A new AP article looks at the CLASS Act, the proposed voluntary federal long-term care program included in the healthcare reform bills. The CLASS Act is notable for borrowing automatic enrollment mechanisms that were installed into 401(k) plans as part of the Pension Protection Act (PPA).
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.