Not a CLASS Act

by on October 9, 2011 at 10:58 am in Current Affairs, Data Source, Law, Medicine | Permalink

When President Obama’s health care proposal was being debated we were repeatedly told that the “The president’s plan represents an important step toward long-term fiscal sustainability.” Indeed, a key turning point in the bill’s progress was when the CBO scored it as reducing the deficit by $130 billion over 10 years making the bill’s proponents positively giddy, as Peter Suderman put it at the time. Of course, many critics claimed that the cost savings were gimmicks but their objections were overruled.

One of the budget savings that the critics claimed was a gimmick was that a new long-term care insurance program, The Community Living Assistance Services and Supports program or CLASS for short, was counted as reducing the deficit. How can a spending program reduce the deficit? Well the enrollees had to pay in for at least five years before collecting benefits so over the first 10 years the program was estimated to reduce the deficit by some $70-80 billion. Indeed, these “savings” from the CLASS act were a big chunk of the 10-yr $130 billion in deficit reduction for the health care bill.

The critics of the plan, however, were quite wrong for it wasn’t a gimmick, it was a gimmick-squared, a phantom gimmick, a zombie gimmick:

They’re calling it the zombie in the budget.

It’s a long-term care plan the Obama administration has put on hold, fearing it could go bust if actually implemented. Yet while the program exists on paper, monthly premiums the government may never collect count as reducing federal deficits.

Real or not, that’s $80 billion over the next 10 years….

“It’s a gimmick that produces phantom savings,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates deficit control..

“That money should have never been counted as deficit reduction because it was supposed to be set aside to pay for benefits,” Bixby added. “The fact that they’re not actually doing anything with the program sort of compounds the gimmick.”

Moreover, there were many people inside the administration who thought that the program could not possibly work and who said so at the time. Here is Rick Foster, Chief Actuary of HHS’ Centers for Medicare and Medicaid Services on an earlier (2009) draft of the proposal:

The program is intended to be “actuarially sound,” but at first glance this goal may be impossible. Due to the limited scope of the insurance coverage, the voluntary CLASS plan would probably not attract many participants other than individuals who already meet the criteria to qualify as beneficiaries. While the 5-year “vesting period” would allow the fund to accumulate a modest level of assets, all such assets could be used just to meet benefit payments due in the first few months of the 6th year. (italics added)

So we have phantom savings from a zombie program and many people knew at the time that the program was a recipe for disaster.

Now some people may argue that I am biased, that I am just another free market economist who doesn’t want to see a new government program implemented no matter what, but let me be clear, this isn’t CLASS warfare, this is math.

Hat tip: Andrew S.

CIP October 9, 2011 at 12:18 pm

Alex,

You are biased, and you are just another free market economist who doesn’t want to see a new government program implemented no matter what…

It is, however, absolutely true that all sorts of zombie stuff gets incorporated in budgets and budget projections. Did you happen to notice that when Bush & Company were slipping through a few trillions in their vearious military and tax cutting adventures? I can’t seem to recall…

Jason October 9, 2011 at 12:34 pm

CIP, in fact Alex wrote about Bush fiscal shenanigans on a number of occasions

http://marginalrevolution.com/marginalrevolution/2003/09/the_beast_isnt_.html

MSB October 9, 2011 at 1:43 pm

CIP, your comments and blog show that you are not biased at all. No one bit. Totally impartial. :- /

Jason October 9, 2011 at 12:42 pm

I’m not sure I trust your claims of “math”; you frequently cite Casey Mulligan’s various structural unemployment claims with summer jobs and senior employment (both < 0.1% of the economy — how are these tiny AS effects supposed to call into question the theoretical support of a 10% AD effect?). Ignoring math when it is convenient seems like post hoc rationalization of already held beliefs to me.

guffaw October 9, 2011 at 2:39 pm

+100

When right-wingers get all fiscally conservativish, it’s math.

When in power and the spending is of the drunken sailor school of thought, it’s absolutely crucial to national security, ergo unpatriotic to question.

