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How the CLASS Act’s Demise Ends the Fiscal Argument for the 2010 Health Care Law

Charles Blahous | 10/24/2011 |

On Friday, October 14, HHS Secretary Kathleen Sebelius announced that she was pulling the plug on the “CLASS Act”, a long-term care insurance program contained in the health care law pushed through Congress in 2010. The program had to be killed because there was no way to operate it in an actuarially sound manner as required under a provision inserted by then-Senator Judd Gregg. Secretary Sebelius stated flatly that “we have not identified a way to make CLASS work,” and so HHS would “suspend work” on implementing it.

In the wake of this announcement, two competing narratives have emerged:

A) Opponents of the law argue that the CLASS Act’s demise is but one further proof that the bill was originally passed on the basis of suspect numbers; and that claims of its improving the fiscal outlook were always disingenuous.

B) Supporters argue that the CLASS Act was a peripheral feature of health care reform, that the law will improve federal finances even without it, and that its suspension was actually an example of the process working as it should.

Of these two opposing spins, the numbers clearly support case #A. The inclusion of the CLASS Act was central to the fiscal case originally made for the health care law. CLASS’s demise actually obliterates the fiscal basis on which health care reform was passed.

Let’s review. Throughout 2010 the Obama Administration vigorously promoted the argument that health care reform was critical to improve the federal government’s fiscal outlook. Opponents offered at least five reasons why that wasn’t true. Among them:

1) The savings from Medicare were being double-counted: first to extend the solvency of Medicare, and second to finance a new health entitlement. I have written about this here and here.

2) The Administration’s health care initiative taken as a whole clearly added to the deficit. The appearance of fiscal improvement was created in part by moving one provision (adding higher Medicare physician payments to the deficit) in separate legislation. e21 has written about this here.

Those two arguments were not about the CLASS Act. They are indeed real problems with health care reform. But even if one ignores these two criticisms, the demise of CLASS reflects on three others:

3) The CLASS program was a gimmick employed to show a positive budget impact during the ten-year window (as its start-up revenues rolled in), though the program was widely acknowledged to be untenable.

4) The larger health bill’s favorable ten-year budget score was misleading; it was created by postponing its most significant costs until 2014. The bill appeared to have a positive effect only because ten years of savings provisions were being netted against six years of new costs.

5) The net favorable score resulted from offsetting certain new spending with uncertain future savings. In particular, critics questioned whether Congress would ever follow through with certain Medicare payment reductions.

The demise of CLASS substantiates criticism #3. It also makes criticism #5 more salient as well, as I will show.

But what many have missed is that the end of CLASS also proves criticism #4 (gimmicking the timing of savings and expenditures) to have been right. This criticism was fiercely debated at the time. On March 5, 2010, OMB Director Peter Orszag and Health Reform Director Nancy-Ann DeParle took to the Washington Post op-ed page to confront it head-on:

“(S)ome skeptics have claimed that the $100 billion in deficit reduction the president's plan would achieve over the next decade is mere gimmickry because the legislation would pay for only six years of coverage expansions with 10 years of budgetary offsets. Now, it's certainly a time-honored Washington budget gimmick to pay for just a few years of costs with many years of savings. But if that were the course being taken, we would expect to see a large hole at the end of the first decade and ever-larger deficits in the second. Instead, the savings in the president's plan grow faster than the costs over time, generating greater deficit reduction with each passing year. . .”

To illuminate this, let’s look at how CBO scored the net deficit impact of the law in 2010.

On this graph, up is good for the budget and down is bad. Most of the bill’s positive 10-year score was concentrated in 2013 and 2014 –just before spending on the new health entitlement kicked in. After 2014 it was almost a wash, with the bill actually worsening the deficit in 2016 and 2017 before looking better later.

Now let’s look at the CLASS Act provision alone. I’ll overlay the CBO score for CLASS by itself onto the same graph.

Despite CLASS’s obvious problems it was assumed to add positively to the bill’s net budget effect throughout the 10-year window. In some years the positive impact of CLASS alone was scored as better than for the bill as a whole. This brings us to the next graph, showing the 2010 health law as it would have been scored without the CLASS Act.

Without the CLASS Act the bill’s total positive score from 2010-2019 would have been attributable entirely to the two years of 2013 and 2014 – notably, before its spending provisions had fully kicked in. This bar graph below may make this clearer.

Had it not been for CLASS, health care reform would have been scored as a net budget positive in the first five years of the ten-year window and a net negative in the later five years – that is, when it was fully in effect. The Orszag-DeParle claim of a positive long-term impact would have hinged entirely upon unquantifiable savings claims in the second decade and beyond, and on a thin $8 billion (1% of the bill’s 10-yr cost) plus in 2019 alone -- after a net minus in each of 2016-2018. Given the uncertainty of the long-term Medicare savings, none of these claims could have been considered reliable.

The utility of CLASS in improving the health law’s budget score was acknowledged at the time. As columnist Al Hunt reported in October, 2009:

In the early private talks, there are two major revenue- raisers mentioned to bring in as much as $100 billion. One is to reduce the $81 billion surplus the Congressional Budget Office projects the Senate Finance Committee bill passed last week would raise over the next decade. The other is to adopt a long-term individual health-care plan promulgated by the late Senator Edward M. Kennedy of Massachusetts, the so-called Class, or Community Living Assistance Services and Supports, Act. This would enable individuals to voluntarily put a small portion of their paychecks into a government fund that eventually would pick up long-term health care for them. Over the next decade it would raise money both because of the fee and because less would be spent on Medicaid and Medicare.

Fast forward to this year. What is different now? Nothing other than that two more years (2020-21) are included in CBO’s scoring window. Its latest score is shown below.

Apples to apples, year for year, the law doesn’t look better now -- it looks worse. Its projected positive impact in 2013-2014 without CLASS has been lowered from $88 billion to $56 billion. Its projected negative impact over 2015-2019 has also worsened, from -$13 billion to -$29 billion.

There’s one main reason why the law – sans CLASS -- now appears as a net budget positive in its out years. It is the assumption that future Congresses will sustain aggressive cuts in the growth of Medicare spending:

Thus, our updated picture of the law turns rosier only when we bring 2020 and 2021 into the picture -- and bring enormous projected Medicare cost reductions along with them. Unfortunately, this is precisely the point in time at which many experts, including Medicare’s own actuary, have expressed skepticism that such savings will be realized:

(I)t is doubtful that Medicare providers can take steps to keep their cost growth within the bounds imposed by these price limitations, year after year, indefinitely. As a result, we anticipate that over time the Medicare price constraints would become unsustainable and that Congress would likely override or modify them. Accordingly, the illustrative alternative scenario assumes that the productivity adjustments would be applied fully through 2019 but then phased out over the 16 years beginning in 2020.

Taken together, the facts are inescapable. The inclusion of CLASS was central to advocates’ claims in 2010 that expanding federal health coverage would somehow improve rather than worsen the budget outlook. And had it not been for the CLASS gimmick, critics’ arguments about the other budget gimmicks used to pass the law would have been substantiated as well.

 

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.

For the latest on the CLASS Act and related health policy developments, visit e21's ObamaCareWatch.org.


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