Report: HHS Suppressed Evidence of Massive ObamaCare Bailout Risk
By Dean Clancy on September 16, 2011
A trove of just-released internal Obama Administration documents reveals that the President’s top health care advisors were fully aware that a key component of ObamaCare presented a massive taxpayer bailout risk, but they chose to suppress the information in their frenzy to push the controversial legislation through Congress.
The documents, quoted extensively in a report released yesterday by the House Energy & Commerce Committee, reveal a shocking level of cynicism by the President’s team — cynicism that will cost Americans hundreds of billions unless the unpopular ObamaCare law is repealed.
The 185 internal HHS emails make for disturbing reading.
We see the Administration’s own internal experts repeatedly warning Health and Human Services Secretary Kathleen Sebelius’s political appointees of the likelihood of a bailout.
The actuaries explain that the provision of ObamaCare known as the CLASS Act is so poorly designed, it is financially “unsound,” “unsustainable,” and likely to prove “terminal.”
What is CLASS? It’s a federal long-term care insurance program that will pay participants a daily benefit to help cover their nursing home and home health care costs. Devised by the late Senator Edward M. Kennedy (D-MA), CLASS is different from previous federal health insurance programs, like Medicare and Medicaid, in that it purports to be entirely voluntary and entirely funded by individual participants’ premiums, with no subsidies from either employers or federal taxpayers. Sounds like a great deal for everybody, right?
Guess what. Every actuary who has looked at CLASS has said the same thing: This won’t work. The premiums are too cheap for the generous benefits offered. Since it’s voluntary, with no mandate on individuals to participate, it will only attract older, sicker people who will take out a lot more in benefits than they paid in. So it’ll go bankrupt. To make this thing work, you either need a mandate or large subsidies (i.e., a bailout). For more information on CLASS’s fatal flaws, see the Joint Economic Committee’s background paper on it.)
Publicly, Administration officials contended just the opposite. The program is sound, they protested, insisting that it would be voluntary to individuals and cost-free to taxpayers. But privately, they knew that just wasn’t so. They had been warned by their own, highly respected Chief Actuary, Richard Foster.
On May 19, 2009, Foster told his superiors:
“The [proposed CLASS] program is intended to be ‘actuarially sound,’ but at first glance this goal may be impossible. . . . [The] substantial premium increases required to prevent fund exhaustion would likely reduce the number of participants, and a classic ‘assessment spiral’ or ‘insurance death spiral’ would ensue.”
And again on June 29:
“I‘ve finished reviewing the two studies provided by Sen. Kennedy‘s staff regarding the CLASS proposal. I’m sorry to report that I remain very doubtful that this proposal is sustainable at the specified premium and benefit amounts. . . . Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue.”
August 14: “As you know, I continue to be convinced that the CLASS proposal is not ‘actuarially sound,’ despite Sen. Kennedy’s staff’s good intentions. I assume you‘ve conveyed these concerns to the staff but, if not, let me know and we can express the concerns in a memo.”
Despite these repeated, unmistakable warnings, HHS political appointees chose to whistle past the graveyard. They persisted in their public assertions that CLASS was “actuarially sound,” citing a Congressional Budget Office estimate that showed the program would take in more money than it spent.
But this was disingenuous in the extreme. As drafted in the bill, the CLASS program would not begin paying out benefits until 5 years after it had begun collecting premiums. During its second or third decade, the program would certainly go belly up. But that didn’t matter — only the first decade counts for congressional voting purposes.
The internal documents reveal that some HHS insiders took seriously the actuaries’ concerns about the bailout risk. In the blunt phrase of one official in the Office of the Assistant Secretary for Planning and Evaluation (ASPE): “Seems like a recipe for disaster to me.”
On December 1, 2009, ASPE made this concern explicit, formally warning the Secretary that, because of its flawed structure, “The end result could be severe adverse selection that would in turn threaten the long-run solvency of the program.”
But by then, the die was cast. The White House and congressional Democrats had already forced the President’s health care bill, including CLASS, through the House and were now pushing it through the Senate.
Between Senate passage on Christmas Eve and final enactment in late March of 2010, HHS never stopped pressing for inclusion of CLASS, never admitted it knew of the fiscal danger the program represented.
Senator Ken Conrad (D-ND) had memorably warned his Senate colleagues that CLASS is “[A] Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” But the Administration assured Senators that, once the bill passed, Secretary Sebelius would use her power under the statute to “fix” CLASS, by increasing the premiums.
But that was a misleading assurance. As Foster had warned, higher premiums can’t by themelves prevent the program from needing a bailout to say in business. You also need a mandate on people to participate. (Which is why there is such a mandate in ObamaCare itself.)
The Department’s internal experts kept warning of financial disaster. Those warnings continued to be suppressed.
The House report concludes:
“It appears that the significant fiscal concerns surrounding CLASS may have been silenced within the Department for political reasons and the fear that publicly discussing concerns about CLASS’s sustainability could have jeopardized the bill‘s passage in the House.”
What will this cost taxpayers? The HHS documents don’t offer a precise estimate. In a July 6, 2009, letter to Congress, CBO wrote: “Overall, CBO estimates, if the Secretary did not modify the program to ensure its actuarial soundness, the program would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window.” Based on CBO and HHS estimates, a reasonable guess is that CLASS could cost taxpayers more than $100 billion over the next 20 years.
If CLASS poses a bailout risk, why would the Administration have been so hell-bent to keep it in the larger bill? Answer: Money. Thanks to that 5-year initial lag in benefit payouts, during its first decade CLASS was projected to generate $71 billion in net premium collections. Team Obama desperately needed that money to help maintain the fiction that their bill was “paid for” and “wouldn’t cost taxpayers a dime.” Turns out it’ll cost taxpayers a lot of dimes.
Would the Democrats in Congress have voted to ram ObamaCare through, if this information had been public? We can’t know for sure. But without CLASS, they would have had to find that $71 billion elsewhere. That wouldn’t have been easy.
What should we do about it? Congress should hold public hearings on this shocking new information: What did HHS and White House officials know and when did they know it?
It also reminds us yet again that there is only one sensible way to deal with the President’s disastrously unaffordable health care law. It must be repealed and replaced with a patient-centered system — a system that doesn’t require bailouts.
Dean Clancy is FreedomWorks’ Legislative Counsel and Vice President, Health Care Policy.