TGGP October 10, 2011 at 12:28 am

Jason links to what Alex said about Bush’s national security spending. Casey Mulligan has published on the Economix blog that he agrees with Joseph Stiglitz on the cost of the Iraq war.

Jim October 9, 2011 at 12:55 pm

Alex, I agree with the above commenters.

Whenever you point out and substantiate that Obama and the Dems are lying through their teeth, the real issue to be discussed is something you did years ago. Or perhaps something you did not do years ago. Either one.

It’s because of observations like these that MR is touted as having a highly-intelligent comment section.

E. Barandiaran October 9, 2011 at 1:04 pm

Alex, you’re wrong. This is not a math question. Fraudulent clowns and their mercenary media believe that they can fool all of the people all of the time. Indeed Gordon Tullock was right when he said (1973 comment on JMCB about an interesting Tobin/Friedman debate on inflation):

“But this whole discussion of deception as a government policy raises most interesting political problems. To whom is his argument addressed? We live in a democracy and hence it might be thought that Tobin was attempting to popularize his views among the voters in hopes that the government will adopt them. Clearly this
is impossible, however, for the voters cannot adopt a policy of deceiving the workers because they are largely the same people.Tobin’s argument must be addressed to some group which is thought of as politically powerful and capable of carrying on a policy of deceiving the workers without telling the voter-workers what it is. It is only on this elitist interpretation that it makes any sense at all.”

Thus, I’m not surprised that ex post some elitist professors are upset at themselves for having trusted fraudulent clowns. Tea partiers may not know math but usually don’t doubt about what they can expect from fraudulent clowns.

BTW, I hope tomorrow both my friend Gordon Tullock and my professor Anne Krueger win the Nobel Prize.

Wagster October 9, 2011 at 1:08 pm

This is just the way government accounting is done. The deficit would be trillions of dollars worse if is, say, Social Security receipts weren’t counted as part of general revenues because they were slated to be spent. That this objection crops up in such a narrow instance seems to indicate opportunism rather than a hankering for honesty.

JWatts October 9, 2011 at 1:39 pm

No. this is not just an example of typical government accounting. The CLASS program was never fiscally sound, nor even close. However, since the CBO only scores programs for the first 10 years it made sense from a political point of view to include the program (and net a campaign promise) by including it, but structuring the expensive costs to kick in at year 11. Now the administration is firing off the staff, because they know the program can never be justified. It served it’s purpose in masking the true costs of the Healthcare Reform act, now it can be dispensed with.

Wagster October 10, 2011 at 9:05 am

Simply not true. In the case of Health Reform, CBO offered estimates over the second decade too, and the total savings in that period were even greater than the first.

Cliff October 10, 2011 at 10:19 am

He was talking about CLASS

Nick October 9, 2011 at 1:37 pm

I’m seeing two main concerns raised:

1. The money paid in to the program shouldn’t be counted as deficit reduction over the next 10 years because it’s meant to be paid out at a later date.

2. The program may not be actuarially sound (i.e., won’t pay for itself)

To the first, the CBO is just using the cash basis for accounting, which I’m fairly certain they use for most else. And even if the $80 billion were taken out of the picture, the PPACA would still be deficit-positive.

To the second, I looked it up, and, by law, HHS has to make the plan 75-year solvent, so either they’re going to make the numbers work or it’s not going to be implemented. Tabarrok cites an actuary referring to an earlier draft of the plan from 2009, so I’m not seeing his concerns as applicable to whatever the current plan is.

Jan October 9, 2011 at 1:51 pm

On Alex’s broader point: the CBO has specific rules it follows when scoring legislation. It must apply the same standards to every bill. It’s not tricky, it’s necessary. So the gimmick here I guess was charging people insurance premiums before starting to make payouts to the beneficiaries. Many, including the non-partisan Commonwealth Fund, a foundation that promotes a high performing health care system, have shown that the CBO consistently underestimates cost savings from health policy reforms. It underestimated the savings from the Medicare prospective hospital payment system by over 100%; the health savings from Balanced Budget Act of 97 by 50-100%; and it overestimated the costs of Medicare Part D by about 40%.

