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

10/14/2011

The Patient Protection and Affordable Care Act (ACA) contains a provision that supporters hope will help strengthen the United States’ system of financing long-term care (LTC). This new program, established under Title VIII, Section 8002 of the ACA has attracted attention and support because it has the potential to add a new funding source to a system that current relies heavily on Medicaid and provides little insurance coverage.

In the absence of increasing public or private LTC coverage, this country’s long-term care system and the people who use it will continue to experience significant funding and delivery gaps. Individuals who need LTC rely on unpaid family members and friends or dip into their home equity, personal savings, and other out-of-pocket dollars to finance home care, assisted living, or nursing home care. Medicaid has become the country’s long-term care safety net for individuals who exhaust their individual and family resources. However, the federally and state-funded program pays for nursing home care but does not guarantee access to home and community-based services. Only seven percent of Americans currently have private long-term care insurance coverage.

Congress designed the CLASS program to address these gaps. It is a public, voluntary long-term care (LTC) insurance program that will be open to all actively employed adults. Following a five-year vesting period, individuals who become disabled in two or three of the Activities of Daily Living (or have a similar level of cognitive impairment) will be eligible to receive benefits and will receive a lifetime, cash benefit, averaging $50 per day. As written in statute, the CLASS program offers level, age-based premiums and includes subsidies for low-income individuals and full-time students. The Secretary may raise premiums only to preserve program solvency. The CLASS program will be entirely premium-funded and must be solvent over a 75-year period.

In creating the CLASS program, Congress also created unique challenges for financial evaluation and implementation. It prohibited two common front-end actuarial risk and cost controls employed by nearly all other insurance programs: mandatory enrollment and underwriting. Without these, program sustainability depends on encouraging adequate enrollment of healthy individuals to offset the effects of adverse selection. Adequate enrollment, however, depends on an attractive premium, which must be set in advance by the Secretary of the Department of Health and Human Services (HHS).

The ACA requires the Secretary to evaluate the financial viability of this premium-based program and to promulgate regulations to develop an expedited eligibility determination process, an appeals process, and a redetermination process, including whether an enrollee is eligible for a cash benefit under the program as well as the level of cash benefit. Because of the unique nature of the program, there are few real-life experiences of behavior to draw upon to evaluate the potential for adverse selection and to subsequently set premium levels.

To assist the Secretary of HHS, Avalerehas modified a long-term care actuarial model it previously constructed under a grant from The SCAN Foundation. Avalere has designed the new model to evaluate key assumptions about the CLASS program and their effects on premiums over a 75-year window. The model estimates the impact on premiums of adverse selection, different benefit triggers and benefit amounts, program enrollment rates, low-income subsidies, and various benefit structures (including cash vs. services).

The remainder of this paper is laid out as follows: Section II outlines the steps taken for the full Model. Section III details the construction of our general population estimates. Section IV illustrates the process of estimating participation in the CLASS program. Section V outlines the construction of the disability rates. Section VI deals in depth with modeling of adverse selection. Section VII details the Medicaid estimates in the Model. Section VIII lists several of the limitations of the Model. Appendix 1 lists each of the data sources used in the Model. Appendix 2 describes in further detail some of the key data sets that we utilized.

Finally, we referenced countless articles on this subject published over the past 30 years. That contributed to our analysis. Instead of attempting to identify the precise contribution of each article, we have included a full bibliography of these sources at the end of the paper.

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