Consumer Power Report: No CLASS

Published September 26, 2011

One of the worst aspects of President Barack Obama’s health care law is the CLASS entitlement, an unsustainable long-term-care program adopted as a testament to the late Ted Kennedy. CLASS is practically designed to fail, and the fact that the Congressional Budget Office judged it a positive deficit reform should tell you a thing or two about how they calculate things.

Now that the administration has gotten around to implementing CLASS, it turns out the thing just won’t work right – so on Thursday they let slip the program was being shut down. From the AP:

In an interview Thursday, a top technical expert working on a financial plan for CLASS said the eight people on the program staff were told last week they would be reassigned.

“They told us that they were going to take a pause,” said Bob Yee, an actuary responsible for long-range cost estimates. Yee said he decided after getting the news to leave the government, and plans to return to private industry.

“It’s difficult trying to find a solution without an in-house actuary,” said Yee. “My feeling is that they are not going to make some wonderful discovery. You draw your own conclusion about what’s going to happen.” Yee’s departure was first reported by The Wall Street Journal.

A central design flaw has dogged CLASS from the beginning. Unless large numbers of healthy people willingly sign up, it will create a situation where soaring premiums for a smaller group of frail beneficiaries eventually destabilize the program.

Avik Roy has more on this, along with several updates that give you a picture of an administration struggling with how to handle this announcement that a liberal pet project is biting the dust. Their clumsy admission of the truth didn’t help – now liberal Senators are upset about the decision. Don’t confuse us with math, they say.

“It’s sad,” said Sen. Barbara Mikulski (D-Md.), a champion of the program that was developed in her Senate HELP Committee by the late Sen. Edward Kennedy (D-Mass.). “We’re evaluating our strategy now.”

Rep. Frank Pallone (D-N.J.), who sponsored the program in the House, said terminating the program would be a “huge mistake.”

“Obviously the administration has put some kind of hold on it,” he told The Hill. “I’m going to try to find out why, but beyond that I’m going to continue to press them to implement it as soon as possible because it makes sense.”

But this isn’t just a partisan bias against unworkable systems. To his credit, North Dakota Democrat Kent Conrad – who has called CLASS a “Ponzi scheme of the first order” – acknowledged that the calculations behind it just don’t work. “It’s unfortunate because it tries to address a real need. The problem is what was put in place doesn’t work, it doesn’t add up,” Conrad said. Couldn’t you say that about all of the president’s health care policies?

— Benjamin Domenech



According to the Beacon Hill Institute’s latest study, Massachusetts’ health care reform has come at a cost of at least 18,000 jobs.

Several recent studies have quantified the effect of Massachusetts Health Care Reform (HCR), but only in a limited way. In this study, The Beacon Hill Institute at Suffolk University deployed its State Tax Analysis Modeling Program (STAMP) to estimate the effects on the Massachusetts economy. The model applies sound economic theory to the determination of the effects of tax changes on employment, investment and incomes. Because it has driven up health care costs, the health care mandates exert effects similar to higher taxes and thus distort the decisions of consumers to spend and firms to invest. As such, the health care law ripples through the economy signaling price changes which must be paid.

Specifically, the Institute found that HCR:

  • has driven total health insurance costs up by $3 billion and $6.1 billion;
  • caused Massachusetts to employ between 15,551 and 21,422 fewer people;
  • slowed the growth of disposable income per capita by $376; and
  • reduced investment in Massachusetts by between $21.28 million and $29.33 million.

“The health care law does not exist in a vacuum,” says BHI Executive Director David G. Tuerck. “The ‘shared sacrifice’ needed to provide universal health care includes a net loss of jobs, which is attributable to the higher costs that the measure imposed.”

SOURCE: The Heartland Institute


Andrew Biggs writes in National Affairs on the limits of means-testing as an approach to entitlement reform.

Means-tested benefits are relatively common in the United States in welfare programs aimed at reducing poverty. Familiar means-tested benefits include the Earned Income Tax Credit, Medicaid, and Supplemental Security Income, while a large number of tax credits or deductions (like the child tax credit, new homebuyers tax credit, and deductions for pension contributions) are phased out as incomes rise. America’s reliance on means-tested programs stands in contrast to most European countries, where universal benefits are far more prevalent. Many European countries pay, for instance, a universal child credit to all parents, and provide universal health coverage (not only to the elderly) regardless of income.

Means-tested benefits have the advantage of being more narrowly targeted, and therefore less costly, than universal benefits. One disadvantage, however, is that a means-tested benefit imposes an implicit marginal tax on people with earnings close to the income level at which the benefit phases out. For instance, for an eligible taxpayer (or couple) with two or more children, the benefit received through the Earned Income Tax Credit declines by 21 cents for each dollar earned above the prior year’s income, imposing an implicit marginal tax rate of 21% on recipients’ increased wages.

When one considers the implicit penalties for earning additional income imposed by all federal welfare programs, and combines them with explicit federal and state taxes, households in poverty can face higher marginal tax rates on taking a new job or working more hours than do households earning significantly more (as much as five times the poverty level, in fact).

