The Rational Non-Implementation of the CLASS Act

The Obama Administration has elected not the implement the CLASS Act portion of the Affordable Care Act. The CLASS act established a national, voluntary insurance program for purchasing community living assistance services and supports (CLASS). It was a long term care insurance program. Individuals who might have elected to buy into the program would have paid a premium for five years before becoming legible for benefits. Following the five-year vesting period, the program will provide individuals with functional limitations a cash benefit of not less than an average of $50 per day to purchase nonmedical services and supports necessary to maintain community residence. Premiums were to be paid through voluntary payroll deductions: all working adults will be automatically enrolled in the program, unless they choose to opt-out.

The title of this piece is a take off on a 1990 article by Mark Pauly entitled “The Rational Nonpurchase of Long-term-Care Insurance” published the Journal of Political Economy. In that article Pauly argued that rational risk averse individuals might not purchase long term care insurance because there are alternative sources of long term care and alternative sources of financing that care. The primary purpose of long term care insurance is to preserve the value of ones estate; without long-term care insurance individuals in need of such care either rely on family members or spend down their savings until they become Medicaid eligible.

Pauly’s predictions on the sale of long-term care insurance fit what has actually happened. Data from the Health and Retirement Survey of 2008 indicates that only about 14 percent of individuals over 65 had private long term care insurance while the Congressional Budget Office estimated that less that 4 percent of long-term care is paid for by insurance. Moreover, one major carrier has stopped selling policies and another is seeking to raise it premiums by 40 percent. Both of these actions are likely to decrease the number of individuals with long term care insurance.

The costs of long term care continue to increase however, both to families and to the nation. The United States spends well over $200 billion annually on long term care. Over 60 percent is paid for by public funds, primarily Medicaid. The share of the population over 80 years old is expected to double in the next 30 years, while the costs of long term care for any individual is expected to continue to increase faster than the cost of other health care costs. Georgia spends about a quarter of its Medicaid dollars for long-term care and that share is likely to increase.

The CLASS act was an attempt to find a way for individuals to finance their long term care needs. It failed because there was no way to set a premium low enough to attract participants while still covering a large enough share to the claims to make the program sustainable. Removing the CLASS act from the Affordable Care Act (ACA) increases the cost of the ACA in the short run because of the loss of premiums paid into CLASS during the initial five year vesting period, but decreases the cost of the law in the long run.

The failure of the CLASS act leaves the problem of financing the costs of long term care. In the current system state Medicaid programs will be paying an increasing share of their costs for long term care. Those costs will place a direct burden on state tax payers. They may also affect Medicaid reimbursement rates for other types of care.

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