For an overview of the
Community Living Assistance Services and Support (CLASS) Act see my posting
here.]
During the summer markup sessions in the Senate's Health, Education, Labor, and Pensions (HELP) Committee,
Sen. Judd Gregg (R-N.H.) offered an amendment, passed unanimously by the committee (and included in final passage of H.R. 3590/P.L 111-148, the Patient Protection and Affordable Care Act of 2010), that the CLASS Act would be actuarially balanced over 75 years. According to the CBO: “Actuarial balance means that expected insurance premiums plus the interest earned on such premium income would equal or exceed the expected cash payments for future benefits and the administrative costs of operating the program” (Elmendorf 11/25/2009:2).
To that end the law requires the Secretary of Health and Human Services to develop a financially sound program with the best mix of benefits and premiums that will both meet customers’ needs and assure program solvency. Collected premiums—the Congressional Budget Office (CBO) based their estimates on an average premium of $123/month and an enrollment of 5 percent of the adult population (Elmendorf 11/25/2009)—will be earmarked for the CLASS Independence Fund and will be invested and managed, “in the same manner, and to the same extent, as the Federal Supplementary Medical Insurance Trust Fund” (Section 3206 of H.R. 3590, p 1927), by the Secretary of the Treasury. In order to build up an adequate reserve in the Independence Fund the federal government will begin collecting premiums in 2012, but it will not begin to pay out benefits until 2016.
As a consequence of this 5-year vesting period and the Act’s requirement for actuarial soundness, the CBO scored the program as reducing the federal deficit by $70.2 billion in the first 10 years after enactment of health reform. Legitimate fiduciary risks aside, if the actuarial estimates conducted by the CBO are accepted as reasonable such measures should insure that the CLASS Act will require no taxpayer funds and will have no net effect on federal debt over its first 75 years. Although Senator Gregg would later join all of the Republicans to vote against inclusion of the CLASS plan, the HELP committee’s passage of his amendment accepting such a degree of fiscal responsibility assured him that “instead of promising more than we can deliver, the program will be fiscally solvent and we won’t be passing the buck—or really, passing the debt—to future generations” (Gregg 2009).
Still, senators opposed to the new entitlement frequently cited the CBO’s own cost analysis of health reform to argue that the CLASS Act “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” (Elmendorf 2009). Given the casual accounting of how Democrats disingenuously sold the general deficit-cutting impact of health care reform by factoring in the CLASS Act’s surpluses, Republican senators, such as
Sen. Tom Thune (R-S.D.), were not without justification to refer to the CLASS Act’s savings as a "sham…a budget gimmick" intended to inflate the savings of the health reform (
Congressional Record 111-1(12/4/2009): S12389).
Republicans were not alone in their discomfort over the program’s potential costs. No less an authority on government finances than the chairman of the Budget Committee,
Sen. Kent Conrad (D-N.D.), provided much critical fodder to the opposition when he characterized the CLASS Act as “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” He vowed to block its inclusion in the Senate bill (
Montgomery 2009). Fearing another costly and potentially underfunded entitlement, Conrad and five other left-leaning senators wrote to majority leader,
Sen. Harry Reid (D-Nev.), requesting the removal of CLASS Act from H.R. 3590. The senators expressed "grave concerns” and described the CLASS Act as “not fiscally responsible” in its creation of a costly, if “laudable,” new entitlement that “bends the health care cost curve in the wrong direction.” “We urge you not to include these provisions in the Senate’s merged bill, nor to use the savings as an offset for other health items in the merger,” they concluded (quoted by Sen. Thune, see
Congressional Record 111-1(12/4/2009): S12389).
Asked by how the Senate leaders could get a sufficient number of moderates to break the threat of a Republican-led filibuster over health reform,
Sen. Joe Lieberman (Ind. D-Conn.) explained to Bob Schieffer on CBS'
Face the Nation that (along with eliminating the public option and refusing to consider any kind of Medicare buy-in for younger Americans), “You probably have to take out the CLASS Act, which was a whole new entitlement program that will, in future years, put us further into deficit” (
Face the Nation 2009)
All the liberal cosigners of the Reid letter as well as five other Democrat senators joined with their Republican colleagues and voted in favor of an amendment (SA 2901), offered by Senator Thune, to strip the CLASS Act from the health reform bill.
[1] Yet, despite the amendment attracting a majority of senators, the 51 affirmative votes fell well short of the two-thirds needed to rescind the provision from the bill.
