Though it has attracted little attention, a bill called the CLASS Act has the potential to fundamentally change the way we think of government social policy. It also runs the risk of becoming yet another costly unfunded entitlement. Congress will decide over the next few months.
The Community Living Assistance Services and Supports Act would create a new national voluntary long-term care insurance program to help pay for the personal care of both the frail elderly and younger adults with disabilities. It would provide a basic lifetime cash benefit funded through an optional payroll deduction.
The proposal is included in both the House health bill and in the measure now being debated on the Senate floor. Originally the brainchild of the late Senator Ted Kennedy, CLASS raises many important issues, but the most interesting may have to do with the way it is funded.
CLASS is a bit complicated, so bear with me. People would have to pay premiums for five years before they can collect benefits. This makes a lot of sense as an insurance design, but also generates a huge short-term revenue windfall for the government—perhaps as much as $100 billion over 10 years. And therein lies the first problem.
Some supporters of CLASS, including Senate Democratic leader Harry Reid, like to say it would help pay for health reform. Indeed, when Reid talks about the budgetary impact of his health bill, he invariably includes the CLASS dollars.
The trouble is, this is both dangerous and dishonest. If CLASS is to be real insurance, premiums need to be both reserved and invested. That won’t happen if the funds are used to help pay subsides for health insurance.
And that leads to the second problem. What some Democrats see as a short-term windfall threatens to become a long-term drain on the Treasury. As they stand, both the House and Senate bills require the program to remain solvent for 75 years. That's important. But if CLASS contributions and investment income are insufficient to fund claims, the government would have to raise premiums. And if that drove too many buyers out of the market, the next step could be--you guessed it-- a government bailout.
These fears are legitimate, and several key Senate Democrats, including Budget Committee Chair Kent Conrad (D-N.D.), share them. But the problems are also fixable and, with a bit of creative thinking CLASS could become a model for other government insurance programs such as Social Security.
The idea is to make CLASS a fully self-financing insurance program. Premiums and investment returns would cover 100 percent of claims. Contributions could be made to a quasi-private corporation kept entirely separate from the budget rather than to the Treasury, where it is too easy for Congress grab the cash. Or, people could buy from pre-approved private carriers, much as they buy Medigap health insurance today.
I’d make CLASS a mandate, and not voluntary insurance. Among the advantages: Universal participation would avoid the problem of adverse selection, where too many buyers require benefits and drive up premiums. Contributions under mandatory coverage might be as low as $50 per month.
A well-designed CLASS Act wouldn’t drain the budget, and it could significantly reduce government costs. The reason: The more people who have insurance, the lower the burden on Medicaid, which currently pays 43 percent of all long-term care costs, or more than $100 billion a year.
The sponsors of CLASS are on to something important, but they need to do it right. If you want to learn more about this issue, check out my book Caring for Our Parents or click here and here.
