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

10/14/2011

  1. The CLASS Act was enacted as Title VIII of the Patient Protection and Affordable Care Act, P.L. 111-148 (March 23, 2010), which amended the Public Health Service Act, 42 U.S.C. section 201 et seq., by adding the CLASS Act as Title XXXII.

  2. They include: Actuarial Standards of Practice No. 12: Risk Classification, American Academy of Actuaries, updated May 2011, Actuarial Standards of Practice No. 18: Long Term Care Insurance, updated May 2011, and Health Practice Council Practice Note: Long-Term Care Insurance, August 2003.

  3. As of the release date of this report, Gregory Kissel is on loan from the Office of Personnel Management on a part-time basis.

  4. Current long-term care cost ranges from an average of approximately $16,000 per year for home and community care (assuming 3 hours per day, 5 days a week) to $70,000 for nursing home care -- 2010 Market Survey of Long-Term Care Costs, MetLife Mature Market Institute.

  5. Even though the CLASS Program emphasizes care in the community, benefits will be paid regardless of the setting. In this report, community care and long-term care have the same meaning.

  6. Less than 8% of Americans under age 65 has private long-term care insurance -- Who Purchase Long Term Care Insurance?Richard W. Johnson and Janice S. Park, Urban Institute, March, 2011. However, approximately 1 out of 2 persons over age 65 will need some formal care in the remaining lifetime. See Long-Term Care Over an Uncertain Future: What can Current Retirees Expect?, Peter Kemper, Harriet L. Komisar and Lisa Alecxih, Inquiry, Volume 42, Winter 2005/2006.

  7. UNUM, Genworth Financial and Prudential Insurance Company.

  8. Annual Medicaid long-term care spending is projected to grow from $64 billion to $101 billion in 2030 -- Lewin Group, 2010, while the ratio of persons under 65 to persons 65 and over is 4.6 for 2010 and the corresponding projected ratio is 2.8 in 2030 -- U.S. Census Bureau.

  9. CLASS Act, Sec. 3201.

  10. CLASS Act, Sec. 3203(a)(1), Sec. 3203(a)(2)(B), Sec. 3203(b)(1)(E)(i), Sec. 3206(b)(2)(A)(iii).

  11. Actuarial Standards of Practice No. 26: Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans, May 2011 and Health Practice Council Practice Note: Actuarial Certification of Rates for Medicaid Managed Care Programs, August 2005.

  12. CLASS Act, Sec. 3208(b).

  13. In insurance, moral hazard occurs when certain insured’s behavior results in unfavorable overall experience for the insurance program. For example, spend more insurance benefits than reasonably needed if they have to be paid out-of-pocket.

  14. CLASS Act, Sec. 3203(a)(2)(B).

  15. CLASS Act, Sec. 3202(a)(1).

  16. CLASS Act, Sec. 3203(b)(3).

  17. Actuarial soundness for the CLASS plans suggests a margin for unfavorable experience built into the premiums, similar to the specific margin for adverse experience required in long-term care insurance since 2003.

  18. The discount rate equals to a fixed interest rate used for statutory reserving.

  19. This assumes a 20% expense ratio for CLASS. See later section for a discussion on expenses.

  20. We recognize that certain enrollees’ attributes may partially offset the effect of asymmetric information. For example, risk-averse individuals tend to be attracted to insurance and are healthy. However, this attribute is already embedded in private insurance’s experience. See Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market, Amy Finkelstein and Kathleen McGarry, American Economic Review, September 2006.

  21. In the toothache insurance example, this is analogous to charging $1,000 premium. Because the expected number of claims is highly dependent on the number of enrolled workers who already had a toothache, we suggest that this is the only prudent premium that ensures a high likelihood of program sustainability.

