Update On The CLASS Act

    The CLASS Act was originally recommended by Senator Ted Kennedy about seven years ago. Some advocates envisioned a new social insurance program with mandatory enrollment and a cost funded by a payroll tax split 50/50 between the employer and the employee, like Social Security.

    However, for a number of reasons, a mandatory program was not politically feasible. CLASS was structured as a voluntary program during the health care reform debate.

    During the health care reform debate, many people considered passage of CLASS to be desirable as a tribute to Senator Kennedy, who had recently passed away. However, the major reason CLASS was heavily promoted seems to have been that it helped make the Patient Protection and Affordable Care Act (PPACA, the administration’s health care reform proposal) appear not to increase the budget deficit.

    The Congressional Budget Office (CBO) is required to “score” bills based on projected results over a 10-year horizon. This 10-year limit was imposed many years ago, to avoid the risk that overly optimistic long term projections would result in the passage of bills that would produce long term deficits. While well-intended, this rule, like others, can have unintended consequences.

    CBO-required accounting for CLASS contributed to misleading short term analysis of the cost of health care reform. The CBO tried to sound the alarm; however, its report was quoted selectively and its warning was ignored.

    Regardless of whether you support or oppose health care reform, the version in PPACA was priced with what former CBO director Douglas Holtz-Eakin kindly referred to as “gimmicks” in his article, “The Real Arithmetic of Health Care Reform” (The New York Times, March 21, 2010). The cost of the program was distorted by:

    1. Benefits deferred for four years resulted in comparing 10 years of revenue enhancements to only six years of outgo in the official scoring of the bill. In subsequent decades, 10 years of benefits as well as 10 years of revenue will be included, resulting in a significantly different picture. (Furthermore, the subsidy of the elderly in PPACA will become more expensive after the 10-year window.)

    2. Medicare savings of $500 billion were allocated to acute health care costs. Naturally, the next actuarial report on Medicare indicated that Medicare’s deficit had reduced as a result of these same savings, which had already been allocated to acute health care costs. That is, the savings were counted twice! The actuarial report had it right—the pricing of PPACA was flawed.

    3. Administrative costs associated with health care reform were ignored. Holtz-Eakin estimated that in the future, Congress would have to authorize $114 billion to cover administrative costs. As he specifically referred to Congress, it seems that he did include the cost of unfunded state mandates. (Of course the cost to be incurred by businesses to implement the acute health care changes and CLASS would not be included in any scoring of the bill because the scoring relates to government accounts only.)

    4. The CLASS Act (an LTC insurance program) was created. According to a letter from the CBO to Senator Tom Harkin, it “would add to budget deficits in the third decade (and in succeeding decades) by amounts on the order of tens of billions of dollars for each 10-year period.” The CBO projected $72 billion in “savings” attributable to the CLASS Act over 10 years because it assumed that not a single penny would have to be set aside to cover future claims. By contrast, the private LTC insurance industry is required by law to set aside huge reserves to pay future claims.

    5. The Social Security tax was increased. However, the resulting funds were diverted from Social Security and spent on acute health care (as was done with the Medicare savings mentioned in number two, above). Thus the PPACA worsened the plight of both Medicare and Social Security by removing potential funding methods that would have put both programs on sounder footing.

    6. The student loan program was nationalized. Yet the $19 billion of projected savings had no relevance to health care reform and should have been allocated to reducing the budget deficit.

    Alice Rivlin, CBO director under President Clinton, also criticized at least some of the above accounting.

    In fairness, PPACA could lead to some enhanced revenues that were not projected. If it improves the health of just some of the U.S. citizens, the result could be that these citizens are able to be more gainfully employed, generating taxes paid by them and their employers.

    The CLASS Act wording required that it be self-supporting for 75 years. Keep in mind that if the intended premiums are charged throughout the 75-year period, the fund would run out of money after today’s newborns have paid premiums but before most of them would receive benefits.

    In other words, the CLASS program was to be priced so that future increases were expected. Yet this pricing and the lack of reserves are two of at least 20 aspects of CLASS that the private LTC insurance industry is not permitted to address.

    During the course of the health care reform debate, many experts, including people within the administration, expressed the opinion that the CLASS program could not satisfy the law’s requirement of being self-supporting. Claims would overwhelm premiums, and the 3 percent of premiums that were allocated to cover administrative expenses was insufficient.

