Last week, Kathy Greenlee, the Assistant Secretary for the Administration on Aging, was placed in the uncomfortable position of defending the unworkable CLASS Program in front of the House Energy and Commerce Health Subcommittee. Her task was made all the more difficult from recent remarks made by Health and Human Services (HHS) Secretary Kathleen Sebelius and by Sen. Max Baucus (D–MT), chairman of the Senate Finance Committee.
At a Senate Finance hearing in February, Sebelius stated, “While the law outlined a framework for the CLASS Act, we determined pretty quickly that it would not meet the requirement that the act be self-sustaining and not rely on taxpayer assistance.”
Moreover, at a separate Senate Finance hearing this week, Senator Baucus stated, “I was not in favor of the CLASS Act, let me tell you, for all the reasons people decry it.”
Congressional discontent surrounding CLASS is actually nothing new. During the Obamacare debate, six Democratic Senators plus Sen. Joe Lieberman (I–CT) expressed “grave concerns that the real effects of (CLASS) would be a new federal entitlement with large, long-term spending increases that far exceed revenues.”
If there was widespread discontent, including among many congressional Democrats, why was CLASS bundled into Obamacare? The reason is that CLASS made the official budget score of the bill sweeter in the eyes of its authors. This is because of the program’s five-year vesting period, when premiums are paid in but no benefits are paid out. Over a 10-year window (the period the Congressional Budget Office uses to assess legislation), the vesting period made CLASS appear to reduce the deficit. The improved budgetary projection that CLASS’s insertion had on Obamacare provided cover for many skeptical lawmakers to support the legislation and certainly contributed to its ultimate passage.
The insertion of CLASS into Obamacare as a budget gimmick makes this particular program worse. There are many underlying problems with CLASS. To start, everyone who earns over $1,200 a year in wages can enroll. Moreover, unhealthy individuals and healthy individuals of the same age must pay the same premium. This makes the program look much more attractive to individuals in poor health or individuals who already have disabilities.
The design problem gets even worse. Individuals who earn below the federal poverty line are required to pay a monthly premium of only $5. In order for the program to be funded solely by participants’ premiums, they will have to be cross-subsidized with much higher premiums for individuals who earn above the poverty line. This will further discourage healthy individuals from enrolling.
Sebelius claims that she has broad authority to change the minimal earnings requirement. She wants this authority in order to limit the number of already disabled individuals enrolling so to protect the program’s integrity. However, on March 15, the Congressional Research Service released a letter that strongly questions the Secretary’s authority to increase the minimal earnings threshold.
Another serious problem mentioned at the hearing by health economist Joe Antos of the American Enterprise Institute and actuary Allen Schmitz of the CLASS Act Task Force is the extreme uncertainty surrounding how high to set the initial premiums for participation. This is because no product like CLASS has ever been offered in the private market. Indeed, a firm that cares about its bottom line would likely never introduce such a financially irresponsible product.
To illustrate, experts have come to very different estimates of what initial premiums would have to be in order for the program to remain fiscally solvent. For example, the Office of the Actuary at the Centers for Medicare and Medicaid Services estimates an initial premium twice as high as what the Congressional Budget Office estimates. If these agencies had used identical benefit amounts, it would have been closer to three times as high.
Despite the fact that the Administration acknowledges that CLASS is “unsustainable” and has not yet released a blueprint for “fixing” the program, President Obama is requesting $120 million in fiscal year 2012 to market CLASS. Greenlee mentioned 35–40 different places HHS can change the CLASS program, but she offered no specific proposal at the hearing. Indeed, Greenlee indicated that a final plan might not be released until October 2012, which is actually when CLASS is supposed to be open for enrollment. There is little evidence that the Secretary can fix CLASS, because she does not have the legal authority, and the basic program framework is simply unfixable.
The private market already offers long-term care insurance products, and millions of Americans purchase them. There is not a market failure here that requires government to create a product to compete with private long-term care policies. On the contrary, government should look at the underlying problem of why not enough individuals purchase long-term care insurance. If government looks in the mirror, it may realize that Medicaid plays a substantial role in crowding out the demand for private long-term care insurance. The underlying problem is the fault of government, not the market.