Long Term Care Insurance as an Employee Benefit

The primary concern about CLASS Act stems from “adverse selection”. This is a term used by organizations constrained by fundamental rules of business that require financial responsibility. Private insurance companies, for example build products with underwriting to control the cost of their products so they are affordable.

Adverse selection refers to a structural bias that causes a disproportionate number of people to participate who are more prone to need benefits in the future. Adverse selection violates the basic insurance principle of spreading risk over an entire population and will cause claims paid to exceed premiums collected.

Consider the following aspects of CLASS that have caused actuaries to use the term “death spiral” when describing the CLASS Act.

Employees will receive coverage without medical underwriting on a guaranteed issue basis. This concession may also be extended to non-working spouses. Every person who is uninsurable for private coverage will be motivated to participate in CLASS.

Participation is voluntary. Employees can opt-out initially, and opt back in at a later time. Why would a young healthy person participate when they can opt-in at any time?

Premiums are to be set by the Department of Health and Human Services to ensure financial viability for a 75 year period. A nominal benefit of $50-75/day is projected to cost $180-$240/month. With premiums this high participation has been estimated to be as low as 2% of the eligible population.

What is the “death spiral”?

CLASS Act is to be funded exclusively by premiums paid by participants. Participation in the program will be conversely proportionate to the size premiums of the premium. More expensive premiums will depress participation while lower premiums have the opposite effect. The death spiral is that setting premiums high enough to keep the program financially solvent will reduce participation which in turn will also affect the solvency of the program. And the problem is exacerbated the higher the premium is.

The death spiral is a catch 22 situation of sorts. Premiums need to be high enough to make CLASS actuarially sound as defined statute. People with pre-existing conditions will choose the CLASS Act in greater numbers while those who are younger and healthier choose comprehensive private insurance that is more affordable.

The implications of this will be discussed in my next blog.

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