Securing the Future of Long-Term Care

If it survives, the CLASS Act has the potential to alter the long-term-care market.

By Joanne Sammer Aug 1, 2011
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April Cover

Editor’s note: Two months after publication of this article, the U.S. Department of Health and Human Services announced on Oct. 14, 2011, that the CLASS Act was not financially sustainable as designed and would not be implemented. You can read about the announcement here and read more about the ramifications for employers here.

While the need for long-term care is not as certain as death and taxes, 70 percent of individuals over 65 will require it at some point, according to federal government data. Yet few people consider long-term care when they think about retirement—beyond perhaps hoping that they will not need it. A federal long-term-care program could change that, but its future remains uncertain.

Neither Medicare nor most private health insurance policies cover long-term-care services, so it is up to each individual to plan for these expenses, either through additional retirement savings or by purchasing a separate long-term-care insurance policy. Long-term care can include a range of services—from nursing home care to help with daily activities, such as bathing and preparing meals, so an individual can remain independent at home. But long-term care continues to be an element of retirement planning that is often overlooked or avoided outright.

For a decade or so, some employers have made long-term-care insurance available to employees as an employee-paid voluntary benefit. But the number of organizations offering long-term care has fallen in recent years, according to the Society for Human Resource Management’s 2011 Employee Benefits survey report, which was released in June and is based on responses from 600 HR professionals. Just 29 percent indicated that their organizations offer long-term care in 2011, compared with 46 percent in 2007.

A mere 14 percent of workers in private industry have access to employer-offered long-term-care coverage, according to the results of the U.S. Bureau of Labor Statistics’ National Compensation Survey, released in March 2010. Moreover, the number of employees taking advantage of voluntary long-term-care insurance tends to be low, with participation percentages in the single digits to high teens in most companies that offer it.

That has been the experience of Greeley and Hansen, a Chicago-based environmental engineering and architectural company. Even after offering long-term-care coverage for 10 years, only 2 percent of its 300 employees are in the voluntary program, according to John C. Robak, executive vice president and chief operating officer.

Many individuals are uncomfortable focusing on their potential need for long-term care in the future. “The psychological element of dealing with your mortality can certainly hinder participation,” says Chris Covill, a partner with consulting firm Mercer in Atlanta. An organization’s demographics can affect how likely its employees are to think about long-term care.

Moreover, long-term-care coverage can be expensive, and the options are sometimes confusing. Buyers choose:

  • Length of coverage. The time frame isusually two to 10 years, although lifetime policies are an option.
  • Daily benefit limits. Benefit amounts can be as little as $50 a day or as much as $500 a day.
  • Elimination periods. The amount of time before benefits kick in ranges from 20 days to a year.
  • Inflation protection. Participants can purchase this option.

“The more choices people have, the less likely they will do anything,” says Peter Florek, vice president with MAGA Ltd., a Chicago-based insurance agency specializing in long-term-care coverage. To minimize confusion, employers offer two or three sets of options rather than a menu of choices.

Enter the CLASS Act

The Community Living Assistance Services and Supports (CLASS) Act—part of the Patient Protection and Affordable Care Act health care reform law of 2010—is a potential game-changer for long-term-care coverage. The law would establish a government-run basic long-term-care program that employers can voluntarily choose to offer employees and that the self-employed can purchase on their own. The plan will pay a minimum of $50 a day in benefits. If an employer offers the CLASS benefits, it could automatically enroll employees, who would pay premiums through payroll deductions, but employees could opt out. While many long-term-care plans offered by employers allow employees to purchase coverage for spouses, parents and grandparents, the CLASS Act allows only workers to participate.

CLASS Act Basics

Although the U.S. Department of Health and Human Services has until October 2012 to roll out the details of a program for the Community Living Assistance Services and Supports (CLASS) Act, the law outlines parameters, some of which are still subject to change.

  • The program is voluntary. Employers can choose whether to offer it to their employees, and individual employees can choose whether to participate.
  • An employer that offers the plan could do so on an opt-out basis—employees would be automatically enrolled unless they opt out.
  • Premiums will be paid monthly through payroll deductions.
  • Employers can subsidize employee premiums but are not required to do so.
  • The plan is open only to those who are currently working or self-employed and earning more than a specific minimum. The minimum is currently $1,200 per year but subject to change.
  • Participants must be older than 18 to contribute and collect benefits.
  • Eligible individuals will be able to enroll on their own if their employer does not offer CLASS benefits or if they are self-employed.
  • Unemployed and retired individuals are not eligible.
  • A vesting period would apply, requiring participants to pay into the program for five years before they can claim benefits.
  • All eligible individuals are accepted for coverage regardless of health status or pre-existing conditions.
  • The law requires the plan to offer minimum benefits of $50 per day. However, benefits may be higher once the details of the plan are final next year.

