Before the model can be used, there are a variety of input parameters that must be selected to create a scenario. These inputs include policy options and actuarial assumptions that influence the results of the model. A given set of policy options and a given set of actuarial assumptions can be saved and retrieved so that runs can be replicated easily and accurately.
In this section, the input parameters will be described along with the sensitivity of the premium level to choices in the parameters. In order to do this, we have chosen (somewhat arbitrarily) a set of parameters as a baseline. The baseline estimate will be a modified version of the CLASS Act with the following choice of input parameters (which will be discussed below):
- 5 years vesting and work requirement
- $12,000 income requirement for 5 years (no low income premium)
- Benefit trigger of 2+ ADLs or cognitive impairment of senility, mental retardation, or developmental disability (SRD)
- $50 daily benefit (nursing home and home care)
- No deductible or lifetime maximum
- Benefits and premiums increase at 2.8% per year, except for those who are aged 65+ and of policy duration 20+
- Full waiver of premium while on claim.
- Participation of 2%
- Administrative expense factor of 3% of premium
1. Policy Options
The policy options are inputs related to the law, regulations, and specifications that would be present under a government-run long-term care program. These assumptions allow the user to define coverage regulations, benefit eligibility requirements, descriptions of the program benefits, and premium expense factors. Coverage regulations include the timeframe during which policies are issued, the number of years of required employment after enrollment, and the number of years required for vesting of the policy. Benefit eligibility requirements (sometimes referred to as “benefit triggers”) include criteria based on cognitive ability and the ability to perform activities of daily living (ADLs), which are used as benchmarks to determine whether a policyholder is eligible to start drawing long-term care benefits. The model allows for the user to change the number of ADLs necessary to trigger the benefit and the definition of cognitive impairment that will qualify a beneficiary for benefits. The user can also define the average daily benefit, deductible, lifetime maximum, and level of inflation protection. The user can enter other policy parameters to model variations of the standard CLASS benefits. These variations include various forms of a return of premium provision and daily benefits that start low and increase substantially.
The first section of the policy input worksheet is a place to name the scenario. This name will appear at the top of each output table.
Coverage (including vesting)
The second section of user inputs describes the conditions under which an individual may participate in the program. Coverage includes the years during which the model assumes new policies will be issued, the ages at which new policies will be issued, and the income required for participation.
First Year of Premiums and Last Year of Issue
It is currently assumed that the first year of premiums will be 2012, which is also the first year of issue. The model will calculate the premiums for this cohort of participants to fully finance their expected benefits. If the user chooses to set the last year of issue also equal to 2012, then the cash flow output from the model will show the cash flow for just this one cohort. If the user elects to set the last year of issue equal to 2094 (the last year of projection), then the model will show the cash flow under conditions of continuous enrollment.
Years Vesting Requirement and Years Required at Income Level
The user may specify any number of years of vesting. No benefits are paid during the vesting period. Under the theoretical antiselection formula, the effect of antiselection decreases each year from issue, regardless of whether benefits are payable. Thus, the vesting period reduces benefits not only for the years of no benefit payments but also because of the waning effects of antiselection during the vesting period. Under the additional first-year claims antiselectionmethod, all antiselecting enrollments survive the vesting period and become beneficiaries.
The user may also set the number of years of work required for vesting. The model assumes that the frailty rates of the working population apply during the years of required work, but that the rates will transition to the total population rates over the 10-year period after the required work period. This 10-year period is known as the “select” period. Decreasing the Years Vesting Requirement increases premiums because antiselection will have a greater effect closer to the purchase of a policy. As the duration from the purchase of a policy increase, antiselection decreases. The following table shows that premiums decrease by about 16% by increasing the vesting period from 5 years to 7 years.
Years required at income level allows the user to change the number of years during the vesting period that a policyholder must earn the minimum required income in order to be eligible to participate in the CLASS program. Decreasing this value increases premiums, because it shortens the select period. The example below changes this parameter from the baseline value of 5 to the 3 (which is the number of years required in the CLASS Act), resulting in a 3% increase in average premiums. The model calculates this effect by decreasing the select effect of the work requirement by two years.
