Section 8002 created the Community Living Assistance Services and Supports program (CLASS), a "voluntary federal program for long-term care insurance that would be administered by the Secretary of Health and Human Services (HHS)."
Unlike traditional health insurance that covers medical benefits, long-term insurance generally covers services that assist individuals in their day-to-day activities of life, such as bathing, eating, or dressing.
Under the program, CBO said "premiums would vary only according to the enrollee's age when he or she enters the program. Once enrolled, an individual's premium would generally remain the same for as long as that individual remained in the program."
To receive benefits from the program, the participating individual must have paid into the program for five years and met certain requirements.
While the purpose sounds good, the CLASS program is misguided policy. The financial structure of the program is so shaky it could require a taxpayer-funded bailout while saddling taxpayers with mountains of debt.
Unfortunately, CLASS is being used as a budget trick to raise the amount of money the health care overhaul will have to spend. As the Washington Post said bluntly, the CLASS provision was simply a budget "gimmick" that was "designed to pretend that health reform is fully paid for."
The Post explained: "premiums would flow into the system beginning in 2011, but benefits would not begin to be paid out until five years later; consequently, over the 10-year budget window through which the Congressional Budget Office assesses legislation, the program would bring in $58 billion, according to CBO estimates." However, as the Post pointed out, "the money that flows in during the 10-year budget window will flow back out again. These are not 'savings' that can be honestly counted on the balance sheet of reform."
CLASS Program Criticized By Budget Experts
According to the Congressional Budget Office (CBO), this provision could "add to budget deficits .... in succeeding decades – by amounts on the order of tens of billions of dollars for each 10-year period." The problems with the structure of the program are so systemic that the American Academy of Actuaries concluded "an actuarially sound program may not be possible to achieve" despite changes that might be sought.
In fact, the financial structure for this new provision is so untenable that one Senator who voted for the health care overhaul called it "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of." The CLASS program could effectively self-destruct for several reasons.
First, Section 8002 created a trust fund. Most insurance trust funds normally are used to stash premiums and grow them into large reserves that pay benefits and cover program liabilities. However, as others have pointed out, premiums paid into the CLASS trust fund are not required to be stashed away to build reserves for paying out future benefits. Instead, HHS will immediately send the incoming dollars back out the door to pay for benefits, starting as soon as 2016.
Supporters of the program will point out that under the law, the Secretary of HHS is required to set premiums at a level to ensure the program's long term sustainability. Supporters of the program might point to CBO's finding that HHS "would invest CLASS program premium receipts in federal securities and would incorporate that expected income into calculations of appropriate premiums to charge."
But such optimism would be misplaced. As CBO pointed out, "trust fund income from investments in federal securities would be an intragovernmental transfer within the federal budget. As a result, from a budget scorekeeping perspective, the CLASS program would inevitably add to future deficits.... by more than it reduces deficits in the near term, even though the premiums would be set to ensure solvency of the program."
A second problem with the program is that CBO determined that the "CLASS program could be subject to considerable financial risk in the future if it were unable to attract a sufficiently healthy group of enrollees." Unfortunately, CBO also found this is a likely outcome, saying "attracting healthy enrollees could be challenging for several reasons." Because the law requires the CLASS program to enroll all eligible individuals who apply, CBO said it is "likely that some enrollees would be people who were unable to obtain coverage in the private market because of their poor health status." So, with a higher percentage of the CLASS program participants consisting of individuals who are sicker and more needy – and therefore cost more to care for – CBO concluded the "relatively small enrollment would increase the risk of adverse selection and could undermine the long-run stability of the program."
The Chief Actuary of the Centers for Medicare and Medicaid Services issued a similar warning earlier this year about the long-term financial threat the CLASS program poses. The Actuary expects that "in 2025 and later, projected benefits exceed premium revenues, resulting in a net federal cost in the long term." But the problems with the CLASS program cannot be rectified by mere administrative tweaks. "In general," the Actuary concluded, "voluntary, unsubsidized, and non-underwritten insurance programs such as CLASS face a significant risk of failure as a result of adverse selection by participants.'' Because of the downward spiral created by adverse selection, HHS could be forced to severely increase premiums for enrollees to unaffordable levels—which could effectively end participation in the program—or taxpayers could be asked to fund another bailout a government-backed enterprise.
Supporters of Health Care Bill Criticize CLASS
Even Members of Congress who voted for the health care legislation have come forward with a variety of concerns with the provision. One Senator said the CLASS provision "will be financially upside down in a very short period of time, [and] needs to be out of the bill."
As Politico reported, this same Senator joined six other Senators—all who also supported the health overhaul—in sending a letter to the Majority Leader "asking him not to include the class act" in the overhaul, because "they are concerned the provision would increase long-term deficits." In the letter, the Senators said they had "grave concerns that the real effect of the provisions would be to create a new federal entitlement with large, long-term spending increases that far exceed revenues." And late last year, twelve Senate Democrats – most of whom supported the health care overhaul – even voted to remove the CLASS provision from the new law. However, despite their public comments, the provision remained in the health care bill –and is now the law of the land.
Despite its design being soundly criticized by nonpartisan budget experts and even politicians who supported the health care overhaul, CLASS is now the law of the land. Unfortunately, the Chairman of the Budget Committee was right: the CLASS provision is indeed "a Ponzi scheme of the first order." Supporters of the overhaul should be embarrassed that the new law uses a budget gimmick to appear to offset new spending, while it will likely expose taxpayers to tens of billions of dollars of loss when the program eventually collapses.
