LTC Bullet:  CLASS:  What's Next?

Tuesday, March 22, 2011


LTC Comment:  News and views on CLASS including a column by actuary Steve Schoonveld after the ***news.***

*** CLTC DESIGNATION MASTER CLASS available online April 1.  No foolin'!  Information, preview and registration here. ***

*** CLASS Scuttlebutt: 

*** CLASS HEARING:  The House Energy and Commerce Subcommittee on Health held a 3-hour hearing on Thursday, March 17, 2011 titled "The Implementation and Sustainability of the New, Government-Administered Community Living Assistance Services and Supports (CLASS) Program."  Watch the hearing and read members' and witnesses statements here. ***

*** LEGISLATION TO REPEAL CLASS ACT introduced by Boustany, Gingrey on  March 17, 2011 ***

*** THE HILL, "House GOP questions CLASS Act startup funds," by Jason Millman, 03/17/11.  "[W]hy [is] the White House . . . requesting millions of dollars to implement a long-term health insurance program that the administration admits is unsustainable. ***

*** HERITAGE:  "Secretary Sebelius Cannot Fix CLASS," by Brian Blase and John S. Hoff, WebMemo #3193, March 16, 2011.  Excellent, must-read analysis. ***

*** CLAUDE THAU on 10 ways the government is prejudicially favored in pricing CLASS:

  1. They save underwriting costs as well as the costs of having to issue policies.
  2. They save commission cost and processing thereof and don't have to appoint and do background checks on brokers, nor engage in broker training or confirm licenses or certifications.
  3. They are allowed to price their product such that if their assumptions materialize, price increases would be required.  In contrast, private LTCi not only cannot price with the intention of having price increases, the private industry must certify that premiums would remain the same even if moderately adverse experience were to occur.  They can account for the program without reporting reserves or holding required surplus.  If insurers had the non-lockbox flexibility that CLASS has, private LTCi could be less expensive.  The government does not incur surplus strain, nor do they have to provide any guarantees as to benefits and they don't have to contribute to state guaranty associations.  Because they have control to change the law, they potentially have access to employer money and other funding to cover shortages and could mandate that everyone must participate.
  4. They do not have to pay premium taxes, income taxes or DAC [deferred acquisition cost] tax, etc.
  5. They don't invest time educating and counseling clients, and filling out applications, including suitability, replacement, etc. They have minimal costs for marketing material and advertising because they can force employers to deliver education to employees.  Furthermore, not only do they have a tremendous critical mass advantage, but to the degree that they incur costs, they do not have to reflect such costs in the premium.  For example, they already have a bevy of HHS staff working full-time on the program at tax-payer expense and they have budgeted $93 million of tax-payer money for marketing.  They also  are able to increase participation artificially through automatic enrollment.
  6. They don't invest any time on non-buyers.
  7. They don't have to file contracts, marketing materials or rate increases with the state, do annual filings on all kinds of issues to the various states, etc.  To the degree they have to do any such things, they get to spread that cost over a huge base and don't even have to charge that cost to the program.
  8. They don't have to monitor and deal with prospective and actual law changes at the federal level, in all 51 jurisdictions and sometimes at lower levels.  Indeed, they have the unique ability to make business hard for their private industry competitors by creating legal and regulatory obstacles and increasing taxes.
  9. They cannot be sued, which saves money and avoids E&O costs.  They are also not subject to state audits, fines or "independent review" of claims.
  10. They can created unfunded liabilities on the states, burdening them with establishing care coordination and claims review processes.

