Long-Term Care Insurance: Coming to an Employer Near You?

Whether you were for it or against it, most of us have enjoyed a much-needed breather from the debate about health-care reform since President Obama signed the bill into law on March 23. (And if you feel the need to articulate political views pro or con, this discussion forum is for you.)

But now that the dust has settled, it's worth exploring a little-discussed provision of the bill, called the CLASS (Community Living Assistance Services and Supports) Act.

The Basics
The CLASS Act puts in place a national insurance pool, offered through employers to help workers pay for long-term care. Those who pay into the system for at least five years will be eligible to receive a minimum of $50 a day in long-term care benefits, either in their homes or in an outside facility, assuming they meet a few specific tests to determine they actually need care. The program takes effect in January 2011, but it will take some time to ramp up. Enrollment isn't likely to begin immediately after the program starts, and participants won't begin receiving benefits until they've been paying into the system for at least five years.

The CLASS Act program would be offered through employers as an employee benefit to working people, including part-timers. It won't be available to people who have already retired. Importantly, however, people who already are sick or disabled will be able to enroll in the program. (Under private long-term care programs, long-term care insurance can be cost-prohibitive for such individuals.) Nor would the program be able to increase premiums on those age 65 or above who had paid into the system for 20 years or more. Premiums may go up from year to year, however, for other employees. The program will rely exclusively on employee premiums, not taxes, to fund benefits. For that reason, premiums would have to cover any benefits paid out.

Employers don't have to offer the program, but those that do would be required to automatically opt employees in, just as is the case with employers who offer automatic 401(k) enrollment for each new employee. Those employees who don't wish to participate would have to opt out. In this respect, CLASS appears to be attempting to capitalize on the well-documented inertia of employees in relation to employee benefits.

What We Don't Know
So that's the basic framework for the CLASS Act. But some key pieces of information are missing. For one thing, while employees at companies that don't offer the CLASS benefit would be able to participate via another venue, there aren't yet details on how these external programs would work.

There's also the elephant in the room: What it will cost employees to participate? For modeling and budgeting purposes, the Congressional Budget Office used a $120-per-month premium as the baseline, but the real cost to employees will depend on how many people participate, as well as the ratio of sick to healthy people and old and young folks in the pool. The fewer people drawing benefits from the program (that is, the younger and healthier the pool is), the lower the premiums for all participants. Some critics have argued that because sick or disabled people wouldn't be screened out, the pool of insured individuals would include significant adverse selection, meaning that the insured pool would be less healthy overall and premiums could be very high. But the true costs of long-term participation--and the rate at which premiums might increase--will only be clear once CLASS is up and running.

How It Affects Planning
Despite all that we don't know, the role of CLASS in long-term care planning is straightforward for a few constituencies.

Retired folks won't be able to participate, so if you're already retired and in the market for long-term care insurance, you have no choice but to purchase that coverage from a private insurer. Ditto for people who are getting close to retirement: The vesting period is five years, so you'd need to be on the job for at least five more years to avail yourself of the program's benefits.

Younger workers (that is, the sub-55-years-old set) with several or more years to retirement can afford to wait to see how the program pans out before purchasing private long-term care insurance. CLASS could prove an attractive alternative--or addition--to a private long-term policy for some individuals. 

For those who are already sick or disabled but still working, CLASS is apt to prove a more cost-effective means of obtaining a long-term care policy than purchasing one on the open market. (Just be aware that the $50-per-day minimum benefit that class provides won't get you very far if you need nursing-home or around-the-clock, in-home care; benefits may be higher for those with greater disabilities)

The calculus is much trickier for others, however. For individuals who are at a prime age to purchase long-term care insurance--55 to 65--but still working, one idea would be to enroll in a CLASS program if and when your employer offers one, while simultaneously exploring the pricing of private long-term care policies, to supplement what CLASS doesn't cover. This article discusses some of the factors to consider when evaluating long-term care policies. 

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