CBO's Analysis of a Proposed Federal Insurance Program for Long-Term Care

July 7, 2009

Yesterday CBO released a letter in response to a request for additional information regarding our analysis of provisions of the Affordable Health Choices Act that would establish a federal insurance program for long-term care. Those provisions are called the Community Living Assistance Services and Supports Act (the CLASS Act) and are currently under consideration by the Senate Committee on Health, Education, Labor, and Pensions.

Enrollment in the program would be open to noninstitutionalized individuals who are either active workers or the nonworking spouse of an active worker. Premiums would vary according to the persons age at enrollment. The average premium would be limited to $65 per month in 2011 and indexed for inflation in subsequent years. The benefit would be at least $50 per day (indexed for inflation). To qualify for benefits, an enrollee would need to have paid premiums for at least five years and been actively working for at least three of those years; the enrollee also would have to be unable to perform at least two or three activities of daily living. The legislation would provide considerable authority to the Department of Health and Human Services (HHS) Secretary to adjust premiums and benefits to maintain the solvency of the program. The Secretary would be allowed to reduce all benefits to the daily minimum of $50 and, if that action was inadequate to avoid insolvency, to increase enrollees premiums.

CBO estimates that the proposals net effect on the federal budget would be to reduce the budget deficit by about $58 billion during the 20102019 period, including some effects on federal revenues and Medicaid spending. In CBOs analysis, the real (inflation-adjusted) average monthly premium was assumed to be $65, and the real daily benefit was assumed to average about $75. The estimated reduction in the federal budget deficit over the next 10 years is chiefly the result of the five-year vesting requirement; the payout of benefits would not begin until 2016, five years after the initial enrollment in 2011.

Beyond the 10-year budget window, the effects of the program could be quite different, and CBO expects that the HHS Secretary would need to reduce benefit payments and increase premiums to maintain the programs solvency. Assuming that the premiums and daily benefit amounts were $65 and $75, respectively, CBO estimates that benefit payments would exceed premium income within the first decade after 2019, leading to depletion of previously accumulated premium reserves (and accumulated interest on those reserves). Although outcomes in the distant future are very uncertain, CBO expects that actions by the Secretary to reduce all benefits to the real daily minimum of $50 and raise the real average monthly premium for new enrollees to roughly $85 sometime during the first decade after 2019 would be adequate to ensure that the program could pay benefits through 2050.

Overall, CBO estimates, if the Secretary did not modify the program to ensure its actuarial soundness, the program would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window. If the Secretary did act to ensure the programs solvency, the program and its effects on Medicaid spending and revenues mightor might notadd to future budget deficits, depending on the specific actions that were taken.