CLASS Act: An $86 Billion Puzzle

October 19, 2011
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In a late Friday “data dump,” the U.S. Secretary of Health & Human Services, Kathleen Sebelius, announced that the long-term-care program established under ObamaCare, the Community Living Assistance Services and Supports (CLASS) program, would not come into effect.

In a late Friday “data dump,” the U.S. Secretary of Health & Human Services, Kathleen Sebelius, announced that the long-term-care program established under ObamaCare, the Community Living Assistance Services and Supports (CLASS) program, would not come into effect.

This humiliating reversal was expected. Late September, the U.S. Department of Health & Human Services turned the lights out at the CLASS offices and reassigned the staff. It has long been understood that CLASS was impossible. It was a voluntary long-term-care program with skimpy benefits ($50 per day), a five-year vesting period before an enrollee could claim benefits, and a rule that healthy and sick people had to be charged the same premium.

 

The Chief Actuary of the Centers for Medicare & Medicaid services (CMS) initially estimated that monthly premia would average about $240 per month. As he wrote in his analysis of April 22, 2010: “In general, voluntary, unsubsidized, and non-underwritten insurance programs such as CLASS face a significant risk of failure as a result of adverse selection by participants” (p. 15). The Chief Actuary expressed considerable doubt that the program could be demonstrated actuarially sound through 75 years, as the law requires.

But this was not the political purpose of CLASS. The purpose was simply for the federal government to start receiving premium income as early as 2011, while not paying benefits until 2016. Instead of investing the premiums like a real insurer, the government would count the premia against the rest of ObamaCare, which suffers significant negative cashflow starting in 2014. The Chief Actuary estimated that CLASS would bring the federal government a windfall of $38 billion dollars for the first decade of ObamaCare, 2010 through 2019.

The Congressional Budget Office (CBO) was also optimistic about CLASS’ magical ability to fund ObamaCare. In a letter dated November 25, 2009 (four months before the legislation was signed), the CBO estimated that the House of Representative’s version of ObamaCare would earn $72 billion in the first ten years from CLASS, and $102 billion from the House of Representatives’ version (p. 350). In testimony dated March 30, 2011, the CBO Director confirmed his office’s estimate that CLASS would reduce the federal deficit by $86 billion in the next decade, 2012 through 2021 (p. 25). The same testimony reported that ObamaCare overall would reduce the federal deficit by $210 billion over the period (p. 12).

So, by dumping CLASS, the Administration has just erased over 40 percent of ObamaCare’s presumed deficit-reducing achievement. This is not to say that the CBO’s figures are reliable. It is well known that some of the cuts to Medicare incorporated in the legislation – especially slashing physicians’ fees – are politically impossible in the short and intermediate term. Furthermore, the CBO dramatically underestimates the number of people who will be seeking refundable tax credits to get health insurance in Health Benefits Exchanges.

Nevertheless, the administrative detonation of CLASS completely explodes Congress’ own budgetary score-keeping. Congressional Republicans are now moving to repeal the CLASS program; and the CBO has announced that it will give a zero budgetary score to such a repeal. This would make it easier for Republicans to support, because it would not increase the deficit score. Nevertheless, it makes no sense. If CLASS was going to reduce deficits by $86 billion, the repeal of CLASS muse increase deficits by same $86 billion.

Secretary Sebelius needs to announce where she plans to find this (now erased) $86 billion. If Republicans want to repeal CLASS immediately, but also keep up the pressure for full repeal of ObamaCare, they should not let her off the hook.