Background

Long-term care services assist people who need help in performing  activities of daily living (ADLs), such as eating, bathing, and dressing. As  some of these services can be expensive, especially services provided in a  nursing home, long-term care insurance helps people pay for the cost of  care. However, relatively few people have obtained long-term care  insurance through products sold in the individual and group markets. To  help federal employees, retirees, and others obtain coverage, the federal  government began offering the opportunity to apply for long-term care  insurance in 2002 through an employer-sponsored group program in which  enrollees pay the entire cost of their premium.

		Long-term Care

Long-term care refers to a range of support services provided to people  who, because of illness or disability, generally are unable to perform ADLs  for an extended period. Long-term care services include medical, social,  and personal services. Care may be provided in various settings, including  facilities such as nursing homes or assisted living facilities, a person’s own  home, or the community. Both paid and unpaid caregivers may provide  long-term care services. As a person ages, his or her ability to perform  basic physical functions typically declines, increasing the likelihood that  he or she will need long-term care services.

		Long-term Care Insurance

People can purchase long-term care insurance directly from carriers that  sell products in the individual market or can enroll in products offered by  employer-sponsored and other groups. Long-term care insurance policies  sold in the individual and group markets cover costs associated with long- term care. For a specified premium amount that is designed—but not  guaranteed—to remain level over time, the carrier agrees to provide  covered benefits under an insurance contract. First sold in the 1970s, long- term care insurance has evolved from initially offering coverage for  nursing home care only to offering comprehensive coverage.  Comprehensive coverage pays for care provided in facilities such as  nursing homes and other settings such as a person’s home. Insurance is  generally purchased for defined daily benefit amounts and benefit periods,  with elimination, or waiting, periods. For example, long-term care  insurance might provide coverage at $100 per day for care provided in a  nursing home or in other settings for 3 years after a waiting period of   90 days. Because long-term care insurance claims might not be filed for  many years after the product is purchased, the insured can purchase  protection against inflation, which can increase the daily benefit amount  covered. In addition, long-term care insurance products can (1) cover  home care at varying percentages of the daily benefit amount; (2) offer  people a range of other types of options, such as policies that return a  portion of the premium payments if the person dies; and (3) include  selected benefits, such as international coverage or care-coordination  services that, among other things, provide information about long-term  care services to the enrollee and monitor the receipt of services.
Many factors affect long-term care insurance premiums. Carriers charge  higher premiums for richer benefits; for example, higher daily benefit  amounts, longer benefit periods, and higher levels of inflation protection  will increase the cost. Premiums are based on the age of the applicant,  with premiums increasing more rapidly as age increases. Premiums are  also based on the health status of the applicant. Most carriers selling  coverage in the individual market assign applicants to one of three general  rating categories based on health status when underwriting the coverage— preferred, standard, or substandard—with associated discounts and  surcharges. In addition, carriers in the individual market usually offer  discounts to married couples when both spouses purchase coverage.  Products sold in the group market may be sold on a guaranteed issue basis  during an open enrollment period, with no or limited underwriting for  employees actively at work who enroll through an employer-sponsored  program, and the products generally do not provide discounts for spouses.  Carriers cannot increase a particular person’s premiums but can increase  premiums for a group of people who bought the same type of policy when  the carrier can demonstrate that anticipated costs will exceed premium  revenue. Carrier pricing assumptions, including projected interest rates,  morbidity or illness rates, and lapse rates—the number of people expected  to drop their policies over time—all affect premium rates and rate setting.
Carriers estimate the total amount of premiums to be collected for long- term care insurance policies sold as well as projected claims and  administrative costs for these policies using an anticipated lifetime loss  ratio. This ratio describes what portion of total premiums is expected to  be paid for claims for the reimbursement of the costs of long-term care  over the life of a set of policies. The portion of premiums not spent on  claims is used to pay for administrative costs, such as marketing, agent  commissions, claims handling, overhead, and taxes, and for profits. In the  past, National Association of Insurance Commissioners (NAIC) model  regulations for long-term care insurance stated that carriers should spend  a minimum of 60 percent of collected premiums on claims. However, in  model regulations released in August 2000, NAIC recommended that  carriers price their products high enough initially to prevent the need for  future rate increases rather than target a minimum percentage to be spent  on claims. So far, according to NAIC, a majority of states have adopted  long-term care insurance regulations based on the 2000 NAIC model, while  some states still require minimum loss ratios. Many large carriers set  premium rates on a national rather than regional basis. Carriers also price  to cover a profit margin and administrative costs as well as to meet  minimum loss ratios.
Few claims are expected to be submitted during the early years of a long- term care insurance policy. As a result of underwriting, it is unlikely that  many people could meet the eligibility requirements to buy the policy yet  submit a claim within 3 years. Industry experts suggested that the effects  of underwriting begin to decline and the rate of claim submissions starts to  increase after about 3 to 7 years. The rate of increase in claim submissions  depends on the average age of the enrollees, with most long-term care  insurance claims submitted when people reach their mid-70s to mid-80s.  Industry experts also noted that the rate of claim submissions in the  federal program is expected to peak 25 years or more after the program  began. Because the average age of enrollees in the individual market is  higher than the average age of enrollees in the federal program, the rate of  claim submissions is likely to peak earlier in the individual market, after 15  to 25 years. The rate of claim submissions is likely to peak after 30 to   40 years in the group market because of the younger average age of its  enrollees.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)  specified conditions under which long-term care insurance benefits and  premiums would receive favorable federal income tax treatment and  provided specific protections to people who purchased tax-qualified  plans. Long-term care insurance plans must meet certain requirements  contained in HIPAA to be considered tax-qualified. For example,  according to HIPAA, a plan must begin coverage when a person is certified  to need substantial assistance with at least two of the six ADLs and a  disability is expected to last 90 or more days, or to need regular  supervision because of a severe cognitive impairment. In addition,  federally tax-qualified plans must comply with the NAIC long-term care  insurance model act and regulations in effect as of January 1993, as  incorporated into HIPAA. These provide certain consumer protections,  such as preventing a carrier from (1) not renewing a long-term care  insurance policy because of age or deteriorating health and (2) increasing  the premium of an existing policy because of a person’s age or claims filed.  Another consumer protection was that carriers had to offer inflation  protection as specified in the NAIC model regulations.
Each state establishes its own long-term care insurance laws and  regulations that cover areas such as benefits, premium setting, and  consumer protections. As a result, product requirements in the individual  and group markets can vary among the states. According to NAIC, 41  states based their long-term care insurance regulations on the NAIC  model, 7 based their regulations partially on the model, and 3 did not  follow the model.