To assuage the concerns of his colleagues,
Sen. Sheldon Whitehouse (D-R.I.) offered an amendment (incorporated as Title I, Sec. 1563 of H.R. 3590) on the floor expressing the sense of the Senate that any immediate savings for long-term care, generated by premiums collected from individuals participating in the CLASS plan, be protected for future beneficiaries. He leveled the accurate charge of hypocrisy at the Republicans whose opposition to CLASS was a “stark contrast to their tolerance of their Medicare Part D program.” Contrasting CLASS to the prescription drug program that was structured as a “massive handout to the pharmaceutical companies” that was “fiscally irresponsible” and “completely unpaid for” he charged:
It seems there is an enormous double standard between programs designed for the benefit of, say, the pharmaceutical industry, or perhaps the insurance industry, and the standards they would apply to programs that benefit people who suffer from the onset of a disability—regular Americans, regular families. (Congressional Record 111-1(12/3/2009): S12301)
There can be no doubt that Senator Conrad was relying upon Senator Whitehouse’s amendment when he rebutted Republican derision and backtracked from his oft-repeated “Ponzi scheme” quote. “[T]hat reference was to an earlier version of the legislation that used CLASS Act funding to pay for other provisions,” Conrad explained. “That has now been changed,” he added, presumably in reference to the agreement that no CLASS savings would be used to offset other parts of the health reform package (
Health Care Administrators Association 2009).
Yet, Senator Conrad could not resist including the CLASS program’s surplus revenue when championing the fiscal prudence of health reform. “This measure [H.R. 3590] reduces the budget deficit by $130 billion over the first 10 years and more than $1 trillion in the next decade,” he explained in December without any conditional statement clarifying his casual inclusion of the CLASS savings (
Press Release 12/19/2009). “It is not my estimate, not the Democratic Party's estimate, not the Democratic leadership's estimate; that is the estimate by the nonpartisan Congressional Budget Office that officially scores legislation before this Congress,” he would reiterate during debate over health reform reconciliation (Congressional Record 111-2 (Mar 23, 2010), p S1835). Even Senator Whitehouse, irrespective of the marked inconsistency with his own amendment, wanted to have his cake and eat it too, adding, “CBO further estimated that the [CLASS] program would reduce the deficit by $72 billion over 10 years….So it has a substantial fiscal upside” (Congressional Record 111-1(12/3/2009): S12301).
Whitehouse’s amendment should have precluded references to such incidental fiscal benefits. Regardless of how the CBO is formally compelled to treat intragovernmental transfers, the intent of Whitehouse’s “sense of the Senate” was, presumably, to insure that the premiums accrued by the CLASS Act would be set aside for their intended purpose and not be double counted as general revenues available to offset the other costs of health reform. Anything otherwise would be like taking out a mortgage to pay the grocery bill and ignoring the large liability that the debtor has concurrently accrued.
Indeed, one of the more honest, if still cynical, assessments of the CLASS Act was provided by the
Washington Post. While accepting that the premiums would be set at an actuarially sound level they called the CLASS provision a “gimmick” “designed to pretend that health care is fully paid for.” The Post went on to say: “[T]he money that flows in during the 10 year budget window will flow back out again. These are not ‘savings’ that can honestly be counted on the balance sheet of reform” (
Washington Post 7/10/2009).
The seeming paradoxical discrepancies over how Republicans and Democrats characterized the financial impact of the same piece of legislation arise because of differences in how the CBO scores the budgetary impact of congressional legislation and how the Department of the Treasury keeps account of the long-term obligations of certain entitlement programs.
Figure 1 presents two schematics that offer an overview of the subtle differences between the two accounting processes related to the CLASS Act and the CLASS Independence Fun.
On the one hand the CBO is required by law and convention to follow unified budget accounting rules. That is, the CBO consolidates all on-budget and off-budget outlays and revenues and estimates the net marginal fiscal impact that a new law, relative to prior law, has on the entire federal budget over a ten-year period.
Significant to the solvency requirements of the CLASS program, the CBO dismisses the longer term actuarial considerations of the CLASS entitlement as irrelevant to its budget scorekeeping and ignores all intragovernmental transfers such as interest revenue earned by federal securities-backed Independence Fund. Such accounting practices simultaneously overemphasize the Act’s short-term capacity to reduce deficits and underestimate the revenues associated with the CLASS Act. (The CBO’s budgetary estimates are presented in
an earlier post.) All CLASS insurance premiums are earmarked for the Independence Fund with any surpluses therein are to be invested in guaranteed federal securities. The CBO, however, treats all of the collected premiums as if they were general revenue that is immediately available to offset the government’s current operations and thereby scores the surplus premiums as reducing the federal deficit. Additionally, the CBO attributes to the CLASS Act certain indirect budgetary effects, such as the reduced Medicaid costs associated with the CLASS payments that subsidize Medicaid long-term care charges and the increased tax expenditures attributed to the preferential tax treatment of employer-sponsored CLASS premiums. Conversely, the CBO ignores the considerable interest earned on the surpluses accumulating in the Independence Fund because such supplementary revenue is essentially an I.O.U. issued by the government to itself; it is an account transfer within the Treasury Department that has no net effect on the federal budget, neither increasing nor reducing the deficit.