Income Threshold for Program Eligibility and Subsidized Premium
This input variable allows the minimum income required to be eligible for the program to be changed by the user. Decreasing the income threshold below the poverty line ($10,830) increases premiums because policyholders below the poverty line are charged a lower premium and their benefits must be subsidized by the premiums of policyholders who earn an income above the poverty line. Above the poverty line, changes in the income threshold for eligibility have a very small effect on the level of premiums. This small effect, however, is the result of the use by the model of different sets of incidence rates that vary by income level. These rates (which are tabulated from the NHIS) vary for those under 65 and in home care, not for the over 65 or for those in nursing homes. In the coverage section, the user also specifies whether a subsidized premium for low-income individuals exists and the income requirement for this subsidized premium. Dropping the income requirement from $12K to $1,090 increases premiums by about 86%.
The third section of user input is to specify the benefits that will be paid under the CLASS program. Several long-term care benefit options are included and may be run in any combination:
- Number of ADLs to trigger benefits
- Separate trigger for cognitive impairment
- Definition of what is included as a cognitive impairment
- Daily benefit (may be specified as any dollar amount separately for nursing home or home care)
- Return of Premium options
- Low initial daily benefit with rapid increases
- Deductible in calendar days
- Lifetime maximum in service days
- Level of inflation protection
- Percent of days on which services are received
- Waiver of premium options
- Indexation of premiums
- Maximum age of a beneficiary for which premiums can be increased
- Maximum duration of time that a beneficiary’s premiums can be increased
- Low Income Premium
Benefit Eligibility Requirement (Benefit Trigger): Number of ADLs and Definition of Cognitive Impairment
The number of ADLs that a person needs in order to be eligible to draw benefits can be changed by the user. A higher requirement for the number or ADLs necessary to draw benefits will lower premiums because it makes the requirements for benefit eligibility stricter. The model has stored utilization rates by ADL from both the NHIS (for the under 65) and the NLTCS (for the over 65). The model always uses all NH admissions regardless of the benefit eligibility requirement. The model assumes that 25% of those with one ADL less than the benefit trigger requirement will also receive benefits. By going from a 2-ADL requirement to a 3-ADL requirement, the average premium decreases by about 13%.
The definition of cognitive impairment can be changed by the user in order to change the utilization rates for the under 65 population. The definitions available for modeling are to define cognitive impairment as:
- Senility (denoted by S and including Alzheimer’s and dementia)
- Senility, Retardation, and Developmental Disabilities (SRD)
- Senility, Retardation, and Developmental Disabilities, “ADD, Bipolar, Schizophrenia, etc.” (SRDA)
By changing the definition of cognitive impairment to include more conditions, premiums will increase. The table below shows that excluding mental retardation and developmental disabilities from the baseline option decreases premiums by about 4%, but by a much greater amount for the younger ages. On the reverse side, including ADD, bipolar, and schizophrenia to the baseline option increase premiums by about 3%, but by much more at younger ages.
Maximum Daily Benefit (separately for nursing home and home care)
The maximum daily benefit can be set to any amount specified by the user. As the daily benefit is increased for both nursing home and home care, premiums increase proportionately. The benefit can be changed for Nursing Home and Home Care independently. In this example, the Nursing Home and Home Care benefit were $50 increased by 2.8% per year in the baseline run. Decreasing the Home Care benefit has a greater downward effect on premiums because more beneficiaries receive home care benefits than nursing home benefits.
Return of Premium Options
The model can calculate premiums for two forms of a return of premium benefit. The first form is a periodic cash benefit paid to policyholders who have not filed a claim during a predetermined period of time. The user may enter the time period between cash benefit payments as well as the cash benefit amount expressed as a percentage of premiums paid during the specified time period. For example, the user may select a 10-year periodic return of 10% of premiums (essentially returning one year’s premium for every 10 years paid). Under this option, every tenth year that a policyholder has not made a claim, he will be paid 10% of the premiums that he has paid during that 10-year period. This benefit has the effect of increasing premiums because it increases the benefits paid to policyholders.
