A CLASS-less Act.
As some may recall, CLASS was meant to establish a voluntary insurance program for the purchase of non-medical community living assistance services and supports for people with chronic illnesses, functional limitations, or severe disabilities. Although CLASS was proposed to support community living for those with severe disabilities, its financial assistance could also be applied to nursing home care. However, as the Times reported, CLASS never really stood a chance, and the administration decided to refrain from any heroic, life-sustaining efforts.
As if by design, the following Sunday Jane Gross (also writing in the New York Times) provided a poignant reality check that resonated with those mourning the demise of CLASS. Drawing from her own experience caring for her elderly mother, she brought into sharp relief the rather significant flaws inherent in the payment priorities of the current Medicare program. She cited the willingness of Medicare to allocate extensive resources to low-value--and at times painful and intrusive--care in the last stages of life, while noting the scant financial support for the kind of services that would likely be of great value to the elderly and their families, and by implication, available through CLASS. Gross pointed out that Medicare will pay generous amounts for such services as hip replacements for patients with advanced Alzheimer's disease and diagnostic tests, feeding tubes, and surgeries for elders in the last stages of life. She noted that such expenditures not only add to our national debt and deplete the Medicare trust fund, but do little to assist families who must devote significant monetary resources and time to care for frail elders. Citing her own case, she asked rhetorically: How many elders and their families could afford to spend a half-million dollars out of pocket to pay for the medical equipment, skilled home health services, and ultimately, quality institutional care to ensure appropriate care and dignity at the end of life?
Such a reaction points to the fact that as in prior efforts to reform our health care system, support for long-term care (LTC) remains a neglected and costly step-child. Our inability to harness public support for LTC services, either in the context of health reform, as a component of our social insurance system, or via the private insurance market, reflects a number of combined influences: the reliance on our means-tested Medicaid program to finance such care; the problem of adverse selection in insurance markets; and perhaps most seriously, an unwillingness to face the realities of our expected use of long-term care services as we age and as our life span lengthens. At the same time, the costs of financing LTC services, either privately or through the public sector, represent a singular challenge for families and for governments in an era of rising health care costs, stagnant family incomes, and weakened prospects for economic growth and public sector tax revenues. Together with the political discord surrounding the ACA, the demise of CLASS reflects several of these influences.
The Failure of the CLASS Act
As noted, CLASS was intended to fill a specific gap in our system of private and public health insurance: the lack of financial support for community-based LTC services. Structured as a voluntary insurance program, CLASS was to be financed by voluntary payroll deductions. After a five-year vesting period, individuals with functional limitations would receive a minimum cash payment averaging $50 per day to obtain non-medical services and supports to help maintain community residence. To ensure adequate enrollment, CLASS incorporated a standard tool of behavioral economics in which actively working adults age 18 or older would be automatically enrolled in the program unless they decided to withdraw (Kaiser Family Foundation 2011). Workers could also enroll in CLASS directly should their employer decline to participate in the automatic enrollment process. However, once actuarial projections of high future premium costs came to light, it appeared that the architects of CLASS had misjudged the enrollment that would be forthcoming. As a result, the prospect of adequate enrollment in CLASS was deemed insufficient to yield an actuarially sound basis for maintaining this insurance pool.
The National Commission on Fiscal Responsibility and Reform (the Bowles-Simpson Commission) issued an early alert in December 2010 regarding the tenuous future for CLASS. Citing the fact that many experts viewed CLASS as financially unsound, the commission recommended significant reform or repeal of the act. In particular, the commission noted that the program's earliest enrollees would pay modest premiums for a limited period, but receive benefits exceeding by many times the payments into the program. Such an imbalance would require increasing premiums and reducing benefits over time. As a result, the program would lose its appeal to potential enrollees and be unable to fulfill its financial obligations. As a consequence, CLASS would require large transfers of general revenues or become unsustainable. Echoing these concerns, Brown and Finkelstein (2011) note that although premiums for CLASS were to be set at levels to maintain program solvency for 75 years, the program would leave such premiums actuarially unfair (again because expected payouts on behalf of beneficiaries would far exceed their contributions). This unfairness was also reflected by the fact that individuals below the federal poverty line and full-time students could enroll in CLASS for only $5 per month, well below actuarial costs. Given these pricing problems and the short vesting period, Brown and Finkelstein cite the concerns of many experts regarding selection into the program by adverse health risks. This type of selection would add to the program's poor financial prospects, especially when the Congressional Budget Office estimated CLASS would attract a limited enrollment pool of only 4% of adults.
