According to Health and Human Services (HHS) Secretary Kathy Sebelius, the design of the Community Living Assistance Services and Supports (CLASS) program has basic flaws, but the bureaucracy will fix those flaws with hard work and deep thinking. Sebelius spoke on the CLASS program on Monday at a Kaiser Family Foundation briefing, and she outlined the Obama Administration’s updated technocratic thinking on this new government-run, long-term care entitlement created under Obamacare.
Sebelius was in part responding to the recent assault on CLASS from a wide breadth of experts. According to the President’s deficit commission, “The program’s earliest beneficiaries will pay modest premiums for only a few years and receive benefits many times larger, so that sustaining the system over time will require increasing premiums and reducing benefits to the point that the program is neither appealing to potential customers nor able to accomplish its stated function. Absent reform, the program is therefore likely to require large general revenue transfers or else collapse under its own weight.” The commission’s solution: repeal or radically rework CLASS.
The American Academy of Actuaries shares this skepticism. It argues that “severe adverse selection would result in very high premiums that are likely to be unaffordable for much of the intended population, threatening the viability of the program.” The main reason is that CLASS is guaranteed-issue, and premiums cannot vary based on health status. This combination will likely lead to disproportionately high number of relatively unhealthy individuals in the CLASS risk pool. Therefore, CLASS can’t really be called insurance at all. Rather, it is a new entitlement program.
Sebelius remarked that the bureaucracy would be able to confront this seemingly intractable problem. She remarked, “Fortunately, the new law also provides a lot of discretion in structuring the premiums to keep the CLASS Program solvent.” According to Sebelius, HHS can find the “right cut-off point” on eligibility between a low standard, where the enrollees will be disproportionately likely to eventually need the benefit, and a high standard, which would violate the principle that CLASS will be “open to any American regardless of health.”
How many hours and how much taxpayer money will bureaucrats waste trying to solve this unsolvable problem? You can’t make a voluntary, guaranteed-issue program work without varying premiums based on health status. Regardless of how much “discretion” the Secretary has, she will not be able to find the “right” formula.
Sebelius began her remarks by stating that taxpayer funds will not be used to bail out CLASS in the event of insolvency. But a taxpayer bailout is a real possibility for several reasons. First, premiums may be set lower than the actuarially correct amount. This is because there isn’t a useful model for actuaries to determine premiums, especially given the uncertainties of enrollee make-up. Second, within the law’s provisions, if benefits paid out are larger than anticipated, then either premiums will have to increase or benefits will have to be cut. This is a move that would be vigorously opposed by interested parties. Beneficiaries with a vested interest in preserving their CLASS payment will likely lobby vigorously to spread the pain through broad-based tax increases.
CLASS made its way into the health care law because it creates the appearance of deficit reduction; beneficiaries must pay premiums for five years to become eligible for benefits, so in the early years of the program there is an apparent surplus of $70 billion, according to the Congressional Budget Office. But the same money that is supposedly paying down the debt can’t also be deposited into the CLASS trust fund. When those obligations come due, the government will have to borrow more money, wiping out the illusory debt reduction. What’s worse, premiums may fall well short of what is needed to pay full benefits. This is what the President’s deficit commission and Chief Actuary believe will happen. Then, pressure will build to borrow even more, leaving tomorrow’s taxpayers will the bill.
Instead of a technocratic model of long-term-care financing that empowers the federal bureaucracy, we should move to a personal responsibility model. Public policies should focus on increasing personal savings to fund anticipated expenses in old age and on increasing the number of private LTC insurance policies to fund unexpected expenses.