Failing Grade for the CLASS Act: Design Flaws Would Have Led to Spiraling Costs

On Friday, October 14, 2011 Health and Human Services Secretary Kathleen Sebelius announced that the administration was abandoning implementation of the CLASS Act, a component of the Patient Protection and Affordable Care Act that would have provided a federal cash benefit to offset certain long-term care expenses for qualifying individuals.

In a letter to House Speaker John Boehner, Secretary Sebelius explained that her department was unable, despite 18 months of analysis, to arrive at a design of the program that would have been financially sustainable over time.
Part of the problem is that PPACA did not mandate participation in the CLASS Act by employers, and allowed employees of participating employers to opt out of the program. As such, it was destined to encounter an “adverse selection” problem where young, healthy people opted out and only those with health needs contributed. Payment into the system would have occurred through voluntary payroll deductions, with a minimum 5-year period of claim payments before benefits could be drawn on. The daily benefits – estimated to average at around $75 per day, and no less than $50, could be used towards the cost of home health care or other in-home living assistance by eligible, participating adults of any age. Eligibility would be limited to individuals who needed assistance with two or more daily life activities such as eating or dressing, whether due to physical impairment or an equivalent cognitive disability such as traumatic brain injury, Alzheimer’s disease.

The 5-year period of premium collection in advance of benefit payments meant that the CLASS Act was one of the few components of the PPACA that the Congressional Budget Office scored as saving money over a 10-year period. However the “savings” effect was limited to the vesting period only, and once HHS started projecting program costs with the assistance of actuaries, it became clear that adverse selection could cause monthly premiums could grow to as much as $3,000. Other projections estimated that the program could begin adding to the federal deficit by 2025.

Opponents have characterized the CLASS Act as a ruse from the start – simply added to PPACA due to the short term “savings” effect it promised. Whether that is the case, or whether the program, which was part of Senator Ted Kennedy’s legacy, was more in the nature of wishful thinking, the end result for employers is one less aspect of health care reform to worry about, and possibly one more reason to evaluate a group long-term care benefit for its workforce.