Claude Thau on the CLASS Act
I have spent my career as an actuary, executive, consultant and
distributor in the insurance industry, focusing entirely on long-term care
insurance (LTCi) for the past 15+ years. Nonetheless, it is difficult to
comment definitely on a moving target and one with a lot of complexity. I
have seen various versions of the CLASS Act over the years and my comments
may not apply directly to the current design (in developing my comments, I
reviewed the version of the CLASS Act that I found on Thomas as of 27Sep09
- http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1721-
it was out-of-date at that time). With limited time and resource, I must
observe that my analysis may be deficient and certainly has not been done
with any mathematical modeling, although I’ve relied on some modeling done
by others. I offer my knowledge, experience and insights because I am
confident that at least some points are quite relevant.
Modeling has, unfortunately, proven to be of limited value in the past.
Diligent efforts to predict the costs of Social Security, Medicare,
Medicaid, etc. have had the following results:
- Costs of the original program have been underestimated.
- The environment has changed, increasing the cost.
- The program has changed subsequently, increasing the cost.
- The political process has been unwilling to deal with the problems.
- Hence we have created huge unfunded liabilities, currently to the
tune of $140 trillion, although Social Security and Medicare were
intended to be self-supporting.
- Those unfunded liabilities are off-balance-sheet. Thus trend
analysis of our national "deficit" and calculations such as the "deficit
per household" ignore these burgeoning unfunded liabilities.
- The nature of the programs has changed from their initial
description. Programs that were supposed to be self-funded social
insurance became increasingly means-tested directly or indirectly, a
trend that will continue. For example, social security income is now
taxed and there are proposals to increase social security taxation for
the more affluent. Medicare Part B health insurance premiums vary based
on the insured’s income, not based on the insured’s likely benefits.
- The program affects the public psyche in perhaps unintended ways.
Because I am dealing with a "political" issue, some readers may wonder
about my political persuasion as well as my credentials. My tendency is to
be a social liberal and economic conservative. I consider myself
independent but have voted Democratic more often than Republican. I have
voted for Dennis Moore in each of his Congressional campaigns and voted
for President Obama in the Kansas caucus as well as the general election.
Fundamentally, earlier versions of the CLASS Act have already proven to
be seriously under-funded and it probably continues to be under-funded, as
I will explain below. It also may devastate the private LTCi industry.
A committee of extremely well-respected actuaries with deep involvement
in the LTCi industry did a study of the CLASS Act on behalf of the
American Academy of Actuaries (AAA). The study concludes that the CLASS
Act, as proposed, would become insolvent within 11 years, by 2021. The AAA
estimates that the premium would have to be $160/month for a $75/day
benefit. Based on my reading of the report and respect for the individuals
involved, I believe that the projection is well-done. However, I believe
that the $160/month conclusion is understated primarily because I believe
that we need to ask slightly, but significantly, different questions.
- One of the recent changes seems to be a requirement for actuarial
solvency over a 75-year horizon. The AAA used that time frame to
determine that the premium would need to be $160/month.
I'm concerned about the 75-year premise. If you stop an analysis with
future benefits still due, you generally understate the cost.
The 2008 OASDI report showed an unfunded liability of $4.3 trillion
75 years into the future, but a $13.6 trillion unfunded liability for
infinite horizon. Certainly the farther out you go, the less reliable
the projection, but it is scary that the infinite horizon liability is
more than triple the 75-year horizon liability. LTCi might be more
back-ended than Social Security but less back-ended than Medicare.
While the unfunded liability might triple (or worse) when extended to
the infinite horizon, the additional premium necessary from initiation
would be much less than triple. I’ve heard suggestions that the
additional cost to be funded to the infinite horizon might be as little
as $3/month (seems very surprising to me) and 10%/month (seems credible
and encouraging). If it only takes an additional 10% to accomplish the
goal of actuarial soundness based on current design and reasonable
assumptions, we should, IF we proceed at all, proceed on that basis.
- The AAA study determined the premium which would be necessary to
fund the CLASS Act benefits. It did NOT determine the premium level that
would result in the program being REVENUE-NEUTRAL to the government.
Without criticizing the AAA (I believe they answered the question they
were asked), I must emphasize that I think the proper question is
revenue neutrality.