The other form of a return of premium benefit is the payment of a death benefit, expressed as a percentage of premiums paid. The death benefit is an amount paid to the beneficiary of a policyholder who dies before a certain age and before ever submitting a claim. This benefit is paid to a beneficiary of the policyholder’s choosing. Under the death benefit structure being modeled, a policyholder will receive the input percentage until he reaches age 65. From age 66 to 75, the death benefit percentage decreases by 10% per year until reaching 0% at age 75. Below is an example of a death benefit schedule with the benefit specified at 80%.
This death benefit will have the effect of increasing premiums because it increases the benefits being paid to policyholders.
When modeling a periodic cash benefit, an additional situation that needs to be considered is the behavior of policyholders who will delay filing a claim in order to collect a cash benefit. Some policyholders may delay going on claim if they are scheduled to receive a cash benefit payment in the near future and then file the claim immediately after the cash payment has been received. To model this behavior, assumptions of the percentage of claimants who will delay filing a claim for each of the four years prior to a cash benefit payment are entered in the “Assumptions” worksheet of the Input workbook. The model then applies these percentages to new claimants in each of those four years leading up to the cash benefit. This calculates the number of beneficiaries who wait to go on claim until after the cash benefit payment. Once the benefit is paid, the policyholders who delayed their claims are added to the pool of beneficiaries and begin drawing benefits.
Increasing Daily Benefit Option (faster than inflation)
An increasing daily benefit policy is a CLASS policy that would pay a benefit that starts small but increases substantially in real terms over the first 25 years that the policies are held. After 25 years, the daily benefit covered by the CLASS policy would reach a high ultimate level designed to cover a substantial portion of the costs of providing long-term care services. An input parameter is provided that sets the maximum real daily benefit paid by the CLASS policy at year 25 under this scenario. Another parameter specifies the daily benefit amount for the first year that benefits are paid. After this 25 year-period, benefits increase by the standard benefit increase to account for inflation.
The Increasing Benefit Option models a daily benefit payment that starts small and then increases rapidly in real terms. The benefit starts at the user-defined maximum daily benefit, and is increased until the real daily benefit reaches the user-defined maximum daily benefit at year 25. After year 25, the benefit is increased by the standard yearly benefit increase. The real benefit increase schedule (i.e., excluding inflation protection) between the first year policies are sold and the twenty-fifth year at which the target maximum daily benefit is reached is as follows:
Years 1-10: No increase in benefit.
Years 11-15: Daily Benefit is increased by 5% per year.
Years 15-20: Daily Benefit is increased by 10% per year.
Years 21-25: Daily Benefit is increased by the factor necessary to raise the maximum daily benefit to the target value at year 25.
The premiums for this option depend on the starting and 25-year values of the maximum benefit being modeled.
By changing the deductible, the user changes the length of time that a beneficiary must wait to start receiving benefits after going on claim. Increasing the deductible will decrease premiums as it decreases the benefit payments.
Lifetime Maximum Benefit
The lifetime maximum benefit allows the user to input the maximum number of days that a beneficiary may receive benefit payments after going on claim. Decreasing the maximum number of days that a beneficiary can draw benefits will decrease premiums.
Inflation Protection (i.e., annual increases to daily benefit amount and sometimes to the premium amount) can be specified as either a fixed amount per year or a variable amount that varies by age of the policyholder. The baseline premiums assume that both benefits and premiums will be indexed by 2.8% every year (which is the ultimate rate of inflation assumed in the 2011 Trustees Reports). If both benefits and premiums were index by 4% per year the resulting premiums would increase as shown in the following table:
If benefits are indexed at 2.8% but premiums are level (instead of also being indexed by 2.8%), then the initial premiums would be significantly higher as shown in the following table:
In addition to the initial premiums being much higher when premiums are level than when they are indexed, the error in the premium of missing the inflation assumption is also much higher. When both benefits and premiums are indexed, the premium assuming 4% indexation is (on average) 8% higher than when assuming 2.8% indexation. With level premiums, the initial premium is 28% higher than when indexed by 2.8% (assuming a 2.8% indexation of benefits). But if benefits are indexed by 4%, then the level premium increases by an average of 23% instead of by 8%.
