New U.S. Long-Term Care Plan Misses The Mark

The recently passed health care reform bill reminds me of the cuisine at the Cheesecake Factory: It attempts to cover so many items (where else can you get Bang Bang Chicken and Shrimp with a side of Buffalo Blasts?) that nothing is quite right.

Like many items at the Factory, the little-known Community Living Assistance Services and Supports (CLASS) Act that was included in the health care overhaul has an enticing name, but its design does not deliver.

CLASS is the government’s new take on long-term care coverage. There are only a few details on CLASS that can be unearthed at the moment; its finer points have yet to be finalized. What we know is that the program will provide at least $50 a day to eligible participants. Unlike Medicaid, CLASS includes no strict limitations on the use of the funds. The goal is to allow recipients to remain independent and in their communities. The funds can go to expenses such as home health aides or repairs to make a home accessible for the handicapped.

To receive benefits, one must be unable to perform two or three activities of daily living (the number is not finalized yet). These include tasks such as eating, dressing, bathing, and transferring (moving into or out of a chair, bed or wheelchair). This is a relatively common benchmark for private long-term care insurance. There will also be a standard for cognitive impairment.

With private insurance, once a person has been disabled for a certain period of time, typically a couple of months, his or her benefits kick in. There is no waiting period for CLASS benefits in the traditional sense. However, one has to have paid premiums for at least five years and have been working for at least three of those years. You cannot sign up for the program and expect benefits the next day.

How do you sign up? First, your employer must choose to participate in the program. Then you are automatically enrolled and premiums are withheld from your paycheck, similar to what happens for Social Security. In order to participate, you have to be working either full- or part-time. The government is likely to add a mechanism allowing the self-employed and those whose employers do not participate to be a part of the CLASS program. Premiums are likely to be based on age and will be subsidized for lower-income participants.

What if you don’t want to join? Not a problem. Anyone who does not want to participate can opt out. But wait, that is a problem!

Providing the option to not join makes the program susceptible to adverse selection — that is, those who are most likely to need the benefits are the ones most likely to participate. When this happens, the payout by the government moves from being a possibility to a near certainty. With few low-risk participants helping to cover costs, paying the promised benefits becomes very expensive.

The law requires the CLASS program to be actuarially sound, without using general tax revenues, for 75 years. In the event that it is not, the government can raise the premiums. Increasing the price of participation would only exacerbate adverse selection. The “too expensive” point for low-risk participants will come quickly, causing many to opt out. It becomes a spiral of increasing premiums followed by exits.

Removing the opt-out provision would help, but not fix, the problem. The American population is aging and with age comes increased risk of needing long-term care. Because the younger, lower-risk generation is small in comparison, the CLASS program is unlikely to be able to effectively spread the risk over the population even with mandatory participation. The CLASS program would likely face the same under-funding issues as Social Security, but I leave that quagmire for another post.

There is no easy solution to the adverse selection problems the CLASS program will almost inevitably face. Unlike the shortcomings of the Cheesecake Factory’s offerings, the internal flaws plaguing the CLASS program cannot be masked with any amount of cream sauce or chocolate ganache. We can only hope that now that Washington has churned out its health reform bill, it will take some time to fix the recipes.