In a Nov. 13 report, Chief Medicare actuary Rick Foster estimates that the CLASS Act--the proposed national long-term care insurance program--faces "a significant risk of failure" because few would buy the coverage, and those who do would likely have high long-term care expenses. This phenomenon, called adverse selection, would drive up the cost of premiums and further discourage healthy people from buying coverage.
The study will be very influential on Capitol Hill. Yet independent analysts say it is far too pessimistic. As one long-term care health economist told me this morning, "Actuaries lack imagination." For more on the pros and cons of CLASS, check out my Kaiser Health News column from this morning
Foster projects only about 2.8 million people would purchase the voluntary insurance--about 2 percent of potential participants. One reason: He estimates the average premium would be a steep $180 per month. Because so few would buy insurance, Foster estimates that CLASS would do little to reduce Medicaid long-term care costs.
In addition, he projects that 10-year net revenues for the program would be only about $39 billion--a little more than half of an earlier Congressional Budget Office estimate. Most of that, he concluded, would be during the first five years when CLASS would be collecting premiums but not yet paying benefits (the program would require people to pay premiums for five years before becoming eligible for benefits). After 2025, he says, the program would lose money.
Foster's estimate of the number of people who would participate in CLASS is lower than CBO's and even lower than the insurance industry. Both projected about 5 percent would buy.
Privately, however, some long-term care experts think the participation rate could be as high as 20 percent, but only if average premiums could be held below $100 per month.
The Medicare study identifies the key challenge to the CLASS advocates. Many economists and actuaries believe a national long-term care program works best when everyone is required to participate. The premium for such a mandated program would be very low--perhaps averaging as little as $45 per month, according to several experts. Most industrialized countries--including Germany, Japan, and France--have already adopted such a system and consumers are very happy with it. Unfortunately, it is hard to imagine that Congress would enact such mandatory insurance as part of health reform.
I agree with those who think the actuaries are being overly-pessimistic and I believe participation in a well-designed program will be much higher than they project. But Foster, CBO, and the industry all identify real problems with a voluntary system. Thus, CLASS backers face a tough choice: pass a second-best program that runs the risk of failure, or come back again in a couple of years with a better plan. Welcome to health care politics, 2009-style.