		Long-term Care Insurance Marketplace

The number of long-term care insurance policies sold has been small— about 9 million as of 2002, the most recent year for which data were  available. About 80 percent of these policies were sold through the  individual insurance market and the remaining 20 percent were sold  through the group market. In March 2005, 13 percent of full-time workers  in private industry had access to employer-sponsored long-term care  insurance benefits; within private industry, 21 percent of workers in large  establishments with 100 or more workers had access to this benefit.
People purchase policies from carriers in the individual market, usually  through agents or brokers, and choose their own benefits from among a  range of options the carriers offer. Groups—for example, employers,  associations, or unions—purchase policies from carriers in the group  market. Groups usually design the benefits, and enrollees are often given  some benefit options from which to choose, for example, differing daily  benefit amounts and benefit periods. However, benefit choices offered in  employer-sponsored group products tend to be more limited than those  that are available in the individual insurance market. Some groups offer  benefit packages in which the benefit options are predetermined. In  contrast to health insurance, where employers often contribute a share of  the premium costs, enrollees in group long-term care insurance coverage  usually pay the entire premium.
A recent downturn in the long-term care insurance industry has led to  more conservative assumptions when setting premiums and consolidation  among carriers. The long-term care insurance industry experienced 18  percent annual growth in the number of policies sold from 1987 through  2002, but the industry has experienced a downturn in more-recent years.  Beginning in 2003, many carriers in the individual market raised  premiums, left the marketplace, or consolidated to form larger companies.  This activity occurred in response to several factors including high  administrative expenses relative to premiums; lower-than-expected lapse  rates, which increased the number of people likely to submit claims; low  interest rates, which reduced the expected return on investments; and new  government regulations limiting direct marketing by telephone. Many  carriers revised the assumptions used in setting their premium rates,  taking a more conservative approach that led to higher premiums, while  state regulators increased their oversight of the industry. Currently,  several large carriers dominate the coverage sold in the individual and  group markets as a result of mergers and acquisitions, and sales in the  group market are growing faster than in the individual market.

		Federal Long Term Care Insurance Program

The federal government began offering group long-term care insurance  benefits in 2002 for federal employees, retirees, and certain other people.  When the Federal Long Term Care Insurance Program began, eligible  people could apply for benefits during two specified time periods: (1) an  early enrollment period for benefit options that were somewhat limited  that ran from March 25, 2002, through May 15, 2002, intended for people  who were well-informed about long-term care insurance and were eager to  enroll in the federal program and (2) an open enrollment period for all  benefit options that ran from July 1, 2002, through December 31, 2002.  Active and retired federal and Postal Service employees, active and retired  members of the uniformed services, qualified relatives, and certain others  are eligible to apply for federal long-term care insurance benefits.  Following the open enrollment period, eligible people could apply at any  time.
The federal program determines eligibility for long-term care insurance  through underwriting. During the early and open enrollment periods, the  program used an abbreviated underwriting application to determine  eligibility for active employees and active members of the uniformed  services and their spouses who applied. All other applicants, including  retirees and qualified relatives, used the full underwriting application,  which was similar to underwriting in the individual insurance market.  Since the conclusion of the open enrollment period, newly hired federal  and Postal Service employees and newly active members of the uniformed  services who apply for long-term care insurance within 60 days of  employment can do so using an abbreviated application, as can their  spouses. All other applicants must use the full underwriting application.
The federal program offers four prepackaged plan designs, each with a   90-day elimination period, a choice of two types of inflation protection— either automatic compound inflation protection or the future purchase  option—and the following benefit options:    Package 1—$100 daily benefit amount for comprehensive coverage and     Package 2—$150 daily benefit amount for comprehensive coverage and     Package 3—$150 daily benefit amount for comprehensive coverage and an  unlimited benefit period, and    Package 4—$100 daily benefit amount for facilities-only coverage and   3-year benefit period.
If not choosing a prepackaged plan, an enrollee in the federal program also  has several options for customizing benefits. The federal program was  designed to comply with the NAIC model regulations and HIPAA tax- qualification standards, which specify that certain benefit options be  offered. (App. II provides more information on federal long-term care  insurance benefits and enrollment in these benefits.)
The federal program provides reimbursement for costs of care when an  enrollee is unable to perform at least two ADLs for an expected period of  at least 90 days or needs substantial supervision because of a severe  cognitive impairment. Reimbursement is based on the benefits chosen by  the enrollee. The federal government does not contribute to the cost of  coverage, so an enrollee pays the entire premium for the benefits chosen.
OPM, rather than the states, regulates the federal program, and Partners  administers the program in accordance with the requirements of the  contract between OPM and Partners. The contract—which was signed on  December 18, 2001, and extends for a period of 7 years—defines key  administrative requirements including who controls program assets and  how profits are determined. The contract requires that the parent  companies of Partners—John Hancock Life Insurance Company and  Metropolitan Life Insurance Company—must hold federal program assets  in accounts separate from all their other businesses. At the end of the  contract period, OPM may decide to enter into a new contract with  Partners. However, if OPM selects a different contractor at that time, the  financial assets of the federal program would be transferred to the new  contractor. The contract also specifies how Partners earn a profit each  year. The profit formula consists of two parts: (1) some of the profit is  capped at 6.5 percent of premiums collected in a year—nearly half of this  type of profit is subject to performance criteria while the rest is  guaranteed—and (2) some of the profit is based on the performance of the  total assets of the federal program being managed by Partners to pay  future claims—this type of profit consists of 0.3 percent of the total assets,  called a “risk charge.” Partners must pay federal taxes on their total profit,  but may charge other taxes to the federal program. Partners also collects  investment-management fees that are less than 0.2 percent of total assets.  No profit is allowed if the premiums are not sufficient to cover claims and  expenses. While OPM expects premium rates to remain level over an  enrollee’s lifetime, Partners may raise or lower premiums for groups of  enrollees during the contract period with OPM’s agreement. Additionally,  premium rates may be changed at the time of a new contract.

