By Foon Rhee, Boston Globe

The late Senator Edward M. Kennedy’s legacy goes on and on in the health care debate.

The legislation that top Senate Democrat Harry Reid unveiled Wednesday night includes a bill that Kennedy had championed for years. Known as the CLASS (Community Living Assistance Services and Supports) Act, it would give the elderly at least $50 a day for long term care and allow them to stay at home if they want.

“The CLASS Act was immensely important to Senator Kennedy because, as he said, ‘It makes a simple pact with all Americans – if you work hard and contribute, society will take care of you when you fall on hard times.’ The Act gives the elderly and people with disabilities opportunities to continue living at home, function in their communities, and obtain the long-term care and support they need,” Senator Paul G. Kirk Jr., who is carrying the health care baton for Kennedy as his temporary replacement, said in a statement today.

He and other supporters say it would save money in the long run by keeping people off Medicaid, but critics have questioned the cost.

A summary of the proposal, provided by Kirk’s office, is below:

BILL SUMMARY

The Need for the CLASS Act

Long-term supports and services are an area that is not currently affordable or accessible for millions of Americans. Approximately 5 million people under age 65 living in the community have long-term care needs. More than 70,000 workers with severe disabilities in the nation today need daily assistance to maintain their jobs and their independence. Many of these people rely on unpaid family members and friends to provide that care. Demographic trends suggest that these sources of support will be increasingly scarce in the coming decades, and paid assistance will be increasingly needed by people with such disabilities.

It is estimated that 65% of those who are 65 today will spend some time at home in need of long-term care services – which costs on average almost $18,000 per year. Currently one and a half million people are in nursing homes. Approximately 9 million elderly Americans will need help with activities of daily living in the coming year, and by 2030 that number will increase to 14 million.

Contrary to popular belief, Medicare and most private health insurance plans pay for long-term care for only a short period of time. Persons with the most intense needs will frequently exhaust their assets and rely on Medicaid. Under the CLASS Act, a new voluntary long-term care services insurance program will provide a lifetime cash benefit that offers seniors and people with disabilities greater protection against the costs of paying for long term services and support so that they can remain in their homes and communities.

How the Program Works

The CLASS Act offers a voluntary, self-funded program for people who are currently employed. Affordable premiums will be paid through payroll deduction, if an individual’s employer decides to participate in the program. In this case, people who do not wish to participate may opt out of the program. Self-employed people or those whose employers do not offer the benefit will also be able to join the program. Participants must pay premiums for five years and work for three years in order to qualify for benefits.

One of the ways the CLASS Act program is unique is that it relies less on medical underwriting than most private insurance plans. All working Americans can participate in the program. The conditions for qualifying for benefits are the same as those commonly used in private insurance plans – when participants in the program need help with a set number of activities of daily living, they will be assessed and, if eligible, start receiving benefits.

The CLASS Act seeks to empower consumers. Individuals usually know best which services and goods they need to stay independent. Yet they often need help in navigating the complicated health and long term services marketplace. For these reasons the Act provides an average cash benefit of $75 a day, so that participants have the most flexibility to meet their own needs. The actual cash benefit will depend on a person’s level of impairment. Counseling, coordination and advocacy services to facilitate the receipt of high quality services will be available to every beneficiary.

Actuarial Framework

The program stands on its own financial feet. It is not a government entitlement program and it does not affect receipt of or eligibility for other benefits, such as Social Security, SSI or SSDI. If an individual uses Medicaid services, the CLASS benefit will be used to offset part of the cost of community based, residential or nursing home care.

Voluntary long term care insurance poses challenges for establishing a solid financial structure. Early formulations of the CLASS Act raised concerns over its financial viability. Through constructive interaction with the industry and other interested parties, several changes in the program were made to address those concerns. First, spouses are not eligible as dependents, decreasing the amount of adverse selection possible in enrollment. Second, the Secretary of HHS has flexibility in selling premiums to ensure 75 year solvency, and flexibility in setting eligibility requirements to qualify for the cash benefit. Third, premiums are age-rated. Fourth, employment requirements were raised to $4,000 a year for 3 years.

