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Ready for the Next Trillion-Dollar Bailout?

Posted By Brian Riedl On July 27, 2010 @ 4:00 pm In Obamacare,Ongoing Priorities | Comments Disabled

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Obamacare has been rightly blasted as fiscally irresponsible, yet few have noticed what may be Obamacare’s largest ticking entitlement time-bomb: the CLASS Act. My new op-ed on the subject is here [2], and my new report, co-written with Jim Capretta, is here [3].

CLASS is a new long-term-care insurance program that was inserted into Obamacare so that Congress could raid its $70 billion surplus through 2020 to cover Obamacare’s initial deficits. Like the raided Social Security trust fund, future taxpayers will have to repay that $70 billion with interest when the program falls into deficit later.

Thus, even Sen. Kent Conrad (D., N.D.) admits [4] that Congress has enacted “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.”

It gets worse. CLASS is simultaneously 1) voluntary, 2) supposedly self-financing (premiums must be raised to match benefits), and 3) required to charge the same premium to healthy and unhealthy individuals of a given age. This is a recipe for insolvency.

To see why, consider an admittedly simplified example: Let’s say three 45-year-olds, based on varying health and expected long-term needs, state their individual willingness to pay for this insurance at $100, $500, and $900 per month.

In order to maintain solvency without risk-based pricing, CLASS would be required to charge all three people the same $500 premium. The healthiest person (willing to pay just $100) would consider this a bad deal and decline participation. At that point, premiums for the remaining two individuals would have to rise to $700 to keep the program solvent. This would cause the moderately healthy person (willing to pay $500) to also drop out, leaving only the unhealthiest person and a $900 premium.

Health economists call this an “adverse-selection death spiral,” and it would likely end in program bankruptcy. The CBO [5], the Department of Health and Human Services [6], and even the American Academy of Actuaries [7] all agree that CLASS is unsustainable. Once it goes bankrupt (likely in 15 to 25 years), the subsequent taxpayer bailouts could cost trillions of dollars.

The best way to avoid a bailout would be to repeal CLASS before it begins enrolling participants and collecting premiums, which could be as soon as January 1, 2011. Is anyone in Congress paying attention?

Cross-posted [8] at The Corner [9].


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/07/27/ready-for-the-next-trillion-dollar-bailout/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/money_stacks0902114.jpg

[2] here: http://www.washingtontimes.com/news/2010/jul/26/riedl-class-is-the-next-huge-taxpayer-bailout

[3] here: http://www.heritage.org/Research/Reports/2010/07/The-CLASS-Act-Repeal-Now-or-Face-Permanent-Taxpayer-Bailout-Later

[4] admits: http://www.washingtonpost.com/wp-dyn/content/article/2009/10/27/AR2009102701417.html

[5] CBO: http://www.cbo.gov/ftpdocs/107xx/doc10769/CLASS_Additional_Information_Miller_letter.pdf

[6] Department of Health and Human Services: http://burgess.house.gov/UploadedFiles/4-22-2010_-_OACT_Memorandum_on_Financial_Impact_of_PPACA_as_Enacted.pdf

[7] American Academy of Actuaries: http://www.actuary.org/pdf/health/class_july09.pdf

[8] Cross-posted: http://corner.nationalreview.com/post/?q=NTI3ZWE1ODI0MGY1MmRjNDVlOTYwOTFhNmIxMGFjZjA=

[9] The Corner: http://corner.nationalreview.com/

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