	Federal Long Term Care Insurance Program Offered Benefits Comparable to Other Products, Usually at Lower Premiums

The federal program offered benefits that were similar to those of other  long-term care insurance products we reviewed and usually offered lower  premiums for comparable benefits in individual products. While federal  program enrollees could choose from many options to customize their  benefits, a broader range of options was available in the other products we  reviewed, especially in the individual products. However, despite the  broader range of options available in the other products, most enrollees in  the federal program and in individual and group products chose similar  daily benefit amounts, elimination periods, and benefit periods. A greater  percentage of federal enrollees chose automatic compound inflation  protection compared with enrollees in other products. Overall, annual  premiums in the federal program averaged across three benefit plan  designs were lower for both single people and married couples who were  both the same age compared with similar individual products sold on  March 31, 2005. Moreover, of total premiums projected to be collected  over the life of the coverage sold during the study period, the federal  program expected to pay a higher percentage in claim payments and a  lower percentage in administrative costs compared with individual and  group products.

		Federal Program Benefits Were Similar to Those in Individual and Group Products

Long-term care insurance benefit options were similar in the federal  program and in individual and group products we reviewed. While the  federal program offered over 500 possible benefit option combinations in  addition to the four prepackaged benefit plans, other products, especially  individual products, offered more possible benefit combinations and more  extensive customization in daily benefit amounts and in elimination and  benefit periods. Benefits offered in the federal program and in the  individual and group products we reviewed were covered by consumer  protections required for HIPAA tax-qualified plans. These consumer  protections included, among other provisions, that enrollees be offered an  option to protect their benefits against inflation. However, some individual  and group product enrollees were also offered the opportunity to purchase  policies that did not meet requirements for HIPAA tax-qualified plans. In  addition, according to officials at OPM and Partners, the federal program  offered several unique benefits, including payment to family members  providing informal care, international coverage, and a process allowing  third-party review of denied claims. Table 1 summarizes the benefit  options in the federal program and in the individual and group products  we reviewed.
Most enrollees in the federal program chose comprehensive coverage and  daily benefit amounts, elimination periods, and benefit periods similar to  those chosen by enrollees in individual and group products. Most enrollees  in all products chose to have the cost of long-term care services  reimbursed at a rate in the range of $100 to $199 per day and chose an  elimination period of 90 days or greater and a benefit period from 3 to   5 years. With regard to inflation protection, over two-thirds of federal  program enrollees chose automatic compound inflation protection, a  higher proportion than for enrollees in individual and group products.  Federal enrollees who did not choose automatic compound inflation  protection received the future purchase option as a default. Several  experts and industry officials said the federal government was a leader in  the group market by encouraging enrollees to choose more comprehensive  inflation-protection benefits. Table 2 summarizes the benefit options  chosen by enrollees in the federal program and in individual and group  products.

		Premiums for Three Federal Benefit Packages Were Usually Lower Than Those for Comparable Benefits in Other Products

Federal Long Term Care Insurance Program annual premiums were  usually lower than annual premiums for individual products for three  benefit packages with similar benefit options sold on March 31, 2005.  Overall, the average premium in the federal program for the three benefit  packages for single people was 46 percent lower than average premiums  for individual products we reviewed, while premiums for married couples  who were both the same age were 19 percent lower. However, the  premium estimates reported for individual products do not include  discounts for good-health status, which several carrier officials said were  about 10 percent to 15 percent and apply to about one-third of all  enrollees. Figure 1 compares average annual premiums for three benefit  packages and overall for the federal program with average annual  premiums for the individual products we reviewed at five carriers.
The pattern of lower premiums in the federal program compared with  those in the individual products remained consistent in different age  groups as well as for single people and married couples. Figure 2 shows  the range in annual premiums in the individual products we reviewed  relative to annual federal premiums for single people and married couples  who were both the same age, by age group, for the most popular federal  comprehensive benefit package. Appendix III provides more information  on annual federal and individual product premiums for the benefit  packages we reviewed.
When compared with premiums offered by CalPERS, the only group  product for which we had premium information, average federal  premiums were higher for two of the three packages. Overall, the average  annual federal premium for single people and for married couples who  were both the same age for the three benefit packages combined was   3 percent higher than the average annual premium for CalPERS.

