Last week, the Obama Administration decided not to implement the Community Living Assistance Services and Supports (CLASS) Act. This Act authorized the Department of Health and Human Services (DHHS) to sell a low price/limited benefit long term care insurance (LTCI) plan, provided that the plan would be actuarially sound. The Act also required DHHS to perform a 75 year financial projection. After a year of analysis, DHHS concluded that there was the plan could not cover its costs and so it pulled the plug on CLASS.
I first learned about CLASS when I was asked by a senior economist in DHHS to provide a strategic assessment of the business prospects for CLASS. DHHS officials were appropriately concerned that the low price/limited benefit plan would almost surely suffer from adverse selection and end up losing money. So they wanted to know whether CLASS could offer additional LTCI plans to cover the losses in the base plan. I persuaded Cory Capps (a former colleague and partner with BatesWhite, an economic consultancy) and Leemore Dafny (my current colleague at Northwestern) to help with the analysis. We shared ideas with economists working within DHHS.
We viewed this as a traditional market analysis. Anyone can enter a market and lose money – the base CLASS plan would be a poster child for this obvious point. We wanted to understand whether there were any opportunities to turn a profit in the LTCI market. We also wanted to understand why, if there are profits to be had, private insurers had not already exploited these opportunities?
