LTC Bullet: The CLASS Act: Implementation and Impact on Consumers

Thursday, April 29, 2010


LTC Comment: Actuaries and others discuss the CLASS Act after the ***news.***

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LTC Comment: On Tuesday, April 27, 2010, the Society of Actuaries Long-Term Care Insurance Section Council and the American Academy of Actuaries jointly sponsored a webinar titled "The CLASS Act: Implementation and the Impact on Consumers." The SOA-LTCI section graciously granted your humble correspondent a press pass to sit in on the program. Following below are my notes on the webinar without editorial comment.

But let me say just this much at the outset. Actuaries and policy experts are highly professional people. Their public statements are nearly always reserved and precise, as they should be. But sometimes the experts are so careful about commenting on the CLASS Act that it puts me in mind of Hans Christian Anderson's tale, the "Emperor's New Clothes." For example . . .

Does CLASS--with its lack of underwriting, anti-selection, indeterminate premiums, five-year vesting and unlimited lifetime cash benefits--really deserve to be taken seriously as "insurance" by professional actuaries, financial experts and policy analysts? Sometimes during the webinar I wanted to scream like the child in the story: "But he [Emperor CLASS] isn't wearing anything at all!" See what you think.

The slides for this program are proprietary, but my understanding is that an archived copy of the webinar, including the slides, will be available for purchase at a later date. We'll let you know when we get more information.


Steve Schoonveld, FSA, MAAA, Chief Financial Office and Actuary, LifePlans, Inc., was moderator for the program.

The panel of respondents included:

  • Howard Gleckman, Resident Fellow, The Urban Institute
  • Mark Meiners, PhD, Professor of Health Administration and Policy, George Mason University
  • Allen Schmitz, FSA, MAAA, Principal and Consulting Actuary, Milliman, Inc.
  • Eric Stallard, ASA, MAAA, FCA, Research Professor & Associate Director, Duke University

Mr. Schoonveld opened the program with an overview of the CLASS Act including its history, what it does, its current status (signed into law March 23, 2010) and the role of the SOA Long-Term Care Insurance Section Council and the American Academy of Actuaries' Federal Long-Term Care Task Force in analyzing versions of the proposal before it became law.

See for example these items: and

Next came opening statements from the panelists:

Al Schmitz: Adverse selection is his largest concern with CLASS. It is a price sensitive product. It needs lower premiums to attract larger participation. The Department of Health and Human Services was dealt a tough hand to find a balance between price, participation, benefits, etc. while controlling adverse selection. There must be some changes. Some changes were proposed, but they were not included in the final bill. Can the needed changes be done legislatively or by regulation? That's not clear. Changes to plan design, to the current premium structure, and to eligibility could help. Another important issue is to try to find a way to work with the private LTCI industry. The fear is that it will deteriorate into a head-to-head clash between LTCI and CLASS.

Howard Gleckman: He took a "broader perspective." CLASS is an extremely important change in how we handle LTC. In fact, it is the most important change since Medicaid began. CLASS represents a transition from a welfare-based to an insurance-based long-term care financing system. CLASS does face fiscal pressures. But the real question is whether Medicaid is affordable. The Medicaid benefit is nursing home care which most people don't like. With its cash and home care focus, CLASS is a tremendous step forward. It does raise design questions. The CLASS Act tries to do too many things at once. It's a benefit program for the disabled while trying at the same time to be an insurance program for people who will age into benefits. Most of the problems with CLASS are caused by the voluntary nature of the program. Implied solution: make it mandatory.

Eric Stallard: CLASS is unlike anything currently in existence. It is voluntary, federal, LTC insurance that differs from either a mandatory federal LTCI program or a voluntary private LTCI program. No underwriting, no benefit caps, but still has cash benefits. The funding is different than any other program. It has a trust fund that differs fundamentally from those of Social Security and Medicare. The key difference is no expectation that all future benefits are to be funded in advance. So no "transition costs" as with Social Security if it were to convert from a public to a private program--last estimated by the Trustees to be $16 trillion. The CLASS trust fund would pay in advance but have sufficient funds on hand to transition immediately. The CMS Actuary will have to sign off every year on the actuarial soundness of this program.

Mark Meiners: He's been involved since the late '70s analyzing why there was no private LTC insurance program. Very intrigued by CLASS. It would be easier if we'd had CLASS back in the '80s. Today, the LTC Partnership program is going live in about 40 states with an incentive for middle income people to buy LTCI. The program started in 1989, went live in four states in 1993, and was reinvigorated with the DRA of 2005. CLASS is different than private insurance models. Three especially interesting aspects: (1) It's a solution for the uninsurable. (2) Modest benefit, but sufficient to help people pay for care coordination. (3) Gives positive visibility to the importance of preparing for LTC risk through insurance. Private vs. social insurance advocates have "banged heads" in the past. Hopefully, the message is out now to all players that they need to work together whether through CLASS, private insurance or a combination.

The webinar software allowed for the audience to be "polled" on certain questions, I was unable to follow or capture the results so the questions and responses will be omitted here.

Discussion proceeded on a number of issues related to CLASS "implementation, key provisions, and success factors." Following are some of the more interesting observations and insights I discerned.

Understand please that the conversation moved very fast. Often, it was hard to tell who was talking. What follows does not capture everything, especially the nuances, precisely. On details or technical questions, it would be best to address any follow up inquiries you may have to the program participants or other actuaries.

Better yet, when the archived version of the program becomes available, purchase it and see/hear for yourself what the participants had to say.

