CLASS(less)

Those of us who are taking Nancy Pelosi's advice to "find out" what's in the health care bill are coming to realize that the Patient Protection and Affordable Care Act is badly misnamed. As I leaf through the pages of this law, I can see the dollars flying off nearly every page. One of its many potential fiscal nightmares is contained in Title VIII of the law, the CLASS Act.

CLASS is an acronym for Community Living Assistance Services and Support. CLASS is an insurance program offered by the federal government that covers the cost of long-term care and assisted living. It's a voluntary (for now) program that will compete with similar types of insurance in the private sector. 

We all know what an entrepreneur the president is, with his investments in the automobile industry, banking, and finance, so it should come as no great shock that he's decided to branch out into insurance.  And like any good businessman, the president designed his CLASS insurance program to carve out his own niche in the market. A clue to the president's marketing strategy is contained in Section 3201(4), where he describes the purposes of the program. (Note: All references to the CLASS program are from an amendment to the Public Health Service Act as contained Section 8002 of the Patient Protection and Affordable Care Act).

[to] address institutional bias by providing a financing mechanism that supports personal choice and independence to live in the community.

Drill down a little farther to Section 3203(a)(1)(A), and you will find that Obama intends to sell his insurance for as little as $5 a month to individuals whose income does not exceed the poverty line. What will the rest of us pay? From the same section, the CLASS program should

establish all premiums to be paid by enrollees for the year based on an actuarial analysis of the 75-year costs of the program that ensures solvency throughout such 75-year period.

Even without any knowledge of net present value or amortization, that formula doesn't sound too good. Fortunately for us, an actuary has reviewed the CLASS program and estimated its monthly premium. His name is Richard S. Foster. He is the Chief Actuary for the Centers for Medicare & Medicaid Services (CMS). CMS is a part of the Department of Health and Human Services, so Foster is a federal employee and technically a part of the Obama administration. However, before you condemn Foster as an administration hack, read page 1 of his report. Foster carefully notes that the Office of the Actuary is "an independent technical advisor" and this report does "not represent an official position of the Department of Health & Human Services or the administration." Overall, it's a rather scathing attack on ObamaCare, and one wonders how much longer Mr. Foster will be employed with the federal government.

On page 15 of the report, Foster estimates that the initial average monthly premium would be $240. He considers this premium high in relation to private long-term care insurance because people paying the regular premium would be subsidizing the people paying five bucks. Sounds like a heck of a business model. Pay more and get the same, or possibly less.

Foster concludes that the CLASS program is unsustainable. People who were likely to need coverage in the immediate future would be more likely to purchase CLASS insurance than those who were healthy. Since the regular premium has to cover both the costs for this mostly unhealthy group and subsidize those individuals who can't afford the regular premium, the high cost of CLASS insurance would further discourage healthy people from participating, which would lead to even higher premiums. Foster employs a colorful phrase to describe this phenomenon: "the insurance death spiral."

According to Section 3210(e), the CLASS insurance programs can start selling policies on January 1, 2011. Since the vesting period for benefits is five years (Section 3203(1)(B)), the first payments from the CLASS program for medical benefits will start on January 1, 2016. This mismatch in revenues and expenses due to the start-up of the program is why Foster estimates that the CLASS program will lead to a net savings in federal spending over the ten fiscal years ending in 2019 of approximately 38 billion dollars. Before I go on, it's worth noting that in the CBO report (see page 11) on Obamacare from December 19, 2009, this same mismatch led the CBO to conclude that the CLASS program would reduce the federal deficit by $72 billion over the same ten-year period. This $72 billion represents over half of the CBO's estimate of a $132 billion reduction in the federal deficit that Obama and his cohorts bragged about ad nauseam.

A prudent person might note that if we're charging premiums in 2011 for care in 2016, it would be a good idea to save that money until it's needed. Well, don't worry. Section 3206 establishes the CLASS Independence Fund. This fund is where all the extra money from the premiums will go. Section 3206(b) provides that the money in the fund shall be invested in accordance with subsections (c),(d), and (e) of Section 1841(d) of the Social Security Act. This investment policy makes perfect sense, since we all know what glowing models of fiscal success Social Security and Medicare are.

If you read the aforementioned sections of the Social Security Act, you'll find that in this case, the Medicare Trust Fund is allowed to invest in only government bonds. The same investment policy applies to Social Security. In essence, the government is loaning the money to itself. This practice and its destructive consequences are poorly understood by the general public.  Most technical explanations fail to hit the mark, so instead, I'll offer a simple example to show why this policy is so ill-conceived and ineffective.

Suppose that you wanted to set some money aside to cover the down payment on a car. Each month, you would put $100 in a shoebox. After about a year, you'd look in the box and realize you've got a fair amount of money. Suppose you wanted to buy a new stereo or kitchen appliance and didn't feel like using your credit card. You might be tempted to take a few hundred dollars out of the box and put an IOU in there for the same amount. Over time, you would probably continue to take money from the box and replace it with IOUs. 

Finally, the big day would arrive. You would walk into the government-run car dealership and pick out the latest model, the cream of federal technology and innovation. As you sat at a desk filling out the undoubtedly myriad forms that would be required to finance such a purchase from our government, you would proudly pull out you shoebox and say, "I don't need to finance that much, Mr. Bureaucrat. I've got a down payment." And when you opened the box, what would you have? A bunch of worthless IOUs.