Given these caveats the CBO estimated that the CLASS Act would reduce net federal outlays by approximately $72.5 billion between 2010 and 2019.
[2] In its second decade of operation the CBO estimated that the CLASS Act would again reduce the federal deficits, but by smaller amounts than in the initial decade. Then at sometime after 2029, in the third decade of the CLASS program’s implementation, the collected premiums will not be sufficient to offset the claims contemporaneously paid to beneficiaries.
On the other hand, the Department of the Treasury, charged with maintaining the CLASS Independence Fund on behalf of the Secretary of Health and Human Services and guaranteeing the program’s long-term solvency, takes a different perspective to accounting the programs debits and credits. Similar to private issuers that invest their reserves in order to supplement their collected premiums, the Secretary of the Treasury will invest the balance of the Independence Fund. Consequently, in addition to the nominal value of the surplus premiums—$70.2 billion (the net surplus of all premiums less any benefit payments and administrative costs
[3]) through 2019—the CLASS Independence Fund will be credited with the interest earned on its accumulated reserves. During the first decade, the amount of interest earned will approximate $15 billion.
If we accept that the excess premiums collected during the program’s early years are invested in guaranteed federal securities and allowed to accrue all compounded interest, then when the annual surpluses and deficits are aggregated over the several decades, the CLASS Independence Fund should have no net effect on the federal debt. This interest earnings, ignored completely by the CBO, should lower the cost of CLASS premiums from what they would be absent the accumulation of this supplementary revenue. “As a result, from a budget scorekeeping perspective,” explained CBO director Douglas Elmendorf, “the CLASS program would inevitably add to future deficits (on a cash basis) by more than it reduces deficits in the near term, even though the premiums would be set to ensure solvency of the program” (11/25/2009: 5). Indeed, if the program perpetually ran a surplus and the interest revenues were never expended it would imply that premiums were set too high.
It is an unfortunate consequence of partisan politicking that neither side could similarly restrict their arguments to the merits of the entitlement and a legitimate debate over the program’s costs and funding structure. Both parties were being disingenuous when they knowingly cherry-picked the conditional data above to support their divergent claims of fiscal (ir)responsibility. The Democrats were overly sanguine in championing the early surpluses estimated by the CBO while ignoring the actuarial solvency requirement that earmarked the bulk of those very surpluses for future obligations. The Democrats were indeed guilty of "double counting" the savings as Rep. Paul Ryan (R-Wisc.) routinely
criticized. Conversely, the Republicans were being unfairly critical (and blatantly hypocritical given their past fiscal performances) of the program’s unsustainable costs when they dismissed the short-term surpluses as a ‘gimmick’ and while simultaneously downplaying the Independence Funds’ reserve and highlighting the later deficits of CLASS Act.
In short, the CLASS Act will both decrease the deficit initially and increase the deficit later; but if properly administered and a proper accounting of interest earned on the surpluses is allowed then the CLASS program should have no direct net increase on the federal debt. The only genuine budgetary savings attributable to CLASS are the $1.6 billion in Medicaid savings that will come from individuals using their self-financed benefits in lieu of publicly funded Medicaid services. But even these savings will be offset by the preferred tax treatment given to CLASS premiums which will reduce government revenues by $1.2 billion in the first decade.
Footnotes:
[1] Voting "Yea" with all the present Republicans were Democrats Max Baucus (Mont.), Evan Bayh (Ind.), Carper (Del.), Kent Conrad (N.D.), Mary Landrieu (La.), Blanche Lincoln (Ark.), Claire McCaskill (Mo.), Ben Nelson (Neb.), Udall (Col.), Mark Warner (Va.), Jim Webb (Va.) and Independent-Democrat, Joe Lieberman (Conn.) (Senate Roll Call No. 360, December 4, 2009)
.
[2] If the accuracy of the CBO’s estimate is respected then the $72.5 billion figure actually underestimates the CLASS Act’s impact on reducing short-term budget deficits. Because premium income in the early decades would reduce the amount that the government would have to otherwise borrow from the public, interest payments on the public debt would also be reduced during that period; such savings, however, are not included in the CBO’s estimate of the marginal budgetary savings of the CLASS Act
.
[3] Any budgetary impact associated with the reduction in spending on Medicaid long-term care and revenue loss caused by the preferential tax treatment of CLASS premiums are incidental to the Independence Fund and, therefore, not included in the Treasury’s solvency computations.