Such deficiencies in the program's structure provided ammunition for the ACA's opponents to point to another perceived shortcoming of health reform. These actuarial difficulties and the political fallout over CLASS sealed its late despite assurances by some that the program could have been made to work (Pear 2011).
The Burdens and Reality of Long-Term Care
By any reckoning, the costs of formal and informal LTC are staggering. According to some estimates, the annual costs of nursing home care run around $75,000 and for home health care around $18,000. As Brown and Finkelstein (2011) report, aggregate U.S. LTC expenditures were $203 billion in 2008, representing 8.7% of health care spending and 1.4% of the gross domestic product (GDP). About a third of such spending is financed out of pocket, while 60% is paid by the public sector; only 4% is financed by private insurance. As is well known, much public spending for LTC is financed by the Medicaid program, and a significant portion is due to people "spending down" on income and assets to become eligible for Medicaid benefits.
These statistics belie a host of significant issues for families and for the private financing of LTC services. Most elders and their families want to avoid nursing facilities, believing that quality of life and health care will be superior at home, and delay to the last possible moment the perceived indignity of qualifying for Medicaid benefits. The absence of significant financial resources to support the provision of both formal and informal home care thus yields a substantial monetary and emotional burden on families providing this care. Indeed, Spillman and Long (2009) have found that financial hardship and physical strain are important predictors of caregiver stress and such stress, in turn, is a strong predictor of nursing home entry. Moreover, the strain on households is only exacerbated when employment by both spouses is a necessity and work schedules have to be adjusted to care for a frail elder.
These pressures may be especially onerous for the "sandwich generation." Many of these families may be of modest means, dealing with the health problems of their parents and also raising their own children; they are seeking ways to finance their own "activities of daily living," and attempting to save for future educational expenses, not to mention retirement. I suspect that the latter financial pressures will intensify as all family members age. Given the poor prospects for economic mobility facing young adults, their parents may likely feel an obligation to provide financial support to ensure adequate child rearing and education for grandchildren, while at the same time, their own elderly parents may require financial and care-giving assistance.
The Burden on State Governments
As I have noted in several previous columns, rising medical care costs constitute a significant burden for states seeking to provide an array of essential services for vulnerable populations while balancing their revenue-constrained budgets. With Medicaid among the fastest, if not the fastest, growing component of many state budgets, the financial burden of Medicaid's commitment to providing LTC services will represent a singular challenge for states that contribute roughly half these costs. While Medicaid was originally intended to address the health care concerns of low-income children, families, and pregnant women, enrollment by the elderly and the disabled has grown so much that it now dominates the spending distribution. In 2008, elders and the disabled represented only 10% and 15% of Medicaid enrollees, respectively, but they incurred a combined 68% of Medicaid spending (25% for the elderly and 43% for the disabled). By contrast, children comprised 49% of Medicaid enrollees and incurred only 20% of spending (estimates are from the Urban Institute and Kaiser Family Foundation based on 2011 data from the Centers for Medicare and Medicaid Services, Medicaid Statistical Information Systems).
Although enrolling elderly parents in Medicaid can certainly relieve some of the burden that families face in financing LTC services, reliance on this safety net represents a particularly harsh form of intergenerational inequity. The taxes used to support Medicaid services, which are provided through the income-generating activities of current workers, not only displace spending that could be used to enhance the care of younger Medicaid enrollees, but--as I have noted on previous occasions--contribute to cutbacks in public education, particularly at public universities.
