On behalf of the Academy, I offer the following recommendations for modifying the CLASS program:
An actively-at-work definition with a minimum requirement of 20 to 30 hours of scheduled work or a comparable requirement;
Restrictions on the ability to opt out and subsequently opt in with the use of either a long second waiting period for benefits or an alternative underwriting mechanism(s);
The use of a benefit elimination period or duration limits;
Benefits that are paid on a reimbursement rather than cash basis;
An initial premium structure that provides for scheduled premium increases for active enrollees at either a consumer price index or alternative rate.
These modifications, along with an effective marketing effort, will improve the sustainability of this voluntary long-term care program. Without these modifications, the program is likely to be unsustainable.
While CLASS program is required to be actuarially sound over a 75-year period without taxpayer support, that will be difficult to achieve, said Allen J. Schmitz, a consulting actuary for Milliman testifying on behalf of the American Academy of Actuaries. With guaranteed issue and a waiting period that is too short, the voluntary program is at great risk for adverse selection, he said.
For more on adverse selection, click here. To see the full hearing, click here.
The federal budget deficit commission is looking at the CLASS Act as a possible source of deficit relief. National Underwriter has the story:
The CLASS Act is supposed to create a voluntary worksite LTC benefits program. Insurance groups and actuaries at the Centers for Medicare & Medicaid Services have criticized the program and argued that it will be actuarially unsound.
Budget analysts say the CLASS Act would reduce the cost of implementing the Affordable Care Act up until 2014 but then would add $76 billion to the deficit from 2015 to 2020.
The CLASS Act program addresses “an important public policy concern, but is viewed by many experts as financially unsound,” Bowles and Simpson say in the Moment of Truth draft.
The program’s earliest beneficiaries will pay modest premiums for only a few years and receive benefits many times larger, and “sustaining the system over time will require increasing premiums and reducing benefits to the point that the program is neither appealing to potential customers nor able to accomplish its stated function,” Bowles and Simpson say.
The CLASS Act program should be “reformed in a way that makes it credibly sustainable over the long term,” and “to the extent this is not possible, we advise it be repealed,” Bowles and Simpson say.
Anyone looking for ideas of how to make the CLASS Act more affordable should consider this series of articles, especially the one starting on page 15. Some of the suggested options for reducing the cost of the program include:
Increase activities of daily living requirement: The Act allows for a two- or three-ADL benefit trigger requirement. The secretary may wish to consider the three-ADL option to help control utilization and lower premiums.
We’ve blogged before about the CLASS Act, the new federal long-term care program built into the Patient Protection and Affordable Care Act. A series of four new articles offers further perspective. The articles detail various implications for individuals, the federal government, employers, insurers and agents, and healthcare providers. You’ll find them here.
A recent Investment News article looks at why long-term care (LTC) insurance can be a difficult sell. Among other things the article considers how health reform and specifically the CLASS Act may counter that trend and build awareness around long-term care:
Insurers are looking for ways to cash in on the Community Living Assistance Services and Supports Act, a part of the health care reform that creates a taxpayer-subsidized federal long-term-care program. The bare-bones benefit is to pay $50 per day. Companies may come out with a supplemental product to add to the federal benefit, but that product probably won’t be available for a couple of years, Mr. Schmitz noted.
The key to the ultimate success of the market depends on awareness on the part of clients and their advisers, Mr. Schmitz added.
“They have to be aware of LTC and have to want to plan for that risk,” he said. “It’s really a matter of education, getting more people to sell it and having the right public policy with respect to long-term care. There aren’t any simple answers.”
The Healthcare Economist has a new article out on the CLASS Act, the much-discussed long-term care (LTC) program established as part of the healthcare reform law. Here is an excerpt:
Milliman notes that currently, the CLASS act would be voluntary and would include guarantee issue (meaning that no one could be denied coverage). Separately, each of these provisions could allow for a sustainable long term care insurance product. The private sector currently uses the voluntary insurance model with underwriting. On the other hand, a guaranteed issue policy could work if purchasing LTC insurance was mandatory.
Together, however, these provisions may be problematic. “The voluntary aspect of the program allows low-risk individuals to never sign up for the program while the guaranteed issues enables some of the highest-risk individuals to join the program. This is a formula that is virtually certain to create financial instability in any insurance program unless there are other important provisions to control risk.”
The CLASS act does have some additional risk control provisions. To qualify for these benefits, one must pay into the plan for 5 years. Employers can decide to offer this LTC as a benefit and employers who choose to this option will have employees automatically enrolled with the premium deducted from each paycheck. Individuals would have to specifically ask to be removed from the program. Also, individuals who opt-out of the program will have to pay a higher premium if they decide to opt back in. The purpose of the vesting and opt-out penalties is to minimize adverse selection.
The Department of Health and Human Services will determine the exact amount of premiums and benefits, and benefits will vary depending on the level of each person’s disability. But benefits will be cash amounts that will be no less than $50 per day.
While that won’t pay for a nursing home stay, which averaged more than $76,000 a year in 2008, “the benefit itself is not insignificant,” says Al Schmitz, a principal and consulting actuary with the health care consulting firm Milliman. “Somebody getting $1,500 a month, that can still help with getting some home care, getting community assistance,” he says.
But what does worry Schmitz is the possibility that the program might not live up to its promise of paying for itself. One worry is what actuaries like him call adverse selection.
“If the final premiums … end up being too high, I think that has the potential to scare away healthy individuals and really only attract less healthy,” he says. That would mean that there wouldn’t be enough healthy people to help spread the risk, and premiums would get even higher still.
But the CLASS Act could face adverse selection risk. Here is an excerpt from the AP article:
The program is meant to be self-supporting, without government subsidies. But some worry too few healthy people would enroll, leaving a group of enrollees at higher risk for needing long-term care _ and not enough money in the program to care for them.
“If premiums are $2,000 a year, some people are going to look at that and say, ‘Boy, that’s pretty steep. … I’ll worry about that risk some other time,’” says Allen Schmitz, an actuary with the independent consulting firm Milliman Inc.
Schmitz says automatic enrollment might help increase sign-ups, but Medicare’s chief actuary has predicted enrollment as low as 2 percent. That could require raising premiums, which would mean even fewer people would participate.
Given that, Schmitz says he sees “significant risk” that the program will fail. Rate increases will be more likely with the government program than in the private market, he says.
Read the full AP article here. Read Al Schmitz’s paper on the CLASS Act here.
We have blogged before about adverse selection risk in reform proposals. A proposal in the House and Senate healthcare reform bills, the CLASS Act, establishes a federal long-term care (LTC) program financed from participant premiums without any federal subsidy. The new LTC program is subject to guaranteed issue, and that, combined with its voluntary nature, subjects the CLASS Act to considerable adverse selection risk. This paper by Al Schmitz examines this risk while considering other likely consequences.
The 2013 Milliman Medical Index, which measures healthcare costs for the typical American family of four, will be released Weds. May 22nd.
(about 3 days ago)
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