The CLASS Act: The Government’s Long-Term Care Insurance Program By John Wilkin Actuarial Research Corporation Middle Atlantic Actuarial Club Annual Meeting October 7, 2010 1

CLASS Act Title VIII of the Patient Protection and Affordable Care Act (ACA, P.L. 111-148) The Community Living Assistance Services and Supports (CLASS) Act Establishes a voluntary long-term care (LTC) insurance program Allows individuals with functional limitations to remain in the community Alleviates burdens of family caregivers Addresses institutional bias Establishes an infrastructure that will help address the Nation’s community living assistance services and supports needs 2

Advocates See CLASS as fitting into a continuum of care: primary, acute, rehabilitative, to LTC See this as a change from government’s current involvement in LTC as dominated by Medicaid payments to institutions CLASS allows middle class to access LTC services in the setting of their choice

The History Backed by Senator Ted Kennedy until his death Kennedy first introduced CLASS as a stand-alone bill in 2005 After Kennedy’s death, first Senator Dodd and then Senator Harkin continued to include CLASS in health care reform Many credit Kennedy staffer Constance Garner for inclusion of CLASS Built a coalition of disability and aging communities and LTC providers Biggest challenge to CLASS was Senator Thune’s amendment to remove CLASS (received 51 votes but not the 60 needed) Affect on Budget deficit was important 4

The Details TBD Regulations must be issued by the Secretary of HHS by October 1, 2012 Method of operation of the program Premiums by issue age Cannot vary by any other factor, including health status How to qualify for and obtain benefits Benefit structure and amounts Appeals process 5

Long-Term Care Assistance to individuals who are unable to perform Activities of Daily Living (ADLs) or who are cognitively impaired ADLs as specified in the law: Eating Toileting Transferring (as from a bed to a chair, for example) Bathing Dressing Continence Number needed to qualify for benefits not yet set, definition of failure not yet set (hands on supervisions) 6

Who Can Enroll? Actively employed individuals (IRS definition), even if currently disabled Must earn the amount for one Quarter of Coverage for 3 years out of the first 5 years of enrollment ($1,120 in 2010) Must report to work and be able to perform all of the usual duties No underwriting but cannot be in an institution at time of enrollment Enrollment only during an open enrollment period, which cannot be more frequently than biennially 7

Automatic Enrollment Employers can automatically enroll all employees and start payroll deduction Employees may opt out 8

Is There A Substitute For Underwriting? Work requirement (will exclude some individuals who are currently disabled) Automatic enrollment by employers (will include some health individuals) 5-year waiting period (will discourage individuals from waiting to enroll until needing benefit)

Who Can Collect Benefits? Must have paid premiums for 5 years Must have been actively employed for 3 of the first 5 years after enrollment (earning at least the amount for one QOC each year) If a lapse of more than 3 months has occurred, must have paid premiums for the 24 consecutive months before the date on which the individual was determined to have a functional limitation Must have a functional limitation 10

Functional Limitation to Qualify for Benefits Limitation certified by a licensed health care practitioner Expected to last at least 90 days Unable to perform ADLs without substantial assistance from another individual Number of ADLs not yet determined (2 or 3) Definition of substantial assistance not yet determined (traditionally either “hands on” or “standby supervision” OR Substantial cognitive impairment that requires supervision to protect health or safety 11

Benefit Structure Secretary must develop 3 “actuarially sound” benefit plans CLASS Independence Advisory Council must recommend one of the plans as the one the optimizes the long-term sustainability of the CLASS program Secretary must select one of the plans by October 1, 2012

Required Benefits Varies by functional ability (not yet determined) Paid in Cash Average not less than $50/day in 2017 indexed thereafter by CPI About twice what Medicaid spends on persons in HCB waivers May be paid weekly (not yet determined) No lifetime limit Advocacy services & Advice and assistance counseling (included as administrative expense) 13

Benefit Parameters TBD Benefit trigger (2 or 3 ADLs) Deductible Daily amount > $50/day Waiver of premium while in claim status Tracking of use of cash benefit

Life Independence Account Established for each beneficiary Benefits deposited into account Funds from account are to be used for services and supports needed to maintain independence outside of an institution Nursing services Home health Aides Homemaker & personal assistance services Can be paid to family members