The variable inflation protection schedule offers greater inflation protection at younger ages. The reduced inflation protection at higher ages (where it is not as important) is a way to reduce premiums. Under this option, inflation protection is determined by age, with younger policyholders acquiring more inflation protection. This schedule is outlined below:
Percent of Days on which Benefits are Received
The model assumes that benefits are paid in cash and that the daily maximum benefit is received every day while in claim. However, it is possible to model a service benefit. The model can also handle the situation where a claimant is given a choice between a (smaller) cash benefit and a (larger) service benefit. For example, the cash benefit could be equal to half of the service benefit payment. To model the effect of this benefit offering, the model first assumes that all Nursing Home and Assisted Living beneficiaries would receive the service benefit amount for every day in claim. To determine the portion of home care beneficiaries who elect to receive cash, data was used from an Institute for the Study of Labor (IZA) publication concerning the German long-term care model as well as data from the NLTCS. Once the proportions of home care beneficiaries who receive the cash and service benefit are determined, a factor can be applied to the home care benefit for each year to adjust the average daily benefit actually paid down to account for beneficiaries receiving the cash benefit.
According to the IZA publication, in 2003, 15% of German LTC beneficiaries not in a nursing home chose to receive the service benefit and 85% received the cash benefit. Of the 85%, those who are in assisted living would receive the service benefit under ARC’s assumption. This portion of the beneficiaries is calculated using frailty data obtained from the NLTCS 1999 survey. Once the proportions of beneficiaries choosing the cash benefit and service benefit are determined, they can be weighted together assuming a benefit of 1 for service and 0.5 for cash. The resulting factor is applied to the home care benefits paid each year to estimate the decrease in benefit payments.
The percent of days for which a beneficiary receives benefits while in the community can be adjusted between 0% and 100%. Decreasing the percent of days in which a beneficiary receives benefits decreases premiums.
Premium Waiver while on Claim
The decision about whether or not to waive premium payments for CLASS beneficiaries will have a direct impact on the level of premiums needed to sustain the CLASS program. The premium waiver can be set to four scenarios:
No waiver of premium for any beneficiaries, i.e., all beneficiaries continue to pay premiums while on claim.
No waiver of premium for Home Care beneficiaries, only for Nursing Home beneficiaries.
No waiver of premium for Nursing Home beneficiaries, only for Home Care beneficiaries.
Waiver of premium for all beneficiaries.
The baseline premium includes a full waiver of premium for all beneficiaries. By lifting this waiver, premiums decrease because the number of policyholders paying premiums will increase to include those who are currently on claim. Waiving premium payments for all beneficiaries would lead to the highest level of CLASS premiums. A partial waiver results in lower premiums, and no waiver leads to the lowest level of premiums.
The level of premium payments is not the only implication of a premium waiver. The uncertainly in the premium level in the future is affected by the decision to waive premiums. CLASS legislation grants the Secretary the authority to raise premiums in order to preserve the viability of the CLASS program. Premiums would need to be raised if the projected income is not enough to cover projected benefit payments. If the pricing of the CLASS policy is incorrect because of interest rate or utilization assumptions, the premium correction necessary to maintain program viability is less if there is no waiver of premium. The necessary premium correction increases for a policy with a partial premium waiver and is the greatest for a policy with a full premium waiver.
For example, suppose utilization is greater than anticipated, and after 10 years of operation, the decision is made to raise premiums in order to keep the program solvent. Below is a comparison of the necessary premium increase for each of the three waiver scenarios.
Maximum Age and Duration of Policy for Premium Increase
The ARC CLASS model contains input parameters that allow the premiums to stop being increased for policyholders who have reached a specified age AND have held their policy for a specified duration. In the baseline run, policyholders must be age 65 and have held their policy for 20 years in order to stop receiving premium increases. For options that include indexed premiums, increasing the age or duration necessary to qualify for a level premium will decrease premiums because policyholder premiums will increase for a longer duration. The following table shows the reduction in premiums when the age requirement for level premiums is increased from 65 to 75. Premiums for those aged 55 or older do not change because the 20-year requirement goes to age 75 or higher.
The following tables shows the premium reductions when the 20-year requirement for a level premium is increased to 30 years. The premiums for those issued policies aged 35 or younger do not change because it takes 30 or more years to meet the age 65 requirement.
