The CLASS Act—the far-reaching proposal to create a national long-term care insurance program—is in the House health reform bill, and is still in the mix as Senate leaders struggle to design their own version of reform. But the key question about the CLASS Act remains: How many will buy the coverage even if it is broadly available?
The answer is significantly more than currently purchase private insurance, but not enough to truly solve the nation’s severe long-term care financing challenges. With some changes, however, it could cover even more.
It is a critical issue. The program’s success will be measured by the number of buyers it attracts. But the economics of insurance makes a large pool of purchasers imperative. The reason is the chicken-and-egg relationship between the number of buyers and the rates they pay: The fewer who buy, the higher the rates, and the higher the rates, the fewer will buy.
In a phenomenon called “adverse selection,” the people most likely to purchase insurance are those most likely to need it. So insurers keep rates down by selling to many consumers who turn out to never require benefits. It is no different for a government plan. Thus, for CLASS to offer attractive rates, lots of people would have to buy.
So how many would purchase CLASS policies? The insurance industry says almost no one. In July, the American Academy of Actuaries and the Society of Actuaries looked at an early version of CLASS and concluded that only about five percent would participate, about the same percentage who currently purchase group long-term care policies. The Congressional Budget Office also assumes a participation rate of about five percent at an average monthly premium of about $120. On Nov. 13, Medicare chief actuary Richard Foster predicted that only two percent of potential participants would buy and that premiums would average $180 per month.
The industry actuaries insisted CLASS policies would be far too expensive—averaging as much as $160-a-month—to attract many buyers. While the proposal has changed from the version they studied last summer, insurance executives say their estimate has not. An industry-funded poll released on Oct. 28 reported that while three-quarters of those surveyed favored CLASS, only about 10 percent would pay premiums of $85 while just three percent would pay $160.
Supporters of CLASS point to focus groups and insist enrollment would be far higher. But they won’t say what they think the participation rate would be.
Privately, industry insiders and other experts think if average CLASS premiums can be held below $100, about 20 percent of workers would buy—roughly 30 million people. That’s four times the number currently insured. The latest version of the bill would allow the Secretary of Health and Human Services to set both benefits and premiums.
All this uncertainty is driven by the design of CLASS. Workers would be enrolled automatically, but they’d be allowed to opt-out if they chose. And employers would not be required to deduct premiums from wages. Since nothing quite like this has ever been tried before, no one really knows what will happen.
But there are some models to look at. For instance, many employers now automatically enroll all their workers in 401(k) retirement plans, but give them the option to opt out if they choose. Compared to the old system, where workers had to decide whether to participate before they could sign up, enrollment has nearly doubled among some employees.
Long-term care insurance is not a 401(k). But inertia is a powerful thing, and many workers won’t bother to stop their long-term care premium deductions. Some may even come to learn how important it is to prepare for this risk: Two-thirds of those over 65 are likely to need some care in their lives, and 20 percent will need it for five years or more.
Could the CLASS Act be changed to keep premiums low and attract even more buyers? I think so. In an ideal world, I’d make coverage mandatory, even though that’s not in the cards this year. Even if workers are going to be allowed to opt-out, I’d at least require all large employers to offer coverage. I’d impose tough penalties on both workers and employers who do not participate.
I’d also do more to encourage participation by young people. For instance, in the House bill, initial premiums would be set by age, but once you enroll, your monthly payments generally would never increase, although your benefits would. A better design would permit small annual premium hikes. This would permit extremely low initial monthly payments and encourage the “indestructible” 20-somethings, many of whom won’t even buy health insurance, to enroll.
Government could also give employers financial incentives to partially match worker contributions, either for CLASS coverage or for private insurance to supplement the government insurance.
With some tweaking, CLASS can do what its backers intend—provide long-term care insurance for millions who are now totally unprepared.
Howard Gleckman, a resident fellow at the Urban Institute, is author of "Caring For Our Parents" and a frequent writer and speaker on long-term care issues.