On CLASS Act specifically: yes, it is not going to be implemented unless it is actuarially sound. If someone has a better solution, we should hear it. Medicare generally doesn’t cover the costs of long-term care, so under the status quo most people must access it through a very fun process called “spending down.” Old people who need long term care sell off their assets (not allowed to give them to family members!) until they are indigent and can qualify for Medicaid-covered long term care.

James Hare October 9, 2011 at 11:12 pm

Lived through that with my grandmother suffering from Alzheimer’s. Her medical bills bankrupted my family, causing me to leave college 3 credits short of a degree and my parents to sell their house.

JWatts October 10, 2011 at 2:23 pm

What? How? My grandmother had a stroke and required a full time nursing home with higher than normal medical care. So my Mom, filled out the paperwork, based upon my ‘Grandmothers’ assets. We had to sell my grandmothers car. Since she lived with us, she didn’t have a house. We combined the money from the car with her liquid assets. Used that for the initial fees. Then had her declared indigent. At that point Medicare started paying for the facility.

I don’t understand how your grandmothers condition would have affected your parents. They are under no obligation to pay her medical bills. The only obligation is that you must use up all of your grandmothers personal assets before Medicare kicks in.

Boonton October 10, 2011 at 3:18 pm

That’s very nice JWatts, but where’s the endgame here? Economically rational grandma’s will basically make sure they have no assets at the end of their lives thereby making sure nearly all the cost ends up being incurred by the taxpayer. Any program then that gets lots of people to start chipping in $50-$100 per month while they are working would only make a bad situation better.

y81 October 9, 2011 at 4:17 pm

“it is not going to be implemented unless it is actuarially sound”

Probably true, therefore it will not be implemented. However, if the administration knew that it was actuarially unsound and would never be implemented, it was dishonest to count its implementation as a deficit reduction.

Obviously, the CBO generally scores things on a ten year time frame, because the future grows progressively more unpredictable as you move out in time. Many corporations do projections on a similar basis. The problem arises when people deliberately design programs to game the CBO scoring system, by shoehorning revenues into the early years and starting the big outflows in year 11. That sort of destructive dishonesty basically never happens in the private sector–you would be fired from a corporate strategic planning department if people found you gaming the financial projection system–but it happens all the time in government. Which is one reason why you should never trust the government, or vote for anyone who wants to expand it, or do anything to help it, because it is composed of crooks.

Stubbs October 9, 2011 at 10:14 pm

According to a Tuesday editorial in the WSJ, HHS recently suspended “Class policy planning, told Senate Democrats to zero out Class funding for 2010, reassigned Class’s career staffers to other projects and pink-slipped the programs chief actuary. Other than that it’s full speed ahead.”

Tom Fitz October 9, 2011 at 10:25 pm

Re Jan: the necessity to “spend down”, rather than estate taxes, would be called the real “death tax” if we had a political discourse worthy of the name.

Re y81: really, “That sort of destructive dishonesty basically never happens in the private sector…”? Where were you in 2008?

James Hare October 9, 2011 at 11:15 pm

Better question: Where are you now? It’s not like the private sector has become more honest or transparent since 2008.

Boonton October 10, 2011 at 2:42 pm

I’m glancing the reports and reading an less than usually helpful wikipedia summary of the act but what I’m getting so far is:

1. Premiums and benefits have not been set yet, in fact aren’t even due until Oct 2012. So how sound it would be actuarial wise is very unclear.

2. The report seems to base its case on adverse selection…in other words people who sign up for it will be people who know they will need nursing home care in the near future and will therefore bankrupt the plan almost as soon as it goes live.

The problem, though, is, well who the hell are these people? To do that you have to be working more or less full time and opt to have $100-$200 per month taken out of your check for five years. Barring a psycic ability to predict the future, who knows they will need nursing home care but at the same time also know that they have at least 5 good working years left to them (if you get too sick to work at year 4.0 you get nothing)?

Boonton October 10, 2011 at 3:20 pm

BTW, the average stay before a person dies in a nursing home is about two years so the ‘adverse selection’ theory here seems very suspect. How many people know they will live exactly 7 more years AND at the same time know they can be sure they will be able to work full time for 5 of those years before collapsing and needing total care for 2 years? Yes such people exist but they really know who they are and know to use this program?

