I’ve written previously about the looming train wreck from Obamacare’s new long-term care entitlement for the elderly, called the CLASS (Community Living Assistance Services and Support) Act. Democratic Senator Kent Conrad (D., N.D.), you may recall, once described the CLASS Act as “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” The Obama Administration strongly supported the CLASS Act’s inclusion in the Affordable Care Act, and Conrad ended up voting for it anyway.

However, the case for the CLASS Act has been rapidly unraveling. In February, HHS Secretary Kathleen Sebelius testified before the Senate Finance Committee, admitting for the first time that CLASS is “totally unsustainable.” Under questioning by Sen. John Thune (R., S.D.), she pointedly refused to rule out an individual mandate that would force everyone to join the program. Though Sebelius assured Thune that she had broad authority to fix CLASS’ structural problems, I obtained a Congressional Research Service report that stated the opposite. In the July/August issue ofForeign Affairs, former White House budget director Peter Orszag proposed an individual mandate as one of “the only solutions” to CLASS’ unsustainability.

So, we’re all in agreement that CLASS is a mess that could cost taxpayers hundreds of billions of dollars. So why was it included in our new health law in the first place?

The reason is simple: budget gimmickry. CLASS will rake in $86 billion in premiums from 2012-2021, but pay out substantially more than that over the long-term, rapidly generating deficits and bankruptcy. However, the Congressional Budget Office can only score the law’s impact over the next ten years, a period in which CLASS “reduces” the deficit. The claim that Obamacare was budget-neutral was critical to winning the approval of skittish moderate Democrats.

And now, today, a new Congressional investigation led by John Thune reveals that the Obama Administration knew all along that CLASS was unsustainable. “As a result of this investigation,” the authors write, “it is now clear that some officials inside HHS warned for months before passage that the CLASS program would be a fiscal disaster. Within HHS the program was repeatedly referred to as ‘a recipe for disaster’ with ‘terminal problems.’”

Congressional Budget Office has refused to release its projections and methodology

Thune’s group asked the CBO to disclose its long-term analyses of the CLASS program, but CBO refused. “CBO has declined to disclose the models it developed to analyze the CLASS program’s long-term solvency,” they write. “CBO staff now say that they do not have the capacity to analyze the CLASS Act’s long-term solvency, despite apparently undertaking that analysis for congressional Democrats before the bill’s passage.”

Medicare Actuary Richard Foster “effectively silenced” after voicing concerns

The Thune report exhibits numerous emails from Medicare Actuary Richard Foster, who expressed concerns from the beginning that CLASS was unworkable. “Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue,” he wrote in one. The Congressional Budget Office, wrote Foster, used faulty assumptions to conclude that the program would be widely popular with seniors:

I haven‘t been able to talk to CBO yet regarding their participation assumptions. Unless they have a compelling reason to expect greater-than-[long-term care] levels of participation, however, I can‘t see how there would be enough workers participating to cover the selection costs for those with existing [activities of daily living] limitations plus the costs for the internal subsidies for students and low-income persons.

Eventually, Democrats tired of Foster’s warnings, and froze him out of further discussions of the program (emphasis added):

After receiving consistent negative information from the chief actuary about the financial viability of the program, Senator Kennedy‘s staff moved to cut out the chief critic of the CLASS Act within HHS from providing any further analysis of the bill. On September 10, 2009, the Director of Policy Analysis in the Immediate Office of the Secretary of HHS emailed the Deputy Assistant Secretary for Planning and Evaluation saying, [a senior democrat staff member] “got back to me, and decided she does not think she needs additional work on the actuarial side.

An email the following week, September 16, reiterated Democrats‘ position: [a senior democrat staff member] “at HELP has done a lot of work changing the program and per CBO it is now actuarially sound.” There had been a clear shift from relying on the chief actuary‘s 36 years of experience in favor of the flawed 10-year timeframe of CBO.

Other officials within HHS expressed qualms about CLASS

It wasn’t just Richard Foster who raised concerns about the program’s solvency. HHS’ Assistant Secretary for Planning and Evaluation (ASPE) stated in a separate document that CLASS “is still likely to create severe adverse selection problems.” William Marton, a staffer at the ASPE office, described the program as “a recipe for disaster…I can’t imagine that CLASS would not have high levels of adverse selection given the significantly higher premiums compared to similar policies in the private market.”

Just two days before the staffer sent that email, Richard Frank, Deputy Assistant Secretary for Planning and Evaluation at HHS, said something quite different at a speech before the Kaiser Family Foundation. “We’ve…modeled this extensively,” said Frank, “and we’re entirely persuaded that…financial solvency over the 75-year period can be maintained.”