		Federal Program Expects to Spend Higher Proportion of Premium on Claims and Lower Proportion on Administrative Costs Than Individual and Group Products

As measured by the anticipated lifetime loss ratio, the federal program  expects to spend a higher proportion of collected premium on claims and  a lower proportion of collected premium on administrative costs than  individual and group products. The Federal Long Term Care Insurance  Program had a higher anticipated lifetime loss ratio than the average  anticipated lifetime loss ratios for the individual and group products we  reviewed—75 percent for the federal program, compared with 59 percent  for individual products and 68 percent for group products. The federal  program expected to pay out in claim payments three-quarters of the   $3.1 billion in premiums it projected would be collected over the life of the  policies for all policies sold from March 25, 2002, through March 31, 2005.  The federal program expected to spend the remaining amount of collected  premiums—25 percent—on administrative costs, including marketing,  underwriting, claims handling, overhead, and taxes, and on profits. For  individual products sold during July 1, 2002, through March 31, 2005,  individual market carriers estimated that an average of 41 percent of total  premiums collected would cover administrative costs and profits. Unlike  the federal program, these administrative costs included agent  commissions, which averaged 17 percent of premiums collected for the  individual products we reviewed, or about half of their administrative  costs. For group products, carriers estimated that an average of 32 percent  of total premiums collected for coverage sold during this time period  would cover administrative costs and profits.

	Federal Program Participation Was Comparable to Other Group Products, while Federal Enrollees Were Younger Than Enrollees in Individual Products and Older Than Enrollees in Group Products

The employee participation rate in the Federal Long Term Care Insurance  Program for active federal civilian employees was 5 percent, comparable  to the industry average in the group market, but overall enrollment was  lower than the expectations established by Partners. Federal enrollees  were younger than enrollees in individual products and older than  enrollees in group products. For all products we reviewed, more women  than men obtained coverage.

		Federal Program Participation Rate Was Comparable to Participation Rates of Other Group Products but Lower Than Initially Expected

The Federal Long Term Care Insurance Program’s employee participation  rate of 5 percent after the open enrollment period for active federal  civilian employees was comparable to the industry average in the group  market. Experts suggested that typically 5 to 6 percent of a group’s  potentially eligible population would enroll in a long-term care insurance  product when initially offered coverage. Participation rates tend to  increase over time, usually reaching closer to 8 percent, depending upon  the average age of the eligible population. The federal program’s employee  participation rates were much lower for active military members, at   0.2 percent, and for active Postal Service employees, at 0.9 percent. Active  military members are young and can be difficult to reach for marketing  purposes, which might explain why they were less likely to apply than  active federal workers, who tend to be older and can be reached directly  through their workplace. Active Postal Service employees are also difficult  to reach because they are located throughout the nation rather than  grouped in centralized locations, and because access to these employees  for marketing purposes has been restricted during working hours.
The federal program was the largest employer-sponsored group in the  nation, with more than 218,000 individuals enrolled for new policies sold  from March 25, 2002, through March 31, 2005. The next largest group  program was CalPERS, with more than 175,000 enrollees for policies sold  from 1995 through 2005. According to Partners, the federal program  accounted for 15 percent of the enrollees in the entire group market and   2 percent of the entire long-term care insurance market in 2002.
Even though it was the largest group in the nation, the federal program’s  enrollment was lower than expected. Partners initially estimated in 2001  that 286,066 people would enroll during the open enrollment period, but  actual enrollment was 161,048, or 44 percent lower than expected.  Partners also estimated that enrollment would reach 343,280 by the third  year of the program; total enrollment eventually rose to 218,890 enrollees  for new policies sold from March 25, 2002, through March 31, 2005, or   36 percent lower than expected. Some of the lower-than-expected  enrollment can be explained by the low participation rates for active  military members and Postal Service employees. Additionally, according  to Partners, the terrorist attacks in the fall of 2001 resulted in slower sales  of discretionary products, such as long-term care insurance, and also  resulted in temporarily reduced access to federal employees, military  members, and Postal Service employees for marketing purposes during the  open enrollment period. A representative of Partners and an expert  knowledgeable about the federal program indicated that a pool of at least  200,000 enrollees is adequate for the federal program to achieve financial  stability, although no minimum number was ever formally established.
The federal program focused its marketing efforts on a core group of  nearly 6 million people out of an estimated eligible population of almost 19  million people, and the majority of the enrollees came from this core  group. The core group consisted of 1.8 million active federal civilian  employees, 1.4 million active military members, 0.8 million active Postal  Service employees, and 1.8 million spouses of active employees and  military members, as shown in table 3. Almost two-thirds of the 218,890  people enrolled from March 25, 2002, through March 31, 2005, came from  this core group. According to OPM officials, the federal program also  reached out to retired federal employees, retired military members, and  retired Postal Service employees.
The enrollees during the first 3 years of the federal program represented  about three-quarters of the applications submitted. The federal application  approval rate of 74 percent was similar to the average approval rate of   75 percent for individual products, but lower than the average approval  rate of 84 percent for group products, which may enroll active workers  using guaranteed issue during an open enrollment period. The most  common reasons for denial of an application for the federal program and  for the group products were height and weight outside of insurable  standards, a chronic condition such as diabetes or cardiac problems, and  cognitive impairment. In addition to these reasons, the most common  reasons for denial of an application for the individual products included  cancer, stroke, and musculoskeletal problems.