The premiums for the CLASS Act coverage would be fully-deductible
above the line (according to Section 201). Thus if a tax-payer's
marginal combined state and federal tax rate is 30%, the government
would net only 70% of the CLASS Act premium.
If 30% is a reasonable marginal tax rate to presume for the future
(tax rates seem likely to rise) and we want the government to
break-even, the CLASS Act is substantially more under-funded than the
actuaries concluded. Tax-deductibility would require a $160 monthly
premium to increase to about $230/month. Please note that this figure
does not reflect the infinite horizon.
These costs would be partially offset by Medicaid savings. Such
savings might offset sufficient Medicaid costs to more than balance the
impact of the above tax deduction. However, a better way to reduce
Medicaid costs is to discontinue making long-term interest-free loans to
people who are not destitute, hence should not be on welfare. It is
improper to treat people as destitute and limit how their loan can be
used, when their assets collateralize the loan. See my paper on Medicaid
Reform for further explanation.
- Any deficits in the program would be "off-budget". The money cannot
be used in any other way, unless the Senate overrules this restriction
with 60 votes.
Unfortunately, off-ledger programs are prone to becoming fiscal
disasters. When unfunded liabilities are off-budget, it is too easy to
overlook them. We currently have $140 trillion of unfunded liabilities
on such programs.
The CLASS Act does not contribute to retiring our existing unfunded
liabilities. Rather it seems very likely to add to those liabilities.
Our current generations are consuming fiscal and environmental resources
at the expense of future generations. We should discontinue that
practice rather than expand upon it.
There could be good reasons for the government to invade the CLASS
Act trust fund with a 60% vote and there might be "political" reasons
which some people might not consider to be "good reasons". The
restriction is helpful but is the type of assumption which allows a
program to be implemented in good faith, but to fail to satisfy original
projections.
- Perhaps this wording has changed, but my most recent version states
that if a 20-year projection indicates that more than 40% of the funds
are required EACH year, then premiums can be increased. By that time,
the claims as a percentage of the funds would likely be increasing each
year, so 20 years further into the future, the ratio would probably be
much higher than 40%.
Requiring that there be no increase until benefits equaled 40% of
the fund for the first time seems to require that there be no increase
until the fund would be on the brink of running dry within a few
years. So there would be little time for a price increase to have much
benefit. A very huge premium increase would be required at such time.
But the individual's premium is not allowed to increase more than
50%, nor to more than double the original premium. Any retired person
over age 65 who has paid for 20 years would be exempted from the
premium increase. So the law seems to require increases that it
simultaneously forbids.
How much would a $75/day benefit help people and how would it impact
the LTCi industry?
- A $75/day benefit would be very meaningful for home care IF it keeps
pace with the inflationary cost for home care. Home care costs,
unfortunately, are likely to explode.
In the study of 2008 Individual Long-Term Care Insurance sales that
I co-authored with Bob Darnell of Towers Perrin, our background data
shows that the home care maximum daily or monthly benefit was the same
as the facility daily or monthly maximum benefit in 87.5% of the
policies purchased.
4.9% of the sales covered home care, but not facility care. Another
0.9% of the sales had a higher daily or monthly maximum benefit for
home care than for facility care. So in 5.8% of the sales, the home
care maximum benefit was higher than the facility benefit.
In 5.5% of the policies, the home care maximum benefit ranged from
50% as much (most common) to 80% as much as the facility maximum
benefit. And 1.2% of the policies covered only facility care.
So the vast majority covered home care to the same degree as
facility care and the others were nearly evenly split between having
higher home care benefits and higher facility benefits.
The trend in the industry is toward home care benefits. When buyers
discuss their desires with insurance brokers, they heavily favor home
care benefits at least as great as the facility benefit level, as
reflected by the above data.
In the group LTCi market, it has historically been very common to
have the home care maximum set at 50% of the facility maximum. The
consumer had no voice in that decision. However, the insurance
industry has been "listening" to consumer preferences. Hence the
percentage of group certificates issued with the home care maximum
daily benefit equal to the facility maximum daily benefit rose from
18.8% of the certificates in 2005 to 31.2% of the certificates in
2007.
In 2008, the average policy sold covered up to $150/day (or
$4500/month) for home care or facility care. Thus a $75/day benefit in
2008 would have been half as high as what was issued in the individual
insurance market. I would consider that to be meaningful coverage.
