Health Affairs

The Obama administration has decided not to implement the Community Living Assistance Services and Supports (CLASS) plan, a voluntary, publicly administered insurance program that was authorized in the Affordable Care Act of 2010.

CLASS was designed to help people should they become disabled and need long-term services and supports, including home care, adult day care, or a stay in a nursing home. In exchange for paying premiums during their healthy, working years, people would have received a daily cash benefit to help defray the costs of these forms of assistance.

By law, CLASS was to have been self-sustaining through premiums and without the infusion of federal tax dollars for 75 years. Kathleen Sebelius, secretary of the Department of Health and Human Services (HHS), informed congressional leaders on October 14, 2011, that after 19 months of work, the administration was unable to find a way to make CLASS financially sustainable within the powers that the law granted HHS.

"I do not see a viable path forward for CLASS implementation at this time," Sebelius wrote, while stressing that some other solution to the nation's long-term care problem is still desperately needed.

Roughly 12 million Americans need long-term supports and services because of disabling conditions such as multiple sclerosis, dementia, Parkinson's disease, or stroke. These conditions hinder people's ability to perform a range of "activities of daily living," including basic personal hygiene and grooming, dressing and undressing, feeding themselves, getting in and out of bed, going to the bathroom, and walking or using a wheelchair.

Many of those who need long-term services and supports enter nursing homes. But far more live in their own homes, with loved ones, or elsewhere in communities (Exhibit 1). In recent years, there has been a growing preference among many disabled people to remain in their own homes and to stay out of nursing homes for as long as possible. Programs such as CLASS are aimed at making that more feasible.

Exhibit 1
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GROWING NEED FOR SUPPORTS: Although people of all ages can be disabled, disability rates increase with age. About two-thirds of today's 65-year-olds are expected to need long-term services and supports to help them carry out these tasks at some point during their lives. The number of elderly Americans age 65 and older needing long-term care services is expected to more than double to 16.1 million between now and 2050.

Many Americans believe--incorrectly--that public programs such as Medicare and Medicaid provide them with comprehensive coverage for long-term services and supports. In fact, Medicare pays only for short-term nursing home stays in so-called skilled nursing facilities, for health care in the home following a hospital stay, or for home care when a terminally ill patient has entered hospice.

Most private health insurance policies provide little or no coverage for long-term care. People can buy private long-term care insurance policies to protect them should they become disabled, but only about one in 10 Americans age 55 and older has long-term care insurance. These policies can be expensive and usually offer a set of benefits for a defined period of time (typically for up to five years). For example, private long-term care insurance monthly premiums average around $184 and offer daily benefits in the range of $160 a day for five years.

CLASS was designed to offer a new form of support for the middle class and to enable people to make provisions in the event they ever became disabled and had difficulty caring for themselves for at least 90 continuous days. According to the Affordable Care Act, any working adult 18 years and older would have been able to make premium contributions and participate in the program. Nobody would have been excluded on the basis of their health status or preexisting conditions.

ELIGIBILITY CRITERIA: As the program was originally designed, people would have been required to pay premiums for five years before being eligible to claim benefits under CLASS. Individuals also would need to have been actively employed or have received earned income for at least three of the first five years of enrollment in the program (or be in the uniformed services on active duty and physically able to perform their duties).

The level of premiums was not specified in the law. Actual premium amounts were to have been established annually by the HHS secretary and a new board of trustees of a planned CLASS Independence Fund that would have held the assets of the program. However, people with incomes below the federal poverty level and full-time students ages 18-21 were to have paid a monthly premium of only $5 (subject to an adjustment for inflation in later years). Premiums for others could be age adjusted--that is, based on the age of a person when he or she enrolled in the program.

To qualify for benefits under the law, a person would need to have trouble with at least two of the activities of daily living, such as bathing or feeding oneself, or require comparable assistance because of cognitive impairment. Benefits would have consisted of a daily cash payment equal to a minimum of $50, indexed for inflation.

Recipients would have had flexibility in how they used the CLASS benefit. They would have been able to use the money to help pay for a nursing home (which currently can run $75,000 or more a year) or an assisted living facility (currently about $38,000 or more per year). Alternatively, they would have been able to use the money to help pay for a home health aide or even for a family member to provide care at home, which is currently how millions get their home-based care. Recipients also could have used the money for home modifications, such as installing a wheelchair ramp or an accessible shower, or for services such as transportation to medical appointments.

The primary challenge to CLASS was financial, and it arose from the program's design. At issue was whether the money coming into the program would have matched the money that could ultimately flow out. The greatest threat to solvency was the possibility that the program could have been subject to a phenomenon known as adverse selection. In insurance, adverse selection means that people most likely to buy it are those most in need and those most likely to draw benefits in the future.

In the case of CLASS, adverse selection would have resulted if people who already had some disability, or who knew they were at high risk of needing long-term services and supports, had been more likely to enroll than younger and healthier people, which is likely to have been the case. The result would have been limited enrollment--since relatively few people would have seen themselves as at risk--and therefore limited premium dollars coming into the program.

At the same time, there may soon have been big payouts as enrollees became disabled and claimed benefits. A so-called death spiral might then have resulted, as premiums rose to cover the high payouts, ultimately deterring even more lower-risk or younger people from participating in the program.

SHORT WAITING PERIOD: The relatively short waiting period--a minimum of five years between enrollment and the start of benefits, which would then have been available for life--may have contributed to assumptions of adverse selection. People who saw themselves as being at high risk of disability within that short time period might have enrolled quickly, while others could have postponed enrollment until they, too, became at higher risk of needing care.

