Stephen A. Moses
With enactment of the ''Community Living Assistance Services and Supports" or CLASS Act, America is about to experience the biggest advertising promotion since visionaries set out to save humanity with a soft drink in the '70s. Remember "I'd like to buy the world a Coke"?
The campaign for CLASS will be just as sugary sweet, sincere and heartrending. Every progressive foundation with money to burn will push this new public product. "Take up" of the "voluntary" government-run long-term care prepayment system (it's definitely not insurance) may far exceed the meager estimates (as low as 2%) of professional actuaries.
I fear the CLASS Act could be a disaster for the people and businesses that need it most. They are:
1. the low income disabled or chronically ill who would otherwise be medically uninsurable, and
2. long-term care providers, including nursing homes, assisted living facilities and home caregivers, who are desperate for a source of revenue other than Medicaid, which pays them less than the cost of providing the care.
What if group No. 1 buys in, perhaps with generous, self-sacrificing financial assistance from parents and friends, but the CLASS "Independence Fund" never gets beyond inhaling premiums to the point of exhaling benefits? Somebody must be smoking something to think CLASS adds up actuarially.
What if group No. 2 puts all its hopes on CLASS and ends up a decade from now with little or no revenue from it, even more dependent on a weaker-than-ever Medicaid program, and with real private LTC insurance still struggling to get a foothold in a yet-government-dominated market?
So before the publicity juggernaut for CLASS gets fully up to speed, let me raise some red flags that I hope will persuade everyone to slow down and take a careful look before they leap. You need search no further than the statute itself to find the glaring pitfalls.
But let's start with a definition of CLASS promulgated by one of its biggest promoters, the American Association of Homes and Services for the Aging: CLASS is a "new voluntary nationwide long term services and supports insurance program for persons with disabilities and seniors with chronic illness."
Wrong on three counts.
— CLASS is not "voluntary." Every worker is involuntarily and automatically opted into the program. Each employee or self-employed person must willfully opt out to avoid the program's large "premiums" that will otherwise accrue by default.
— Second, CLASS is not "insurance" by any stretch of the imagination. Insurance is for healthy people who want to prepare responsibly for the relatively small possibility they may become disabled or chronically ill. CLASS is more accurately described as pre-payment of care subsidized by the insurable for the benefit of the uninsurable. Charity in other words.
— Finally, CLASS will be promoted as a program for chronically ill seniors as well as for the disabled, but it is predominantly a program to benefit the working disabled. CLASS benefits, even if they are paid at something approaching the most optimistically anticipated rates, hardly will make a dent in the cost of long-term care for the elderly.
Let's just tick off a few of the fundamental problems that stick out like sore thumbs in the CLASS Act:
– CLASS has no underwriting, which means there is no price put on the level of risk each participant brings into the program. Some will pay more than their level of risk would otherwise require so others can pay less and take out more than their level of risk objectively justifies.
— CLASS has subsidized premiums, as little as $5 per month for the poor. The non-poor will pay higher premiums to make up the difference. Again, charity, not insurance.
— CLASS will suffer adverse selection. People most likely to use the benefits will be far more likely to participate than people who are privately insurable otherwise.
— CLASS will experience moral hazard. Once covered and eligible for benefits, there is no reason not to file claims because lifetime benefits are unlimited and eligibility criteria are loose . . . just find an agreeable physician to certify need.
— CLASS will have nothing of real value in its "Independence Fund" from the outset. Every nickel the government collects goes to fund current operations, with IOU's (Treasury bonds) replacing the real money and generating only negligible returns even if the government makes good on them in the future at all.
— CLASS joins a long chain of unfunded entitlement programs as its weakest link. Medicare is under water $89 trillion and Social Security $17 trillion, not to mention the unfunded liabilities of federal, state, local and private-companies' pension systems.
— CLASS says you'll qualify if you need help with two or three ADLs (activities of daily living), but what if CLASS can't afford that "generous" a "trigger" when the time finally comes many years from now to pay claims? Minnesota just went to a four-ADL trigger for its Medicaid program.
Everything in CLASS depends on a final decision by whoever is secretary of the Department of Health and Human Services someday when CLASS claims come due. If CLASS is broke, the secretary can change virtually anything and everything to fit the funds available. That means future premiums, eligibility rules, benefit triggers and the benefits themselves are big unknowns … or a "crapshoot" as someone from CBO was quoted as saying.
So before you take the CLASS leap, consider this. You'll have no contract enforceable in a court of law. You'll be jumping into a risk pool with a lot of people paying in less than you are and guaranteed to take out a lot more than you do. Your premiums do not go into responsibly and privately invested reserves. No state insurance commission will hold the federal CLASS program's feet to the fire. You'll have zero recourse if this insurer-of-last-resort fails.
What if you want to get all of those protections and benefits? Then consider private long-term care insurance instead. You'll not only be better protected yourself, but you'll be doing a much better deed for the poor who truly are dependent on government programs like Medicaid or CLASS.
There's an old saying: "The best way to help the poor is not to become one of them." The best way to do that is to insure yourself and your family privately. Then support public policy to target scarce public LTC benefits to people most in need and use the savings to encourage responsible LTC planning.
Bottom line: The CLASS Act does not take financial reality into consideration. It's as if NASA had built the moon ship without taking gravity into consideration. Don't let America's ailing LTC system crash and burn because of baseless wishful thinking.
Editor's note: The author also addresses the question, “If CLASS isn't ‘insurance,' then what is?” Read his explanation in "The Inherent Individualism of Insurance."