A Solution in Search of a Problem: A Look at the “CLASS Act” Proposal for Federal Long-Term Care Insurance
Posted by Jeffrey Brown on Nov 24, 2009
Filed Under (Health Care, U.S. Fiscal Policy)
Deep within the “Patient Protection and Affordable Care Act” – the short title of the 2000+ page health care bill winding its way through the Senate – is a provision that came from legislation previously known as the CLASS Act. The CLASS acronym stands for “Community Living Assistance Services and Supports” and is a plan to “establish a national voluntary insurance program for purchasing community living assistance services.” Essentially, this legislation would create a voluntary, public long-term care insurance program.
This provision has received almost no attention from the press, which is actually pretty surprising given that it would represent a major change in the federal government’s role in providing insurance for long-term care. It would be a voluntary program through which individuals – in return for paying premiums to the government program for 5 years – would be eligible for a benefit of approximately $50 per day that they are receiving eligible care (where eligibility is triggered by an individual’s inability to engage in activities known as “Activities of Daily Living,” or ADLs – things such as bathing – without assistance.)
It is understandable that there is tremendous interest in rethinking our approach to long-term care. The private market for long-term care insurance is quite small (e.g., only about 10 percent of the age 50-70 population is covered, and only about 4-5 percent of long-term care expenses are covered). The government is already the largest source of payment for long-term care services through Medicare and Medicaid. These expenditures are expected to grow rapidly in the coming decades due to population aging, among other factors.
But as I read this legislation, the same question keeps nagging me over and over. The reason it is nagging at me is that I cannot figure out the answer. The question is, “exactly what problem is this legislation meant to address?”
The legislation would create a public insurance program under the assumption that people cannot get the insurance privately. In other words, it seems to be assuming that the problem is that private insurers can’t or won’t provide good insurance. But there is not much evidence of this. To be clear, we know the private market is imperfect. My own research with Amy Finkelstein has shown that prices are higher than actuarially fair, and the benefits provided are not very comprehensive. But we also show that the limited size of the overall market is almost surely driven by limits to consumer demand for these products, not because of problems with insurers providing insurance.
So if the government wants to solve the problem of people being inadequately insured against long-term care expenses, it needs to address the issue of demand. But, best I can tell, this legislation does virtually nothing on this front. For example, if you think people are not buying it because they underestimate the risk, or because they are in denial about needing care, or because they think they have substitute forms of care, there is nothing in this legislation that will change this. It is, after all, still voluntary to purchase it and simply having a government-run program is not going to change these beliefs.
On the other hand, Amy and I also show in our research that the Medicaid program serves as an enormous disincentive for purchasing private insurance. In a nutshell, people do not want to pay for private insurance if most of the benefits they are paying for are simply duplicative of what Medicaid would have provided for free had they not purchased private insurance. This public program would have the same problem – why should I pay premiums for this program so long as Medicaid will still pick up the tab if I fail to pay the premiums? The feature that allows individuals to keep part of the benefit when Medicaid picks up the tab is presumably meant to address this, but I’m afraid it simply is not going to be sufficient to overcome this concern.
The government seems to implicitly understand that there are limits on demand – their own estimates are that only 5% of the population will take up this insurance. That hardly sounds like a resounding success to me.
In short, it seems 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. Needless to say, I am not optimistic as to this program’s future …