A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Section II: The Long-Term Care Policy Simulator

10/14/2011

Avalere Health has modified its existing Long-Term Care Policy Simulator (LTC-PS) model to more closely reflect the specifications of the CLASS program as included in the ACA. The LTC-PS is an Excel-based model that tracks age-specific groups of CLASS program enrollees for 75 years. This paper describes many of the key assumptions and modeling options that we incorporated into the LTC-PS in order to provide estimates of premiums for variations of the CLASS program that may be under consideration by the Secretary of HHS.

The LTC-PS creates enrollment groups from the overall population and calculates the expected costs and premiums for each enrollment group separately by age. For the most part, the same process is repeated for each consecutive group of annual enrollees. We make exceptions to this repetition with estimates for expected enrollment, adverse selection, and premiums.

The CLASS program is required to be actuarially balanced over a 75-year window. This, in short, means that the present value of total expected costs of the program, including benefit payments, administrative costs, and subsidies, must equal the present value of total expected income of the program, including premiums and interest payments. The estimated premium represents the average premium required in the initial year for each age of estimated enrollment to accomplish an actuarially balanced model.

In order to construct these expected costs and expected income, we estimate for each enrollment group the number of people participating in the program and receiving benefits as well as the number of people participating in the program and paying premiums. Depending on the policy options selected, these may or may not be mutually exclusive categories. In order to calculate the total costs of the program and the total income, the steps described in this paper are applied to each age group above 18 years old for 75 consecutive years. In addition, each enrollment year is modeled separately.

The following provides an overview of the major functions of the model and the conceptual sequence of these functions. It is followed by a more detailed explanation of each of the major functions.

Estimating Program Enrollment. In order to determine costs and income, we first estimate how many people are enrolled in the program. There are two key analyses associated with program enrollment: the eligibility requirement and voluntary participation.

  • Eligibility requirement. The CLASS program is available to individuals over the age of 18 who have at least 3 years of active work experience. At the onset of the program, we assume that the work requirement will prevent most of the currently disabled population from being able to participate. We make an exception for individuals who have a severe disability and are currently working (approximately 5 percent to 7 percent of the severely disabled population is currently employed). We incorporate these individuals through our estimates of adverse selection, discussed in Section VI.

  • Voluntary participation. The CLASS program is a voluntary benefit. As such, enrollment is based on the expected value for each individual relative to the estimated premium. The assumptions used to estimate participation are described in detail in Section IV.

Estimating Benefit Eligibility. After determining the enrolled population, we determine the proportion of individuals who are eligible to receive benefits (i.e., who are vested). The CLASS program has a 5-year vesting requirement with an earnings threshold. In the model, we assume any individual who has been enrolled for five consecutive years will be eligible to receive benefits.

Estimating Individuals Qualified to Receive Benefits. Once the Model has calculated the enrolled population and those eligible to receive benefits, we must estimate how many enrolled and eligible people have a disability that qualifies them to receive benefits. Section V details our method for constructing estimates of severe disability. For each age and year in the Model, there are two components of the disabled population: newly disabled and continuing disabled.

  • Newly disabled. Using age-specific incidence rates we calculate the number of individuals who are eligible to receive benefits who develop a severe disability in a given year. The calculated incidence rates are for an entire calendar year, but for modeling purposes we only want to track the average number of people who would receive benefits in their first year of need. We therefore discount a portion of the incident population in each year, and include the remaining incident population in our total estimates for the following calendar year.

  • Continuing disabled. We also adjust the prior-year age-specific population with a disability to account for both the estimated number of individuals who cease to be severely disabled, either through death or improvement in condition. This is done via the continuance estimates as described later.

Estimating the Disabled Who Are Receiving Benefits. While a person might be enrolled in the program and meet the vesting as well as the disability requirements to receive benefits, that person might have exhausted benefits in a program that pays for a specified period of time less than lifetime (i.e., one or three years). For any CLASS options with a limited benefit of less than lifetime, we apply a factor to account for people with disabilities who have already received the maximum amount of allowable benefits in the program. To estimate these factors, we use the continuance estimates as described in section V.

  • As an example, if the CLASS program were to have a one-year benefit, the Model calculates for each age the number of persons with a severe disability who are still disabled for more than one year. We remove them from the count of total disabled to construct the premium estimate for this program variation.
  • One of the limitations of the Model lies in the interaction of a limited benefit and the non-continuance population. We are not able to estimate the number of persons who develop a disability, receive benefits for a short time, stop receiving benefits due to an improvement in their condition, but then develop a disability a second time and start receiving benefits again. While an actual long-term care program would be able to track these individuals and stop benefits in a limited-benefit situation, we are unable to do the same from a modeling perspective.
  • We do not model the impact of a delayed receipt of benefit in the CLASS program, either under a lifetime or limited benefit. We assume that once a person enrolled in the program has developed a disability severe enough to qualify for benefits, he will begin receiving payments from the program.

Amount of benefit payment. After determining the number of people receiving benefits, the Model next calculates the amount paid for each recipient. There are two options for the user to select: a cash benefit or a services benefit.

  • Cash benefit. Users can select a cash benefit amount of $50 per day, $75 per day, or $100 per day. This amount is increased by the estimated annual increase in the CPI-U, set at the first year that benefits are paid in the program. The cash benefit is paid to all of the “disabled receiving benefits” population in the Model.

    In the aggregate, we assume that every beneficiary receives the full amount of the average cash payment. However, it is possible to alter the amount of benefit received based on the level of disability or setting of care. We incorporate these differences for each age-specific estimate of disability and setting.

  • Service benefit. We used the estimates of paid utilization from each of the main surveys (SIPP and NNHS) to determine approximate service utilization. For any given year, we assume the ratio of community care to institutional care for each age remains constant. Any shift in the overall mix of services is caused by a shift in the average age of beneficiaries. We assume that annual costs increase by the expected growth in nominal wages.

Low-income subsidy. The low-income subsidy in the CLASS program is internally financed. The cost of the subsidy is paid for by higher premiums to non-subsidized participants. The amount of the subsidy is based on the number of low-income participants less any low-income premium. The estimated number of individuals receiving the low-income subsidy is modeled separately, and discussed in section III.

Administrative costs. Any insurance program has administrative costs associated with marketing, premium collection, benefit payments, and other operational costs. The law requires a 3 percent administrative cost level, which we estimate based on the annual premium amounts.

Fund balance. For most insurance programs, there is an annual difference between premiums collected and benefits paid. Given that the CLASS program is a new program that pays for a relatively low occurrence but high cost event, the program will collect significant amounts of premiums in the early years. As the program, and the population, ages, it then pays out these funds. For any annual excess collections, our baseline assumptions use the current expectations for Treasury bonds rates to calculate the interest income of surplus funds.

Premium calculations. Finally, after making all of the above calculations, we have the total expected cost of the program for the next 75 years for each enrollment group and each age. These values are adjusted to 2012 dollars (or first year of the program) via the expected rate of inflation for each of the next 75 years. Once the total present value of all spending is estimated, we estimate the level of premiums required over the course of the same 75 years such that the 2012 present value of these payments equal the total costs.

  • Premium increases. The Model allows a user to test the impact of increasing premiums by inflation on an annual basis.

  • Age-adjusted premiums. Since each age is separately modeled, each age also has an actuarially-balanced premium. Note, given the interactions with adverse selection, low-income, and other items that will impact the first enrollment group more than subsequent enrollment groups, we require each subsequent round of enrollees to pay the same age-specific premium as individuals already enrolled in the program. Without this requirement, it would be possible for future years’ enrollees to have lower age-specific premiums than prior years’ enrollees.

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