The issue of medical underwriting and adverse selection is a stumbling block for the new CLASS (Community Living and Services and Supports) law. The legislation took effect Jan. 1, 2011, but the Secretary of Health and Human Services (HHS), who has been delegated broad authority, does not have to present full rules and regulations until October 2012, and individuals won’t be enrolled until at least 2012.
Now, the Center for Retirement Research at Boston College has released a new issue in brief; “What is ‘Class’? And Will It Work?” is coauthored by Alicia Munnell and Josh Hurwitz. It provides good insights and data while discussing the challenges that the CLASS program, which was designed to meet the financial challenges for people needing long-term care (LTC) related services, faces. Participants will be eligible for benefits after paying premiums for five years and meeting the minimum work requirement for at least three of those years. Benefits will be triggered once a participant needs help performing two or three activities of daily living (eating, bathing, dressing, etc.) or needs comparable assistance because of cognitive impairment. These functional limitations must be expected to last for at least 90 days, as certified by a licensed health care practitioner. The HHS secretary will determine a scale for the benefit amounts, based on the level of impairment. In its analysis of the legislation, the Congressional Budget Office (CBO) assumed an average daily benefit of $75 that would increase each year with inflation.
The chief problem with CLASS is that it is a voluntary opt-out program not subject to medical underwriting. Benefits will amount to only $75 a day (compared to an average of $160 under private insurance) but benefits continue for life instead of three to four years with most private insurance plans. The CBO estimated premium of $123 is slightly lower than the average premium paid for private long-term care insurance. However, the CBO estimate may well be low, as pointed out by Munnell and Hurwitz in their article.
Finally, CLASS has an implicit vesting period in that participants have to contribute for five years (three of them while working) in order to qualify for benefits, while private insurance enables the purchaser to claim benefits immediately if disabled. Aside from some other benefit plan provisions differences, the biggest issue is dealing with adverse selection. Unless CLASS was changed to become mandatory, Munnell and Hurwitz estimate that based on assumptions needed to make CLASS sustainable more than 75 years, an average monthly premium of $194 is needed. They conclude: “To keep premiums down, CLASS must attract a pool of young and healthy participants. Attracting a broad pool will require programmatic changes, such as more stringent work requirements and longer vesting periods, as well as an effective national advertising campaign. However, even if all of these suggestions are adopted, premiums may never reach an affordable level for middle-class households.”
Essentially, CLASS is a public option for long-term care expenses, yet it is voluntary and not subject to medical underwriting. That is a difficult equation to solve, as healthier individuals will be able to find coverage through the private sector insurance market, yet their participation is greatly needed to make the program sustainable. It will be important for agents to monitor the final plan design and costs provided through HHS to advise their clients of the best option based on their specific situation.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.