Perceptions and Realities
Perhaps a key factor limiting support for a dedicated, public LTC program such as CLASS (as well as for private LTC insurance, which I discuss later) is a false perception of the risks that one will incur such expenditures. As Garber (1996) and Brown and Finkelstein (2011) have noted, use and expenditures for LTC are highly skewed and unevenly distributed across the population. Between 35% and 50% of people turning age 65 will be admitted to a nursing home at some point during their remaining years of life, and 10% to 20% can expect to remain there for more than five years. At the least, this represents a substantial probability of use and suggests that individuals should be willing to support public efforts to ensure such protection or seek some private remedy to address this risk. Thus a critical issue is why such support appears lacking.
One possible reason lies in our unwillingness to confront the reality of future LTC needs despite the probabilities. In particular, behavioral or cognitive biases may underlie such reluctance. For example, the young may be justifiably myopic when thinking about potential LTC needs that might arise in the future and would displace, either through additional taxes or premium payments, current expenditures on family essentials. Individuals may be unfamiliar with such probabilities and, as a result, exhibit overconfidence regarding their future health status and underestimate their own vulnerability for LTC services. Other factors, such as a willingness to "gamble" over the prospects of future losses due to LTC needs rather than incur current spending with certainty (loss aversion), also may hinder support for LTC financing. Finally, as noted earlier, individuals may perceive that they can rely on the social safety net for long-term care needs. To qualify for such assistance, some more affluent elders may adopt a strategy of making cash transfers to others to protect accumulated savings and other assets and to ensure bequests rather than use these resources to finance their own LTC needs or to pay for private protection. For example, the Government Accountability Office (U.S. GAO 2005) found that in 2002, among elderly households surveyed, a fifth reported making cash transfers; nearly 37% who did so had incomes exceeding $24,200 and non-housing resources exceeding $51,500.
Is a Private Market for Long-Term Care Insurance Sustainable?
As a number of observers have noted, the data on the uncertainty of LTC expenditures and the considerable spending likely to be incurred if such services are needed should make private LTC insurance of considerable value. However, as Brown and Finkelstein (2011) document, the market for such coverage is underdeveloped, with only 4% of spending on LTC financed through private coverage and only about 14% of individuals age 60 or above holding such coverage. Given the failure of CLASS to obtain the necessary enrollment to ensure its actuarial soundness, the reasons behind the limited demand for LTC insurance in general should warrant investigation.
Here, several factors come into play. As Mechanic (2006) has pointed out, individuals may face difficulties understanding precisely what would be covered by LTC insurance and the adequacy of such coverage in the future. Noting some of the constraints mentioned earlier--inaccurate perceptions and limited income for coverage in light of other important current spending--he cites several other concerns: lack of confidence that the insurance carrier will be in business when LTC services are required; uncertainty as to whether prior premium payments and future benefits will be lost if enrollees cannot afford coverage for a short period; and worries that a carrier will deem an individual ineligible for coverage when the need arises.
Looking more specifically at the operation of the insurance market itself, Brown and Finkelstein (2011) make several important observations. First, they note that on average, the benefits forthcoming from LTC plans are not particularly generous, with substantial deductible periods (typically 30 to 90 days), relatively low maximum daily payments for services, and somewhat limited lifetime benefits of one to eight years. Moreover, they say that a quarter of all policies have a daily benefit fixed in nominal terms, and that the typical plan has a 5% per year benefit escalation rate, both of which can limit the real value of coverage. Regarding premiums, they note that such payments become more expensive as the value of LTC coverage increases and they rise sharply with age. Accounting for both the somewhat low benefits and relatively high premiums for LTC coverage, Brown and Finkelstein find that the insurance loading factor--which determines the benefit payout relative to premium costs and thus the "true" economic price for insurance--is quite high compared to group health insurance and products in other insurance markets They compute the average load to be about 32% (meaning that carriers will pay out only 68% of every premium dollar received), with substantial differences in the load by gender (55% for men and only 13% for women), reflecting the fact that the greater longevity of females will likely yield greater use of LTC services. They also note that the load rises to 50% for lapsed policies, whereby individuals typically lose their coverage.
