"The CLASS Act and the Future of
Long-Term Care Financing"
by Stephen A. Moses
for the Society of Actuaries "Living to
January 5, 2011 in Orlando, Florida
Slide 1: "The CLASS Act and
the Future of Long-Term Care Financing"
by Stephen A. Moses, president, Center for Long-Term
Care Reform, Seattle, Washington
Good morning, ladies and gentlemen.
I'm sorry I cannot be with you in person because of a
family medical emergency. Please direct any questions or comments to me by
phone or email.
I'm speaking today about the CLASS Act and the likely
future of long-term care financing.
Slide 2: Overview
CLASS became law as part of "health reform" when
President Obama signed the Affordable Care Act on March 23, 2010.
One of the CLASS program's biggest proponents described
it as a "New voluntary nationwide long term services and supports
insurance program for persons with disabilities and seniors with chronic
That definition sets CLASS apart from the government
program that has dominated long-term care financing since 1965.
- CLASS is the Non-Medicaid program
CLASS definitely is the non-Medicaid program.
Whereas Medicaid is a means-tested public welfare
program, CLASS is social "insurance" into which people pay premiums and
earn "entitlement" to benefits.
Whereas Medicaid pays mostly for nursing home care,
CLASS provides funds that can be used for "long term services and
supports," including home and community-based care.
Whereas Medicaid reimburses care providers directly,
CLASS puts money in the hands of patients and their families to purchase
care as they see fit.
Whereas Medicaid has different benefits and eligibility
rules in every state, CLASS is consistently the same nationwide.
Whereas Medicaid shortchanges younger disabled people in
favor of frail and infirm elders, CLASS does not discriminate.
- Will CLASS solve or aggravate problems?
Bottom line: the CLASS program attempts to correct or at
least ameliorate major problems with America's long-term care service
delivery and financing system, problems that are often associated causally
These problems include (1) limited access to care, (2)
dubious quality, (3) inadequate provider reimbursements, (4)
discrimination against Medicaid recipients, (5) institutional bias, and
(6) loss of independence and control.
So, hooray for the CLASS Act's goals. But will it
resolve or aggravate these shortcomings in the current system?
Slide 3: Understanding the LTC
- How did we end up with a welfare-financed,
nursing-home-based LTC system?
One of the biggest mistakes policy analysts and
legislators make is to attack the symptoms of social problems instead of
their causes. The only way to avoid that error is to understand how those
problems came to exist in the first place.
- Brief history of LTC services and financing
So, how did the United States come to have a
welfare-financed, nursing-home-based long-term care system that serves no
In 1965, at a time when many more people were living
longer and dying slower, with fewer women at home to provide free care,
Medicaid made nursing home care easily available at little or no cost. I
provide more detail in the paper and in my other publications, but in a
Easy access to government-financed nursing homes stunted
the development of a privately financed home and community-based services
infrastructure, crowded out a market for home equity conversion or private
insurance to fund long-term care, and caused Medicaid expenditures to
Therein lie the origins of the long-term care service
delivery and financing problems we still face today, including
institutional bias, budgetary strains, low provider reimbursements,
caregiver shortages, excessive Medicaid dependency, and disappearing
private-pay census and funding sources.
- Unintended consequences of well-intentioned but
Our current dysfunctional long-term care system is the
logical and inevitable consequence of the well-intentioned but
counter-productive policy to fund nursing homes through a welfare program.
Unfortunately, instead of addressing the cause, i.e.
easy access to government-subsidized nursing home care, most academics and
the state Medicaid programs they influence, have tried to fix the
symptoms, i.e., institutional bias and high costs.
Slide 4: Can Medicaid
rebalance it's way to solvency?
The holy grail of recent long-term care financing policy
is the idea that by "rebalancing" from funding nursing home care to
supplying home and community-based services instead, Medicaid can give
more people long-term care services they prefer at lower cost.
Are HCBS cheaper than institutional care?
But are home and community-based services really less
expensive in the long run and across the whole society?
Most research suggests they are not. In general, home
and community-based care delays but does not replace nursing home
institutionalization. Also, home care is labor intensive and lacks the
economy of scale of a nursing facility. It ends up costing more, not less.