		Federal Program Enrollees Were Younger Than Enrollees in Individual Products and Older Than Enrollees in Group Products, and More Women Than Men Obtained Coverage for All Products

The average age of federal enrollees was 56 years at the time of  enrollment, compared with an average age of 60 for enrollees in individual  products and 52 for enrollees in group products, as shown in table 4. The  average age was 54 for enrollees in CalPERS. In the individual market,  carriers typically target older adults who are planning for retirement or  who have already retired. The carriers are able to market to them through  direct contact from commission-based agents. In the group market,  carriers typically target active employees, who are younger than enrollees  typically marketed to in the individual market. The carriers market to the  active employees through the employer via mailings and on-site  enrollment meetings, but may not be able to obtain contact information  for retirees. Unlike much of the group market, the federal program does  have access to retiree contact information and is able to market to retirees  through mailings to their home addresses.
More women than men enrolled in the Federal Long Term Care Insurance  Program, individual products, and group products. (See table 4.) While  more women than men enrolled in the federal program overall, slightly  more men than women enrolled among eligible active federal employees,  active military members, and active Postal Service employees. However,  women in these groups enrolled in the federal program at a higher rate  than their representation in the eligible population. Enrollees in the federal  program from these groups were 51 percent male and 49 percent female,  while the eligible population of all active federal employees, active military  members, and active Postal Service employees was 67 percent male and   33 percent female.

	Early Claims Experience in Federal Long Term Care Insurance Program Was Lower Than Expected, but It Is Too Soon to Determine Whether Adjustments Are Needed

The early claims experience of the Federal Long Term Care Insurance  Program was below the expectations established by Partners. During its  first 3 years, the federal program paid 39 percent of what it initially  expected to pay for claims per enrollee; the number of claims paid per  enrollee also was lower than initial expectations. It is still too early to  determine whether this trend will continue or whether adjustments to the  expected claims experience or premiums are needed. About half of the  total amount of claim payments was spent on facility care. The most  common medical conditions prompting claims in the early years of the  federal program were cancer, stroke, and injuries and poisoning. Across  the individual and group products we reviewed, the most common medical  conditions that prompted claims were also cancer, stroke and injuries, as  well as cognitive problems, musculoskeletal disorders, cardiac disease,  and arthritis.
The cumulative claims experience in the first 3 years of the Federal Long  Term Care Insurance Program was considerably lower than the  expectations established by Partners. The program paid 39 percent of the  claims expenditures expected per enrollee for long-term care services and  paid 33 percent of the expected number of claims per enrollee, as shown  in table 5. While the overall claims experience for the first 3 years was  lower than expected, the number of claims paid as a percentage of  expected claims in each consecutive year of operation was higher than the  previous year. In the first year of operation, the amount paid for claims per  enrollee was 40 percent of expected payments and the number of claims  per enrollee was 4 percent of expected claims. By the third year of  operation, the amount paid for claims per enrollee had remained level at  40 percent of expected payments, while the number of claims per enrollee  had increased to 48 percent of expected claims.
It is still too early to determine whether the early claims experience will  continue or whether adjustments to the expected claims experience or  premiums are indicated. While having lower-than-expected claims  experience is a positive financial indicator, if the claims experience is  significantly lower than expected over the longer term, then it is possible  that the premiums are too high. On the other hand, in accordance with  NAIC premium-setting guidelines, it may be appropriate to project the  claims experience assuming moderately adverse results to protect against  the need to raise premiums. As noted earlier, it is expected that the  number of claims submitted in the first years of a long-term care insurance  program will be a small percentage of the claims submitted over time— most claims are not expected to be submitted until 25 years or more after  the program begins. Additionally, the expected claims experience is  sensitive to factors such as the level of underwriting, the total number of  enrollees, the ages of the enrollees, and the types of enrollees—for  example, active workers, retirees, or relatives. Furthermore, the claims  experience is only one of many factors—such as interest rates, lapse rates,  and mortality rates—that affect the long-term financial outlook of the  program. The financial projections for long-term care insurance are  sensitive to changes in assumptions about all these factors. Figure 3 shows  the amount of paid claims per 10,000 enrollees and figure 4 shows the  number of paid claims per 10,000 enrollees during the first 3 years of the  program compared with the expected claims experience over the first   35 years of operation.
Facility care accounted for a considerable portion of the federal program  claim payments in the first 3 years. Of the total $3.6 million it paid for  claims in the 3-year period, the federal program spent 49 percent on  facility care, 3 percent on home care, 22 percent on informal caregivers,  and 27 percent on other care. While about half of the total claim payment  amount was spent on facility care, this type of care represented less than a  quarter of the total number of claims.
Generally, most early long-term care insurance claims are submitted for  conditions such as cognitive problems, cancer, arthritis, stroke, and  injuries. For the federal program, the most common medical conditions  that prompted claims during this relatively early period were cancer,  stroke, and injuries and poisoning. Across the individual and group  products we reviewed, the most common medical conditions that  prompted claims were also cancer, stroke and injuries, as well as cognitive  problems, musculoskeletal disorders, cardiac disease, and arthritis.

	Conclusions

The Federal Long Term Care Insurance Program generally compared  favorably with other products we studied during the first 3 years it offered  coverage. The federal program offered benefits comparable to other  products at competitive premium rates for similar benefits. Ultimately, the  premium any enrollee pays for a long-term care insurance product is  affected by several different factors, including the benefit options  purchased, the age of the enrollee at the time of purchase, applicable  discounts or surcharges, and the results of underwriting decisions. In  addition, the premium is affected by the underlying assumptions about  what will happen in the future regarding the number and dollar value of  claims filed, interest rates, mortality rates, and lapse rates. If the actual  claims experience, interest rates, mortality rates, or lapse rates vary  significantly from what was expected, then this could mean that the  premiums were too low or too high, and that premium or benefit  adjustments could be warranted. Because the federal program had been  offering coverage for only about 3 years at the time of our study, it was too  early to draw conclusions about the claims experience, especially in  relation to the premiums charged. Consistent with other long-term care  insurance products, the federal program expected most enrollees, who  averaged 56 years old when they enrolled, to submit long-term care  insurance claims in their mid-70s to mid-80s—the time when most claims  are submitted. While the early claims experience of the federal program  was considerably lower than initially projected before the program began,  an assessment of the claims submitted during the next several years and of  other factors that affect the financial performance of the program will  begin to provide a clearer picture of the longer-term implications.

