There is broad agreement that the Community Living Assistance Services and Support (CLASS) Act, as passed by Congress, will be a challenge to implement successfully. Where disagreement lies is in the ability to change the program and the level of changes that are necessary to launch a sustainable and effective program. In this article I provide an analysis of CLASS as it stands today and offer an alternative approach that will more effectively and broadly meet the goals of the program and the needs of consumers.
CLASS Adjustments
The goals of the CLASS program as stated by Kathleen Greenlee, Assistant Secretary for Aging in the U.S. Department of Health and Human Services’ Administration on Aging, are “to create an opportunity for individuals to prepare financially for their own long term needs, support consumer choices related to their own care and living arrangements, and facilitate independence and community living.
”The authors of the CLASS program point to the institutional bias and the impoverishment provisions of Medicaid as the only source of support offered to most households. While this is indeed a gross mischaracterization of some innovative state Medicaid programs, it is indeed a painful general truth. State Medicaid programs are in the midst of a significant crisis; however, CLASS will not help the people it is intended to help if it is designed to fail. The Administration has a difficult task ahead of them to construct a program under the law that is sustainable and enables broad and meaningful participation.
Adjustments that have been presented in public forums, such as the recent testimony by the Assistant Secretary, include the use of indexing premiums, increasing penalties for delayed enrollment or opting back in, increasing the “actively at work” definition to a $12,000 annual income level, and reducing the one-size-fits-all aspect of the program. The presumption within this latter adjustment is that alternative benefit levels and durations are being pursued. Whether these adjustments can be made without legislation is immaterial. The real question is whether the adjustments will yield a sustainable and effective program.
The Participation Play
Greenlee stated that participation is key for the success of the program, which is true to a limited extent. Once the appropriate level of scale is achieved, the sustainability of the program should not vary based on whether one or a million additional policies are sold. Participation is a variable that impacts the financial sustainability of the program and should not be a core foundation for pricing an insurance program.
The hope that healthy employees will purchase CLASS and retain coverage through lean financial times is of special concern in a very long duration program, where ongoing adverse selection and induced demand issues are ever-present. Any one of a number of long term pricing assumptions could bankrupt the program—a simple example is the number of subsidized premium participants.
A voluntary guaranteed issue program is considered by many to be a contradiction. To be successful, CLASS will need to do one of two things: either significantly reduce the guaranteed issue aspect or make use of an individual mandate. The former produces a program that mimics private group long term care insurance. The latter is a social program directly funded through general revenue such as payroll deductions.
Complementary But Different?
In general, the group long term care insurance market offers guaranteed-issue coverage for employees who are actively at work and enables spouses of employees to purchase coverage if they are able to pass underwriting. The use of simplified or medical underwriting on employees is rare and limited to certain cases such as the purchase of high amounts of coverage, unlimited benefit periods, or coverage purchased after the initial offering. In addition, the employer, the insurance carrier and the broker or agent spend a significant amount of time marketing the product to employees through the use of employee meetings, marketing materials to encourage enrollment and web-based product demonstrations.
According to Towers Watson’s Mark Warshawsky’s testimony in front of the health subcommittee of the House Committee on Energy and Commerce, “About 50 percent of large employers offer but do not subsidize long term care insurance to their workers,” yet participation rates for these voluntary worksite benefits remain in the mid-single digits. Reasons for the low participation levels have been attributed to the general reliance on Medicaid as the “payer of only resort,” the lack of strong tax incentives to purchase, and the very limited focus on retirement and financial planning. Furthermore, affordability cannot be ignored.
Affording to a 2009 Society of Actuaries study on Retirement Risks and Solutions, 25 to 75 percent (the middle mass) of households within the pre-retirement ages between 55 and 64 have an average annual gross household income of $57,000. Given the current cost of housing, college tuition and saving for retirement, there is little left for a premium ranging from $65 to $240 per month.
It is clear that private insurance product sold through the group channel is quite similar to what CLASS will likely become.
The markets may be complementary in the level of benefits that are offered, but are the markets and the approach to sales significantly different? One area of difference will be the budget available to market CLASS. Within the Administration’s current budget proposal is more than $90 million for CLASS marketing. While this will go quite a long way to educate the public on the financial risks they face, will it enable CLASS to enroll beyond the mid-single digit level? Will this be money well spent for a small level of CLASS participation?
Never Let a Serious Crisis Go to Waste
This quote, spoken in support of the economic stimulus bill by fellow Chicago native and Mayor Rahm Emanuel, can also be said of today’s Medicaid. State Medicaid programs are facing crises, and the opportunity to reform should not go to waste. These programs should be reserved for the truly impoverished and for circumstances in which care is needed for catastrophic occurrences. Currently, the ability to qualify for Medicaid through artificial impoverishment is far too easy. This has encouraged a reliance on Medicaid as the product of choice for catastrophic long term care needs and discouraged the responsible purchase of an insured solution.
A common reason given for the creation of CLASS was the perceived institutional bias and impoverishment requirements of medicaid programs. The inability to qualify for benefits and remain in the community is also cited. To attain the same goals, CLASS supporters should refocus their energies on enabling states to administer Medicaid so that it is an efficient means of funding care for the truly impoverished and unfortunate, rather than a dependency for the many. Such a move will have strong and wide support, as without such changes Medicaid will not be able to continue even the basic mission of assisting the impoverished.
With support from the research gained from CLASS, these improvements can increase the reach of Medicaid to reverse many of the recent cutbacks in benefits. Furthermore, the absence of an assumed dependence on Medicaid, beyond the truly catastrophic safety net, will increase the enrollment in insurance products that meet the needs of consumers, thereby reducing the burden on Medicaid.
The Assistant Secretary stated that Medicaid nursing home care costs “are a key source of financial stress on public budgets.” Unfortunately, the likely outcome of CLASS will not significantly change this anytime soon. It is time for an effective approach that is based on sound and efficient public policy solutions instead of a program that may have limited participation and an uncertain future.
