No Mourning for Death of the CLASS Act

Posted by Jeffrey Brown on Oct 16, 2011

Filed Under (Health Care, U.S. Fiscal Policy)

Late Friday afternoon, the Obama Administration announced that it was killing the CLASS Act, a controversial provision of Obamacare (the Patient Protection and Affordability Act) that was going to create a new, government-run long-term care insurance program.  The fact that they released this news late on a Friday should not come as a surprise, as this is a time honored trick for trying to bury bad political news (although as noted by Stefano DellaVigna and Joshua Pollet, this strategy does not have long-lasting benefits, at least for publicly traded companies!)  Undoubtedly, both sides of the political divide will try to spin this issue for political benefit, as it is the first part of Obamacare that has been ended.

Politics aside, however, the death of this program is a rare victory for good economics.  And we should give credit to the Obama Administration for killing it before it grew into yet another unworkable and fiscally irresponsible government program.

Early in the life of this blog (November 2009), in a post entitled “A Solution in Search of Problem,” I wrote about why the proposed CLASS Act (which went on to become law several months after my post) was fatally flawed.  In that post, I made the point that “the government has developed a solution to a supply problem that does not exist, but has failed to address the demand problems that do exist.”

In a recently issued NBER working paper, MIT economist Amy Finkelstein and I wrote in much more detail about the flaws of the program.  Here are a few of the points we make:

“Medicaid will likely impose a large implicit tax on CLASS benefits, just as it does on private insurance policies … Overall, the Congressional Budget Office (2009) has estimated that only 4 percent of the adult population would enroll in the CLASS Act program by 2019.”

“The pricing and financing of the program are controversial. Monthly premiums are to be set by the Secretary of Health and Human Services with a goal of maintaining program solvency over 75 years.  In practice, this means that premiums will likely be below “actuarially fair” levels. To understand why, imagine that individuals start paying premiums immediately, but the average payout will not occur for, say, 25 years in the future. To oversimplify, a 75-year “solvency” calculation counts 75-years’ worth of premium payments, but only 50 years’ worth of benefit payments. Thus a program could be technically solvent even though it is being run on a negative NPV basis. The financial problem is magnified by the fact that individuals below the poverty line and full-time students would be able to participate at only $5 per month (in 2009 dollars). A number of experts have also voiced concerns about adverse selection into this voluntary program, and have suggested that the program will face a troubled fiscal future.”

This program was a clear example of a program designed by people with good intentions, but who had such a frail grasp on basic economic concepts that they designed a program destined to fail. We should all just be glad that it was killed before it developed its own constituency and grew to become “too big to fail.”

2 Responses to “No Mourning for Death of the CLASS Act”

  • JX says:

    Jeff,

    I’m just wondering if you’ve heard about a new book titled “Retirement Heist” written by Ellen Schultz, and if yes what’s your thought on it.

    http://www.npr.org/2011/09/29/140344871/retirement-heist-how-firms-trimmed-pensions

  • Jeffrey Brown says:

    JX – I have not read this book, but I appreciate the reference. Based solely on the description (which is not always accurate), I suspect Ellen Schultz has found something that will explain behavior for some firms, but which would likely not hold up empirically as the primary explanation for the overall dramatic shift from DB to DC over the past 3 decades. But I should withhold judgment until I have had a chance to read it! I will just note that there is a literature exploring the transition, and there are many reasons for the shift. It may be that she has added one more …