Setting the right premium levels would also have been challenging. Adverse selection could have been aggravated if the premiums were set too high. Steep premiums could have discouraged large numbers of people from enrolling, and those who did not sign up could be those at the highest risk of needing the assistance.

Going too far in the other direction--setting premiums relatively low in order to encourage many younger and healthier people to enroll--also would have had risks. Under that approach, there might not have been enough money coming in to pay out benefits, particularly if there were large numbers of people who needed assistance in the early years.

The Congressional Budget Office (CBO) has forecast that in the short term, CLASS would have reduced the federal deficit but, in the long term, would have been likely to increase it. In a March 2011 estimate, CBO projected that CLASS would reduce the federal budget deficit by $83 billion through 2021, largely because people would be paying premiums in, but little would be paid out for at least five years. But by around 2030, when baby boomers start turning 85, CLASS would be paying out more than it took in, CBO projected. As a result, the program would start running a deficit of tens of billions of dollars each decade.

As it analyzed approaches for implementing CLASS, HHS developed four options but concluded in the end that none of the options could be successful under the terms of the Affordable Care Act. Actuaries evaluated different plan options to predict enrollment levels and financial outcomes; marketing experts sought to determine the likely response rate from beneficiaries; and legal experts compared the plans to the health care law to anticipate potential legal challenges.

The basic or baseline plan HHS considered closely followed the language in the health care law. The beneficiary had to be employed for three out of five years and had to have annual minimum earnings of $1,120. Monthly premiums would remain stable, and the daily cash benefit would average $50.

Other plan options changed some of these features, for example, by increasing the annual earnings requirement to $12,000 from $1,120; requiring a full five years of employment instead of three; increasing the daily benefit amounts according to degree of impairment (but then cutting them substantially after five years); increasing monthly premiums according to an index; or imposing a 15-year exclusion period during which time no payments would be made if a serious medical condition existed at the time of enrollment.

For some options, actuaries and marketing specialists concluded that the required enrollment numbers would not be met because the benefits were too small or inconsistent to be attractive to enough beneficiaries. For other options, there was a high degree of uncertainty about their long-term solvency.

Legal analysts also concluded that there was "substantial uncertainty" about the statutory authority that the HHS secretary had to make substantial changes to the CLASS program that deviated from the terms set forth in the law. There was also concern about the harm to enrollees should the program commence, only to be terminated later through a successful court challenge.

Senate Democrats have already removed funding for the CLASS plan in the HHS 2012 spending bill, and the Obama administration is not expected to request any additional funding.

With the CLASS plan on hold, some lawmakers have resumed their efforts to repeal the program. The administration does not support repealing CLASS, however, because that would require legislative action that could invite additional attempts to change or repeal the Affordable Care Act. The administration believes it is sufficient to keep the program in hiatus without funding.

In her letter to Congress, Sebelius wrote that she hoped that the work that HHS had done to implement CLASS would be useful in finding other affordable and sustainable long-term care options. "The challenge that CLASS was created to address is not going away," Sebelius wrote, noting that fewer than 3 percent of Americans have any kind of long-term care policy and that the taxpayer cost to finance this care will only increase, further straining state and federal Medicaid budgets.

"We look forward to continuing our work with you and your colleagues in Congress, consumer advocates, health care providers, insurers, and other stakeholders to find solutions that ensure all Americans have the choices that best meet their needs," Sebelius concluded. Whether or not Congress will take up the offer anytime soon remains at this point unclear.

"A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program," Department of Health and Human Services, October 2011.

Congressional Research Service, Memorandum to Rep. Charles Boustany Jr., March 15, 2011.

Johnson, Richard W. and Janice S. Park, "Who Purchases Long-Term Care Insurance?" Urban Institute, March 2011.

Kaye, Stephen H., Charlene Harrington, and Mitchell P. LaPlante, "Long-Term Care: Who Gets It, Who Provides It, Who Pays, and How Much?" Health Affairs 29, no. 1 (2010): 11-21.

The Lewin Group, "Medicaid and Long-Term Care: New Challenges, New Opportunities," June 25, 2010.

Mulvey, Janemarie and Kirsten J. Colello, "Community Living Assistance Services and Supports (CLASS) Provisions in the Patient Protection and Affordable Care Act (PPACA)," Congressional Research Service, May 3, 2010.

Munnell, Alicia H. and Josh Hurwitz, "What Is CLASS and Will It Work?" Center for Retirement Research, Boston College, February 2011.

Scan Foundation, "Six National Fact Sheets on Long-Term Care," September 13, 2010

"Secretary Sebelius' Letter to Congress about CLASS," October 14, 2011.

Stevenson, David G., Marc A. Cohen, Eileen J. Tell, and Brian Burwell, "The Complementarity of Public and Private Long-Term Care Coverage," Health Affairs 29, no. 1 (2010): 96-101.

"The Moment of Truth," Report of the National Commission on Fiscal Responsibility and Reform, December 2010.

Written by
Joanne Kenen
(Kenen is a veteran journalist and author covering health policy on Capitol Hill.)

Editorial review by
Marc Goldwein
Policy Director
Committee for a Responsible Federal Budget
New America Foundation

Richard W. Johnson
Senior Fellow
Urban Institute

Ted Agres
Senior Editor for Special Content
Health Affairs

Anne Schwartz
Deputy Editor
Health Affairs

Susan Dentzer
Editor-in-Chief
Health Affairs

Health Policy Briefs are produced under a partnership of Health Affairs and the Robert Wood Johnson Foundation.

Cite as:
"Health Policy Brief: The CLASS Act," Health Affairs, Updated November 17, 2011.

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