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Public Statements

A First CLASS Failure


Location: Washington, DC

Right now, the federal government is in the process of constructing a doomed long-term care entitlement program: the Community Living Assistance Services and Supports (CLASS) program.

The program is meant to be a voluntary insurance plan supported by premiums, not tax dollars. Workers would pay a monthly premium of around $100 dollars. Upon retirement or in case of disability, CLASS beneficiaries would receive $50 a day. The beneficiaries could use this money to help stay in their home, or to pay for a nursing home.

During the debate over last year's massive new health care law, Senate Budget Committee Chairman Kent Conrad (D-ND) publicly called the CLASS program "a Ponzi scheme of the first order, the kind of thing Bernie Madoff would be proud of."

Suppose you knew about all the accounting tricks that Bernie Madoff was using to run his fund. Now suppose that you were responsible for investing other people's money. Would you have put that money into Madoff's doomed fund? If so, then you would certainly be a party to his crimes and would expect to suffer criminal and civil penalties when the scheme was discovered.

What if the government set up a Ponzi scheme? Would any politician or bureaucrat suffer the fate of Bernie Madoff? Unfortunately, legislative malpractice isn't punished in the same way as investment fraud.

This week, I joined with other House and Senate Republicans in releasing a detailed report on the creation of the CLASS program and the willful ignorance about the program's failings leading up to its inclusion in the law.

Long before the first draft of the health care reform bill was written, Senate Democrats were working to include the CLASS program. In May of 2009, the chief actuary for Medicare and Medicaid took a detailed look at the long-term fiscal health of the program. He concluded that the program could be destined for an "insurance death spiral."

An insurance death spiral happens when the benefits being paid out by a program start to exceed the premiums being paid in. When the price of the premium starts to creep up, participation in the program decreases. Eventually, premiums cannot rise fast enough to account for all the benefits being paid out and the loss of participants. The plan goes bankrupt.

The chief actuary's warnings about the CLASS program were ignored. The authors of the bill could never get the answer that they wanted and eventually decided that no further analysis was needed, even as the bill started to move through committees and onto the Senate floor.

Doubts about the program were so great, that the Department of Health and Human Services prepared a list of recommendations of how the program should be changed when House and Senate negotiators met to create the compromise legislation that would become law.

When the people of Massachusetts took the unexpected step of electing a Republican and opponent of the health care law to the Senate, Speaker Nancy Pelosi decided to force the poorly written Senate legislation through the House. Now the nation is stuck with a Ponzi scheme that will hurt businesses and states, and could eventually need a massive taxpayer-funded bailout.

The CLASS program was included in the health care law because it brought $70 billion into government coffers in the first ten years. It helped give the appearance that President Obama's health care reforms would be paid for. There were other budget gimmicks and tricks, but this one could end up as the most devastating to the federal budget.

The reason why the program looks fiscally sustainable over the first decade is because it wouldn't pay out any benefits in the first five years. In its second decade, the program's benefit payments would skyrocket and the account built in the first decade would evaporate. The federal government would face the prospect of leaving beneficiaries high and dry, or using general government revenue to keep the program running.

The CLASS Act is an ocean liner that was put to sea with a giant hole in the hull. The time to terminate this program is now, before it begins enrolling participants and taking premiums. The government has to stop making promises that it can't keep.

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