A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Minimum Earnings Requirement and Nominal Premium

10/14/2011

Under the statute, eligible beneficiaries must meet a minimum earnings requirement for 3 out of the first 5 years of enrollment equal to the amount of wages to be credited with one quarter of Social Security coverage41. This amount is $1,120 for 2011. However, the Secretary is authorized to make exceptions to this rule for certain population42. A low minimum earnings requirement allows enrollment of low-income workers who, as a group, are generally in poorer health43.

Furthermore, the statute requires a $5 nominal monthly premium for enrollees whose income is below the poverty line or who are full-time students under age 2244. This provision poses a potential threat to the financial viability of the CLASS Program. Without any mitigation for adverse selection, this is a tremendous incentive for a poor worker, who is near or already met the benefit triggers, to enroll. The ‘returns’ in the form of benefits (approximately $18,000 a year for the first year and indexed higher thereafter) far exceed the ‘investments’ of 5 years of $5 monthly premiums ($300). Because other enrollees will be subsidizing the poor, the overall premiums will need to be higher than without this subsidy. This adds to the competitive issue with private insurance. In addition, estimation of the appropriate premiums will not be reliable due to the unpredictable mix of nominal and regular premiums.

In order to mitigate this threat, raising the minimum earnings requirement for certain enrollees so that it is always above the poverty level could be explored. This should be somewhat effective in controlling adverse selection by those who expect to receive a high level of benefits for very little premium.

As stated above, the Secretary is authorized to promulgate regulations on exceptions to the minimum earnings requirement for certain populations. Under the Phased Enrollment plan design, those enrolled through individual enrollment are certainly a population that needs special attention since most of the adverse selection is expected to come from this group. Under the Temporary Exclusion design, the potential problem is less severe but not entirely eliminated. In either case, raising the minimum earnings requirement on this group would help. In addition, since it is not explicitly prohibited, defining “actively employed” to require a minimum number of work hours at time of enrollment can also help mitigate adverse selection. Finally, there should be a specific regulation to prevent companies from forming for the sole purpose of enrolling employees into the CLASS Program.

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