The CLASS Act: Why a Good Idea Failed

Edition: January 2013 - Vol 21 Number 01
Article#: 4165
Author: Repertoire

As nursing homes and extended care facilities continue to grapple with the financial challenges of running their business and caring for patients, industry experts consider sustainable options for financing long-term-care services to the elderly and ill.

In the e-book, “Universal Coverage of Long-Term Care in the United States: Can We Get There From Here?” (Russell Sage Foundation 2012), policy experts examine various models for a universal long-term care financing system. In chapter 3, “The Rise and Fall of the CLASS Act: What Lessons Can We Learn?” author Howard Gleckman ponders the country’s next steps to move forward.

Gleckman does not appear surprised that the Obama Administration abandoned CLASS in October 2011. It failed, in part, due to adverse selection, he suggests. The program was designed to benefit both working people who already have a disability, as well as healthy individuals seeking protection from the cost of potential disability. As a result, the success of the CLASS Act was threatened by the large number of high-risk buyers who could drive up premiums.

The failure of the CLASS Act means this country still must find a solution for providing for the chronically ill and disabled, he points out. “Currently 10 million Americans need some form of long-term care,” he says. “Sixty percent are 65 or older.” The cost of long-term care is exorbitant and – for the most part – shouldered by Medicaid. While Medicaid offers relatively comprehensive coverage for poor people, middle-income earners must spend down their financial assets to qualify. While private long-term-care insurance is available, only a small percentage of adults purchase it, as it can be expensive.

The history of Medicaid reform

The CLASS Act is but one step in a years-long process aimed at reforming Medicaid, notes Gleckman. In 1990, the U.S Bipartisan Commission on Comprehensive Health Care – also known as the Pepper Commission – questioned whether private long-term-care insurance could provide comprehensive care to enough elderly and disabled people and looked to government to “provide benefits to all those with severe disabilities, regardless of age,” he says. The Commission came up with a plan to pay for most home care, as well as the first three months of nursing home care for everyone, regardless of income. It also would offer benefits to long-term-stay nursing home residents once they spent down to the program’s asset limits.

President Clinton’s Health Security Act created a state-administered – but almost entirely federally funded – program for individuals with severe physical, developmental, mental and cognitive impairments, regardless of age, says Gleckman. “In a key change from Medicaid, all medically eligible individuals could receive home care benefits, regardless of income,” he explains. “However, institutional care, as well as assistance for those with less severe disabilities, would remain in the welfare-based Medicaid program. In addition, users would pay co-insurance tied to their income levels.”

The CLASS Act emerged in 2003 under Senator Edward Kennedy’s direction. In time, “CLASS became a hybrid aimed at achieving several goals at once,” says Gleckman. “It represented the first steps away from means-tested Medicaid long-term-care benefits, but also maintained Medicaid as a key component of long-term-care financing.” In essence, it “was designed as a national voluntary long-term-care insurance program.”

Good intentions, poor design

In theory, CLASS had the potential “to become a critical bridge from the current means-tested Medicaid system to a more sustainable insurance-based design,” says Gleckman. Yet, after 19 months of analyzing the law, HHS Secretary Kathleen Sebelius determined this would not be possible. “What went wrong?” he asks. “Why did she abandon the program and what could be done to improve it?

“CLASS was killed long before policies were ever offered for three reasons: political, legal and financial,” he continues, pointing to the strong opposition the Obama administration faced with regard to the Affordable Care Act. Ultimately, however, CLASS failed as a result of three major design flaws, he points out. “It was voluntary; it required no underwriting; and it attempted to serve two incompatible purposes by creating both a new benefit program for working people with disabilities and an insurance system for those looking to hedge against the risk of long-term care in old age. The voluntary nature of CLASS and lack of underwriting increased the likelihood that those who chose to enroll would eventually go to claim.”

Moving forward, Gleckman suggests several options for policymakers to pursue. The most obvious solution, he says, is to build on CLASS and attempt to create a revised voluntary public program. This would require new legislation to address the following:

  • Eligibility. This may require two solutions in itself: financing care for working people with disabilities, and providing insurance for healthy people seeking to protect against the uncertain risk of needing long-term care in the future.

  • Enrollment. There must be incentives – such as inflation-adjusted premiums to reduce costs for young enrollees – to drive the purchase of optional public insurance.

  • Benefits. In order for the program to work, the benefit design must address the daily benefit, the duration of benefit and the payment mechanism.

  • Premiums. Premiums must be affordable.

  • Long-term financial stability. Policymakers should create a separate quasi-government insurance fund that has the flexibility to invest premiums in a diversified portfolio.

  • The role of private insurance. Policymakers might consider adopting a full partnership with private insurance. “In this model, insurance would be mandatory or voluntary,” says Gleckman. “A mandatory system would be based upon guaranteed issue so no buyer could be rejected for coverage. Voluntary insurance would still have to address all of the anti-selection issues of pure government insurance.”

“The CLASS Act had the potential to fundamentally redesign the way long-term care is financed in the United States,” says Gleckman. “Its cash benefit and the possibility

that it would have encouraged some to shift from reliance on Medicaid to self-funded insurance were powerful reforms. However, the design of CLASS undermined its many potential benefits.”

Policymakers can redesign a voluntary system or build a mandatory one, he says. “The most likely course, however, is that Congress will do nothing. After its experience with CLASS, and given the policy and political challenges of reopening the issue of long-term-care financing, it is unlikely that lawmakers will soon attempt to address this serious national problem.”