A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. The CLASS Act Statute

10/14/2011

Due to the lack of conference reports and other explanatory documents, we effectively relied only on the text of the statute for benefit plan design.

The following provisions in the statute have significant influence on benefit plan design:

  1. The CLASS program is a voluntary insurance program9. An insurance program allows a group of individuals to share the risks by collecting premiums from everyone and paying benefits only to those for whom the risk materializes. An insurance program operates under the law of large numbers. That is, the individuals in the program form a sufficiently large homogeneous group with relatively the same risk so that the actual claim results will be close to that assumed in the premiums. In a voluntary insurance program, the group must be relatively free of asymmetric information where certain insureds have better information about their risk of claiming benefits than the insurer. Otherwise, premiums will be high and unattractive to lower risk individuals. This situation would render the program unworkable.

  2. Actuarial soundness is mentioned in at least in four occasions10. Adapting from a number of sources11, we have developed the following working definition for the CLASS Program:

    A CLASS benefit plan is actuarially sound if, at any time, the balance on the trust fund, all future anticipated premiums and investment income, in aggregate, are adequate to provide for all reasonable and appropriate anticipated future costs, including plan benefits, benefit-related expenses, marketing and administrative expenses.

    Several comments regarding this definition:

    1. Actuarial soundness is a prospective determination of projected income covering projected outgo with a certain comfort level.
    2. This definition implicitly satisfies the stipulation that no public funds can be used to pay CLASS benefits12.
    3. An actuarially sound benefit plan encompasses not only the benefit design that makes if sound but also other rules of the plan that serve to minimize moral hazard13. These rules affect the procedures for enrollment and reenrollment, conditions for enrollment and benefits, etc.

    The statute also requires the CLASS Program be sustainable over a 75-year period such that their will be sufficient funds to pay future benefits. A plan that is deemed actuarially sound would provide good assurance (though not absolute guarantees since future events are uncertain) that the Program is sustainable. On the other hand, a program where the projected income barely covers the projected expenses may be sustainable but it is not actuarially sound because there is insufficient margin for future unfavorable experience.

  3. The CLASS Independence Advisory Council will recommend a benefit plan for designation as the CLASS Independence Benefit Plan that “best balances price and benefits while optimizing the probability of long-term sustainability of the Program”14 (emphasis added). These two phrases epitomized the value proposition of CLASS to the American workers. In order for the Plan to be attractive to the consumers, it needs to be competitive with private insurance. Ensuring long-term sustainability will result in stable premiums for the enrollees.

  4. While the statute prescribes certain conditions and restrictions, in no way does it define a specific plan. In fact, the statute requires at least 3 actuarially sound plan choices for consideration15. The statute thus anticipates alternative plan designs to be developed within its confine. Being actuarially sound does not satisfy all of the design goals. The designated plan still needs to be attractive to the consumers.

  5. No underwriting can be used to determine premiums or to prevent enrollment16. Taken together with the voluntary nature of the Program, this restriction poses potential adverse selection risk.

  6. The Secretary is authorized to set premiums, designate the benefit plan and promulgate regulations regarding enrollment, benefit eligibility, claim payment, etc.

Implementing the statute involves interpretations that may be subject to challenges. Certain provisions in the statute appear to be in conflict with each other, specifically, with the premise of voluntary insurance. We discuss this further in the section below on Adverse Selection.

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