Finance

Health-Care Reform and Grandpa's Care

In 1982, President Ronald Reagan saw a chance to realign the relationship between Washington and the states. He offered to switch government responsibilities: The states would...
by | November 30, 2009
 

In 1982, President Ronald Reagan saw a chance to realign the relationship between Washington and the states. He offered to switch government responsibilities: The states would take over the federal food-stamp program and the joint federal-state welfare program. In exchange, the federal government would pay for Medicaid, the jointly-funded health insurance program for people with low incomes or disabilities.

At the time, welfare and food-stamp costs came to $16.5 billion per year; Medicaid's cost was $19 billion. It looked on the surface like a relatively good financial deal for the states, but they were wary for another reason. They suspected that the Reagan administration wouldn't devote adequate funds to Medicaid once the bargain was struck. A New York Times editorial called the swap "a bad bargain." Ultimately, the nation's governors balked.

Bad call. In fiscal year 2007, food stamps and Temporary Assistance for Needy Families cost roughly $70 billion; Medicaid cost $319 billion, with nearly one-third of it spent on a relatively small group of people--low-income, disabled seniors in need of long-term help. Medicaid has come to serve a purpose for which it was never intended: providing nursing-home care. And the states cannot afford it.

The situation is poised to get worse. The recession has sent Medicaid enrollments skyrocketing. The federal stimulus package is offsetting some of the pain of increased caseloads, but that funding runs out next year. Meanwhile, enrollments will keep expanding--not just because joblessness remains high but also because the health reform bills making their way through Congress would expand Medicaid dramatically. Meanwhile, demographics are another engine: baby boomers are moving into retirement age. All totaled--and barring a dramatic change--experts predict that Medicaid will have to double its spending on long-term care over the next two decades.

The health reform bill that passed the U.S. House in November may not offer states the help they really want--a federal takeover of long-term care--but it does contain a little-noticed feature that holds out the prospect of altering the way long-term care is provided and paid for. This lifeline is called the Community Living Assistance Services and Supports Act--or CLASS.

CLASS would create a voluntary public insurance pool, administered by the federal Department of Health and Human Services and open to all working Americans. After paying in for five years, purchasers who were incapacitated would become eligible for daily cash payments with which to pay caregivers--thus enabling many of them to remain in their homes.

While the primary beneficiaries would be the disabled, CLASS also could alleviate some of Medicaid's long-term care burden. By providing some financial support for home-care services, CLASS has the potential to disrupt the cycle whereby people spend down (or transfer) their assets in order to qualify for Medicaid assistance. For CLASS enrollees who do require nursing-home or other institutional care, the insurance would pay for a significant portion of the costs.

Right now, some 10 million Americans need long-term care services and help with basic activities of daily life, such as eating and dressing. Most are elderly, and family members and friends provide the bulk of these services--sometimes at great cost to themselves. Only about 7 percent of those using long-term care rely on paid personal caregivers, who cost an average of $29 an hour.

Long-term care is a textbook example of an expense that should be insured: Only about half the population will need it, but one-quarter of those who do will run up bills of more than $100,000. Buying long-term care policies would protect them. Yet less than 4 percent of the public has purchased such policies. Instead, people end up relying on Medicaid to finance their needs. "Medicaid itself isn't insurance," notes Judy Feder, a professor at Georgetown University's Public Policy Institute. "The protection it provides is enormously valuable, but you have to give up everything or be destitute to begin with in order to qualify."

A decade ago, a handful of states--notably California, Connecticut, Indiana and New York--partnered with private insurers in an attempt to encourage people to purchase long-term care policies. As an incentive, these states allowed people to shield assets they might otherwise have to spend down in order to qualify for Medicaid. Since 2005, more than 30 states have taken similar steps.

Yet most observers have been disappointed by the results. "It's not a model," Feder says. "Even the most optimistic projections for the numbers of people it might cover over time don't come remotely close to the coverage we have on health care--and we consider 16 percent uninsured a national disaster." A 2005 study by the Congressional Research Service found that a majority of people who purchased these policies in California and Connecticut had more than $350,000 in assets--far more than the $55,000 held by the typical 55-year-old whom the program was hoping to reach.

CLASS takes a different approach. It would be a public health insurance program--run by HHS and paid for by the workers themselves--with voluntary participation. Companies that chose to offer the program would withhold a monthly premium from employee paychecks. Employees of a company that chose not to participate would be able to contract directly with HHS. That agency would not engage in underwriting--the standard insurance industry practice of culling high-risks. Instead, everyone who paid in and worked for five years would receive benefits in the event they became incapacitated. Those benefits would come in the form of a daily cash allotment--roughly $75 per day--which recipients could then use to pay the caregiver of their choice, including a friend or family member, for help with tasks such as cooking, cleaning and bathing. The legislation creating CLASS requires the program to be actuarially sound, meaning that HHS would be required to set premiums and payments at a level that could be sustained indefinitely.

Not everyone is impressed. The Concord Coalition, a fiscal watchdog group, questions the wisdom of creating a program with a pot of money Congress could easily dip into at a moment of fiscal crisis. "With health care spending already on an unsustainable track," Concord's executive director Robert Bixby said in a statement this fall, "the last thing Congress should do is create a new entitlement."

Some state Medicaid directors have concerns, too. Says Alabama's Medicaid director, Carol Steckel, "This has 'clawback' written all over it." In other words, the federal government would be giving the states money only to grab for it later.

The American Academy of Actuaries also has been critical of some of the assumptions behind the program. An analysis prepared for an earlier version of the legislation concluded that it would be "unsustainable within the foreseeable future." While subsequent changes have addressed some of these concerns, Steven Schoonveld of Life Plans Inc., a Boston-based private insurance company, says CLASS should have more stringent work requirements for those who have been injured. "We generally ask five or six questions on the application when someone buys insurance," Schoonveld says. That mitigates the problem of "adverse selection," which can occur when people with chronic illnesses or a history of disabilities enroll at a higher-than-average rate. Without some type of underwriting to screen sicker-than-average people out (or a mechanism to bring healthy people in), skeptics fear that CLASS could be set up for what insurance executives call a "death cycle" down the road.

In some ways, CLASS reflects the promises and perils of an approach to social policy closely associated with one of President Obama's most influential domestic policy advisers, Cass Sunstein. As a professor at the University of Chicago, Sunstein joined economist Richard Thaler in championing an idea they call "libertarian paternalism," whereby government would encourage but not force people to make the "right" choices. The classic example is saving for retirement: Research cited by Sunstein and Thaler has shown that seemingly small decisions, such as requiring people to opt-out rather than asking them to opt-in, can have large effects on enrollment in a savings plan.

The CLASS program is "libertarian paternalism" lite. Unlike a traditional social program funded by new taxes, CLASS aims to "nudge" employers and individuals to insure themselves against the possibility of future needs. Instead of mandates, it offers both employers and employees the chance to opt in. Even so, it remains to be seen how successful it will be. The Congressional Budget Office has estimated that only 5 percent of eligible workers will sign up for CLASS. That wouldn't help a great deal.

Libertarian paternalist solutions may be more politically palatable than old-fashioned tax-based policies. But they also can be more complicated and less effective. Other countries do things differently. When Germany addressed the problem of long-term care in 1995, it imposed a 1.7-percent fee on worker salaries and pensions. By making participation mandatory and universal, Germany sidestepped the problems of adverse selection. In contrast, CLASS avoids coercion or collective action in favor of that most American of values, individual choice. How many Americans actually will make the choice remains an open question.

Join the Discussion

After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.

More from Finance