Overview of CLASS Act

Summary of Key Provisions of “Community Living Assistance Services and Supports Act” or the “CLASS Act” The CLASS Act (Title VIII of H.R. 3590/P.L. 111-148, the Patient Protections and Affordable Care Act of 2010) establishes a national voluntary insurance program for non-medical long-term care and disability assistance with benefits paid directly to individuals who meet certain need. Eligibility • enrollment open to Americans over the age of 18 with a minimal actively-at-work requirement • program is voluntary, but if employer offers it, workers will be automatically enrolled unless individuals opt out • enrollment will begin in January 2011 Benefits • beginning in 2016 individuals with five-years of vesting will be eligible for benefits • to qualify for benefits must need help with at least 2 (or 3) of 6 activities of daily living or be cognitively impaired (mirrors HIPAA long term care insurance benefit triggers) • minimum $50 per day cash benefit, indexed to inflation • no lifetime limit on benefits • will be primary payer for Medicaid beneficiaries receiving long term care in nursing home or within the community; saving the federal government $2 billion in Medicaid spending between 2016-2019 Funding • premiums adjusted only for age of initial enrollment; no risk adjustment for pre-existing conditions • nominal premiums of $5 for students and working poor individuals earning less than 100% of FPL • no taxpayer funds to be used to fund benefits (including subsidized benefits available to students and poor) • interest earned on surplus premiums deposited (after beneficiary claims and administrative costs) in CLASS Independence Fund • actuarial soundness required over 75 years

Over 10 million Americans require non-medical long-term care (LTC) and support to assist them in their daily activities, and this number is expected to increase with the aging of the general population. LTC needs emerge from chronic medical conditions that occur at birth (e.g. autism and other congenital defects—mental or physical), develop during developmental stages (e.g. dementia), or that result from accidents (e.g. paralysis). The need is prevalent: 75 percent of couples over the age of 65 can expect that at least one spouse will require long term care services. Further, while most people associate long-term care with seniors in ill health, 40 percent of people currently receiving long term care services are aged 18 to 64 (Department of Health and Human Services, 2009).

Introduced by Reps. Frank Pallone (D-N.J.) and John Dingell (D-Mich.) and Sen. Edward Kennedy (D-Mass.) in their respective chambers, and included in both the Senate and House version of health reform, the Community Living Assistance Services and Supports (“CLASS”) Act (introduced as S. 697/H.R. 1721), is a federally-administered insurance program (a “public option”) to provides guaranteed-issued long-term care cash benefits to participating individuals. “The bill we propose is a long overdue effort to offer greater dignity, greater hope, and greater opportunity,” said Senator Kennedy when he introduced the legislation in 2009, having already thrice introduced similar legislation in each Congress since 2003. “It makes a simple pact with all Americans – ‘If you work hard and contribute, society will take care of you when you fall on hard times” (Pallone 2009).

Passed as Title VIII of Patients Protections and Affordable Care Act of 2010 (to amend the existing Public Health Service Act (42 U.S.C. 201) by adding Title XXXII—COMMUNITY LIVING ASSISTANCE SERVICES AND SUPPORTS) the stated purpose of the CLASS program is to:

      (1) provide individuals with functional limitations with tools that will allow them to maintain their personal and financial independence and live in the community through a new financing strategy for community living assistance services and supports;
      (2) establish an infrastructure that will help address the Nation's community living assistance services and supports needs;
      (3) alleviate burdens on family caregivers; and
      (4) address institutional bias by providing a financing mechanism that supports personal choice and independence to live in the community. (Section 3201)

The CLASS insurance program is structured to supplement private medical insurance, Medicaid and/or Medicare and subsidize the cost of non-medical health expenses such as paying for a wheel chair ramp, a part-time caretaker, adult day care or compensate a family members who may have to miss work to care for relatives in need. The aim is to help people needing long-term care to stay out of nursing homes; although the benefits could be used to subsidize such care if necessary.