  • 2013 is the anticipated implementation year for CLASS. Expect the "CLASS advisory council" to start work on benefit design, methods of premium collection, etc. in 2011.
  • Non-working spouses are not included under guaranteed issue.
  • Mr. Gleckman worries whether enough employers will opt in given they will be consumed with implementing health reform changes.
  • Are people who already meet benefit triggers really eligible to participate? Answer: Yes. That was intentional. But they do have to wait through the 5-year vesting period.
  • How to prevent gaming, adverse selection: longer wait periods, bigger penalties for dropping premiums, incentives to enroll as early as possible, simplified underwriting are possibilities.
  • Dr. Meiners: If participants can't afford premiums after starting, there needs to be some way to keep them in the risk pool with some sort of subsidy.
  • Currently penalties are greater for someone who starts, drops out and rejoins CLASS than for someone who doesn't sign up in the beginning at all.
  • Mr. Gleckman: The Administration is aware of these problems and working to fix them.
  • CLASS allows temporary lapses whereas private LTCI permanently excludes insureds after a lapse of 90 days.
  • CLASS includes "lapse support," i.e., funds paid in by people who later lapse help to support the pool.
  • Underwriting: Many in the Administration agree the income level to qualify for participation in CLASS needs to be higher.
  • Dr. Meiners: Medicaid benefits have been expanded so the system will somehow have to support people in both risk pools. What CLASS pays will help Medicaid.
  • Mr. Schmitz responded when asked that voluntary insurance programs use a variety of underwriting methods, including group characteristics, average age, salary, simplified underwriting, actively at work requirement, including hours per week, etc..
  • Mr. Stallard: Does the 5-year wait period mitigate adverse selection sufficiently? Proponents say it wasn't set up for gaming CBO's 10-year scoring rule. Perhaps a ten-year waiting period or a 10 to 15 year waiting period or even a 20-year waiting period would more adequately address adverse selection. The benefit payment could be different based on different periods of waiting.
  • CLASS administrative expenses are limited to only 3% of premiums collected. Sufficient? Mr. Gleckman: No. None in the first year. Being able to do extensive promotion is a huge factor for success of CLASS and private insurance. The Administration is aware that 3% is very low and they're trying to "scrounge" more money to get the program off to a strong start with heavy marketing and promotion.
  • Dr. Meiners: They have to find the right price point to get people to participate. If CLASS can get expenses below the 60% loss ratio benchmark of private insurers, that will help with the risk issue too. We want healthy people participating in CLASS.
  • Benefits are not clear. Specific benefits and premiums to be set by the Secretary of Health and Human Services probably in 2012. Not less than $50 per day per the statute. Think about it as a benefit to caregivers not just care receivers.
  • Private LTCI is usually reimbursement. CLASS is Cash. Cash policies usually come with a cost.
  • Premiums are going to depend on actuarial determinations that are made. Some CLASS participants cannot get rate increases according to the law: if over 65 or paid for 20 years or more, for example.
  • This program is regulated on federal, not the state level. Not clear how federal regulation of this will be managed.
  • Mr. Stallard: You need an adequate return on assets to maintain solvency. Other trust funds are designed to hold funds but not prefunded. Rather, pay as you go. CLASS funds are advance-funded. Those are federal funds held in the Treasury. Could reduce the need for other federal revenues. Return is fairly good, risk free, 5.7% per annum rate of return for Social Security and Medicare. Could go out to private equities market, but current law does not allow anything different than what's allowed for the Medicare trust fund.
  • They could "close the block," i.e. have temporary moratorium. How would that affect future rate increases? Silence. Closed blocks in private LTCI have experienced significant rate increases. Could create "death spiral" opportunities for CLASS.
  • Mr. Gleckman: Most major industrial countries faced with similar welfare-system problems have changed to social insurance. Japan and Germany implemented mandatory government programs in the 1990s. France's system is strictly means tested enabling a strong private supplemental LTC insurance market that pays about of LTC costs.
  • CLASS as designed does not lend itself to private insurance supplementation. It doesn't meet the same standards that insurers are using today.
  • Gleckman finds targeting catastrophic costs interesting whereas Meiners prefers going the opposite direction, like the Partnership, covering the front end first. Lower middle income people need help with that front end risk.
  • Implications of a public LTC plan: opportunity or competition for private LTCI? Decreased number of agents? Does CLASS help raise awareness? Are they able to propose a plan to healthy individuals that offers opportunities.
  • Dr. Meiners: It is up to the LTCI industry to step up, offer short-fat benefits. Link with Partnership. For the Partnership: if CLASS stays as it is, that's an opportunity for the private market.
  • Mr. Gleckman: The analogue is Medigap insurance. Seems like there are opportunities to supplement CLASS. Industry needs to work with the Administration. Could take LTCI industry out of its doldrums.
  • Others: Medicare does provide premiums and benefits that are obvious to supplement with Medigap. Not as many opportunities in CLASS. Most people have Medicare to be supplemented. Boils down to the price point. CLASS needs to be such a great buy that those who want more coverage will go to the private market.
  • Medicaid is not going away because of the CLASS Act.
  • CLASS is one-size-fits-all. Risks consumers face are not that uniform. Lack of underwriting is both good and bad. Why would a healthy individual participate? No consideration for regional differences.
  • Can consumers afford either CLASS or LTCI? Several slides showing income and assets by demographic cohort shed doubt on the affordability of either.
  • Mr. Gleckman: SCAN Foundation has a tool on its website that enables comparisons between insurance models. The premium for a mandatory program similar to CLASS is only $40 per month. "That is certainly affordable for everyone."
  • Dr. Meiners: Before jumping into a politically charged mandatory program, better to try a short and fat product. That would bring the price down too.

Program ended without time for the last polling question: "A sustainable CLASS program will satisfactorily address the long-term care needs of consumers."

A. Strongly agree
B. Agree
C. Neutral
D. Disagree
E. Strongly disagree

What do you think?

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