LTC Bullet: CLASS and the Senior Care Investor

Wednesday, April 21, 2010


LTC Comment: What should senior care investors think about the CLASS Act? An expert's answer after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau, a Master General Agent who serves LTCi producers nationwide. Claude is the lead author of the Milliman Broker World LTCi Surveys. He helps you build whichever markets suit you best (individual, executive carve-out, work-site, affinity, financial institution, referrals from other professionals, etc.). Claude was selected by Senior Market Advisor as one of the 10 "Power People" in the LTCi industry in 2007 and was Chairman of the Board of the Center for Long-Term Care Financing. Test Claude by calling 800-999-3026, x2241 or email him at to ask questions or get references. ***

*** SENIOR CARE AUDIO CONFERENCE on Thursday, May 13 at 1-2:30 p.m. Eastern. Details here. Why should you care? Read today's Bullet to find out. Register by April 30 to save $50. Titled "New Health Care Law Impact on Senior Care Businesses, Investments and Property Values," this program, hosted by SeniorCare Investor editor Stephen Monroe, features Steve Moses and two highly regarded senior care experts: Rick Matros, Board Chairman and CEO of Sun Healthcare Group, Inc. and Hedy Rubinger, a partner in Arnall, Golden Gregory LLP, a health law firm. Find out: What will happen to Medicare reimbursement? Will the CLASS Act result in more residents or less in the future? Will the health insurance mandates hurt my property (or company) value? Will these additional costs get reflected in my reimbursement rates? How will I deal with the new ownership disclosure requirements? can ask the panelists the questions that mean the most to you. Press release here. ***

*** CMS ADMINISTRATOR NOMINATED finally. Obama picks Donald Berwick of Harvard to run Medicare and Medicaid N.C. Aizenman, Washington Post. April 20, 2010 Harvard University professor Donald Berwick has been officially tapped by President Obama to fill the position of administrator of the Centers for Medicare and Medicaid Services. Berwick, a specialist in health-care policy and pediatrics, currently heads the Boston-based Institute for Healthcare Improvement, priming him for the CMS position, where he will help with the implementation of the new health care reform legislation. Source: AHCA/NCAL Gazette - Tuesday, April 20, 2010. ***



LTC Comment: When people on the insurance side of long-term care think of financing, what comes to mind first are government and LTCI. After all, Medicaid and Medicare pay for most long-term care but private insurance should. That's the essence of the LTC problem and the LTC opportunity.

But there is another side to long-term care financing that is just as important and often overlooked. After all, someone has to provide the debt and equity capital to build, operate and maintain LTC facilities. The people and companies that do that I call the LTC financiers.

LTC insurers, LTC providers, and LTC financiers are natural allies. In a rational world, most LTC financing would come from private insurance that could pay market rates to LTC providers making LTC service delivery a profitable business for LTC financiers. Instead, we have a welfare-financed LTC system that crowds out private insurance and leaves LTC providers and financiers starved for scarce financial oxygen from government.

In December 2000, the Center published a report titled The LTC Triathlon: Long-Term Care's Race for Survival. Read it here. This report explained how LTC market interests (Providers, Insurers and Financiers) could work together to improve long-term care services, relieve financial pressure on the government safety net, and turn LTC into a profitable business.

But The LTC Triathlon's message was ignored. Consequently, we find ourselves still languishing ten years later with a welfare-financed, under-capitalized, institutionally biased, and insurance-bereft LTC system that serves no one well. And now, adding insult to injury, government has piled on another unfunded entitlement program--the CLASS Act--compounding the problem instead of solving it.

Steve Monroe edits a newsletter for LTC financiers called The SeniorCare Investor. His lead article in this month's issue looks at the CLASS Act from the investors' point of view. We thank Mr. Monroe for permission to "reprint" excerpts from the piece and we urge you to visit this website and consider a subscription.

Don't forget to register for Mr. Monroe's interactive phone conference on May 13 titled "New Health Care Law Impact On Senior Care Businesses, Investments and Property Values." I'm a panelist along with two top-notch senior care investors and Monroe himself. You can get all the details here.


Excerpts from Stephen M. Monroe, "Health Care Reform & LTC: Reform Won't Impact Everyone the Same, But...," The SeniorCare Investor, Vol. 22, Issue 4, April 2010, pps. 1-5.