The CLASS Act should not be confused with the Federal Long Term Care Insurance Program (FTCIP) that was also created by Congress, through the Long-Term Care Security Act of 2000 (P.L. 106-265). Unlike the CLASS insurance program, the FTCIP is not a public option (the FTCIP is currently administered by a fully owned subsidiary of John Hancock Financial Services, Inc.) and is available only to federal employees and annuitants (as well as, in certain instances, their spouses, children and parents). With a quarter million enrollees, it is the largest employer-sponsored long term care insurance program in the country.

In contrast to the FLTCIP, enrollment in the CLASS program will be open to all working Americans, including part-time workers, over 18 and retirees who had enrolled while previously employed. (The House version had provided for the guarantee issue of CLASS insurance to the spouses of workers, without any actively-at-work underwriting requirement for the stay-at-home spouse; but, to lessen the potential adverse selection of unhealthy claimants the Senate version that was signed into law included more rigorous employment requirements.) The CLASS insurance program is voluntary, but if an employer chooses to offer the benefit, its workers will be automatically enrolled unless individuals opt out. Unfortunately, at least from the perspective of encouraging broad enrollment, the absence of auto-enrollment for employers will mitigate the likelihood that the auto-enrollment of employees will stimulate broad program participation. Premiums will be accorded the same favorable tax treatment that the premiums for employer-sponsored health care insurance policies currently receive.

After a five-year vesting period, enrollees who are experiencing limitations in certain daily activities, such as bathing, eating or dressing, will become eligible for a daily cash benefit of no less than $50/day. Precise benefits have yet to be set, but the CBO assumes an initial daily average benefit of about $75 (to be indexed for inflation), with benefits for severely impaired beneficiaries being higher. Although $50-75/day may seem a modest amount of money, at $2,250/month or $27,375/year, with no life time restrictions, the funds will go far in subsidizing an individual’s cost of care. For example, one year of care at home, assuming one needs periodic personal care help from a home health aide (the average is about three times a week), costs about $18,000 a year (US Dept of Health and Human Services 2008). In contrast to private long-term care insurance, that often imposes a maximum limit on benefits of 3 to 5 years (sufficient for the needs of most beneficiaries), CLASS insurance will have no lifetime limit. This characteristic will be particularly beneficial to the millions of individuals who develop chronic conditions early in life and require a part-time caregiver for many years.

The CLASS Act will be publicly administered and it is to be entirely self-financed by enrollee premiums, estimated by the CBO to be $120/month. Other than controlling for the age of an individual at time of their initial enrollment, premiums will not be risk-adjusted and will remain constant, irrespective of general or healthcare-related inflation, for enrollees who maintain their coverage. Students and the poor will be eligible for $5/month premiums (subsidized by other beneficiaries, not the state), but they will become responsible for the full cost of their premiums when either of these conditions no longer apply. With respect to premiums the law includes the important stipulation: “if the Secretary [of HHS] determines, based on most recent report of the Board of Trustees of CLASS Independence Fund…that the monthly premiums and income to the CLASS Independence Fund for a year are projected to be insufficient…the Secretary shall adjust the monthly premiums for individuals enrolled in the CLASS program as necessary.” Any premium changes, however, would “not apply to persons age 65 and older, who have paid premiums for at least 20 years, and who are not actively at work.”

Premium payments will be deposited along with any interest accruing on the surplus premiums in the CLASS Independence Fund that will be similar in operation to the Medicare Trust Fund. The law is explicit in that no taxpayer funds will be used to subsidize CLASS benefits. Indeed, if the CBO’s estimates are accurate then the fiscal effect of the CLASS Act should be a marginal net savings on the federal budget (as well as state budgets) after the impact of the Medicaid savings are included. Table 1 below presents the CBO’s estimate of the budgetary impact of the CLASS program. A negative entry connotes revenues that reduce the budget deficit (however, the interest revenue credited to the CLASS Independence Fund is not included in the CBO’s official budgetary analysis and therefore has no effect on the deficit).