A $75/day benefit would have covered 3 to 4 hours of home care per
day, which is meaningful support for a family burdened by caregiving
responsibilities. The balance of care would come from the family or be
paid for by the family.
A $75/day benefit would cover only 36% of the national average cost
of a private room in a nursing home. In judging meaningfulness,
consider that less affluent people would likely reside in a less
expensive nursing home. Unlike home care costs, facility costs are
related to real estate. So families could reduce their costs by
selecting facilities in areas where real estate is less expensive.
Many might get by in assisted living facilities which are generally
less expensive (particularly for those who are not cognitively
impaired).
There are limitations to relying on the average home care costs.
Many people do not incur average costs. While average costs might be
fine for pricing, they would not cover each person satisfactorily.
There may be future pressures to increase the benefit levels.
Secondly, home care usage will be significantly higher to the
degree it is covered by CLASS Act coverage or private insurance. When
a family is paying for commercial home care out-of-pocket, it may go
to a great deal of effort to minimize the cost. The family’s interest
in minimizing cost ebbs when a third party is paying the bill.
Thirdly, the cost of commercial home care will zoom in the future.
Historically cost increases for home care services have been depressed
because:
- Our Medicaid system has driven care recipients to nursing homes by
reimbursing nursing home expenses, but not home care expenses.
- Our culture is still adapting to the concept of hiring someone to
provide care to your family member. It will become an increasingly
acceptable approach.
- The home care delivery system may have grown in advance of the
needs as entrepreneurs anticipated that home care would be in great
demand.
- The home care industry has been fractured, hence not run with
fiscal acumen. Consolidation is likely to occur.
- Inexpensive immigrant labor may have contributed to low costs.
Going forward, tremendous inflation is likely in the commercial
home care industry because:
- Commercial care will be come more "acceptable".
- Commercial home care will become more fiscally-sound.
- Demand will greatly exceed supply. While the number of elder
people requiring care will increase tremendously, the number of adult
able-bodied providers might remain fairly stable.
- Increasing numbers of younger adults will also be needing care as
a result of increased survival by handicapped babies and children who
would have succumbed in the past. Furthermore obesity, adult-onset and
environmental issues could have a significant impact.
Some of the above factors may be partly offset by improved
electronic caregiving capabilities. See the Urban Institute’s May 2007
study entitled "Meeting the Long Term Care Needs of the Baby Boomers",
for corroboratory analysis.
So, for the $75/day benefit to provide meaningful support, it will
have to keep pace with the inflation in the cost of commercial home
care services, which is likely to exceed the commonly-quoted Urban
CPI.
This inflation aspect is an area in which well-intentioned
projections as to the impact and cost of the CLASS Act might turn out
to be seriously understated.
- On a number of occasions, I’ve heard suggestions that the intent of
the program is to "stimulate the private LTCi industry". The theory is
that the availability and publicity of this program will help the
private LTCi industry grow. Presuming that such statements are made in
good faith, they reflect surprising naiveté.
Private industry and the government have invested a lot of money,
time and effort to educate the public that LTC needs are typically not
covered by Medicare. Although we have had meaningful success, some
people still don’t understand. Private industry and the government
plan substantial resource to continue such educational efforts.
In that light, can we reasonably expect that the institution of a
government-provided LTC program through the CLASS Act will impact the
public in any way other than to persuade them that the government will
cover their LTC needs? Even if the program has shortcomings and
knowledgeable people are aware of those shortcomings, they will
project in their minds that, by the time they need care, the program
will be more generous. They’ll hope for such increase in benefits and
defer a decision to buy private LTCi until they know what the
government will do. Of course, the longer they defer, the less
affordable the insurance. The result will be fewer sales of private
LTCi.
Even some people who are not enrolled in the program will still
think they are covered or will expect to be able to enroll whenever
they may need care.
In such an environment, educating people about the nature of
potential LTC needs far into the future will get more difficult. A
(much) smaller percentage of people would buy coverage that would wrap
around the CLASS Act coverage than would buy LTCi today, even though
the premium for such coverage would be lower because CLASS Act
benefits would be carved out. Indeed, the more valuable the $75 CLASS
Act benefit, the more difficult to sell a meaningful wrap-around
coverage.