The model contains two parameters that can be used to load expenses into the premium calculation: one is a load as a percent of benefits, and the other is a load as a percent of premiums. The expenses as a percent of benefits variable allows the user to input a percentage load on premiums for expenses. This load will follow the pattern of benefit payments, such as the expenses related to the administration of claims. Increasing the percentage will have the effect of increasing premiums. For example, a 4% load on benefits will increase premiums by 4%.
The expenses as a percent of premiums variable allows the user to input a percentage load on premiums for expenses. This load would follow the pattern of premium payments related to the collection of premiums, such as expenses related to premium billing and collection and for maintaining policies in force. Increasing this percentage will increase premiums by the reciprocal of one minus the load. For example, the 3% load in the baseline premiums results in a 3.1% (= 1/(1-3%)) increase in premiums. If this parameter were increased to 10%, then the increase from the baseline premium would be 7.8% (=.97/.9).
2. Actuarial Assumptions
The model has the capability to estimate results with various sets of actuarial assumptions. The “Assumptions” input worksheet allows a user to specify the average annual return on investment, antiselectionfactors, utilization rate factors, participation assumptions, and voluntary lapse assumptions. These assumptions do not vary according to the policy options, but are parameters used in the formulas to calculate premiums.
Expected Rate of Return (Interest Rate)
The expected rate of return can be set to any value by the user. Increasing the expected rate of return decreases premiums because benefits paid in the future are discounted at a greater rate. The increase in investment return means that fewer premium dollars are required to finance benefit payments. As can been seen below, the assumed expected rate of return has a significant impact on the premium level.
Antiselectionand Selection Factors
Adverse selection is the idea that an individual’s propensity to enroll in an insurance program is positively correlated to their risk. This means that individuals who are more likely to draw benefits from an insurance policy are more likely to enroll in the program than people who are healthy. This would imply that the insured population is frailer than the general population. In order to account for this increased frailty, adverse selection factors are used to increase the likelihood that a policyholder will draw benefits.
The model can use one of two approaches to antiselection: a theoretical approach or a first-year assumption regarding additional claims. The theoretical approach assumes that adverse selection is greatest at the time of issue, so the adverse selection factors for an individual decrease as the policy moves further from the enrollment date. This is true for two reasons: First, an individual’s ability to predict their future health is greatest for the near future and becomes less accurate for the distant future. Second, if an individual does not go onto claim for many years after issue, it is an indication that their own perceived disabilities were not significantly greater than that of other policyholders.
The antiselection factor in the model varies by duration, the participation rate, and the prevalence rate of frailty. The model calculates antiselection factors dimensioned by sex, issue age, and duration and multiplies these factors by the respective incidence rates derived from general population survey data when calculating nursing home admissions and home care incidence, as described in Chapter VII on Benefit Payments. Perfect antiselectionwould mean that every single eligible person who is already frail and immediately eligible for benefits would purchase a policy. Using both the actual prevalence rates and assumed participation for a given age and gender, we can construct an upper bound for antiselection as the reciprocal of the maximum of prevalence and participation. This maximum antiselectionapplies at duration zero.
The model also allows the user to build in a level of conservatism by not allowing the antiselection factor to fall below an ultimate value (set at 1.1 for the baseline) for all durations at and above a specified number (set at 20 for the baseline). This means that ultimately the average policyholder is assumed to be 10% more likely than the general population to become frail. For durations 1 through 19, the model does a geometric interpolation between the duration zero antiselection factor and the duration 20 antiselection factor.
The factor is further dampened to take into account that antiselection will not be perfect. The dampening takes the form of raising the antiselection factor to a user-specified power (set at 0.7 in the baseline). The CLASS Act has a 5-year vesting period before a policy holder is eligible for benefits, so the first relevant antiselection factor is that at duration 5.
Below is an example of the antiselectionfactor at duration 5 when the participation and prevalence rates are both 1%. The reciprocal of 1% is 100, which when raised to the 0.7 power equals 25.12. The geometric interpolation of 25.12 and 1.1 at duration 5 gives the antiselection factor (ASF, as used in Chapter VII):
ASF(1%, 5) = 25.12 ^ 0.75 * 1.1 ^ 0.25 = 11.49
Thus, the incidence rates for the appropriate age and sex would be increased by a factor of 11.49 in order to calculate the new claims at duration 5 when the participation rate is 1%. The 0.75 exponent is equal to 15 / 20, which is the fraction of the distance from 0 to 20 represented by the distance from 5 to 20, while the exponent 0.25 is the ratio of 5/20. The table below shows the effect of increasing the antiselectiondamping factor from 0.7 to 0.85 when the participation rate is 2%.