    The advocates, including the administration, insisted that CLASS could (and would) be self-supporting, that premiums would be sufficient, and that 3 percent of premiums would cover expenses.

    In September 2011, Republicans issued a paper calling it a “scandal” and that the administration did not heed the warnings of its own staff.

    From my perspective, it is management’s job to assemble a team that will have differing opinions and will speak up. In such a healthy environment, management has the responsibility of making the final decision, thereby overriding the opinions of some staff. If management demonstrates integrity while overriding some staff recommendations, they have acted properly. Criticizing them for overriding staff is counter-productive to our society’s needs.

    The United States needs a government that is comfortable fostering internal debate, rather than one that hires only “yes-people,” in order to avoid criticism.

    As it turns out, immediately upon the passage of PPACA, advocates sounded a different theme: (1) They pointed out that, although the bill said that only 3 percent of premiums could be used for expenses, it did not preclude covering expenses from general revenues and that it was their intention to rely on general revenues (i.e., more PPACA administrative costs were ignored in “scoring” the bill). (2) More importantly, Secretary Sebelius of Health and Human Services (HHS) publicly stated that CLASS was untenable as designed.

    The timing of these statements—right on the heels of passage—suggested that the advocates and administration might have known the critics were right but vociferously disagreed to foster the impression that PPACA would not increase the deficit.

    HHS hired an actuary to design a program that could be self-sufficient. HHS staff expressed intent to design a program that was inconsistent with the requirements of PPACA. They acknowledged that HHS efforts might be blocked. Secretary Sebelius talked about such modifications.

    After the actuary filed his report to Secretary Sebelius, HHS concluded that it no longer needed his services and they transferred CLASS staff to other projects. When reporters indicated that CLASS had been “dismissed” (abandoned), HHS demurred at first.

    Then, on October 14, 2011, CLASS Administrator Kathy Greenlee, who reports to Secretary Sebelius, submitted a report that concluded, “I do not see a path to move forward with CLASS at this time.”

    Clearly, she and Secretary Sebelius had agreed upon this conclusion in advance, as Secretary Sebelius wrote to Congress the same day, stating, “But despite our best analytical efforts, I do not see a viable path forward for CLASS implementation at this time.”

    HHS decided, perhaps due to the political climate, to abandon its previously stated intent to implement a plan that differed from the provisions of the CLASS Act.

    In her report to Secretary Sebelius, Ms. Greenlee stated, “These analyses indicate that the premium for the basic CLASS benefit plan, which is the benefit design that follows from the most natural reading of the statute, produces a benefit costing between $235 and $391 a month, and may cost as much as $3,000 per month, if adverse selection is particularly serious…We have identified potential benefit plans that could be actuarially sound and avoid the risk of adverse selection.

    “…All of these design options rely on the following strategies: They significantly increase the minimum earnings requirement specified in the statute, modifying it from $1,120 to at least $12,000 per year; they alter the benefit package so that it more closely resembles the typical package in the private market; and they phase enrollment in the plan, initially limiting eligibility to groups with better-than-average health risk profiles. While these benefit plan options show some promise in achieving actuarial solvency, they may be inconsistent with other provisions of the statute…In other words, as we take necessary steps to mitigate solvency risks, we concomitantly raise the legal risk that the plan could be found impermissible under the statute.”

    After Ms. Sebelius submitted her letter to Congress, the administration seemed to have clearly stated that CLASS could not be implemented in sound fashion. However, on October 18, White House spokesman Nick Papas said, “We do not support repeal. Repealing the CLASS Act isn’t necessary or productive. What we should be doing is working together to address the long term care challenges we face in this country.”

    Many people thought that the White House was resisting repeal of CLASS because the planned on $72 billion of budget savings would not materialize. From my perspective, the failure of CLASS is a blessing for the administration because they can now say that the $72 billion disappeared because CLASS could not be implemented, skirting the issue that the $72 billion was fictitious in the first place. The CBO eliminated this issue by removing the CLASS Act “savings” from the budget the same day that Mr. Papas spoke.

    Now, many people are seeking another “solution.” The left continues to believe that LTC is too expensive for people, therefore the government needs to pick it up somehow. The right essentially wants to rely on personal responsibility.