The negative effects of these incentives on work are mitigated, however, by the fact that most people cannot easily choose how many hours to work. For the overwhelming majority of Americans, the choice is essentially to work a full-time job (40 hours per week) or not to work at all. Moreover, because of the complicated ways in which federal welfare programs and taxes affect one another, the effective marginal tax rates can be nearly impossible to decipher; their negative incentives thus become difficult to act upon. The result is that most people in the prime of their working years – whether they qualify for government benefits or not –will work as much as they can, regardless of marginal incentives.

But the story is different with older Americans. Often, seniors have far more flexibility – fewer immediate financial obligations, and more accumulated resources to cover the obligations they do have – as well as real choices about whether to work and how much to save. Marginal incentives can therefore make a very real difference for them (as we shall see). This is one reason why means-tested benefits – though common among federal programs targeted at the poor – have, for the most part, not been applied to Social Security and Medicare.

SOURCE: National Affairs


An interesting excerpt from remarks by Atul Gawande on health care costs:

My son was having trouble in school. He was doing fine but he had drifted down in his grades, and it just wasn’t getting noticed. He was in a class of 30 students to one teacher in the Newton public schools which is a well-funded district. And I went to the parent teacher conference with my wife to try to understand what we might be able to do to help with the situation.

I ran into the new school superintendent, who had been hired to be a school reformer and help make the quality of our schools better. And I said to him, “What are you doing to work on this problem? We have 30 students in my son’s classroom. What are you working on these days?”

And he said, “You know what I’m working on? You know what I spend more time on than anything else? Health care costs.”

He said, “Our tax revenues have been flat. The school enrollment is up, and this year’s teacher health care premiums went up 9 percent.”

I said, “Oh.” And I went off to the parent-teacher conference. (laughter)

And on the way, I ran into a teacher that I had operated on. She’d had a lymphoma, and we’d been able to save her. But I realized she was one of that small percentage that accounted for more than half of their health care costs. And that’s when I realized, I had doomed my son’s education.

Now, I do not believe that the choices are between whether my son gets a great education or his teacher gets great care for her lymphoma. I believe that it’s possible to have great care for her lymphoma and a great education for him.

SOURCE: Boston Globe


An interesting Mercatus study looks at the transition from defined benefit to defined contribution plans across the country.

State pension liabilities across the United States have surged to unprecedented levels in recent years. Historically, periods with higher levels of unfunded state pension liabilities have been associated with slower economic growth and restructuring of pension programs. Program restructuring takes many forms, and it ranges from benefit cuts to changes in eligibility requirements, to contribution rate increases – a more subtle form of restructuring involves adjusting the discount rate and actuarial assumptions built into defined pension benefit programs.

Many different state pension reform proposals have been proposed in the academic literature, and some states have engaged in radical reforms that shift public pensions from defined benefit to hybrid or defined contribution plans. The common rationale for reform is that defined benefit plans are proving costly to taxpayers, and the costs cannot be carried forward during stagnant economic times.

In addition to their high total costs – as evidenced by total contribution rates that exceed 20 percent per dollar in most public programs – defined benefit programs are less predictable when it comes to future funding costs and outlays.

Despite the need for state-level reform, defenders of defined benefit programs assert that the programs simply need tweaks to be sustained; proponents resist radical reform because they are concerned about capital flight and the transition costs associated with shifting from defined benefit plans. This paper explores the current state of public pensions across the United States and addresses transition cost and capital flight concerns. Further, it examines defined benefit programs vis-à-vis defined contribution plans, using a number of case studies to illustrate the challenges many states face.

SOURCE: Mercatus Center


A sloppily written HHS rule could raise all sorts of privacy concerns, Rep. Tim Huelskamp (R-KS) writes in an oped at the Washington Examiner:

The HHS has proposed the federal government pursue one of three paths to obtain this sensitive information: a “centralized approach” in which insurers’ data go directly to Washington; an “intermediate state-level approach” in which insurers give the information to the 50 states; or a “distributed approach” in which health insurance companies crunch the numbers according to federal bureaucrat edict.

It’s par for the course with the federal government, but abstract terms are used to distract from the real objectives of this idea: no matter which “option” is chosen, government bureaucrats would have access to the health records of every American — including you.

There are major problems with any one of these three “options.” First is the obvious breach of patient confidentiality. The federal government does not exactly have a stellar track record when it comes to managing private information about its citizens.

Why should we trust that the federal government would somehow keep all patient records confidential? In one case, a government employee’s laptop containing information about 26.5 million veterans and their spouses was stolen from the employee’s home.

There’s also the HHS contractor who lost a laptop containing medical information about nearly 50,000 Medicare beneficiaries. And, we cannot forget when the Agriculture Department’s computer system was compromised and information and photos of 26,000 employees, contractors and retirees potentially accessed.

SOURCE: Washington Examiner


I gave an interview last week concerning the Burkhauser study, which is starting to make the rounds on Capitol Hill. Several Hill staffers have reached out in regards to this story in the past few days, and I’d expect hearings on the matter in the future. For a summary of the study and reactions, read this Marc Kilmer piece at The Heartlander.

SOURCE: New Ledger