A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Appendix Nd: Presentation Entitled "Comments on 'the Long-Term Care Policy Simulator Model'"

10/14/2011

Comments on
“The Long-Term Care Policy Simulator Model”

Richard W. Johnson
Urban Institute

CLASS Act Models Meeting

September 22, 2010

What Does Avalere LTC Policy Simulator Model Say About CLASS?

  • Plan parameters
    • only workers may participate
    • 5-year vesting
    • $50/day lifetime cash benefit
    • No elimination period
    • those in poverty pay zero premiums
    • premiums cover all costs
  • Model output
    • participation rate = 15% (approx)
    • avg monthly premiums = $116 (in 2010)

Generic Model Structure

  • Establish pool of eligible participants
  • Set benefits and premium schedule
  • Identify those who choose to enroll
  • Model their receipt of benefits
  • Check that premiums cover costs
  • Iterate

Avalere Developed a Cell-Based Model

  • Start with SSA population forecasts
  • Use 2007 ACS data to compute number of workers by age
  • Assign enrollment rate based on benefits that plan provides
    • more generous plan reduces participation (because it raises premiums)
  • Estimate benefits received by enrollees
    • attempt to account for adverse selection
  • Set premiums to cover benefit payments

Participation Rates Seem Somewhat Arbitrary

  • Assign points based on plan parameters
  • Assume participation rates increase with number of points
  • More generous plans get fewer points, because they charge higher premiums
    • exception: low-income subsidy
  • Participation rates range from 5% to 35%
    • where do these rates come from?
  • Implicit assumption is that enrollees minimize cost, not maximize utility

Participation Rates Increase with Age

  • Increase participation rates by 2% per year above age 50 (not pct. points)
  • Decrease participation rates by 1% for each year below age 50
  • Example
    • age 30: 16%
    • age 50: 20%
    • age 65: 26%
    • age 90: 36%
  • Should participation rates in CLASS increase in retirement?
Examples of Participation Rates at Age 50
  (1) (2) (3)
Cash benefit $100 $75 $50
Length of benefit   lifetime   3 yrs 1 year
Vesting none 5 yrs 5yrs
Waiting period none none 90 days
Eligibility all all workers
Subsidy level none   100% pl     150% pl  
Funded by govt 0% 25% 50%
Participation rate   5% 20% 35%

Adverse Selection

  • Economists assume that people who will use more services will be more likely to purchase coverage
    • Assumes policyholders have private knowledge of their disability risk
    • Problem is likely to be especially severe in program that does not underwrite risk
  • Model assumes that those with “perfect knowledge” that they will need LTC risk enroll
    • In the long-run (10 years after program inception) assume that 25% of population has perfect knowledge
    • In short-run, assume 75% has perfect knowledge

Model Limitations

  • No role for income in the enrollment decision
  • Does not account for heterogeneity in the population
    • income and disability are correlated
  • Does not account for population changes over time (other than age)
    • i.e., income growth
  • How will automatic enrollment affect enrollment?

DynamicMicrosimulation Modeling Is an Alternative to the Cell-Based Approach

  • Start with a nationally representative sample of the population
  • Age population year by year
  • Estimate equations of disability onset and duration
  • Estimate equations of program enrollment
  • Feedback to check that premiums cover benefit payouts
Relative Merits of Cell-Based vs. Dynamic Microsimulation Apporaches
    Cell-Based     Dynamic Microsim  
Tractability X  
Transparency X  
Development cost X  
Projecting chars. of future population     X
Capturing heterogen. of population   X

Summary

  • The Avalere LTC model carefully simulates plan participation and costs
    • May be best option currently available to model CLASS
  • But it relies heavily on assumptions that have not been thoroughly tested
  • Alternative approaches would be expensive to develop

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