LTC Comment:  Why is the government exempt from these routine consumer protections that are mandatory for private LTC insurance? ***



LTC Comment:  If you missed the House hearing referenced in the ***news*** above, you might want to invest some time to watch it here.  But just in case you can't spare the three hours, here's our thumbnail summary:

Proponents said CLASS does good things, so we should ignore its financial and actuarial irresponsibility.  Opponents said CLASS is financially and actuarially irresponsible, so we should ignore all the good things it claims it would do.  Everyone agreed Medicaid is a disaster that forces people into impoverishment so something has to be done.  But no one understood or explained that (1) Medicaid does not require impoverishment, (2) is easily available even to the upper-middle-class after care is needed, (3) anesthetizes the public to LTC risk, and (4) crowds out the markets for (a) privately financed home care, and (b) home equity conversion or (c) private insurance to pay for it.  The whole hearing floundered for lack of this clarity on Medicaid's role as the cause of the problems, the symptoms of which CLASS ineffectually attempts to address.


We're pleased now to bring you the following article by well-known consulting actuary Steve Schoonveld.  He opines about what's wrong with CLASS and how to fix it. 

"The CLASS Act:  What Now?"
Steve Schoonveld

There is broad agreement that the CLASS program, as passed by Congress, will be a challenge to implement successfully.  Where disagreement lies is in the ability to change the program and the level of changes that are necessary to launch a sustainable and effective program. In this article I provide an analysis of CLASS as it stands today and offer an alternative approach that will more effectively and broadly meet the goals of the program and the needs of consumers.

CLASS Adjustments

The goals of the CLASS program as stated by Kathleen Greenlee, Assistant Secretary for Aging in the U.S. Department of Health and Human Services’ Administration on Aging, are "to create an opportunity for individuals to prepare financially for their own long-term needs, support consumer choices related to their own care and living arrangements, and facilitate independence and community living." The authors of the CLASS program point to the institutional bias and the impoverishment provisions of Medicaid as the only source of support offered to most households. While this is indeed a gross mischaracterization of some innovative state Medicaid programs, it is indeed a painful general truth. State Medicaid programs are in the midst of a significant crisis, however CLASS will not help the people it is intended to help if it is designed to fail. The Administration has a difficult task ahead of them to construct a program under the law that is sustainable and enables broad and meaningful participation.

The adjustments which have been presented in public forums, such as the recent testimony by the Assistant Secretary, include the use of indexing premiums; increasing penalties for delayed enrollment or opting back in; increasing the actively-at-work definition to a $12,000 annual income level; and reducing the one-size-fits all aspect of the program. The presumption within this latter adjustment is that alternative benefit levels and durations are being pursued.  Whether the secretary can make these adjustments without legislative means is immaterial.  The real question is whether the adjustments will yield a sustainable and effective program.

The Participation Play

Greenlee stated that participation is key for the success of the program.  This is true to a limited extent.  Once the appropriate level of scale is achieved the sustainability of the program should not vary based on whether one or a million additional policies are sold.  Participation is a variable that impacts the financial sustainability of the program and should not be a core foundation for pricing an insurance program.  The hope that healthy employees will purchase CLASS and retain coverage through lean financial times is especially concerning in a very long duration program where ongoing adverse selection and induced demand issues are ever present.  Any one of a number of long-term pricing assumptions, a simple example is the number of subsidized premium participants, could bankrupt the program.

A voluntary guaranteed issue-program is considered by many to be a contradiction.  To be successful CLASS will need to do one of two things; either significantly reduce the guaranteed issue aspect or make use of an individual mandate.  The former produces a program that mimics private group long-term care insurance.  The latter is a social program directly funded through general revenue such as payroll deductions.

Complementary but Different?

In general, the Group Long-Term Care insurance market offers guaranteed-issue coverage for employees who are actively at work and enables spouses of employees to purchase coverage if they are able to pass underwriting.  The use of simplified or medical underwriting on employees is rare and limited to certain cases such as the purchase of high amounts of coverage, unlimited benefit periods, or coverage purchased after the initial offering.  In addition, the employer, the insurance carrier and the broker or agent spend a significant amount of time marketing the product to employees through the use of employee meetings, marketing materials to encourage enrollment and web based product demonstrations.