	Recommendations for Executive Action

We recommend that the Director of OPM take the following two actions.  First, the Director should analyze the reasons for the lower-than-expected  early claims experience and, as appropriate, use the results of this analysis  to modify assumptions about the expected claims experience. Second, the  Director should analyze the projections for the amount of premiums to be  collected to pay for claims, including an analysis of the assumptions made  for the projections that are related to future claims experience and other  factors affecting premiums. OPM should report both analyses to Congress  prior to the next contract negotiations.

	Agency Comments

We provided a draft of this report to OPM, Partners, CalPERS, and five  long-term care insurance carriers.
In its written comments, OPM generally agreed with our findings and  provided comments on our recommendations. OPM stated that it intends  to consider this report when performing due diligence before making a  decision about a new contract for administration of the Federal Long Term  Care Insurance Program, in accordance with the Long-Term Care Security  Act. OPM also stated that the discussion of claims experience and  premium setting in this report provides all the information currently  available, precluding the need for a specific report on these issues at this  time. OPM commented that it would provide updated information on  claims experience and premium setting in its written recommendation to  Congress prior to making a decision about the next contract. We support  OPM’s willingness to consider updated information on claims experience  and premium setting as it works with Congress in determining the next  contract for the Federal Long Term Care Insurance Program, and we agree  that a separate report will not be necessary. We believe that it is important  that actuarial assumptions about future claims experience and premium  setting reflect the experience of the program to date while still anticipating  moderately adverse assumptions regarding claims experience and other  factors in the future. In its comments, OPM also indicated that the  expectations about the federal program’s enrollment and claims  experience were established by Partners prior to the start of the program,  rather than established by the marketplace. We revised the report to  reflect that the expectations about enrollment and claims were established  by Partners. (OPM’s comments are reprinted in app. IV.)
In its written comments, Partners stated that the recommendation in the  draft report implied that claims experience is the determining factor in the  pricing of premiums, but that other sections of the report explain that  other factors in addition to claims experience affect pricing, such as  interest rates and lapse rates. We clarified the recommendation to reflect  that other factors in addition to claims experience affect the pricing of  premiums.
OPM, Partners, and one carrier provided technical comments, which we  incorporated as appropriate.
We are sending copies of this report to the Director of OPM and interested  congressional committees. We will also provide copies to others on  request. In addition, this report is available at no charge on the GAO Web  site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix V.

Appendix I: Scope and Methodology

To evaluate the competitiveness of the Federal Long Term Care Insurance  Program, we surveyed Long Term Care Partners, LLC (referred to as  Partners), the administrator of the federal program; the California Public  Employees’ Retirement System (CalPERS), the second largest long-term  care insurance group in the nation after the federal program; and five of  the largest long-term care insurance carriers to obtain long-term care  insurance data. The five insurance carriers were AEGON USA, Bankers  Life and Casualty Company, Genworth Financial, John Hancock Life  Insurance Company, and Metropolitan Life Insurance Company. All five  carriers sold policies in the individual market, and two of the five  carriers—John Hancock Life Insurance Company and Metropolitan Life  Insurance Company—were also among the five largest carriers that sold  products in the group market. To supplement these data, we interviewed  officials at the Office of Personnel Management (OPM); Partners; the five  carriers; CalPERS and the organization that administers its program; and  five trade associations, including one representing actuaries. We also  interviewed three experts on long-term care insurance. In addition, we  reviewed studies and literature addressing long-term care insurance. We  conducted our work from March 2005 through February 2006 in  accordance with generally accepted government auditing standards.

	Data Request

We developed a data-collection instrument to obtain uniform long-term  care insurance data from Partners, CalPERS, and the five carriers. In  developing the instrument, we attempted to collect as much data as  possible while also considering the burden our request would place on the  respondents. Because of the proprietary nature of much of the data we  requested from the five carriers, we agreed to report the data so that they  could not be attributed to any specific carrier unless the carrier agreed  that we could release the data. To capture the full experience of the  Federal Long Term Care Insurance Program, we requested data from  Partners for the period March 25, 2002—the first day of the federal early  enrollment period—through March 31, 2005. We requested data from the  carriers and CalPERS for the period July 1, 2002, through March 31, 2005.  To document the early enrollment and open enrollment periods for the  federal program, we also requested data from Partners for the period of  March 25, 2002, through February 7, 2003—the last day the open  enrollment period applications were processed. From each source, we  requested data for the following categories: benefits, premiums,  administrative costs, enrollment and enrollee characteristics, and claims  experience.

		Benefits

We requested data on the number of enrollees in the individual and group  markets (including the federal program and CalPERS) who chose selected  benefit options for new long-term care insurance policies sold from July 1,  2002 (March 25, 2002, for the federal program) through March 31, 2005. We  collected data on coverage types, daily benefit amounts, elimination  periods, benefit periods, inflation-protection options, Health Insurance  Portability and Accountability Act of 1996 (HIPAA) tax-qualification  status, and optional benefits offered. The respondents determined which  policies they considered to be sold during the period. While we asked the  respondents, where possible, to report data for sold policies that became  active and for which they collected premiums, two respondents reported  benefit data for the number of new applications submitted rather than for  the new policies sold during the period. Because the federal program  offered long-term care insurance coverage in four prepackaged plans, we  asked Partners to identify the most popular benefit package chosen.  (Table 6 in app. II summarizes the four prepackaged plans offered in the  federal program.)