  22. See Adverse Selection, Memo to Kathy Greenlee from Bob Yee, April 27, 2011 (Attachment 1).

  23. See Design Alternatives, May 6, 2011 (Attachment 2).

  24. Clearly high risk employees can still select against the insurance plans even with a short enrollment period. Although one insurer no long in the group business is in the process of filing for premium increase, the overall experience to date suggests that this adverse effect from group enrollment is manageable and insurers have adjusted their claim expectation accordingly.

  25. CLASS Act, Sec. 3206(c)(2)(B)(i)(III - IV).

  26. Thus individual enrollment would have 400% extra claims than group enrollment. The initial estimation of expected increase in claim costs can be quantified through a study of disability status of individuals declined for private long-term care insurance.

  27. Depending on the cost estimates for this provision, the 15 years may have to extend to 20 years in order to keep the CLASS premiums competitive.

  28. In the toothache insurance example, a high participation rate helps to keep the premium relatively reasonable. If 80 workers (including all 5 workers already had a toothache) enrolled, the premium of $156 [(5 + 75 x 10%) x $1,000 ÷ 80] is a more tolerable and predictable premium compared with the prospect if only 6 workers enrolled.

  29. See Attachment 3 for a summary of the proposed plans.

  30. The purpose of this comparison is to merely illustrate the possibility of developing a CLASS plan that is reasonably price competitive with private group insurance. The CLASS premiums have not been finalized. Note in particular that the comparison is between the level premiums of private group insurance plans and the initial premium for the CLASS plan with an increasing premium schedule. In addition, this premium illustration is not derived from models provided by Actuarial Research Corporation and Avalere Health as described in the Actuarial Modeling section below.

  31. CLASS Act, Sec. 3203(a)(2)(B).

  32. CLASS Act, Sec. 3203(a)(1)(D)(ii).

  33. U.S. Consumer Price Index for Urban Nursing Home and Urban Adult Day Care Costs, National Care Planning Council, http://www.longtermcarelink.net/eldercare/ref_cpi_inflation_rate.htm.

  34. CLASS Act, Sec. 3202(a)(1)(C)(iii).

  35. CLASS Act, Sec. 3203(a)(1)(D)(iv).

  36. CLASS Act, Sec. 3205(c)(1)(B).

  37. CLASS Act, Sec. 3205(g).

  38. The entire schedule can move up or down according to experience of the program.

  39. CLASS Act, Sec. 3203(b)(2).

  40. CLASS Act, Sec. 3205(b)(4).

  41. CLASS Act, Sec. 3202(6)(A)(iii).

  42. CLASS Act, Sec. 3202(6)(C).

  43. See, for example, Low-Income Workers and Their Employers -- Characteristics and Challenges, Gregory Acs and Austin Nichols, Urban Institute, 2007.

  44. CLASS Act, Sec. 3203(a)(1)(A)(ii).

  45. CLASS Act, Sec. 3203(b)(1)(C) and Sec. 3203(b)(1)(E).

  46. CLASS Act, Sec. 3203(a)(1)(D)(i).

  47. CLASS Act, Sec. 3205((b)(1)(a).

  48. CBO letter to Rep. George Miller from Douglas Elmendorf, November 25, 2099.

  49. CLASS Act, Sec. 3203(a)(1).

  50. CLASS Act, Sec. 3206(c)(2)(B)(i)(III - IV).

  51. The plan tested is the ‘Modified’ CLASS with waiver of premium and 2% enrollment rate. ‘Modified’ here refers to the CLASS plan with the proposed Senate amendments (in particular, allowed for indexing of premiums).

  52. 2009 National Health Interview Survey and 2009 Current Population Survey (PINC-05) people age 15+ with annual income greater than $12,500.

  53. We can expect that any load much above 20% will dramatically reduce enrollment to a point where the proportion of unhealthy enrollees is intolerable.

  54. This illustration conservatively ignored those enrollees who are disabled but do not yet qualify for benefits under CLASS.

  55. 2011 LifePlans estimate.

  56. A pre-paid plan, such as a dental plan, anticipates that nearly everyone who enrolled will claim. Thus the premiums approach the value of the benefits.

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