Table 1. CBO Estimate of Budgetary Impact of CLASS Act, in $Billions
	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2010- 2014	2015- 2019
Premiums	0	-3.8	-6.6	-9.0	-10.2	-11.5	-11.4	-11.6	-11.7	-11.8	-29.6	-87.6
Benefit Payments	0	0	0	0	0	0	1.6	3.0	4.3	5.2	0	14.1
Administrative Costs	0	0.1	0.2	0.3	0.3	0.3	0.3	0.3	0.4	0.4	0.9	2.6
Medicaid Savings	0	0	0	0	0	0	-0.2	-0.3	-0.5	-0.6	0	-1.6
Changes in Revenues*	0	^	0.1	0.1	0.2	0.2	0.2	0.2	0.2	0.2	0.3	1.2
Net Outlays	0	-3.7	-6.3	-8.6	-9.7	-11.0	-9.5	-8.4	-7.3	-6.6	-28.4	-71.3
Interest Credited to CLASS Independence Fund*	0	0	0.2	0.5	1.0	1.6	2.2	2.6	3.0	3.3	1.8	14.4
^ = between -$50 million and $50 million * = estimates from the CBO’s accounting of the House version of the CLASS Act (Section 191 of H.R. 3962, America’s Affordable Health Choices Act; see Elmendorf 2009a): as the Independence Fund surpluses will be higher in the Senate version of the CLASS Act the interest revenue above underestimation; the changes in revenues, reflecting the preferential tax treatment given to CLASS premiums should be unaffected. Source: adapted from Elmendorf 2009a; 2009b

Ignoring the budgetary chicanery of both the Left and Right (see my discussion in a related post here) and regardless of the CBO’s positive assessment of the program’s fiscal solvency, the CLASS Act, and any associated estimate of its actual future costs, involves many unknowns and thereby poses a serious fiduciary risk for the government. CBO’s Director, Douglas Elmendorf, admitted that he could only offer a “broad assessment of the potential budgetary outcomes in future decades” given the long term estimates were “very difficult to predict” and conditional upon many factors yet determined (Elmendorf 2009).

Given the general susceptibility of long-term care insurance to adverse selection, Al Schmitz (2009), a principal actuary for Milliman, cautioned, “[T]he CLASS Act also contains provisions that increase the risk of adverse selection and may threaten the ultimate success and viability of the program” (Schmiltz 2009). With premiums being neither publicly subsidized nor adjusted to the health status of potential enrollees, the program is likely to attract a sicker (ie. costlier) population and have lower participation rates among healthier (ie. cheaper) individuals than comparable private plans (plans nonetheless used by the CBO for its own actuarial estimation of CLASS). Medicare's chief actuary, Rick Foster, cautioned, “In general, voluntary, unsubsidized, and non-underwritten insurance program such as CLASS face a significant risk of failure as a result of adverse selection by participants” (2009: 11). Exasperating the adverse selection problem, students and employed individuals earning less than 100% of the FPL will pay only a nominal premium of $5 per month, resulting in the need of other participants premiums to subsidize these low premiums (Sec. 3203(a)(1)(A)(ii), p 1894). “Premium subsidies that are financed solely from the premiums of non-subsidized participants may influence participation levels (and ultimately adverse selection levels) of those participants,” warned Schmitz (2009).

On April 22, 2010, Richard Foster, the chief actuary for CMS, re-estimated the CLASS Act and concluded it would reduce the deficit by just $38 billion. The discrepancy between the two estimates is that the Office of Actuary’s newer accepts estimates a relatively lower participation rate of just 2.8 million persons, about 2 percent of potential participants, compared to a participation rate of 4 percent used in the CBO’s estimate. The more conservative accounting estimates that in 2025 and later projected benefits will exceed premium revenues, compared to the CBO estimates that such deficits will not begin until sometime after 2029. Unfortunately, at this stage it would be only conjecture to defend either estimate as more prescient.

Further, Foster predicted a much higher monthly premium rate of $240—nearly doubling the CBO’s estimate—to be necessary to meet actuarial soundness while subsidizing the low premiums offered to students and the poor and the likelihood of severe adverse selection in the public plan (2010: 15). He cautions:

Setting the premium at a rate sufficient to cover the costs for such a group further discourages persons in better health from participating, thereby leading to additional premium increases. This effect has been termed the ‘classic assessment spiral’ or ‘insurance death spiral.’ The problem of adverse selection is intensified by requiring participants to subsidize the $5 premiums for students and low-income enrollees. (Foster 2010: 15)