The woodwork effect
Furthermore, when Medicaid pays for more home
care--which people prefer--and for less nursing home care--that most would
rather avoid--the program attracts more participants.
People already financially eligible are more likely to
rely on Medicaid and others are more apt to self-impoverish intentionally
to qualify when they perceive that the program provides more desirable
How to avoid the pitfalls of rebalancing
To summarize the argument so far: Medicaid-funded
institutional care crowded out a private market for home and
community-based care and led to our welfare-financed, nursing-home-based,
prohibitively expensive long-term care system.
But efforts to counteract the system's deficiencies by
rebalancing to provide more home care only made Medicaid more attractive
and increased rather than decreased its costs and problems.
The only way Medicaid can afford to offer a full
continuum of long-term care services to all recipients is to reduce the
number of people who end up dependent upon the program.
Slide 5: Why does Medicaid pay
for most long-term care?
But that brings up the question "Why does Medicaid--a
means-tested, public assistance program--pay for most long-term care in
the first place?"
Isn't it supposed to be a safety net for a relatively
small number of truly needy people?
Don't people have to spend down into impoverishment
before they get help from Medicaid?
- The fallacy of impoverishment
That perception of Medicaid is what I called the
"fallacy of impoverishment" in a 1990 Gerontologist article. In fact, most
Americans qualify quite easily for Medicaid-financed long-term care. The
financial eligibility rules are much more generous and elastic than
- How Medicaid LTC eligibility actually works
Anyone with income below the cost of a nursing home
qualifies based on income anywhere in the United States. Applicants may
need an "income diversion trust" in "income cap" states, but they'll be
able to shelter much more income in "medically needy" states, the
Exempt assets are virtually unlimited including a home
and contiguous property up to an equity value of at least $500,000 and as
much as $750,000 in some states, plus one business, one car, prepaid
burials, household goods, and term life insurance of unlimited value.
Anyone with excess assets can make them non-countable by purchasing exempt
assets such as these.
For people who still don't qualify based on their income
and assets, a cottage industry of Medicaid planning specialists eagerly
provides advice on how to self-impoverish by means of special annuities,
trusts, life care contracts and other legal gimmicks.
Slide 6: Summary and Relevance
of the CLASS Act
Now, let's return to the CLASS Act.
- Will CLASS fix what's wrong?
Will CLASS fix the problems that Medicaid has caused? I
don't think so.
- Take up low because of Medicaid crowd out
Most people do not worry about long-term care until they
or a loved one need it. Then the path of least resistance is to qualify
for Medicaid. CLASS does nothing to change that. In fact, its five-year
wait for benefits equals Medicaid's five-year asset-transfer look back
Private LTCI already pays for HCBS but people don't
Private long-term care insurance already pays for the
whole continuum of long-term care including home care, adult day care,
respite care, assisted living and skilled care if needed. But most people
don't buy it. CLASS will have the same problem.
- Public sees LTC as a right, an entitlement because of
Medicaid and Medicare
More than four decades of easy access to
Medicaid-financed long-term care has anesthetized the public to its risk
and cost. The public sees LTC as a right, as an entitlement--because of
Medicaid and Medicare. CLASS does not change that.
Because CLASS lacks the routine medical underwriting
essential for all true health or long-term care insurance, it will attract
participants most likely to claim its benefits. It will repel people with
better health prospects who can get more protection for less cost from
private insurance or simply "go bare" and count on Medicaid and Medicare.
One size fits all
Although CLASS lacks Medicaid's state-specific
variations, its one-size-fits-all structure precludes adapting the program
to fit the special needs of individuals and families in the manner private
insurance policies can.
Slide 7: Conclusion
- CLASS tries to fix LTC without accounting for why
The CLASS Act attempted to fix what's wrong with
long-term care services and financing without first asking why the system
- Addresses symptoms, not causes
CLASS addressed the symptoms of our long-term care
problems, but not the causes.
Are most people uninsured for long-term care? Yes, but
CLASS will not change that because it does not address the cause: decades
of easy access to Medicaid.
Do long-term care providers discriminate against
Medicaid recipients? Yes, but CLASS will not change that because it will
not provide enough revenue for beneficiaries to afford market-based
private-pay service rates.