An alternative method for estimating the impact of antiselection is to estimate the number of people who are immediately eligible to enroll in the program and also meet the ADL or cognitive requirement to qualify for benefits. This method relies on counts of frail individuals in survey data as opposed to a comparison of prevalence rates from data and an assumed participation rate in the theoretical antiselection calculations. Under this alternative method, it is assumed that 100% of this frail population would: (1) choose to enroll in the CLASS Act the first year policies are offered, (2) survive the 5-year vesting period, (3) meet the work requirements, and (4) file a claim as soon as possible. After the first year in which benefits are paid, incidence rates for policyholders are assumed to be the same as general population incidence.
NHIS 2007-2009 survey data were used to determine the number of policyholders who would be eligible to file a claim in the first year that benefits are paid. Frailty prevalence rates for people age 18 to 64 are distributed by income, category of cognitive impairment, and number of ADLs. The number of first-year claims is then determined based on the user-defined input for these three categories. Once the number of first year claims is determined, the claims must be distributed by age, sex, and poverty status to be used in the model.
This table illustrates how premiums are affected when using the additional first-year claims method of estimating antiselection versus the formula approach. Premiums for all ages decrease under the first year claims method of antiselection. This decrease is because the first-year additional claims method adds fewer additional claims over the life of the policy than the formula method. The first year additional claim method does result in a greater number of claims during the first year benefits are paid, however this method does not impact incidence in subsequent years. In contrast, the formula antiselection method increases incidence rates for the first 20 years of program operation.
The number of first-year claims above the income eligibility threshold and below the subsidy threshold is considered the number of below poverty claims. The remaining claims above the subsidy threshold are standard claims. The claim distribution resulting from the NNHS nursing home and the NLTCS home care incidence rates was used to distribute the number of first-year claims between nursing home and home care claims by age and sex. The distribution of claims by age and sex is the same for the above poverty population and below poverty population. The resulting claim distributions are used to calculate nursing home and home care incidence for the first year that benefits are paid.
Selection is the idea that the rules set up by the issuer of an insurance policy will allow only lower-risk individuals to participate. This would imply that the insured population is less frail than the general population. The CLASS Act requires that a policyholder earn income above a certain threshold during at least three years out of their five-year vesting period. The model uses a select period of ten years after the completion of the years of income requirement or age 75, whichever comes first. The model has an initial selection factor as an input and then uses a linear interpolation with a selection factor of 1.0 (i.e., no selection) as the ultimate selection factor to populate the array of selection factors by issue age and duration. The initial selection factor can be set by the user (it is 0.6 for the baseline) for ages under 65 (where the work requirement applies), but 1.0 for ages 65 and over. The 0.6 factor is based on tabulations of the HIS that show the prevalence of frailty for those that earn at least $1 per year is about 60% of the prevalence for the total population. The model then multiplies these selection factors, all of which are less than or equal to 1, by the relevant incidence rates when calculating nursing home admissions and home care incidence.
In theory, the selection factor of 0.6 should apply to any individual in a year when he is working. The selection factor should begin moving toward 1.0 in the year that the individual stops working. The model begins the trend toward 1.0 in the year after the work requirement ends, rather than when actual work stops. Thus, if there is a requirement for three years of work, then the selection factor would begin moving toward 1.0 in the fourth year after issue. The table below shows the change in the premium if the selection factor is set to 0.8 instead of 0.6.
Utilization Rate Factors
There are two factors that can be used to change the general level of the utilization rates: one adjusts the level of the incidence rate and the other adjusts the average length of stay (for nursing home stays) and average lengths of episode (for home care stays). The input variable, Percent Morbidity Improvement, is provided to adjust the overall level of utilization for a given group of policyholders. This factor is applied to incidence rates and can be used to adjust the overall level of utilization up or down. When the average length of stay (episode) is changed, the model adjusts the continuance tables to match the new lengths of stay.