While Brown and Finkelstein cite factors such as asymmetric information and imperfect market competition for the high loads and consequently poor payoff, they also attribute the presence of Medicaid as significantly "crowding out" purchases of private LTC coverage by the lower two-thirds of the wealth distribution. In particular, they note that a large proportion of the benefits from private LTC plans would be redundant with benefits paid by Medicaid absent the take-up of private coverage. Put differently, they assert that Medicaid imposes an implicit tax on private LTC policies, reducing public LTC benefits when one holds private coverage. This "tax" reflects the fact that those with private LTC coverage are less likely to meet the income and asset tests required for Medicaid eligibility, and if they do, Medicaid becomes the second payer only after private benefits are exhausted. Such an implicit tax, the authors note, also helps to explain the positive relationship between wealth and the purchase of LTC coverage.
Apart from the important role played by Medicaid, especially for those with low incomes and assets, Brown and Finkelstein mention other factors that limit private demand. These include the availability of family members who can provide both financial resources and informal care; the illiquid assets of an owned home that can be turned into cash should one need to pay for LTC; and the status quo bias that impedes consumers from making long-term probabilistic decisions. These same factors help explain the unwillingness to pay for public LTC assistance, such as programs like CLASS. Finally, the authors also note that approaches that might limit reliance on Medicaid and encourage enrollment in private LTC such as tax incentives for LTC coverage and changing state rules for asset protection in determining Medicaid eligibility--are unlikely to have a substantive impact.
In sum, provisions of the Affordable Care Act will help to defray the out-of-pocket costs of insurance and health care use through a series of income-related tax credits and subsidies; the ACA will also seek to economize on system-wide costs through coordinated and integrated health care delivery and payment reforms. Inclusion of the CLASS program was a small step to extend such benefits to our fragmented and inequitable provision of long-term care. While the act may have been a victim of its own ambitions, unrealistic expectations, and poor actuarial planning--not to mention the inability to shift the public's unwillingness to pay for such a benefit--its hasty demise should act as a wake-up call rather than a death knell. Addressing the financing needs and burdens of both public and private LTC activities, especially in light of demographic trends and the pressures facing families, is essential to assure the fiscal health of both families and publicly provided health care, as well as to obtain more value for our health care dollar.
Brown, J. R., and A. Finkelstein. 2011. Insuring Long-Term Care in the United States. Journal of Economic Perspectives 25(4): 119-142.
Garber, A. M. 1996. To Comfort Always: The Prospects of Expanded Social Responsibility for Long-Term Care. In Individual and Social Responsibility: Child Care, Education, Medical Care, and Long-Term Care in America, V. R. Fuchs, ed. Chicago: The University of Chicago Press for the National Bureau of Economic Research.
Gross, J. 2011. How Medicare Fails the Elderly. New York Times Sunday Review October 16: SR 8.
Henry J. Kaiser Family Foundation. 2011. Focus on Health Reform. Summary of the New Health Reform Law. April 15. Menlo Park, Calif., and Washington, D.C.: Henry J. Kaiser Family Foundation.
Mechanic, D. 2006. The Truth about Health Care: Why Reform is Not Working in America. New Brunswick, N.J.: Rutgers University Press.
National Commission on Fiscal Responsibility and Reform. 2010. The Moment of Truth. December. Washington, D.C.: National Commission on Fiscal Responsibility and Reform.
Pear, R. 2011. Health Law to be Revised by Ending a Program. New York Times October 15: A10.
Spillman, B. C., and S. K. Long. 2009. Does High Caregiver Stress Predict Nursing Home Entry? Inquiry 46(2):140 161.
U.S. Government Accountability Office (GAO). 2005. Medicaid: Transfers of Assets by Elderly Individuals to Obtain Long-Term Care Coverage. September. Washington D.C.: GAO.
Alan C. Monheit, Ph.D.
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|Title Annotation:||The View from Here|
|Author:||Monheit, Alan C.|
|Date:||Dec 22, 2011|
|Previous Article:||Social Movements and the Tranformation of American Health Care.|