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CLASS Act (Updated)

Harold Pollack is a professor at the University of Chicago School of Social Service Administration and Special Correspondent for The Treatment

I’ve written before on the CLASS (Community Living Assistance Services and Supports) Act, an important but costly and complex disability provision in health reform. CLASS’s future may be determined this week.

For the uninitiated, CLASS is a voluntary program in which workers can pay a monthly premium which would entitle them to monthly cash payments in the event of disability.  Recipients could use this money to buy ramps and other equipment, assistance from home health care workers, and other goods or services that promote independence and personal well-being.

CLASS is included in the Senate HELP Committee and House bills. Much of the disability community has rallied around it, including some 275 advocacy groups and organizations. CLASS also derives odd political benefit from the Congress’s mechanical health reform budget scoring rules. CLASS front-loads revenues by requiring a 5-year vesting period before individuals are eligible to receive benefits. It therefore produces billions of dollars in premiums that count as apparent surplus under the next decade.

The Senate Finance Committee is a tad more skeptical. The depth of opposition among fiscal conservatives is exemplified by Senator Conrad’s description of the CLASS Act as "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of." Conrad’s comment infuriates CLASS supporters, who note that this legislation, and its 5-year vesting period, were proposed and debated years before the 2009 health reform and its accompanying 10-year budget scoring rules.

On Friday, Richard Foster, Chief Actuary at the Centers for Medicare and Medicaid Services released a tough report on key provisions of health reform. As a matter of organizational structure and historic practice, CMS actuaries do not speak for the Department of Health and Human Services or for the Obama administration. They certainly didn't this time. This was the kind of report that evokes the term unhelpful among unhappy Democrats.

Buried inside this controversial report, the actuaries conclude that CLASS will produce $39 billion in net federal budget savings by 2019. Premiums are sufficient to meet program obligations until 2025. That’s the good news.

The bad news about CLASS is…well pretty much everything else Foster says. The report estimates that an average monthly premium of $180 is required to adequately fund CLASS benefits. (Premiums would strongly vary by age, though I can’t find a specific account of how this would be done or the assumed benefits supported by this $180 premium. The lack of transparency in politically and substantively crucial expert analyses is a continual frustration in this entire process. I hope to write on this in a future post.)

The Foster report estimates that only about 2 percent of eligible workers would elect to participate in the CLASS program. From an actuarial perspective, this implies disastrous adverse selection, whereby people living with current or likely future disabilities would comprise too large a fraction of CLASS beneficiaries.

Foster’s conclusion is the actuary’s equivalent of the slaughter scenes from Friday the 13th:

Individuals with health problems or who anticipate a greater risk of functional limitation would be more likely participate than those in better-than-average health. Setting the premium at a rate sufficient to cover such a group further discourages persons from participating, which may lead to further premium increases. This effect has been termed the “classic assessment spiral” or “insurance death spiral.”

Language in the Senate HELP bill requires CLASS to be fiscally sound over a 75-year period. Like the American Academy of Actuaries, The Foster report argues that there is a significant risk that CLASS will prove financially unsustainable.

In principle, Foster’s report can be ignored. The Congressional Budget Office's budget numbers comprise the official scoring of health reform. As noted below, these numbers are more favorable than Foster’s. Of course, things are not quite that simple. One Hill staffer told me, “As you would expect, we are disappointed and in disagreement with the CMS actuary.” This person is disappointed because many Senators and Representatives are ambivalent about CLASS, and care about its budgetary impact. If the CMS actuary report is even close to right, the underlying problems are substantive, as well as political.

Fortunately, it’s not clear that this alarmist analysis is right. I’ve spoken to several long-term care experts and health economists inside and outside government who believe CMS actuaries are too pessimistic. The Congressional Budget Office—whose own analysis expressed skepticism about CLASS –projects that CLASS will accumulate a $72 billion surplus before 2019. Based on private market experience, CBO posits a participation rate of 5 percent, which produces a much healthier participant pool with corresponding reductions in monthly premiums, which CBO estimates will be about $123. 

Experts elsewhere at HHS have extensively analyzed CLASS and also reach more optimistic conclusions. Distinguished health economist Richard Frank is Deputy Assistant Secretary for the Office of Disability, Aging, and Long-Term Care Policy. He reported to a recent Kaiser Family Foundation conference that HHS analysts have modeled CLASS issues extensively, and that

[W]e’re entirely persuaded that reasonable premiums, solid participation rates, and financial solvency over the 75-year period can be maintained. So it is, on this basis, that the administration supports [the CLASS provisions].

Under current language, the Secretary of HHS would enjoy significant latitude in structuring premiums and benefits to ensure the program’s continued financial health. Georgetown professor Judy Feder--a long-time expert on disability policy and long-term care services—is in contact with many administration and Hill staffers working on the final bill. Feder suggests that changes in legislative language will tighten CLASS to address specific actuarial concerns. For example, the bill will not allow nonworking spouses to participate. This is too bad, because nonworking spouses need protection, too. Yet this is one way to limit the program’s exposure to large claims from the already-disabled. “This is a change that will strengthen the bill. Every worker will make it on his or her own.”

Barbara Manard of the American Association of Homes and Services for the Aging is a leading expert among CLASS advocates, she argues that CMS actuaries grossly underestimated the number of healthy workers likely to enroll in CLASS, and thus the proportion of contributing healthy people able to keep the program solvent with affordable premiums. Staffers note specific measures designed to reach young and healthy people. For example, CLASS provisions include a $5 monthly premium for full-time college students, who can become vested for CLASS benefits in their mid-20s--long before they work 40 quarters required to become eligible for federal disability programs.  

Menard notes that many private and public employers have successfully implemented long-term care programs and related benefits that—like CLASS--have no health screening and still avoid the severe adverse selection feared in the Foster report. As she put things: “The legislation is written presuming that the details matter.” CLASS requires a thoughtful model, a transparent process to set premiums and benefits, and intelligent implementation. “Obviously, if you did a terrible job of implementing it… you could make any program fail.”

As someone who values the goals of CLASS but sees the fiscal uncertainties, I think this last point raises the essential issue, and the essential risks. This is a valuable program that will accomplish much good. CLASS is based on prior experiments and demonstrations, but has not been attempted on the scale proposed in the current bill. CLASS needs to be implemented in an administratively and politically disciplined fashion to control its costs. It is no Ponzi scheme.

There is a genuine risk that it will turn out to be more costly than we now anticipate, and that a costly, entrenched program will require painful adjustment. There is also the opposite risk: that we will fail to act now to enact needed imperfect legislation when the political moment is right, thus squandering the opportunity to help millions of people.

How confident should we be in our capacity to do this right, or need-be, in our capacity to make midcourse adjustments and repairs to make a complex and humane program economically sustainable? Where you stand on CLASS—come to think of it, where you stand on many issues of health reform—depends on how you weigh these competing risks.

Update: The Associated Press reports this evening--based on Democratic sources--that the Senate health care bill will include CLASS. This won't get the attention paid to (say) the public option. Yet this provision provides another indication that the 2009 health reform will be a bolder and more progressive piece of legislation than is often credited.