Mortality and Morbidity Trend Assumptions
Mortality Improvement can be: (1) manually set to a yearly rate of improvement, (2) read from the trustees report assumptions, (3) or turned off. If the user sets the annual rate of mortality improvement to be 0.5%, for example, then the age-sex specific mortality rate in one year is equal to the corresponding rate in the prior year multiplied by .995. The user may also limit the number of years of mortality improvement. Rates after this number of years become constant. Increasing mortality improvement increases life expectancy and therefore raises premiums because more policyholders live to higher ages where frailty rates increase.
When the parameter is set to use the Trustees Report assumptions, the model reads year-by-year the life tables used in the 2011 Trustees Report. These life tables result in rates of improvement that vary through time and by age and sex. The mortality rates at age 65 and the resulting average annual rate of improvement are shown in the following table:
The duration of mortality improvement can be set by the user. The baseline premiums assume mortality improves over the entire projection period (which is 82 years for issue age 18). Shortening the duration of the mortality improvement will shorten life expectancy and decrease premiums.
Morbidity improvement is applied to utilization and decreases utilization of benefits because of assumed decrease in incidence of disease. Annual morbidity improvement works in a similar fashion to mortality improvement. For example, if the morbidity improvement factor is 0.5%, then the age-sex specific incidence rates (one for nursing home admissions and one for home care incidence) for a given year are equal to the corresponding rates for the prior year times .995. Morbidity improvement can be turned off or set to a manually input value. Increasing morbidity improvement will decrease premiums because it decreases the number of claimants.
The duration of morbidity improvement can also be set by the user. The baseline premiums assume morbidity improves until the end of the projection period. Shortening the duration of the morbidity improvement will increase incidence and increase premiums.
Assumed average participation can be entered for both low income and high income populations. The participation rates by age and sex for individuals above the poverty line are stored in the “Data” workbook. The low income participation rates are assumed to be constant by age and sex. Increasing participation decreases antiselection and increases program income. This results in lower premiums.
Lapse rates can be manually entered by the user for multiple issue ages and durations. The durations for which lapse rates are entered cover the first ten years of enrollment, and ages for which lapse rates are entered are 20, 35, 50, and 65. These rates are then interpolated across the range of issue ages. The baseline premiums assume a 0.75% lapse rate for all ages and duration. Increased lapse rates will decrease premiums because policyholders who lapse have paid more in premiums than they have received in benefits, and no benefits will be paid in the future. This excess of premiums over benefits can then be used to pay for benefits to continuing policyholders.
Under the law, an enrollee is considered to have lapsed from the CLASS program if they fail to pay premiums for three months. If the enrollee fails to pay premiums for less than five years, then they can reenroll but premiums will be set at the same level as a newly enrolled person. To become eligible for benefits, the enrollee will need to continue to make payments for the larger of A) The number of months left to pay before the lapse and B) 24 months. If the lapse lasts longer than five years, the person may reenroll, but will have to pay for the full 60 months to achieve eligibility and will have to pay premiums equal to a new enrollee of the same age plus a 1% penalty for every month of the lapse.
There are currently no provisions to return benefit reserves to lapsed or otherwise disenrolled participants. Therefore, when someone lapses or disenrolls and does not return to the program those benefit reserves are kept by the CLASS Independence Fund, which can reduce the overall premiums necessary to sustain the CLASS program. In addition, anyone who has a lapse of more than 5 years but returns will not keep their benefit reserves and will pay punitive premiums that are higher than someone who enrolls for the first time at the same age. People who lapse for less than five years and return will earn coverage with a shorter deferral period than someone entering the program for the first time (though no less than 24 months). This person will be more expensive to insure than someone entering the program for the first time, but they will still be paying the same premium. In the case of someone who lapses and returns in less than five years, the CLASS Independence Fund cannot keep the entire benefit reserve from the original lapse as a mechanism of reducing premiums.
Lapse-supported premiums rely on the assumption that lapse allows the CLASS Independence Fund to retain the benefit reserves from lapsed people. Expected benefits paid out are reduced by the noncoverageof people who lapse and then become frail. However, the people whose lapses are most significant are those who become frail shortly after they lapse. These are also going to be the most difficult to keep out of the program politically.