Why The Heritage Foundation is Wrong About the CLASS Act

By :: July 27th, 2010

In a Washington Times column today, two Heritage Foundation researchers argue that the Community Living Assistance Services and Supports (CLASS) Act is a trillion dollar government bailout waiting to happen. The CLASS Act is a national voluntary long-term care insurance program that was included in the new health care law. And to listen to the authors, you’d think CLASS will make Fannie Mae look like a Salvation Army Christmas kettle.

They are dead wrong. While the law is flawed, it need not be the boondoggle that James Capretta and Brian Riedl fear. In fact, with some adjustments, CLASS could be a step toward responsible reform in the way we pay for long-term care in the United States. It could provide 10 million frail elderly and younger people with disabilities with flexible personal care and, at the same time, save states and the federal government billions of dollars. That’s right. Despite Heritage’s fears, CLASS has the potential to cost taxpayers less money than today’s dysfunctional system of long-term care services. 

Here’s how CLASS would operate: Starting in about 2013, anyone working at least a part-time job will be allowed to purchase government long-term care insurance. After paying premiums for at least five years, participants would receive a daily cash benefit for as long as they need personal care. This would give consumers broad choice in how they’d receive assistance with activities such as bathing, eating, or moving from a bed to a chair. They could use the funds to pay for home care, adult day programs, assisted living, or nursing home care. Both benefits and premiums will be set by the Secretary of Health and Human Services over the next couple of years, but the minimum average daily benefit would be $50. The Congressional Budget Office and Avalere Health, a national consulting firm, figure premiums will average about $120-a-month.   

Capretta and Riedl are correct that CLASS has problems. Because it is voluntary and open to all regardless of health status, many buyers will be more likely than average to receive benefits. That will drive up premiums, making healthy people even less interested in buying.

I share the authors’ concern about this flaw. But it can be fixed, either with modest changes or in one big way. And CLASS can be a lot better than what we have now.

Today, taxpayer-funded Medicaid, (that’s Medicaid, NOT Medicare) pays for half of all long-term care in the U.S., at a cost to taxpayers of more than $100 billion-a-year. Medicaid is already busting state budgets and, by mid-century, will absorb more than one of every six federal tax dollars. Worse, Medicaid often provides poor and inappropriate care to beneficiaries, often once-middle-class seniors who have exhausted their financial assets.

CLASS has the potential to turn long-term care from a welfare program to self-funded insurance—a change conservatives should support. The program can be improved and premiums reduced by stiffening the work requirement for buyers and making some other technical changes. Or, Congress could make CLASS participation mandatory, just as it has done with health insurance. Heritage argues this would force people to buy “expensive” insurance. But Avalere estimates premiums for a mandatory program would average only about $40-a-month.

And one analysis suggests that mandatory CLASS-like insurance could cut Medicaid long-term care costs in half. Because people will be insured, they will be less likely to turn to Medicaid. Even after providing a premium subsidy for those with low incomes, government would be way ahead.

Fiscal conservatives such as Capretta and Riedl ought to be looking for ways to improve CLASS, rather than demanding its repeal. The millions of Americans who will need personal assistance, their families, and taxpayers would all be better off for it.  


  1. Anonymous  ::  11:08 pm on July 27th, 2010:

    So basically I read you as they are right as the act stands today but the act could be good if amended. You might want to change the title of your piece if this is the case
    The argument that CLASS (mandatory) would cut Medicaid payments in half is entirely specious. Let's just do some quick math. Let's say 200 million Americans above the age of 21 paying $40/month for mandatory insurance. That's about $8 billion a month or $96 billion a year in premium payments. Of course that's assuming the premiums are $40 a month, something I wouldn't accept on the basis of one estimate. The good news is this cuts Medicaid payments in half (saving $100 billion). This is a good deal why? It's just another example of moving liabilities around and now we won't pay taxes, we'll pay mandatory premiums. SIGH

  2. Anonymous  ::  11:40 pm on July 27th, 2010:

    If I am understanding the article correctly, this would save Medicaid because everyone would be required to purchase CLASS. Isn't this just calling a tax by another name? Wouldn't the same objective be met by raising taxes on Medicare/Medicaid (I can never remember which is which). Referring to this as a self-funded insurance seems to make me recall Unemployment, Social Security, Medicare, etc. Each of which have run into problems at one time or another when the self-funding can't keep up with the payments, so I would also be leary of who was setting the prices, too low and it can't keep up, too high and everyone will complain…always hard to balance the two.