- Access? Medicaid co-opted private HCBS.
Do too few people get the home care services they
prefer? Yes, but CLASS will not change that because wide publicity about
Medicaid "rebalancing" has further desensitized the public to the risk and
cost of long-term care.
- Quality? Medicaid paid too little.
Is long-term care quality a problem? Yes, but CLASS will
not change that because of low participation, very limited payments, and
likely rapid insolvency.
- Institutional bias? Medicaid paid for nursing homes.
Do too many people end up in nursing homes on public
welfare? Yes, but CLASS will not change that either because few good risks
will enroll for the same reason they shun private insurance, their denial
enabled by traditional Medicaid financing.
Slide 8: The Future of
Long-Term Care Financing
So, to conclude, what is the most likely future for
long-term care services and financing?
- No change until we address the causes, not just the
More of the same. I predict the CLASS Act will be
repealed before it is implemented as so many have recommended, including
President Obama's "Debt Commission."
But if it is implemented as currently configured, it
will fail shortly after it is put in place as predicted by most
professional actuaries who have examined the program.
If CLASS is somehow modified so that it reflects some
level of actuarial competence, achieves lower premiums and higher
benefits, or if it is made "mandatory," it could possibly be made to
sputter along for awhile.
- But policy makers keep making Medicaid more
attractive and easier to get
But policy makers keep making Medicaid appear more
attractive. The media and "Medicaid planners" keep making Medicaid
benefits easier to get.
Just as private long-term care insurers have never fully
realized that Medicaid is their biggest competitor, siphoning off the
middle and affluent markets they could have otherwise captured, so CLASS
advocates have been blindly optimistic that their Rube Goldberg
alternative could do better.
My best guess of what to expect for long-term care
services and financing is that . . .
CLASS will flounder . . .
- Medicaid will have to cut back radically, when
support from Social Security and Medicare end
State Medicaid programs will cut back radically to
survive as federal-match bonuses from the "stimulus" disappear July 1,
2011, as 16 million new recipients are added by "health reform" in 2014,
and as support from Social Security and Medicare declines as I explained
in my paper.
- Boomers will spend through savings and home equity
Boomers, only one-third of whom have saved enough for
their retirement income security, have set aside almost nothing to meet
future acute and long-term care costs. They will quickly spend through
their savings and home equity if they need long-term care after they can
no longer rely on Medicaid.
- Reverse mortgages and private LTCI will flourish
Reverse mortgages will become the dominant funding
source for middle class and affluent home owners who require long-term
care once Medicaid's home equity exemption has been eliminated or
radically reduced as it will have to be.
As soon as Medicaid no longer operates as free
inheritance insurance for heirs, more and more people will purchase
private long-term care insurance to avoid the new, and this time very real
risk of asset spend down.
- Medicaid will do a better job for fewer people
Now that I've depressed you all sufficiently, let me
close on an upbeat note. We will get through this.
When it is no longer available to middle class and
affluent people after the insurable event occurs, Medicaid will be able to
do a better job for fewer dependents at less taxpayer expense.
In time, most people will see the real risk and cost of
long-term care. They will prepare to be able to pay privately for
long-term care if and when the need arises.
Private revenue will supply much needed financial oxygen
to the service delivery industry. People spending their own money or their
private insurance benefits will not go to nursing homes until they need
them medically. So institutional bias will disappear.
When most patients pay market-based rates, long-term
care providers will prosper, pay better salaries, and grow. So problems of
access, quality and caregiver supply will disappear. Desperately needed
private debt and equity capital will pour into the long-term care services
industry when it is profitable again.
When people know they must pay for their own long-term
care, the reverse mortgage and long-term care insurance industries will
prosper and grow. So there will be more jobs created and increased tax
Bottom line, if we stop doing what we've always done in
long-term care services and financing, we'll get a different result.
Because CLASS does nothing to replace Medicaid as the dominant LTC payer,
it will lead to more of the same.
According to Albert Einstein, doing the same thing over
and over again and expecting a different result is . . . well, let's be
tactful and just say . . . not very useful.
Thanks for your attention.