    There are a number of small things that can be done, but there are two big opportunities:

    1. Proper Medicaid LTC reform can reduce Medicaid costs substantially while making desirable home care more affordable to many people. (An article I wrote on this topic was published on October 24, 2002, by the Center for Long Term Care Financing.)

    2. Death with dignity can resolve a lot of acute health care costs in our country as well as LTC costs. A very large part of the cost to the U.S. health care system is incurred during the six months prior to death. Providing such care is humane, but requiring people to receive such care is inhumane and violates individual freedom, in my opinion. Some healthy seniors commit suicide due to fear that they will eventually lose control of their lives.

    The smaller steps include, but probably are not limited to:

    1. Senator John Thune’s suggestion to allow tax-favored withdrawals from 401(k) and 403(b) plans to pay for LTC insurance. Withdrawals from IRAs to pay for LTC insurance could also be tax-favored. Other potential tax changes include:

    • Tax break limits by age are so steep that they cover a very small part of the premium at the younger ages. The unexpected result is that the tax breaks below 50 do not accomplish the intention; thus increasing them would make sense.

    • There are strong arguments that  HSA withdrawals to pay LTC insurance premiums should be uncapped.

    • If tax deductions were changed to a lower figure that was a tax credit, it could be more beneficial to the middle class. (That would be a controversial change, compared to the others.)

    2. The Partnership programs need to be “cleaned up,” but doing so is not likely to increase sales meaningfully.

    • More spotlight on the Partnership might help a bit.

    • Some believe that replacing the “dollar-for-dollar” Partnership model with 100 percent asset disregard with the purchase of a three-year benefit period or perhaps even a lower benefit period. I do not support this idea.

    3. Insurers need encouragement to enter or stay in the market and to lower pricing. At this time, the low interest rate environment is extremely troublesome for the insurance industry because most benefits are paid by investment income rather than premiums. Interest rates have continued to drop and our government intends to keep them low for the next few years. (I am not criticizing that plan, just acknowledging it.) The low interest rates are hard to deal with.

    • If the insurers assume that interest rates will increase in the future, they end up with lower premiums, which help the market. However, if interest rates stay low, the insurers have huge losses and states don’t allow them to recoup investment income shortfall through rate increases. Perhaps the industry could be allowed to market a policy that has a lower premium scheduled to increase to a higher level if interest rates don’t rebound. Or maybe carriers could start with a higher premium that drops if interest rates rise. Obviously, there would be a lot of issues that I have not even tried to address yet.

    • I understand that Canadian valuation laws require insurers to presume that future interest rates will be no higher than current interest rates (some of our insurers are Canadian-owned). I’ve heard that there are discussions which could conceivably lead to the same interpretation in the United States. I am not involved in such discussions; maybe I’ve misunderstood. To the degree this is true, it seems that reserves could swing wildly from year to year. We should consider ways to avoid such an undesirable result and to avoid requiring a reserve level which may be too likely to be redundant.

    4. Could the cost of LTC (as opposed to LTC insurance) be lowered by the government and/or the insurance industry?

    • Connecticut requires care-giving businesses to give a 5 percent discount to Partnership policyholders. I’m not sure that makes sense.

    • Perhaps the government could negotiate discounts for Partnership policyholders. Lower care prices would help LTC insurance stretch further. Encouraging LTC insurance would produce more private-pay clients for LTC providers, which is important for the providers.

    • Maybe the industry could band together to negotiate such price discounts.

    • Could proven cognitive enhancement tools (or other approaches that would limit future LTC costs) be treated favorably as health care costs?

    Note: The government has been increasing the cost of private LTC by underpaying for Medicaid recipients. Thus, providers have to raise private pay rates to make up for their inability to cover overhead with Medicaid patients.

    I wouldn’t be surprised if there are other ideas that might help insurers serve the market.

    Claude Thau is the national brokerage director for USA-BGA, which helps financial advisors nationwide serve their clients’ long term care, life insurance, annuity and disability planning needs. He also markets unique software that, among other exclusive features, provides fiduciary justification for advisors’ long term care projection assumptions and consults with entities interested in the long term care insurance industry.

    Thau is well-known to Broker World readers from authoring the annual LTCI surveys since 2005. His career highlights include being a former inner-city school teacher and actuary, running a national carrier’s LTCI division, consulting for the Federal government when it developed its LTCI program and being named by Senior Market Advisor as one of 10 honorees on its Long Term Care Insurance Power List in 2007.