CLASS Is Dismissed

Critics of Obamacare’s mammoth price tag have directed much of their ire at the billions of dollars earmarked for the expansion of Medicaid and for government subsidies to help people who make as much as $88,200 purchase private insurance.

Both issues are important, but budget hawks should save some of their venom for a third money sink: the Community Living Assistance Services and Supports Act, or CLASS Act. This component of the health reform bill represents a huge new entitlement that could add tens of billions to the national deficit. The CLASS Act should be among the next Congress’s first targets for repeal.

CLASS charters a federal long-term-care insurance program open to all Americans. Benefits of between $50 and $100 per day will go to disabled folks and seniors who have trouble performing basic activities like getting dressed or bathing. The beneficiaries could use the cash to help pay for an in-home caretaker or adult day care.

Where’s all that money going to come from? Congress intends for CLASS to sustain itself with monthly premiums deducted from Americans’ paychecks. Workers will be automatically enrolled in the program but could opt out.

To further encourage people to sign up for CLASS, the government will require that a person pay premiums for five years before receiving benefits.

Defenders of this new entitlement claim that it will actually improve the federal budget. They cite a report from the Congressional Budget Office that estimates that the CLASS Act would cut the deficit by $72.5 billion over its first ten years.

But it takes some charitable math to come up with that figure. The CLASS program will begin collecting premiums in 2011. But it won’t start paying out benefits until five years later. So the $72.5 billion in savings includes 10 years of premiums—and only five years of benefits.

Once people start claiming benefit checks, the program’s finances will deteriorate rapidly. Indeed, the CBO admits that “in the decade following 2029, the CLASS program would begin to increase budget deficits … by amounts on the order of tens of billions of dollars for each ten-year period.”

In other words, the CLASS Act will put the federal government into an even deeper budgetary hole. How? The answer lies in the way the program is structured.

Because the CLASS program is open to all Americans—and because all participants will pay the same premium, regardless of whether they’re likely to claim benefits—only those who foresee needing CLASS’s assistance will enroll. The government estimates that just 2% to 6% of eligible Americans will sign up.

As needy individuals require greater and greater payouts, premiums will edge higher to compensate. And as premiums increase, healthier people will leave the insurance pool.

This process will repeat until no premium-paying customers are left. At that point, the government will have to decide whether to fund CLASS benefits from general tax revenue or scrap the program altogether. The feds won’t kill benefits for those who have paid into the system, so the only available option in the end is a taxpayer bailout.

Indeed, the Centers for Medicare and Medicaid Services concluded that the CLASS program faces “a significant risk of failure.”

Rather than launching an expensive new entitlement, Congress should’ve done more to bolster the marketplace for private long-term-insurance, perhaps through tax credits and other incentives.

Some eight million Americans currently have private long-term-care policies, the vast majority of which offer benefits that far exceed $50 a day. The fifty bucks promised by the CLASS Act are not nearly enough to put a dent in the cost of nursing home care, as a shared room in a typical facility runs $198 a day. Home care generally costs $21 an hour. Cognizant of these high costs, only 15% of private plans reimburse less than $100 a day.

Sen. Kent Conrad (D.-N.D.), chairman of the Senate Budget Committee, dubbed the CLASS Act a “Ponzi scheme of the first order.” And Senate Finance Committee Chairman Max Baucus (D.-Mont.) once declared on the Senate floor, “Frankly, I am no fan of the CLASS Act myself.”

Too bad both senators voted in favor of it. Rep. Charles Boustany (R.-La.) has introduced a bill that would repeal the CLASS Act. Conrad, Baucus, and any other lawmaker concerned about America’s fiscal future would be wise to join Boustany’s effort.