In the din of debate over health care reform legislation, one of the bill’s most important features went almost unnoticed–a public option for long-term care insurance.

The law signed into law earlier this year establishes a national insurance program for purchasing community living assistance services and support (CLASS for short). The new plan, which will be rolled out over the next several years, was a top priority of the late Sen. Ted Kennedy.

CLASS should help raise the profile of long-term care insurance (LTC)–an important financial tool that doesn’t make it into most retirement plans. Long-term care needs can throw a monkey wrench into even the best-designed retirement plan.

About one-third of Americans turning 65 this year will need at least three months of nursing home care sometime during their lives, according to the Center for Retirement Research at Boston College (CRR). Another 24 percent will need more than a year of care, and 9 percent will need more than five years.

Medicare covers only a small portion of long-term care needs, and the cost of a semi-private room averages $79,000 per year. CRR calculates that the mean lifetime exposure to long-term care costs for a 65-year-old couple is $260,000, with a five percent risk of a $570,000 expense.

That’s the sort of risk that’s best handed off to an insurance company. LTC insurance offers a way to protect your assets and insure that any unmet care needs will be covered. But private LTC coverage hasn’t taken off, probably due to the complexity of policy choices and the simple fact that none of us are too eager to set aside money now for a visit to a nursing home later. Then there’s expense; annual premiums can run $3,000 or more for policyholders who buy LTC coverage in their 50s.

These hurdles have held back sales of LTC policies. Ninety percent of people over age 55 have no LTC coverage, says Mark Meiners, a professor of health administration and policy at George Mason University. The largest provider of LTC coverage is Medicaid, the federal and state-administered insurance program for low-income Americans. Medicaid funds about 49 percent of all LTC, but getting coverage requires spending down most of your assets.

CLASS is an attempt to expand coverage by providing a basic, inexpensive LTC option. The program will be deployed mainly through the workplace as an opt-out choice in benefit plans. Employers don’t have to participate, but the opt-out feature will be important for those that do. It means employees will be in unless they make an active decision to drop out.

And, while CLASS is aimed mainly at the workplace, there also will be a public exchange where policies can be purchased by those working for companies that don’t participate, or for self-employed people.

CLASS participants would pay an insurance premium via payroll deduction, currently projected at $123 per month. After a five-year vesting period, CLASS would provide a benefit of no less than $50 per day to pay for LTC. Two additional, very significant features make CLASS different than most private coverage: There will be no lifetime or dollar cap on benefits, and insurers can’t turn away applicants due to a pre-existing condition. CLASS becomes effective in 2011, but Meiners doesn’t expect plans to appear in workplace benefit plans until January, 2013.

But the success of CLASS will depend largely on how it’s implemented–and the program faces some complex challenges. “I worry about how it will be put forward,” says Meiners, who is a supporter of the general CLASS concept. “A lot of factors will make it difficult for this to work.”

One obstacle is pricing. A national survey of 1,000 employed Americans last fall by the American Council of Life Insurers found broad support for a public option LTC program such as CLASS–73 percent of respondents reacted positively to the idea.

But support dropped sharply when proposed premium prices were mentioned, and 95 percent said they were not likely to participate if the premium was set at $110 per month. That suggests employers could have a tough time getting employees to stay in CLASS. And employers could decline to participate out of concern that the program will be more trouble than it’s worth.

A limited benefit period would be one way to reduce premium costs. Meiners notes that the lifetime care benefit is extremely generous compared with private LTC policies–but it’s a “sacred cow” among CLASS proponents and not likely to be altered anytime soon, he says.

Another worry is what Meiners calls “the selection issue. If the only people who opt for CLASS are those who can’t be insured elsewhere and everyone else opts for private coverage, that’s a significant problem. You need younger, healthier people to get in and stay in to balance against the cost of uninsurable people.”

Related posts:

1. Debate heats up on public long-term care insurance
2. Watch: Experts dissect public option for long-term care
3. What’s next for long-term care insurance after collapse of CLASS?
4. Long-term care insurance market shows signs of trouble
5. What’s next for long-term care after CLASS Act folds?

Tags | long-term care