Recertification of Eligibility for Benefits Periodically (TBD) beneficiaries must submit: Medical evidence of continued eligibility Records of expenditures attributable to the cash benefits received

Premiums For those below poverty line and for working students, premium = $5/month in 2009 indexed by CPI All others, premium set by Secretary can vary by issue age and in general should be level for life 17

Premium Limitations Premiums can be adjusted as necessary to maintain solvency Except for retired individuals over 65 who have paid premiums for over 20 years Premium load for administrative expenses no more than 3% No money from general funds for benefit payments Law is silent on the source of funds for administrative expenses 18

Lapses in Premium Payments If lapse less than 3 months, the law is silent If lapse for more than 3 months: In general new issue age premium If reenrolled within 5 years: Receives credit (TBD) for past premium payments Must pay premiums for 3 years before eligible for benefits If reenrolled after 5 years: New issue age premium increased by greater of: Actuarial adjustment (TBD) 1% per month of nonpremium payment period 19

Where Have I Seen This Before? Board of Trustees Advisory Council Annual Trustees Report due on April 1 75-year projection period Statement of actuarial opinion (from the Chief Actuary of CMS) that techniques and methodologies used in the report are generally accepted within the actuarial profession and that the assumptions and cost estimates used are reasonable 20

Issues The level of participation: Who will enroll? Can CLASS premium compete with private insurance CLASS = 97% loss ratio; PI = 60% loss ratio The level of antiselection: If too high, no premium will be sufficient to fund benefits Dependent on participation level, which in turn is dependent on premium level, which in turn is dependent on the antiselection level How to calculate a level premium for benefits that are indexed to an unknown pattern of future inflation? The effect of the low-income subsidy Lapse, nonforfeiture benefits, rate increases Affect on insurance industry Use as marketing tool Develop wrap-around products 21

Premium Sensitivity Premiums are very sensitive to some assumptions: Subsidy Participation rates Income requirements Waiver of premium Indexing 22

Premium Sensitivity to Low Income Subsidy Data on workers by earnings levels for 2009 Current Population Survey. Roughly 28 million workers above QOC ($1,090) and below poverty ($10,830) in 2009 dollars. Roughly 130 million above poverty. Premiums for unsubsidized group is affected more by the dependency ratio than by utilization. 2.8 mil vs 1.3 mil DR = 4.1 / 1.3 2.8 mil vs 7.7 mil DR = 10.5 / 7.7 5.6 mil vs 1.3 mil DR = 6.9 / 1.3 5.6 mil vs 7.7 mil = 13.3 / 7.7 Low Income PR High Income PR Dependency Ratio (Total / Unsubsidized) 10% 1% 3.2 6% 1.4 20% 5.3 1.7 23

Premium Sensitivity to Participation Rates Participation rates affect the level of antiselection, thus the level of the premiums. The level of the premiums affects the level of antiselection. Once premium levels go above private insurance alternatives, participation drops and antiselection increases. 24

Premium Sensitivity to Income Requirements Population eligible for the low-income premium must earn above the enrollment requirement and the poverty line As the enrollment requirement approaches the poverty line, the population eligible for the low-income premium goes to zeroModel determines selection effect from NHIS data that shows ADL levels crossed with income levels Utilization rates (and the potential for antiselection) decline as income requirement increases 25

Premium Sensitivity to Waiver of Premium Waiver of premium is also affected by the dependency ratio (beneficiaries divided by premium payers). If beneficiaries do not pay premiums, then the burden on premium payers increases. This provision interacts with the level of antiselection to destabilize premiums. Example: ratio of beneficiaries to premium payers when beneficiaries are 10% and 50%: 10% / 90% = 11% vs 50% / 50% = 100% Note: Ceiling on premium with waiver of premium = infinity. Ceiling on premium with no waiver of premium = $1500 (=$50/day for 30 days). 26

Premium Sensitivity to Indexation of Premium If benefits are indexed to inflation and premiums are level, premiums are highly sensitive to the actual level of inflation Example: The difference between 2.8% inflation and 5.6% inflation could more than double premiums at younger ages and increase them by 50% at older ages. Indexing premiums at the same rate as benefits greatly reduces the sensitivity, but does not eliminate it. Example: The difference between 2.8% inflation and 5.6% inflation could increase premiums at younger ages by 25% and increase them at older ages by 15%. 27