Such is the condition of our Social Security and Medicare trust funds. Obama is continuing the budgetary fraud. But if you're lucky enough to live for another twenty to thirty years, and maybe even become a CLASS beneficiary, you will be able to participate in the debate on the CLASS bailout.
Those of us who are taking Nancy Pelosi's advice to "find out" what's in the health care bill are coming to realize that the Patient Protection and Affordable Care Act is badly misnamed. As I leaf through the pages of this law, I can see the dollars flying off nearly every page. One of its many potential fiscal nightmares is contained in Title VIII of the law, the CLASS Act.

CLASS is an acronym for Community Living Assistance Services and Support. CLASS is an insurance program offered by the federal government that covers the cost of long-term care and assisted living. It's a voluntary (for now) program that will compete with similar types of insurance in the private sector. 

We all know what an entrepreneur the president is, with his investments in the automobile industry, banking, and finance, so it should come as no great shock that he's decided to branch out into insurance.  And like any good businessman, the president designed his CLASS insurance program to carve out his own niche in the market. A clue to the president's marketing strategy is contained in Section 3201(4), where he describes the purposes of the program. (Note: All references to the CLASS program are from an amendment to the Public Health Service Act as contained Section 8002 of the Patient Protection and Affordable Care Act).

[to] address institutional bias by providing a financing mechanism that supports personal choice and independence to live in the community.

Drill down a little farther to Section 3203(a)(1)(A), and you will find that Obama intends to sell his insurance for as little as $5 a month to individuals whose income does not exceed the poverty line. What will the rest of us pay? From the same section, the CLASS program should

establish all premiums to be paid by enrollees for the year based on an actuarial analysis of the 75-year costs of the program that ensures solvency throughout such 75-year period.

Even without any knowledge of net present value or amortization, that formula doesn't sound too good. Fortunately for us, an actuary has reviewed the CLASS program and estimated its monthly premium. His name is Richard S. Foster. He is the Chief Actuary for the Centers for Medicare & Medicaid Services (CMS). CMS is a part of the Department of Health and Human Services, so Foster is a federal employee and technically a part of the Obama administration. However, before you condemn Foster as an administration hack, read page 1 of his report. Foster carefully notes that the Office of the Actuary is "an independent technical advisor" and this report does "not represent an official position of the Department of Health & Human Services or the administration." Overall, it's a rather scathing attack on ObamaCare, and one wonders how much longer Mr. Foster will be employed with the federal government.

On page 15 of the report, Foster estimates that the initial average monthly premium would be $240. He considers this premium high in relation to private long-term care insurance because people paying the regular premium would be subsidizing the people paying five bucks. Sounds like a heck of a business model. Pay more and get the same, or possibly less.

Foster concludes that the CLASS program is unsustainable. People who were likely to need coverage in the immediate future would be more likely to purchase CLASS insurance than those who were healthy. Since the regular premium has to cover both the costs for this mostly unhealthy group and subsidize those individuals who can't afford the regular premium, the high cost of CLASS insurance would further discourage healthy people from participating, which would lead to even higher premiums. Foster employs a colorful phrase to describe this phenomenon: "the insurance death spiral."

According to Section 3210(e), the CLASS insurance programs can start selling policies on January 1, 2011. Since the vesting period for benefits is five years (Section 3203(1)(B)), the first payments from the CLASS program for medical benefits will start on January 1, 2016. This mismatch in revenues and expenses due to the start-up of the program is why Foster estimates that the CLASS program will lead to a net savings in federal spending over the ten fiscal years ending in 2019 of approximately 38 billion dollars. Before I go on, it's worth noting that in the CBO report (see page 11) on Obamacare from December 19, 2009, this same mismatch led the CBO to conclude that the CLASS program would reduce the federal deficit by $72 billion over the same ten-year period. This $72 billion represents over half of the CBO's estimate of a $132 billion reduction in the federal deficit that Obama and his cohorts bragged about ad nauseam.

A prudent person might note that if we're charging premiums in 2011 for care in 2016, it would be a good idea to save that money until it's needed. Well, don't worry. Section 3206 establishes the CLASS Independence Fund. This fund is where all the extra money from the premiums will go. Section 3206(b) provides that the money in the fund shall be invested in accordance with subsections (c),(d), and (e) of Section 1841(d) of the Social Security Act. This investment policy makes perfect sense, since we all know what glowing models of fiscal success Social Security and Medicare are.

If you read the aforementioned sections of the Social Security Act, you'll find that in this case, the Medicare Trust Fund is allowed to invest in only government bonds. The same investment policy applies to Social Security. In essence, the government is loaning the money to itself. This practice and its destructive consequences are poorly understood by the general public.  Most technical explanations fail to hit the mark, so instead, I'll offer a simple example to show why this policy is so ill-conceived and ineffective.

Suppose that you wanted to set some money aside to cover the down payment on a car. Each month, you would put $100 in a shoebox. After about a year, you'd look in the box and realize you've got a fair amount of money. Suppose you wanted to buy a new stereo or kitchen appliance and didn't feel like using your credit card. You might be tempted to take a few hundred dollars out of the box and put an IOU in there for the same amount. Over time, you would probably continue to take money from the box and replace it with IOUs. 

Finally, the big day would arrive. You would walk into the government-run car dealership and pick out the latest model, the cream of federal technology and innovation. As you sat at a desk filling out the undoubtedly myriad forms that would be required to finance such a purchase from our government, you would proudly pull out you shoebox and say, "I don't need to finance that much, Mr. Bureaucrat. I've got a down payment." And when you opened the box, what would you have? A bunch of worthless IOUs.

Such is the condition of our Social Security and Medicare trust funds. Obama is continuing the budgetary fraud. But if you're lucky enough to live for another twenty to thirty years, and maybe even become a CLASS beneficiary, you will be able to participate in the debate on the CLASS bailout.