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 … 

7 Responses to “A Solution in Search of a Problem: A Look at the “CLASS Act” Proposal for Federal Long-Term Care Insurance”

  • Yushan Yang says:

    I agree with your opinion but is that possible the new policy can change the demand for long-term care insurance? As you mentioned, the current premium set by private insurer is too high. The high premium is not necessary only resulted from small population of insured people. I believe that high executing costs also have premium raised. If the government can lower the premium first, then demands might be spurred. Moreover, the population is aging and baby boomer is going to retire, there might be potential demand for long-term care, especially fewer young people can take care of their parents. It is also true that Medicare and Medicaid also cover long-term care insurance. I don’t know what kind of quality of care they provided but I presume it might be basic. There might be some people are willing to pay some extra money acceptable to get higher quality of care. Besides, actually the government can control the demand by adjusting the premium and the quality of long term care provided by the Medicare and Medicaid. Also, is that possible that the government gradually switches the cost of long term care to the citizen by launching this Federal long-term care insurance? I mean that the government can cancel some of coverage of long-term care in the Medicare and concurrently provides citizen long-term care insurance with lower premium than private insurer does. In this way, more and more people might pay for their own long-term care insurance premium. kind of like price discrimination.

  • Jeffrey Brown says:

    Hi Yushan,

    No question that if the government reduces the price of insurance, we will get some demand response. The question is, how big? Unless the price elasticity of demand for LTC insurance is exceedingly high, this program is unlikely to ever cover more than a small fraction of the population.

    The other point is that, even if one does think that subsidizing LTC is a good policy, one does not need a government run program to do it. We could also subsidize it directly, such as through refundable tax credits for purchasers.

  • Carolyn Fischl says:

    Though I understand that the demand is not there, I believe that it’s a relatively safe assumption that the demand for LTC insurance will have a significant increase in the near future. If you look at the statistics presented in today’s presentations, 33% of the elderly pay for long-term care out-of-pocket and they’re paying premiums that are much too high. With the recent deterioration of the economy and the 28% decrease in 401(k)’s, many retirees will quickly outlive their means. Though Medicare and Medicaid help pay for LTC, these programs are unsustainable as they are currently structured and will have severe difficulties continuing the support of LTC as the number of Americans over the age of 85 is projected to quadruple by 2050. Medicare and Medicaid will have to either cut benefits offered or make the eligibility requirements stricter in order to support the growing number of the elderly. With these statistics in mind, the demand for better LTC insurance is bound to increase. The government can help increase the demand as well by offering tax breaks for those who pay the LTC insurance premiums. So although the CLASS Act seems relatively pointless right now, I believe this piece of legislation will be necessary and very valuable in the future.

  • Brienne Filkin says:

    While I understand the question you are posing seems to be surrounding whether or not the government should be in the long term care insurance business and it seems a key reason against is the lack of demand when products already present in the private market are not high utilized. However, my question is whether a lack of awareness that such an insurance policy exists could be a driving force behind the low demand, not necessarily that people choose not to pay a premium because they assume Medicare/Medicaid will pick up the tab in the event long term care is needed. That being said, is it possible the government may be in a better position to reach individuals who would be interested in such a policy?

  • Yuan Zhang says:

    This article makes me think of a paper which talked about the affordability of health insurance. The problem of demand can be described as people who can afford coverage remain uninsured. In analysis of this problem, higher loading reduces the probability that an individual purchases private coverage. To the contrary, higher expected expenditures “may well increase the measured affordability of coverage if the value individuals place on coverage exceeds the higher premium associated with higher expected expenditures”. Therefore, those affordable uninsured have a less expected expenditures which comes to the same point as people “underestimate the risk”. For my part, it is the government’s responsibility to improve the understanding of the risk and the importance of insurance.
    From the nature of the long term care, it is mostly facing people with a degenerative condition, a prolonged illness or cognitive disorder. In position of the individual, everyone has the thought that they are lucky enough to not have the above illness. No wonder the risk is underestimated. It is not reality to mandate everything for the long term care. A combined policy will be better such as those under 75 are mandated and those above 75 are voluntary, or those live alone are mandatory and those live with a family or in a nursing house are voluntary.

  • Darrien J. says:

    Piggybacking on what Brienne said, I think the government is in a unique position to promote this are of insurance and I think at a minimum the government’s entry into this space will promote a healthier market for provider who can provide higher quality LTC at premium cost. I’m not sure if I want government responsibility for health care to grow to create this new market, but I’m sure the government’s actions will be beneficial for it.

  • Megan says:

    To comment on what Brienne and Darrien J. said, I agree that the government provides more visibility and a heightened sense of awareness to government run programs such as LTC. Although they may carry this visibility of the programs they offer, I can’t help but agreeing with Jeff that there will still be limits on the demand this program receives. As we learned in class, many of the 52 million people enrolled in Medicare and Medicaid rely too heavily on the services they offer, and realize the government will be able to pick up their tab. This mentality reduces participation in voluntary programs such as the CLASS ACT. I personally believe that the government has the best intentions for people who are not able to complete activities of daily living. It is an admirable act, but it will be interesting to see if it does both receive the demand the government hopes for and truly improves the livelihood of the people it intends to help.