A new study by the highly respected Center for Retirement Research at Boston College concludes that premiums for coverage under the CLASS Act–the new voluntary national long-term care insurance program included in the 2010 health reform law–are likely to be unaffordable for many middle class families.

The analysis, by center director Alicia Munnell and co-author Josh Hurwitz, projects an average monthly CLASS premium of $194–a rate that falls within the wide range of earlier estimates by both government and private analysts. For instance, the Congressional Budget Office projected monthly premiums for a CLASS-like policy would cost an average of $123, while the office of the Medicare actuary projected a premium twice as high.

To estimate premiums, Munnell and Hurwitz built a basic economic model to project premiums for both CLASS and several variations of the insurance program. The authors conclude that premiums could be cut significantly with some major changes to the basic CLASS framework. However, they found that the deepest premium cuts would only come if the insurance were made mandatory–an outcome favored by many economists but quite unlikely in the current political climate. 

They concluded that only a mandatory program could drive premiums below $100 per month.      

As I have noted at Caring for Our Parents in the past, the big problem with the CLASS design is that coverage is available to all, including working people who already have disabilities. This is good for them, but their high level of likely claims threatens to make premiums unaffordable for healthy buyers.

To ease that problem, Munnell and Hurwitz propose a couple of changes to the CLASS design that would mimic the medical underwriting that private insurers use to hold down premiums. They’d require both a tougher work requirement for buyers and a 10-15 year waiting period before they can collect benefits. The current waiting period is five years. 

Unfotunately, while these changes may make good actuarial sense, they’d drive a wedge between the political coalition of aging and disabilities groups that backed CLASS in the first place.

The authors also suggest a more practical change that I have also proposed. They’d index premiums for inflation instead of setting them at a fixed level for life. This one adjustment could cut average premiums by one-third to about $120, Munnell and Hurwitz estimate.

Finally, they urge a major marketing campaign to teach prospective buyers the importance of planning for long-term care needs. As they note, however, such an effort will be costly for the government. While some private foundations and advocacy groups have commited to help fund such a campaign, it is hard to imagine the current Congress allocating any new funds for the effort. 

The Munnell and Hurwitz paper is more evidence that while CLASS is based on a good idea, it faces huge challneges if it is going to succeed in the real world. 

A typical couple would have to save nearly $200,000 to pay for their out-of-pocket medical costs from the time they are 65 until they die, according to an important new study by the Center for Retirement Research at Boston College. Add in nursing home costs, and they are likely to need $260,000.

But that’s only part of the story. About 5 percent of 65-year-old couples will face catastrophic medical and long-term care costs exceeding $570,000, according to researchers Anthony Webb and Natalia Zhivan.They estimate those expenses would have exhausted the total financial assets of 85 percent of all retirees even at the peak of the stock market in 2007.

These conclusions are similar to prior studies by others, including Paul Fronstin at the Employee Benefit Research Institute. But they are nonetheless hair-raising. It is especially important to keep in mind that these costs are for people who already have Medicare. Indeed, those expenses include premiums for Medicare Part B and Part D (the drug benefit), Medicare Supplement (Medigap) insurance, retiree health insurance. and copayments for services not fluly covered by Medicare.  

Lots to chew over here, especially as we think about health reform, the CLASS Act, and the need for private long-term care insurance.