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

10/14/2011

Before discussing Phased Enrollment, it is helpful to review the types of risk mitigation practices typically used in the group long-term care insurance market. Insurers offer group coverage in the workplace with endorsement from the employers. Premiums are usually collected through payroll deduction. For large employee groups of over 500, insurers would generally offer guaranteed issue to full-time active workers during a limited enrollment period (1-2 months). Some form of underwriting is required for those enrolled outside of this period and for spouses and other immediate family members. New hires can enroll without underwriting during a short period following hire. Presumably, insurers are protected by the very limited window of opportunity for enrollment as opposed to a situation where the workers can join whenever it is to their advantage24. Enrollees tend to be white-collared workers who have available discretionary income for insurance and who are generally in better health status than the average worker. To date, premium rate increase filings for group long-term care insurance are uncommon. The overall claim experience appears to be close to the anticipated claim costs in the development of the premiums.

The statute specifies two methods for workers to voluntarily enroll. Workers can enroll either through their participating employers or through an alternative individual method. Individual enrollment is for the self-employed, individuals with more than one employer, and for those workers whose employers are not participating in the Program. The statute is silent regarding the manner and timing for implementing either method.

The Phased Enrollment design adopts certain risk mitigating practices from group long-term care insurance. Under this design, enrollments with be phased according to a pre-determined risk tolerance. Initial enrollments will first be limited to the group setting through employers with a specified minimum number of employees. The initial enrollment period will be 1 to 2 months. Subsequent enrollment periods will be indeterminate. This is similar to the current practice for guaranteed issue group long-term care insurance.

Such practice is workable in mitigating adverse selection because:

  1. High risk workers cannot seek insurance. Only those whose employers participate can enroll.

  2. Enrollment period is short. There is little opportunity for a working individual becoming unhealthy to enroll at will.

  3. The relatively large size of the groups provides a spread of risk.

The alternative individual enrollment method allows any workers not included in group enrollments to sign up. Without a way to temper high risk workers to enroll as in the case for group enrollment, we expect most of adverse selection to come through this method. Accordingly, individual enrollment will commence in a controlled manner to ensure solvency of the Program.

Premiums will be set with a specific margin that provides for a reasonable allowance for individual enrollment in the future. The annually required actuarial analysis25 will specify the number of future individual enrollments.

The following is an example of how Phased Enrollment works. A 20% load is added to the premiums for CLASS specifically for expected higher claims through individual enrollments. Suppose we determined that enrollees from individual enrollment can be expected to be 5 times more likely to claim than those through group enrollment26. When the number of enrollees reaches 200,000 and provided that the claim assumption remains unchanged, we would allow up to 10,000 (= 200,000 x 20%/400%) new enrollees through individual enrollment.

Thus, under the Phased Enrollment design, the degree of adverse selection is rationed based on what is available to accommodate the expected higher claims. Individual enrollment starts when the group enrollment meets a pre-set threshold. We will allow a pre-determined number of workers to enroll during a limited individual enrollment period. In order to validate the adverse selection assumption, we plan to evaluate individual enrollees’ medical records but naturally would not use them to deny enrollment. Lessons learned from the evaluation will help us to devise subsequent individual enrollments, including enrollments of employees from smaller sized employers.

The advantage of this design is that the impact of adverse selection is controlled. Note that this design does not materially alter our expectation of the ultimate number of enrollees in the CLASS Program since we expect that the majority of enrollees would come from group enrollment anyway. Phased Enrollment therefore does not mean the CLASS Program will necessarily be small. The disadvantage is that the margins designated for individual enrollments could be depleted due to overall unfavorable experience of the Program. The timing and the allotted number of individual enrollments are not guaranteed. There may be public pressure to expand individual enrollments thus causing harm to the Program. Finally, additional legal analysis will be required to determine whether the Phased Enrollment plan must be available to all employers.

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