Tuesday, October 20, 2009

Update on the CLASS Act: changes have made this long-term care insurance program viable

Earlier, I criticized the CLASS Act, a long-term care insurance proposal that the late Sen. Kennedy sought to add to health reform. I felt that the program would not be financially viable.

However, I was at an event hosted by the Kaiser Family Foundation earlier today, where several panelists discussed the CLASS Act. It seems that changes have been made to the program structure. One of the key ones is that there is now a work requirement in the initial 5 year vesting period. Enrollees must pay premiums for 5 years in order to be eligible for benefits; now, they must also be working 3 out of the 5 years. This will inevitably weed out some elderly folks who would otherwise have paid premiums and then have become disabled and been eligible for the benefits almost immediately after the vesting period was over.

That's tough for those folks. However, any voluntary insurance program must deal with this problem, known as adverse selection, in some way. Basically, adverse selection happens when more sick people enroll in one insurance plan than in others, which drives up premiums for those in the plan. Social insurance programs usually deal with adverse selection by mandating that everyone enroll. Private insurance programs usually underwrite, or charge people different premiums based on their health status or other risk factors.

The changes do mean that the CLASS Act will probably be viable as a voluntary program. It was especially striking that Paul van de Water, a senior fellow at the Center on Budget and Policy Priorities, said that whatever deficits the Act produced past the 10 year budget period would be manageable. If the Act would have killed the Federal budget, I am certain Dr. van de Water would have said so; he was a very senior official at the Congressional Budget Office.

It does remain to be seen how many people enroll. The American Academy of Actuaries and the Congressional Budget Office both project around 5% enrollment, which is quite low and which is about the number of people who are enrolling in private long term care insurance programs today. CBO is the official scorekeeper for the U.S. Congress and is well-regarded and non-partisan. AAA is also non-partisan, and has considerable actuarial expertise. Of course, the U.S. has never done anything like this, and so their 5% figure might turn out to be pessimistic; if more people, especially more young people, enroll in the CLASS Act, then the premiums will be lower than what we might otherwise expect. Conversely, if the initial enrollment is older, the premiums will be higher.

If the CLASS Act gets wide enrollment, it could be transformative for long-term care. Far fewer people who could otherwise be supported in the community would be forced into Medicaid (the program for the poor) and nursing homes. Most long-term care is given informally by family members, mainly women; these caregivers would now be able to replace some lost income and hire respite care as needed (respite care means hiring a paid caregiver so you can get a break). The CLASS Act wouldn't solve all the U.S.' long-term care problems, but it would be a big step forward. As long as the financing is sound, I hope it passes.

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