $160/mo under this structure to achieve actuarial soundness. For the Act to be actuarially sound, its fund would need to be able to pay benefits for 75 years, which is similar to the specifications for Social Security.

With voluntary participation, the Act runs into two problems. One, with low participation, administrative expenses are relatively higher. The Social Security program's administrative expenses are under 1% of premiums collected. The Actuaries estimate that the CLASS Act's administrative expenses would be as high as 7% of premiums collected. Two, there will be adverse selection. People who have good reason to think they may be disabled (for example, who have a chronic disease or a history of disability in old age) will enroll and then collect benefits after the 5-year vesting period. Healthier people and younger people will put off enrollment unless they feel they may need it. The poor are offered the chance to enroll at a significant discount, and they have higher disability rates than average, so they will be more likely to enroll. All these will drive expenses up; the AAA analysis accounts for this effect.

The Democrats have three options regarding the CLASS Act. They can scrap it or make it mandatory. If they insist on continuing it as a voluntary program, they could increase the vesting period to 10 or 15 years (in other words, you must pay premiums for 10-15 years before you can collect any benefits). They can also consider implementing a deductible (in LTC insurance, this is structured as an elimination period, which is a set length of time after you become disabled for which the insurance doesn't pay). It would be possible to start the Act as a voluntary program, and later make it mandatory. The only way to make it a really sound and effective program is to have mandatory participation, which is also applies to regular health insurance.

Shawn Tully of CNN Money argues that the Democrats are interested in the CLASS Act because it has a budget gimmick effect. The US uses a 10-year budget window - expenses and tax collections are anticipated 10 years ahead under current law or a proposed change to the laws. The CLASS Act brings in money over the next 10 years on net, but after that, expenses will increase significantly. For better or worse, like Social Security, the funds collected in taxes are not segregated from general funds. In other words, it looks like the CLASS Act is contributing $58 billion dollars to offset the anticipated costs of health reform; the Democratic House bill is about $250 billion short right now. Tully's opinions on health reform are detestable, but lawmakers would be best advised not to use the CLASS Act as a budget trick. Health reform needs to be paid for, and you also cannot enact a long-term care program that will not be paid for.