Health Insurance Public Policy

CLASS Act: Will it work?

One aspect of health reform that has received little attention is passage of the Community Living Assistance Services and Supports(CLASS) Act.  This act creates a long-term care (LTC) insurance program.  However, the insurance plan in its current form is fairly limited.  Those who require assistance with activities such as bathing, dressing, getting out of bed and using a toilet would receive about a $50 per day benefit.  This is of course not enough to pay for full-time care in a nursing home, but would help defray some of the cost for assistance in one’s home.

Milliman notes that currently, the CLASS act would be voluntary and would include guarantee issue (meaning that no one could be denied coverage).  Separately, each of these provisions could allow for a sustainable long term care insurance product.  The private sector currently uses the voluntary insurance model with underwriting.  On the other hand, a guaranteed issue policy could work if purchasing LTC insurance was mandatory.

Together, however, these provisions may be problematic.  “The voluntary aspect of the program allows low-risk individuals to never sign up for the program while the guaranteed issues enables some of the highest-risk individuals to join the program.  This is a formula that is virtually certain to create financial instability in any insurance program unless there are other important provisions to control risk.”

The CLASS act does have some additional risk control provisions.  To qualify for these benefits, one must pay into the plan for 5 years.  Employers can decide to offer this LTC as a benefit and employers who choose to this option will have employees automatically enrolled with the premium deducted from each paycheck.  Individuals would have to specifically ask to be removed from the program.  Also, individuals who opt-out of the program will have to pay a higher premium if they decide to opt back in.  The purpose of the vesting and opt-out penalties is to minimize adverse selection.

However, Scot Forman of Long Term Care Associates notes that many employees may not realize that if they opt out after just 1 payment and later opt in more than 5 years in the future, they would pay “a massive penalty,”  If a young worker who has just 1 deduction from her paycheck at age 38 later decides to opt-in when she’s 59, her premiums would be higher than they would have been had she stayed in the program. In the example given, “the rate increase will be no less than 250% on each payment, which is CLASS’s penalty for opting back in.”

1 Comment

  1. As I explained on John Goodman’s Health Blog, there seems to be opportunities to game the system.

    The benefits are meager, while the premiums compared to the benefit package are rather high. So why would anyone use a CLASS Act policy? Because there is no medical underwriting.

    As long as an enrollee has had some connection to the workforce for three years, they could drop out of the workforce while continuing to pay premiums for two additional years. This process could be started after a disability has already begun to present itself.

    In the event of a disability, they could ultimately qualify for a benefit worth $18,000 to $27,000 per year in return for $7,500 in premiums.

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