RIEDL: CLASS is the next huge taxpayer bailout

ANALYSIS/OPINION:

Are you ready for the next massive taxpayer bailout?

Many of the same lawmakers who infuriated taxpayers by bailing out Wall Street, the auto companies, and Fannie Mae and Freddie Mac recently created a new program virtually guaranteed to require bailouts.

And unlike those one-time bailouts, this one will become an annual taxpayer expense.

The Community Living Assistance Services and Supports (CLASS) Act is a new long-term care insurance program. The concept had floated around Washington for years before Congress inserted it into the Obamacare health law — most likely to provide a $70 billion piggybank that could be raided to cover up Obamacare’s initial deficits. Yet this ticking entitlement time bomb could cost future taxpayers trillions of dollars.

Here’s how it works:

CLASS is a voluntary long-term health care insurance program. Enrollment is open to all working adults, regardless of health status. Benefit eligibility requires first paying premiums for five years.

CLASS is supposedly self-funded, and the secretary of health and human services is empowered to adjust premium and benefit levels to guarantee 75 years of solvency without costing taxpayers a dime. Like Social Security, CLASS is funded on a pay-as-you-go basis, meaning current premiums will fund current beneficiaries.

But there is one complication: CLASS administrators are forbidden from basing individual premiums on any health-risk factors other than age. Unhealthy individuals who will likely require more benefits must be charged the same premiums as healthy individuals who will likely require fewer benefits.

And therein lies the seeds of bankruptcy.

Consider a basic example of three 45-year-olds of varying health deciding whether to enroll in the program. Based on their expected long-term care needs, their individual willingness to pay for this insurance comes to $100, $500 and $900 per month.

In order to maintain solvency without risk-based pricing, CLASS would be required to charge all three people the same $500 premium. The healthiest person (willing to pay just $100) would consider this a bad deal and decline participation. At that point, premiums for the remaining two individuals would have to rise to $700 to keep the program solvent. This would cause the moderately healthy person (willing to pay $500) to also drop out, leaving only the unhealthiest person and a $900 premium.

Health economists call this an “adverse-selection death spiral,” and it would likely end in program bankruptcy.

For this reason, the Congressional Budget Office, the chief actuary for the Medicare program, and the American Academy of Actuaries have all acknowledged that CLASS is unsustainable.

In fact, Senate Budget Committee Chairman Kent Conrad, North Dakota Democrat, calls CLASS “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.”

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