A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. I. Introduction

10/14/2011

Despite the potentially catastrophic costs of long term care, fewer than 3% of Americans have long term care insurance (LTCI). In order to increase LTCI coverage, the CLASS Act authorizes the Department of Health and Human Services HHS to offer a government-sponsored long term care insurance product (henceforth, CLTCI) alongside the offerings of private insurers. A key requirement of the CLASS Act is that projected revenues from CLTCI must equal or exceed expenses; that is, the product should be designed to at least break even. A second key requirement is that CLTCI cannot medically underwrite its basic policies; instead, initial premiums can vary only according to age at enrollment. HHS may be able to offer additional plans not described by the CLASS Act; it is not clear if HHS can medically underwrite these offerings. A third key feature is that employers that participate in the CLASS plan must automatically enroll their employees, who in turn can opt out of the program.3 HHS has asked us to assess whether CLTCI is likely to be financially viable and to provide recommendations that would increase the appeal and viability of CLTCI.

In short, we have been asked to determine whether CLTCI can profitably enter the LTCI market. Although it is tempting to perform such an analysis by projecting revenues and expenses, such projections often prove to be highly speculative. Instead, we perform a strategic analysis of the LTCI market in general and possible CLTCI designs in particular. Strategic analysis, as exemplified by Michael Porter’s Competitive Strategy and Besanko, Dranove, et al’s Economics of Strategy, considers whether the underlying economic conditions of a market enable the participants to prosper and, at the same time, assesses whether there are profitable opportunities for entry.

We employ three classic tools of strategic analysis:

  • Industry Mapping provides a basic set of facts about the industry that are required to understand the nature of competition and the potential for entry.

  • Industry analysis assesses the competitiveness of a market, whether market conditions are likely to support profitability, and how incumbent firms are likely to respond to entry.

  • Positioning analysis of a specific firm assesses the relative strengths and weaknesses of that firm and whether it can prosper by outperforming its rivals.

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