Mark Warshawsky of Towers Watson testified in front of the Health Subcommittee of the House Committee on Energy and Commerce, “about 50% of large employers offer but do not subsidize long-term care insurance to their workers”.  Yet participation rates for these voluntary worksite benefits remain in the mid-single digits.  Reasons for the low participation levels have been attributed to the general reliance on Medicaid as the “payer of only resort”, the lack of strong tax incentives to purchase, and the very limited focus on retirement and financial planning.  Furthermore, one cannot ignore affordability.  According to a 2009 Society of Actuaries study on Retirement Risks and Solutions, the 25th to 75th percentile (or middle mass) of households within the pre-retirement ages between 55 and 64, have an average annual gross household income of $57,000.  Given the current cost of housing, college tuition and some need to save for retirement, where is there room for a premium of anywhere from $65 to $240 per month?

It is clear that the private insurance product sold through the group channel is quite similar to where CLASS will likely proceed.  The markets may be complementary in the level of benefits that are offered but are the markets and the approach to sales significantly different?  One area of difference will be the budget available to market CLASS.  Within the Administration’s current budget proposal is over $90 million for CLASS marketing.  While this will go quite a long way to educate the public on the financial risks they face, will it enable CLASS to enroll beyond the mid-single digit level?  Will this be money well spent for a small level of CLASS participation?

"Never let a serious crisis go to waste"

This quote, spoken in support of the economic stimulus bill by fellow Chicago native Rahm Emanuel, can also be said of today’s Medicaid.  State Medicaid programs are facing crises and the opportunity to reform should not go to waste.  These programs should be reserved for the truly impoverished and for circumstances in which care is needed for catastrophic occurrences.  Currently, the ability to qualify for Medicaid through artificial impoverishment is far too easy.  This has encouraged a reliance on Medicaid as the product of choice for catastrophic long-term care needs and discouraged the responsible purchase of an insured solution.

A common reason given for the creation of CLASS was the perceived institutional bias and impoverishment requirements of Medicaid programs.  The inability to qualify for benefits and remain in the community is also cited.  To attain the same goals, CLASS supporters should re-focus their energies on enabling states to administer Medicaid so that it is both an efficient means of funding care for the truly impoverished and unfortunate rather than a dependency for the many.  Such a move will have strong and wide support as without such changes Medicaid will not be able to continue even the basic mission of assisting the impoverished.

With support from the research gained from CLASS, these improvements can increase the reach of Medicaid to reverse many of the recent cutbacks in benefits.  Furthermore, the absence of an assumed dependence on Medicaid, beyond the truly catastrophic safety net, will increase the enrollment in insurance products that meet the needs of consumers thereby reducing the burden on Medicaid. 

The Assistant Secretary stated that Medicaid nursing home care costs “are a key source of financial stress on public budgets”.  Unfortunately, the likely outcome of CLASS will not significantly change this anytime soon.  It is time for an effective approach that is based on sound and efficient public policy solutions instead of a program that may have limited participation and an uncertain future.

Steve Schoonveld is a consulting actuary specializing in the Long-Term Care and Accident & Health industry.  Currently Steve serves as chairperson of the LTC Industry Think Tank which is jointly sponsored by the LTCi Section of the SOA and the ILTCI Conference Board.  He is a Fellow of the Society of Actuaries and is a member of the American Academy of Actuaries.  Steve can be reached at or


*** THE CLASS CONTENT covered in today's LTC Bullet has been added to our Members-Only Zone website here:, exclusive for Center members.  Not a member yet (you should be if you’re receiving this)?  Need to renew?  Need a refresher on your username and password?  No problem.  Just contact Damon at 206-283-7036 or  Center membership is only $150 per year for individuals or $12.50 per month and gets you access to The Zone and allows you to receive our daily LTC E-Alerts and LTC Bullets by email. Corporate memberships are also available. Support the Center's research and advocacy on behalf of rational long-term care public policy and responsible LTC planning. ***