HHS knew that Sebelius might not have the authority to fix the program

“In January 2010,” write the investigators, “HHS staff prepared a list of suggested technical corrections to the CLASS Act” to help fix some of these problems. One of these was to give Kathleen Sebelius more authority to modify the program and put it on sounder financial footing. “It is possible,” wrote HHS staff, “the authority in the bill to modify premiums will not be sufficient to ensure the program is sustainable.”

Unfortunately, because of Scott Brown’s victory in the Massachusetts special election for U.S. Senate, the House of Representatives was forced to pass the Senate’s CLASS bill from December 2009, without significant modifications, preventing HHS from implementing any of these corrections.

The fact that HHS sought this correction makes clear that, contrary to Kathleen Sebelius’ assurances, the Administration knows that it may not have the authority to fix CLASS without further legislation.

HHS considered forcing employers to enroll their workers into CLASS

Other emails from within HHS show that staffers there knew that CLASS would impose a heavy burden on employers, whose participation in CLASS would lead to significant legal liability and compliance burdens, and also state governments, who would have to spend their own money to implement the program. In one email, a staffer from the Centers for Medicare and Medicaid Services admitted that CMS didn’t even conduct an analysis of the implementation costs for CLASS. “However, I think little of it is really ours versus the states.”

ASPE wrote that employers “collecting premiums would require a nontrivial change to existing payroll systems and additional responsibilities that employers may be reluctant to take on.” Indeed, out of concern that employers would be reluctant to participate in the program, HHS considered forcing them to do so. “One possible alternative [for driving participation in CLASS] is to move to a ‘mandated offer’ approach where employers over a certain size (e.g., 50 employees) would be required to offer enrollment.”

Congress should repeal CLASS now

Whether you are a supporter or an opponent of the Patient Protection and Affordable Care Act, you should favor repeal of the CLASS Act. The program will do much to damage the reputation of the broader law, and force Congress to curtail other spending priorities. Long-term care in America is something worthy of serious attention, given that it comprises nearly one-third of all Medicaid spending. But CLASS makes things worse, not better.

There is already bipartisan support for repealing CLASS; the Simpson-Bowles Commission recommended repealing the law if it could not be fixed. Several Democratic Senators are on record opposing the program. The problem is that the CBO will have to score a repeal of CLASS as “adding” to the deficit, at a time when there is no appetite for doing so.

HHS spokesman Richard Sorian told Associated Press reporter Ricardo Alonso-Zaldivar that Sebelius won’t go forward with CLASS unless it can be fixed. But Sebelius has not been honest about the program’s problems in the past, and it’s hard to see why taxpayers should trust her now.

Avik Roy is a health care analyst at Monness, Crespi, Hardt & Co., and writes on health care policy for Forbes at his blog, The Apothecary where this post first appeared. You can follow him on Twitter at @aviksaroy.

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5 Responses for “CLASS-Gate”

  1. kim says:

    I’m glad to see someone is pointing out that this emperor has no clothes. It’s disgraceful — although “technically” correct — that the CBO scoring counted the early year CLASS premiums as offsetting costs of the rest of the bill. Now they can’t repeal it without looking like they are increasing the deficit, a true Catch-22.

    I think CLASS is the most objectionable part of PPACA; one can argue legally & philosophically about mandates, exchanges and so on, but the financing for CLASS is just downright misleading at best and dishonest at worst.

  2. tim says:

    “CBO staff now say that they do not have the capacity to analyze the CLASS Act’s long-term solvency, despite apparently undertaking that analysis for congressional Democrats before the bill’s passage.”

    This can’t be true. The CBO is “non-partisan”. The Associated Press told me so.

  3. Eric Tremont says:

    Excellent post. The CLASS act scandal will make the Solyndra scandal look trivial.

  4. John Ballard says:

    The point is correct. The CLASS Act portion of PPACA is actuarially unsustainable as written. It was dropped in almost as an afterthought as a memorial to the late Ted Kennedy.

    It was supposed to be self-funding over time in the same way that Social Security is funded, from yet another (opt-out) payroll tax. Unfortunately the need for financial assistance to those who would become beneficiaries is so great that yet another payroll tax falls far short of what is needed.

    So the challenge is not how do we scrap the plan but how best do we address the bleeding needs it was intended to meet? All I’m getting seems to be variants of let-them-eat-cake, Ron Paul’s they-need-to-make-better-decisions, or churches-can-handle-it.

    I’m still waiting for constructive alternatives. I find none in this post.

  5. kim says:

    John — it’s not rocket science (although it requires actuarial science). The premiums need to be set so that they pay for the cohort of beneficiaries who pay them, which means it can’t be pay-as-you-go. People in immediate need can’t buy into an “insurance” program. There is a moderately robust private long term care insurance market that aims to do this, although the tail on the liabilities is so long — literally generations long — that no one really knows if it is priced right.

    If CLASS is aimed at people in immediate need or financially unable to pay premiums, then we’re talking about a social welfare program that would be some variant on Medicaid.

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