Boonton October 10, 2011 at 2:57 pm

I mean here’s another questionable part:

Alternatively, suppose that a significant number of people without any limitations in [activities of daily living] could be persuaded to participate in the program. How many people would be needed to cover the benefit costs for those qualifying as beneficiaries? For the sake of illustration, suppose 10 million people qualify for benefits of $50 per day (annual cost of $182.5 billion). About 234 million people, paying premiums of $65 per month, would be needed to cover this cost (ignoring administrative expenses). The size of the U.S. population aged 20 and over is about 225 million, and about 165 million of these are employed. This rough—but probably not unrealistic—example further calls into question the feasibility of the maximum financing versus the minimum benefits.”

OK, here’s the problem….the nursing home population of the US is already about 1.4M!

So today we have 1.4M in nursing homes, how are we paying for that? well first of all most of them are not paying out of pocket and most of them are paying much, much more than $50 per day. Think more like at least $200 a day. The answer is we are already paying for it. We are paying for it in taxes, in decreased home equity (if your parents need a nursing home and won their own home, guess what you ain’t getting it when they die!), and a few of us are paying for it by taking out pretty expensive long term care policies.

In theory if 234M opted to pay $65 per month into some type of LTC system, there’d be some increased utilization and reallocation of spending. Fewer old people would hit nursing homes on Medicaid or if they did Medicaid could pay less since this program would pick up maybe 1/3 or more of it.

So the doomsday scenero isn’t so much a problem with the program but with the universe itself. Nursing home care is very expensive and if we as a society are going to have 10 million people in it we are going to have a massive problem. But then this might just be one of those “in 100 years NYC will be drowning in hoarse feces” type of predictions. As nursing homes get more and more burdensome, cost saving options become more and more interesting and attractive. Options include right now home based care that is often provided by low wage workers who swing by every day to help people with basic chores like washing and eating, improving building codes so new homes are more friendly to older people, systems of adult day care and so on.

Eric October 10, 2011 at 3:32 pm

Consider the voluntary aspect a problem too. If folks “know” they’ll need care why don’t more of them hold LTC policies? People aren’t preparing for old age, especially the boomers and beyond.

LTC or even post-acute care are aspects of our health system I don’t feel many people (those who debate HCR in blog comments that is) know enough about. When discussing health care costs people obsess over doctors vists and pharma but the true black hole of Medicare costs are in acute care settings.

Regardless of the social system/insurance plan/health care delivery reforms that we run with to deal with the coming silver tsunami, it will be interesting to see how government responds with regulations to “protect” those in whichever care setting (home, adult day, LTC facility, etc.) is being paid for with government loot. Nursing home regulation drive provider expense up, and those regulations seem to grow year after year. How soon will AL and even home care providers be regulated to the same degree?

Boonton October 10, 2011 at 3:38 pm

Consider the voluntary aspect a problem too. If folks “know” they’ll need care why don’t more of them hold LTC policies? People aren’t preparing for old age, especially the boomers and beyond.

It seems like a simple way to make this program sound would be to rewrite it as a baseline-insurance option. Opt to pay into it for 5 years, you build up a min. gurantee (say $10,000 of baseline coverage provided thru the gov’t) with a voucherlike option to choose from private LTC companies offering pre-authorized plans. The insurance companies would probably feel better about the risk profile becuase these people have been paying in for 5 years or more so its not like someone who is gaming the system because he knows his health is going to go very soon.

Perusing the web, many private plans offer deep discounts for agreeing to accept waiting periods with 1 year being the most drastic so it seems like adverse selection is only a modest problem for a population willing to pay in 5 years before seeing any benefits.

JimN October 10, 2011 at 7:25 pm

Is it still “Math” if the evidence is describing an earlier draft of a proposal selectively quoted from a partisan senators website and no actual numbers are provided in a partisan reading of the same? It can be, but we don’t have enough to know.

Popeye October 10, 2011 at 11:25 pm

How do Credit Snobs fit into the picture?

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