"The CLASS Act is a new entitlement that allows participants to receive somewhere between $50 and $75 per day (not finalized yet, and will be constantly changing) for a variety of long-term care services, which can include the costs of a skilled nursing or assisted living facility, home health care services (from a family member or outside agency), adding amenities to your house to enable you to stay there longer and many others. All you need to qualify for the benefit is assistance with at least two activities of daily living. So, if you are in the elder care business, this sounds great, as it appears to provide flexibility for the consumer and should result in many new customers with money to spend on services as they age. We are sure that on March 23, someone, somewhere announced that it was a great day for the elderly in America. We beg to differ." (p. 2)

"If you haven't figured it out, one of the main problems with CLASS, at least for the first 10 years or so, is that most people who are subject to a payroll tax do not need the CLASS benefit (meaning they are relatively young), and those who do, or will need it in a few years, are already retired. Not to say that the 'young' (age 25 to 65) should not have LTC insurance, it's just that the cost of private insurance for many people would be one-half the CLASS premium and the benefit much better for a variety of reasons. The five-year vesting period is not common for private insurance policies, and this was obviously done to build up 'reserves' for future policy pay-outs. So the 'benefit' for the elderly is way off in the future, and that depends on how the benefit is paid for. And this is just one canard in the entire scheme." (p. 2)

"It is bad enough that our elected officials are using the $70 billion in estimated premiums under CLASS in the first 10 years as one of the deficit-reduction measures to 'pay' for health care reform. But the premiums that people will be paying for this future benefit will be going into the same type of 'lock box' that payroll deductions for Social Security have been going into for decades. In other words, they will be spent on other government programs, with the lock-box holding government bonds, representing IOUs of Uncle Sam which, in order to be redeemed, will need to be financed with yet more government borrowing. Any member of Congress who says that the money will be secure and waiting there for the beneficiary is remarkably naive at best, or very stupid at worst (we prefer other adjectives that are not printable). Just like there is no Social Security trust fund, there will be no CLASS trust fund overflowing with money to be spent on the needs, real as they may be, of the elderly. This is a classic Ponzi scheme and if it wasn't perpetrated by the government, it would be considered illegal by that very same government." (pps. 2-3)

"Another issue we have about CLASS is that too many people will believe they are covered for skilled nursing care with it, just like they often believe Medicare covers it. What happens after paying premiums for 20 years (if it lasts that long) and an 85-year old moves into a nursing facility? The benefit will only cover a third of the cost (at best), and the family will be wondering why. In addition, unlike the private insurance market, there will be no underwriting for CLASS, with all enrollees paying the same premium, so naturally it will eventually attract those most likely to be in need of the services as opposed to a healthier population. What does that do? Nothing but send the future costs through the roof." (p. 3)

". . . I happen to have a 'Cadillac' long-term care insurance policy, with premiums that have been about $50 a month for 10 years with a benefit that is (in today's dollars) four times more than what would be available under CLASS, with an annual inflationary increase in benefit. Since there are some people who believe that Cadillac health insurance policies result in escalating use and costs and should be taxed, will my Cadillac policy be viewed the same way? Could that become a disincentive to plan for the future, resulting in being thrown into the CLASS fold in the future, broken or not, with higher premiums and lower benefits? Beware the unintended consequences." (p. 3)

"So, some people believe CLASS is a great new benefit for the elderly population, others think it is a gimmick that will fail as Medicare and Social Security crumble under the weight of their collective trillions of dollars of unfunded liabilities. But what about the providers? As we stated, there is no impact for the next five years, since benefits can't be paid out, and after that most likely very little since the vast majority of the initial people in the five-year vesting period will not be needing skilled nursing or assisted living facility services, and may not need at-home services either. In theory, if fully vested, it would be logical to think that CLASS could keep the elderly in their homes longer and out of 'institutional' care settings. We all know that this is what most people want, but if this happens, the acuity levels of those eventually entering both skilled nursing and assisted living facilities down the road would likely rise, which would result in even shorter lengths of stay, higher turnover and higher costs funded by...who knows?" (p. 4)

"On February 26, the GAO stated that it 'could not render an opinion on the consolidated financial statements of the federal government (other than the Statement of Social Insurance) because of widespread material internal control weaknesses and other limitations' (emphasis is ours). Is it troubling that public company CEOs are held to a higher standard than our own federal government, and subject to prosecution? It would be hard to make this stuff up. Stay tuned for our next audio conference on health care reform and LTC, slated to air on Thursday, May 13." (p. 5)