Brian Riedl argued in a Washington Times piece on Tuesday that the Community Living Assistance Services and Supports (CLASS) Act should be repealed. CLASS, a government-run long-term care (LTC) insurance program, has been widely panned by actuaries as unsustainable and likely to result in a future taxpayer bailout.
Howard Gleckman of the Urban Institute responded in turn with an argument that participation in CLASS should be made mandatory. Gleckman’s argument, however, is flawed.
As Americans live longer, demand for long-term care services grows. Gleckman correctly states that Medicaid, which is busting state budgets, pays for half of all LTC in the U.S. at an annual cost of more than $100 billion. Medicaid pays the LTC expenses for individuals who have little accumulated wealth or who have spent down their wealth.
To reduce taxpayers’ burden for LTC through Medicaid, Gleckman argues that CLASS participation should be mandatory. The estimated average premium he cites is about $500 per year. Gleckman declares that this would change LTC from a welfare program to self-funded insurance, a change conservatives should support.
The first problem with his proposal is that the burden to taxpayers is simply replaced with a burden to all individuals who must pay the mandate. Direct taxation is replaced by indirect taxation in the form of mandatory premium payments.
The problem of LTC financing is a difficult one to solve, but the formation of another entitlement program to deal with the problem is irresponsible and unsustainable. While private insurance leads to the creation of reserves to fund future benefits, entitlements tend to involve transfers from relatively young payers to relatively old beneficiaries. And the evidence shows that entitlements grow faster than projected and place increasing burden over time on taxpayers.
Unlike private insurance, excess premiums paid by participants would not be deposited into an account to build reserves for future benefits. Instead, the government would spend the premiums in excess of benefit payments on other programs, technically borrowing the money from the CLASS “trust fund.” And when incoming payments are less than outgoing benefits (the present state of Medicare and Social Security), government would tap into general tax revenue to pay the difference. The ability to tap taxpayer dollars is a key difference between public insurance and private insurance.
Instead of moving to a government-run, compulsory Social Security model for long-term care financing, we should move to a personal responsibility model. Public policies should therefore focus on increasing personal savings to fund probabilistic expenses in old age and on increasing the number of private LTC insurance policies to fund unexpected expenses.
Furthermore, fundamental Medicaid reform is a necessary component of LTC policy for two reasons. First, individuals can benefit from Medicaid while maintaining homes worth up to half a million dollars. Of course, taxpayers are left on the hook for all this spending. Second, the presence of Medicaid creates a moral hazard by reducing the necessity of both building up savings and purchasing LTC insurance.
While the CLASS Act should not have been bundled into Obamacare, its presence may cause policymakers to have a serious debate about how to pay for increasingly burdensome LTC expenses. Based on the fiscal track record of compulsory entitlements, another solution must be found.