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

10/14/2011

This design aims to control the impact of adverse selection through the claim process rather than the enrollment process. Under this design, no benefits will be paid during the first 15 years27 of an individual’s enrollment if the qualifying ADL (Activities of Daily Living) or cognitive deficiencies can be determined to be the result of a prevailing serious medical condition that existed at the time of enrollment. At the time of enrollment, the enrollees will have access to a list of such conditions and acknowledge that they understand this restriction, if applicable. This list would be similar to the list of uninsurable conditions in private insurance’s field underwriting manual. We will not collect medical information at time of enrollment. At time of claim, medical records will be reviewed to determine whether a serious medical condition existed at enrollment caused the deficiencies. If no determination can be made, or medical records are not available, we will pay the claim. From experience of the private group market, we expect that the majority of the enrollees will be relatively young (in their 40s). Because of this expectation, we believe the vast majority of beneficiaries with functional limitations during the first 15 years of their enrollment will have a medical origin, rather than due to frailty.

Qualifying deficiencies due to conditions not on the list or conditions developed after enrollment are eligible for benefits after the 5 year vesting period, assuming other benefit eligibility requirements have been met. This design puts the high risk enrollees on equal footing with the other enrollees, enabling the law of large numbers to work.

Temporary exclusion is a risk mitigating technique used in life and disability insurance. We expect claims under this design to be estimable even though they would still be higher than claims from guaranteed issue group plans.

The advantage of this design is that all workers are treated fairly under the principle that enrollees insure only their unknown risk. The degree of subsidization among the workers is expected to be acceptable. The disadvantage is that this design could be perceived as a pre-existing condition exclusion where the insured is denied coverage or permanently excluded from claiming under the condition. Covering pre-existing conditions is possibly workable in an insurance program where there is substantial participation (for example, over 80%) to spread the extra risk. It violates the insurance principle of homogeneity of the insured group in programs such as CLASS where participation is expected to be low (typically less than 10%)28.

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