  3. Anonymous  ::  6:10 pm on July 28th, 2010:

    CLASS, as enacted, will need repeal – but this issue is small potatoes when compared to what will happen when pre-existing condition reforms take full effect. Any reform of CLASS will be undertaken in the context of the financial failure of most insurance companies, due to the weakness of offsetting mandates. Either mandates will be made stronger – at which time CLASS will be made the same way – or the entire private health system will fold and be replaced with some sort of single-payer system – either comprehensive or catastrophic. CLASS reforms will occur inside that new reality.
    The other reality to consider is tax reform. Both Len Burman and I suggest that Medicaid should be entirely federalized while state tax subsidies be ended in federal taxation. If this happens, its a game changer for CLASS as well.

  4. Anonymous  ::  7:16 pm on July 30th, 2010:

    Brian Riedl argued in a Washington Times piece on Tuesday that the Community Living Assistance Services and Supports (CLASS) Act should be repealed. CLASS, a government-run long-term care (LTC) insurance program, has been widely panned by actuaries as unsustainable and likely to result in a future taxpayer bailout.
    Howard Gleckman of the Urban Institute responded in turn with an argument that participation in CLASS should be made mandatory. Gleckman’s argument, however, is flawed.
    As Americans live longer, demand for long-term care services grows. Gleckman correctly states that Medicaid, which is busting state budgets, pays for half of all LTC in the U.S. at an annual cost of more than $100 billion. Medicaid pays the LTC expenses for individuals who have little accumulated wealth or who have spent down their wealth.
    To reduce taxpayers’ burden for LTC through Medicaid, Gleckman argues that CLASS participation should be mandatory. The estimated average premium he cites is about $500 per year. Gleckman declares that this would change LTC from a welfare program to self-funded insurance, a change conservatives should support.
    The first problem with his proposal is that the burden to taxpayers is simply replaced with a burden to all individuals who must pay the mandate. Direct taxation is replaced by indirect taxation in the form of mandatory premium payments.
    The problem of LTC financing is a difficult one to solve, but the formation of another entitlement program to deal with the problem is irresponsible and unsustainable. While private insurance leads to the creation of reserves to fund future benefits, entitlements tend to involve transfers from relatively young payers to relatively old beneficiaries. And the evidence shows that entitlements grow faster than projected and place increasing burden over time on taxpayers.
    Unlike private insurance, excess premiums paid by participants would not be deposited into an account to build reserves for future benefits. Instead, the government would spend the premiums in excess of benefit payments on other programs, technically borrowing the money from the CLASS “trust fund.” And when incoming payments are less than outgoing benefits (the present state of Medicare and Social Security), government would tap into general tax revenue to pay the difference. The ability to tap taxpayer dollars is a key difference between public insurance and private insurance.
    Instead of moving to a government-run, compulsory Social Security model for long-term care financing, we should move to a personal responsibility model. Public policies should therefore focus on increasing personal savings to fund probabilistic expenses in old age and on increasing the number of private LTC insurance policies to fund unexpected expenses.
    Furthermore, fundamental Medicaid reform is a necessary component of LTC policy for two reasons. First, individuals can benefit from Medicaid while maintaining homes worth up to half a million dollars. Of course, taxpayers are left on the hook for all this spending. Second, the presence of Medicaid creates a moral hazard by reducing the necessity of both building up savings and purchasing LTC insurance.
    While the CLASS Act should not have been bundled into Obamacare, its presence may cause policymakers to have a serious debate about how to pay for increasingly burdensome LTC expenses. Based on the fiscal track record of compulsory entitlements, another solution must be found.

  5. Anonymous  ::  2:26 pm on October 15th, 2010:

    They could use the funds to pay for home care, adult day programs, assisted living, or nursing home care.

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  8. www.ltcoptions.com costs of long term care insurance  ::  5:46 am on July 27th, 2013:

    CLASS Act was abolished even before it started and for the obvious reasons. It was flawed and there is no way the said program will work out. It’s too ambitious and wasn’t planned carefully. Now, we have Obamacare. Not everyone is in favor of this and I just hope this will work out well for people who are in dire need of health care.

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