April 5, 2011
One negative provision of Obamacare is back in congressional crosshairs. The CLASS (Community
Living Assistance Services and Support) Program, a new long-term care entitlement, has already endured withering criticism. In July 2009, the American Academy of Actuaries released a blistering report on its structural flaws. Senator Kent Conrad (D-ND), Chairman of the Budget Committee, referred to CLASS as a Ponzi scheme during the Obamacare debate. And more recently, President Obama’s deficit commission recommended repealing or significantly revamping the program.
Secretary Sebelius has repeatedly asserted that CLASS is unsustainable. She has advocated repeal if CLASS can’t be reformed. It appears likely that the Obama Administration knew the program was fiscally unsustainable before Obamacare became law, and included it in the health care law only as a mechanism to reduce the price tag of the bill. Now, Secretary of Health and Human Services Kathleen Sebelius is asserting power that Congress did not grant her in a futile attempt to remake the program into something sustainable.
CLASS fails due to the interaction of three of its requirements. First, everyone who earns more than $1,200 a year in wages can enroll. Second, unhealthy individuals and healthy individuals of the same age must be charged the same premium. And third, individuals who earn below the federal poverty line are required to pay a monthly premium of only $5.
The program requires that all its funds come solely from participants’ premiums, so artificially low $5 premiums will have to be cross-subsidized with much higher premiums for individuals who earn above the poverty line. This combination leads to an adverse selection spiral, where younger and healthier individuals will be discouraged from participating, resulting in a disproportionate number of poor and sick individuals in the risk pool.
In the wake of the realization that CLASS is unsustainable, Secretary Sebelius has claimed broad power to change the program’s structure to ensure its solvency. She has stated that she cannot change the underwriting provision, leaving her with two possible changes that would improve the CLASS risk pool: increasing the minimal earnings requirement and increasing the $5 premium for individuals below the poverty line.
Secretary Sebelius has not asserted the authority to increase the nominal premium for individuals below the poverty line, and a careful reading of the statute indicates that she wouldn’t have the authority to do so. However, she has suggested increasing the minimum earnings requirement up to $12,000, a tenfold increase.
But a Congressional Research Service (CRS) letter released on March 15 indicates that she does not have the power to do this. Apparently, Secretary Sebelius would seek the authority under CLASS provision §3202(6)(C), which reads that the Secretary of HHS “shall promulgate regulations specifying exceptions to the minimum earnings requirement [described above] for purposes of being considered an eligible beneficiary for certain populations.”
According to the CRS report, the legislative intent was clearly for the Secretary to be able to lower the threshold for CLASS eligibility. The CRS expressed doubt about her power to increase the earnings requirements, however. The report concluded that: “[B]ased on the ordinary meaning of the word ‘exceptions’ and the opinion in Public Citizen v. HHS, it appears that there is a basis upon which a court could conclude that §3202(6)(C) alone would not provide the Secretary with sufficient authority to raise the minimum earnings requirement for eligible beneficiaries under the CLASS Act.”
Despite these problems, President Obama’s 2012 fiscal year budget requested more than $100 million to advertise CLASS. Rejecting this request is really a no-brainer.