Actuarial modeling has further evaluated potential changes in the program to ensure the program’s solvency. In particular, indexing the premium at even half the rate of the consumer price index leads to an 83% reduction in premiums. The indexing also ensures growth of the premium amount over time, creating a growing reserve fund of unused premiums at the start of the program which will not be tapped until the third decade of the program – at which point advances in care will likely have changed the face of disability in our country.

All told, these changes ensure that the CLASS program is financially viable and self-sustaining long into the future.

The Participation Question

In its modeling assumptions, the Congressional Budget Office assumes a 5% participation rate in the CLASS program, based on current participation rates for private long-term care insurance. However, a number of factors suggest that participation in the program will be substantially higher than 5% – which will further strengthen the financial outlook for the program.

First, the benefit in the CLASS program is a cash benefit, rather than a service-based payment. The ability to flexibly address one’s own needs by purchasing anything from a caregiver’s services to orthotics to a shower chair will make this program more attractive to consumers than traditional long-term care insurance. This choice is expected to translate into higher participation rates.

Second, the program is a lifetime benefit. In contrast, only 4% of group long-term care insurance products and 20% of individual long-term care insurance products have a lifetime benefit. With a lifetime cash benefit, the program will generate increased interest and participation.

Third, the program, unlike private long term care insurance, allows autoenrollment and payroll deductions for premiums. The program maintains its voluntary nature through an employee opt-out, but the autoenrollment feature will increase participation levels above that expected for proactive enrollment, a trend that has been demonstrated with 401(k) plans, and that underlies automatic enrollment in the Federal Employees’ Group Life Insurance plan, where enrollment rates are 84%.

Fourth, government endorsement of the plan can be expected to increase participation. The Long Term Care Partnership Program, for instance, found that people who enrolled in private long term care insurance plans reported that the endorsement of the State was an important factor in the decision to participate.

Long-Term Savings

Beyond being self-supporting and voluntary, the program can be expected to generate long-term savings in Medicaid. The $75 daily benefit is applied towards any Medicaid long term care costs. In addition, the program will help people live independent lives at home and in the community. When people with disabilities get the services they need, they are less likely to enter a nursing home or hospital.

The average $75 daily cash benefit in the program –the equivalent to $27,375 a year – will certainly enable people to purchase services in the community, and delay or avoid more expensive institutional care. In fact, the cash benefit is larger than the average yearly cost of home health services ($18,000). Based on 2008 caregiver prices, $75 a day will purchase 2 ½ hours of daily service from a home health aide, 4 hours of daily service from a homemaker, and cover all of the daily cost of an Adult Day Care Center.

Since the CLASS program is innovative, there is not exact precedent, but there are examples and systematic evidence that demonstrate the ability of community-based services to avoid or delay more expensive care in institutions. One study found that the “Cash and Counseling” program, which provides a cash benefit towards home health services, reduced nursing home use by 18% over 3 years. Another study of expanded home-based and community based services through Medicaid waivers from 1995 to 2005 found that states with high spending on such services under Medicaid had 15 percent less Medicaid spending on nursing home care than states with low spending on such services. As a result, expansion of these services reduced institutional spending, and produced long-term cost savings after the initial investment in establishing these community services.

A major factor driving entry into a nursing home is caregiver stress. Eliminating such stress prevents 73,900 long-staying nursing home admissions over a two year period (roughly one quarter of all long-staying nursing home admissions). Providing a cash benefit under the CLASS program to purchase additional caregiver services can therefore be expected to reduce such admissions.

Consumer-directed benefits such as in the CLASS program have the additional advantage of increasing consumer satisfaction with services. When consumers directly hire their caregivers (as is the case with a cash benefit), both the consumer and the caregiver report higher rates of satisfaction. Home-based care through a consumer-directed approach is therefore a sustainable alternative to institutional care.

For all of these reasons, the CLASS program can be expected to generate long-term savings, while also enabling the growing population of older and disabled citizens to continue enjoying functional lives in their homes and communities.