The CLASS Act could change a long-term-care system that relies heavily on Medicaid for financing. One-third of Medicaid’s budget—more than $100 billion a year—is spent on long-term care. Medicaid bears such a heavy burden because conventional health insurance does not cover long-term care and many older people lack the resources to pay for it for any length of time, says Howard Gleckman, resident fellow of the Urban Institute in Washington, D.C., and author of Caring for Our Parents: Inspiring Stories of Families Seeking New Solutions to America’s Most Urgent Health Crisis (St. Martin’s Press, 2009).

Although the CLASS Act was supposed to go live earlier this year, the deadline for regulations and guidance has been delayed until October 2012. Some observers think the delay could extend into 2013.

First, the program needs to survive. Almost from the time it was passed, the law has been under scrutiny. Lawmakers in Congress have introduced bills that would repeal it. Even President Barack Obama’s National Commission on Fiscal Responsibility and Reform stated late last year that the plan as outlined in the health care reform law would be financially unsound, with benefits quickly outstripping premiums. It recommended that the law either be retooled significantly or repealed outright.

“The CLASS Act is poorly designed, so there is a real question about whether or not it will succeed in accomplishing its objective, which is to wean us off Medicaid and get people to plan for their own long-term-care needs,” Gleckman says.

The challenge is to set premiums low enough to be affordable to a broad cross section of individuals while covering benefits. What’s needed is “a policy that has premiums that are less than $100,” Gleckman says. “Once the premiums get higher than $100 a month, nobody wants to buy.”

With no underwriting to determine whether someone is eligible for CLASS Act coverage, the program would accept all individuals who meet the employment criteria, regardless of their health. “Someone who is unhealthy and can’t get private insurance would gravitate toward a program that doesn’t have any underwriting,” Florek explains. “Healthier individuals might gravitate toward private insurance because they can customize the policy exactly how they want and the premiums are going to be competitive because they are in good health.”

So far, the Obama administration has emphasized continued support for the CLASS Act—even as officials recognize that the plan needs modifications. Making the CLASS Act work will be up to the U.S. Department of Health and Human Services. Its mandate is to ensure long-term viability. “The law already provides plenty of flexibility to make sure CLASS is successful,” Kathleen Sebelius, the department’s secretary, said in a February speech in Washington, D.C. “We are committed to using that authority to make sure this program meets people’s needs while remaining fiscally sound.”

The CLASS Act could be a boon for many employers—and their employees—even if they already offer long-term-care coverage. “It can be helpful for employers to offer an additional benefit,” Covill says—particularly one that provides guaranteed coverage for people with pre-existing conditions that could disqualify them from buying private long-term-care coverage.

Getting Employers Onboard

Backers of the CLASS Act must convince individuals and employers that it is a viable and cost-effective way to obtain long-term-care coverage. “If employers do not participate in large numbers, the CLASS program is doomed to fail,” Gleckman says.

Employer support is especially crucial in light of the act’s employee opt-out requirement. As 401(k) plan sponsors have learned, automatically enrolling individuals in a program can make inertia work in its favor. According to the results of the Defined Contribution Institutional Investment Association’s 2011 Plan Sponsor Survey of 101 large 401(k) plans, employers that have implemented automatic enrollment in their 401(k) plans have increased enrollment by nearly 30 percent.

But long-term care is not a priority for most employers. If they offer long-term-care coverage, it will likely remain a low-participation voluntary benefit. “Long-term care is a major social issue, especially with life expectancy increasing, but employers don’t necessarily see long-term-care coverage as part of their core employee benefits plans,” says Tom Lerche, health care reform leader with consulting company Aon Hewitt in Chicago.

Therefore, Sebelius recognizes the need to make it as easy as possible for employers to offer CLASS coverage to employees. Her plans to revamp the CLASS Act include making payroll deductions simple.

Employers could press for some type of financial incentive to offer the plan, and it is not unreasonable to think the government might make an incentive available. After all, to become financially sound, the program needs to attract enough participants—and employers’ willingness to offer it will be a key element.

“The CLASS Act is something that we will certainly evaluate as the details of the plan continue to develop and are implemented,” says Greeley and Hansen’s Robak. “It may be a good option for providing long-term-care coverage to staff who otherwise may not be eligible for coverage through our current long-term-care provider.”

To avoid surprises, employers that offer the CLASS program will have to communicate with their employees well before they start deducting premiums from paychecks. They will need to explain the role the plan’s benefits might play in different retirement scenarios. “Avoid creating a false sense of security. The risk is similar to that associated with automatic enrollment in a 401(k) plan,” Covill explains. “Just enrolling in a 401(k) plan does not necessarily ensure enough income to retire. Similarly, the CLASS program may not offer enough coverage to handle all of an individual’s long-term-care needs.”

If the CLASS Act survives long enough to be rolled out and attract some participating employers, it could change the long-term-care market. “There will be some new long-term-care policy designs,” Covill says. “These might be supplemental or wrap-around products that pay out above CLASS benefits and, therefore, might offer more-favorable pricing than a full long-term-care policy.”

The author is a New Jersey-based business and financial writer.

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