Insurance brokers would need more revenue from a sale to fund the
increased difficulty and time-consuming sales process. But such income
would have to be spread across fewer sales and smaller sales. Hence
the distribution cost of the product would increase significantly as a
percentage of the premium. Clearly the impact on cost of the product
is undesirable and damaging to the LTCi industry. Creation of a
meaningful CLASS Act benefit seems likely to collapse the LTCi
industry.
If the program is fine-tuned to reduce the percentage of people who
will enrolled, in order to salvage some ground for the private LTCi
industry, the results of the CLASS program will deteriorate. It needs
a high percentage of participation to minimize anti-selection. That
is, if fewer people enroll, those people will include those most
likely to need LTC.
Realistically, the CLASS Act proposal will create two negatives:
unfunded liabilities and a dismantled private LTCi industry. The
relative degree of unfunded liabilities and a dismantled private LTCi
industry will vary depending on the way the program is instituted and
changes over time, but both of these negatives seems very likely to
occur, in my opinion.
If this program is toned down to focus on the less affluent, we end
up covering people who would be covered by Medicaid. What is the need
to replace Medicaid as the provider of LTC services to the
impoverished? The primary way the CLASS Act would reduce Medicaid
expenditures is to transfer the expenses to another account. That does
not constitute savings at all. I am submitting another paper regarding
reducing Medicaid expenditures.
A few more observations that may be helpful:
- The CLASS Act says that CLASS coverage would be treated like
tax-qualified coverage from LTCi policies. That statement seems to apply
to taxation of benefits. As regards taxation of premiums, the CLASS Act,
as noted above, stipulates that the premiums would be tax-deductible.
The CLASS Act does NOT stipulate that private LTCi premiums would be
tax-deductible. If CLASS Act premiums are tax-deductible but private
LTCi premiums are not tax-deductible, there would be unfair competition
between the CLASS Act and private LTCi. How could the private industry
compete?
- There are additional costs in the CLASS Act proposal which might not
have been reflected in the AAA analysis.
--The beneficiary would also be entitled to advocacy, advice and
assistance services from apparently a couple of counselors.
--The bill also requires states to develop adequate caregiving
services and creates a federal panel to study the adequacy of caregiver
salaries. That might be an unfunded Federal mandate.
--The higher benefits for needing help with 4 ADLs (activities of
daily living) vs 2 ADLs adds cost to distinguish status. Benefit cost is
also likely to increase with such a design, because families will want
to show a 4-ADL need in order to double their benefits. This feature is
another likely source of unintended benefit creep. In addition to claims
of 4 ADLs, the government and public may realize that a 2-ADL need costs
more than half of a 4-ADL need. Hence there may be pressure to increase
the 2-ADL benefit level.
- According to the CLASS Act, if someone is receiving Medicaid LTC
benefits and is in a facility, that Medicaid beneficiary gets to keep 5%
of her/his CLASS Act benefit in addition to their normal Personal Needs
Allowance. In Missouri, for example, the Personal Needs Allowance is
currently $30/month. With this provision, a person needing help with 2
ADLs might get to keep 5% of $75/day, which is 5% of $2250/month which
is $112.50/month. The total becomes $142.50/month instead of $30/month.
If the person needs help with 4 ADLs, it would become $265/month. That
increase would add cost to the proposal.
- A person on Medicaid Home Care could keep 50% of the LTCi benefit,
depending on the state's Medicaid rules and services, but such money
might have to be used for care purposes. Such a provision would increase
benefit cost by increasing the amount of commercial home care utilized
and would also increase processing costs.
- CLASS benefits would be ignored when determining eligibility for
other benefits. This provision either adds cost or forfeits a possible
small offset to the costs of CLASS Act.
The author can be reached as follows:
Claude Thau, President, Thau, Inc.,
cthau@targetins.com
Ph: 913-403-LTCi (-5824); 800-999-3026, x2241; Fax: 913-384-3781
Thau Inc. was established to help create a sound
long-term care insurance industry in the U.S.A. It works in 3 areas:
- Consulting for LTCi companies, providers of services, employers,
associations, insurance agencies, etc.
- Wholesaling LTCi by training and servicing insurance brokers across
the country.
- Advocacy work.
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