		Premiums

We asked Partners to provide annual premiums for a policy sold on March  31, 2005, for enrollees in each of the four prepackaged benefit plans  offered by the federal program, with automatic compound inflation  protection. Partners provided premium data for enrollees of four different  ages—40, 50, 60, and 70 years old—for the four benefit packages, with  automatic compound inflation protection and with a future purchase  option for inflation protection. Because the federal program provided no  discounts for spouses, we doubled the premiums that single people paid to  determine how much a married couple of the same age would pay  annually for a long-term care insurance policy through the federal  program.
To compare premiums with those in the federal program, we asked the  five carriers selling products in the individual insurance market and  CalPERS to provide annual premium data for the four federal benefit  packages or for coverage that most closely resembled each package for  people for the four ages—40, 50, 60, and 70 years old—for policies sold on  March 31, 2005. Two of the five carriers selling individual products did not  sell facilities-only coverage on March 31, 2005, so we did not include the  premiums for facilities-only coverage in our analyses. Therefore, we  compared premiums for the three comprehensive benefit packages in the  federal program. Because carriers selling products in the individual  market usually place people in rating categories according to their health  and other criteria, we asked them to provide annual premiums for a single  person underwritten into the standard rating category, which is the  category most often used. Furthermore, as these carriers usually offer  discounts for married couples, we asked them to provide annual premiums  for a married couple of the same age underwritten into the standard rating  category. The premiums the carriers reported reflected their discounts for  couples, which in each case was either 30 percent or 40 percent. We also  asked respondents to identify the coverage types, daily benefit amounts,  elimination periods, benefit periods, and inflation protection for the  packages if these benefits differed from those of the federal benefit  packages. These are the benefit options that most affect premiums. We did  not ask them to identify other benefits automatically included in the  coverage or to identify the percentage of the daily benefit amount that the  package covered for benefits such as formal home care or informal home  care, if included. Other than for CalPERS—which, like the federal  program, did not use rating categories or provide discounts for spouses— we did not request any premium data for other group products because of  the variation that exists across the groups insured by each carrier.
To compare the amount of premium spent on claims and the costs  associated with administering long-term care insurance in the federal  program with that of other products, we collected information on  anticipated lifetime loss ratios. The anticipated lifetime loss ratio  represents the present value of the total expected claim payments  compared with the present value of the total expected premiums over the  life of a set of policies. This ratio describes what portion of the premium  dollar is expected to pay for claims over a long period, with the balance  going to administrative costs and profits. We collected these data for new  policies sold from July 1, 2002 (March 25, 2002, for the federal program)  through March 31, 2005. Two respondents did not provide data on loss  ratios.

		Enrollment and Enrollee Characteristics

We asked for enrollment information from Partners, CalPERS, and the five  carriers for new policies sold from July 1, 2002 (March 25, 2002, for the  federal program) through March 31, 2005, including the number of new  applications submitted and approved. We obtained data on selected  enrollee characteristics, including age at time of enrollment and sex.

		Claims Experience

We collected claims-related data from our study participants. For example,  we obtained the primary medical conditions that prompted the claims  from Partners, CalPERS, and the five carriers. However, because of  differences in enrollee characteristics and benefit choices across the  carriers that would affect the claims experience, we focused primarily on  the early claims experience of the federal program. We collected data on  the number of paid claims and the amount of claim payments during the   3-year study period from Partners. We also compared the anticipated  claims experience for the federal program as projected prior to initial  enrollment with the actual number of claims submitted and the actual  amount of claim payments during the 3-year period.

	Long-term Care Insurance Interviews

To learn about long-term care insurance and to discuss the type of data we  wanted to obtain through our data request, we interviewed officials at  OPM and Partners, a CalPERS official and an official from the organization  that administers the program, and officials at five carriers that sold  products in the individual market—two of these carriers were also among  the five largest carriers that sold products in the group market. We also  conducted follow-up interviews to clarify the data provided in response to  our data request, to verify reliability of the data received, and to obtain  additional information.
We interviewed officials at several groups and associations as well as long- term care insurance experts. To obtain broader-based information about  long-term care insurance, we interviewed the Director of Long-Term Care  at America’s Health Insurance Plans and the Senior Director of Long-Term  Care Insurance at the American Council of Life Insurers. We interviewed  actuaries and health policy staff from the American Academy of Actuaries.
To learn more about state regulation of long-term care insurance products  we contacted officials at the National Association of Insurance  Commissioners. We interviewed officials at AARP to learn about long-term  care insurance and the products offered through that association. We also  interviewed three experts on long-term care insurance.
We also reviewed studies on long-term care insurance, including a  longitudinal study on buyers and nonbuyers of long-term care insurance.  In addition, we reviewed a literature review and six policy briefs  commissioned by the Department of Health and Human Services, Office of  the Assistant Secretary for Planning and Evaluation, all dated August  2004.

Appendix II: Federal Long Term Care Insurance Program Benefits

The Federal Long Term Care Insurance Program offered enrollees the  option of choosing a prepackaged benefit plan or of customizing benefits.  In addition, some applicants for federal benefits who were denied regular  coverage had another option available that offered nursing-home-only  coverage, called the Alternative Insurance Plan, while all applicants denied  coverage could purchase a Service Package, which did not provide  insurance but offered services such as access to a person who coordinated  care and to a discounted network of long-term care providers. Nearly two- thirds of all federal enrollees during the period March 25, 2002, through  March 31, 2005, chose a prepackaged benefit plan, with the remaining  enrollees during that period customizing benefits or enrolling in the  Alternative Insurance Plan.

	Prepackaged Benefit Plans in the Federal Long Term Care Insurance Program

Enrollees in the Federal Long Term Care Insurance Program could choose  from four prepackaged benefit plans. In each of the plans, several benefit  options—daily benefit amount; coverage period; elimination period; and  maximum lifetime benefit, which is a combination of the daily benefit  amount and benefit period—had been preselected into the packages along  with all covered services. After selecting one of the four packages, the  enrollee only had to choose the type of inflation protection—either  automatic compound or the future purchase option. Table 6 shows the  four prepackaged plans offered in the Federal Long Term Care Insurance  Program.
The federal program included care-coordination benefits and coverage for  international benefits and had no war exclusion. Federal program care  coordinators provide, among other services, general information about  long-term care services; assess and approve need for care; develop a care  plan; and monitor and reassess services. Using these services did not  reduce an enrollee’s maximum lifetime benefits. Care-coordination  services were also available to qualified relatives, who did not need to be  enrolled in the program, although some services could be provided at an  additional charge. Coverage for benefits received outside the United States  was available at 80 percent of the maximum amounts that would  otherwise be payable, with certain restrictions. Although the federal  program did not have a war exclusion, it included a catastrophic-coverage  limitation; that is, a catastrophic event could limit the benefit period.
The federal program did not include several benefits and services that  could be available in other products. For example, the federal program did  not offer limited pay policies, in which the long-term care insurance policy  could be paid up over a limited period of time; restoration of benefit  options, in which any of the policy’s maximum benefits that has been used  could be replaced if the enrollee did not receive benefits for a specified  period of time; or any discounts for both spouses of a married couple  purchasing coverage, all of which were options available in individual  products.

	Customized Benefits in the Federal Program

Federal program enrollees had several options for customizing benefits  instead of choosing a prepackaged benefit plan. Within certain parameters,  federal enrollees could design their own plans by mixing and matching  benefit options. In total, the federal program provided for 528 design  variations. In addition to the benefit options selected, covered services  listed in table 6 were automatically included. Table 7 shows the type and  number of benefit options available to enrollees.

	Other Benefits in the Federal Program

Applicants denied regular coverage in the Federal Long Term Care  Insurance Program had other benefit options. Some federal employees,  members of the uniformed services, and their spouses who could apply for  the federal program using an abbreviated application, but who were  denied regular coverage, were offered coverage in the Alternative  Insurance Plan. This plan covered nursing homes only, had a 180-day  elimination period, provided coverage for 2 years, and started with a  weekly benefit amount of $200. In addition, all applicants for the federal  program who were denied coverage could purchase a Service Package for  an annual fee. This noninsurance option provided access to care- coordination services and discounts.

	Enrollment in Federal Program Benefits

Nearly two-thirds of the 218,890 people who enrolled in the federal  program from March 25, 2002, through March 31, 2005, chose one of the  four prepackaged benefits. As shown in table 8, 35 percent of the enrollees  customized their benefits within the ranges offered by the federal  program, and less than 1 percent enrolled in the Alternative Insurance  Plan.
Overall, 141,195 people enrolled in one of the four prepackaged benefit  plans. Of the enrollees who chose a prepackaged benefit plan, 12 percent  enrolled in the facilities-only package. The remainder, 88 percent, enrolled  in one of the three comprehensive packages. Most of the people who  enrolled in a comprehensive package enrolled in the Comprehensive 100  package. About two-thirds of all the enrollees choosing a prepackaged  benefit plan also chose automatic compound inflation protection. Table 9  shows federal program enrollment in the four prepackaged benefit plans.

Appendix III: Annual Premiums for Three Benefit Packages Offered in the Federal Program and at Five Carriers

Annual premiums for three comprehensive benefit packages offered in the  Federal Long Term Care Insurance Program compared favorably with  premiums at five carriers selling similar products in the individual  insurance market. Tables 10 through 12 show that federal premiums for  each of the three benefit packages were always lower than the average  premium at five carriers for single people and for married couples who  were both the same age. When considering the range of premiums  available at the five carriers selling similar individual products, federal  premiums for a single person were always lower than the premiums for  individual products, while married couples who were both the same age  could find lower premiums in the federal program in almost every case.

Appendix IV: Comments from the Office of Personnel Management

Appendix V: GAO Contact and Staff Acknowledgments

	Acknowledgments

In addition to the contact named above, Christine Brudevold, Assistant  Director; Laura Sutton Elsberg; Elizabeth T. Morrison; Michelle Murray;  and Joseph Petko made key contributions to this report.

Summary:
Why GAO Did This Study

The Long-Term Care Security Act required the federal government to offer long-term care insurance to its employees, their families, and others. The act also required GAO to conduct a study of the competitiveness of the Federal Long Term Care Insurance Program, which began in 2002, compared with individual and group products generally available in the private market. GAO compared the federal program's benefits, premiums, enrollment rates, and enrollee characteristics with other products over a 3-year period. GAO also compared the federal program's early claims experience with initial expectations.

What GAO Found

Program offered benefits similar to those of other long-term care insurance products GAO reviewed. Most enrollees in the federal program and in individual and group products chose similar benefit amounts, elimination or waiting periods, and benefit periods. The federal program usually offered lower premiums than individual products for comparable benefits. Overall, annual premiums for the federal program averaged across three benefit plan designs were 46 percent lower for single people and 19 percent lower for married couples who were both the same age in comparison with similar individual products sold on March 31, 2005. The participation rate in the Federal Long Term Care Insurance Program for active federal civilian employees--5 percent--was comparable to the industry average in the group market, although enrollment in the federal program was lower than initially expected. The average age of all enrollees in the federal program was younger than the average age of enrollees in individual products and older than the average age of enrollees in group products. The Federal Long Term Care Insurance Program paid 39 percent of what it initially projected to pay for claims per enrollee. The number of claims paid per enrollee was also lower than initial projections. While the early claims experience was below expectations, it is still too early to determine whether this trend will continue or whether adjustments to the projected claims experience or premiums are indicated, because most claims are not expected to be submitted for many years.