Long-Term Care Insurance: Oversight of Rate Setting and Claims Settlement Practices
Published: 2008-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As the baby boom generation ages, the demand for long-term care services, which include nursing home care, is likely to grow and could strain state and federal resources. The increased use of long-term care insurance (LTCI) may be a way of reducing the share of long-term care paid by state and federal governments. Oversight of LTCI is primarily the responsibility of states, but over the past 12 years, there have been federal efforts to increase the use of LTCI while also ensuring that consumers purchasing LTCI are adequately protected. Despite this oversight, concerns have been raised about both premium increases and denials of claims that may leave consumers without LTCI coverage when they begin needing care. GAO was asked to review the consumer protection standards governing LTCI policies and how those standards are being enforced. Specifically, GAO examined oversight of the LTCI industry's (1) rate setting practices and (2) claims settlement practices. GAO reviewed information from the National Association of Insurance Commissioners (NAIC) on all states' rate setting standards. GAO also completed 10 state case studies on oversight of rate setting and claims settlement practices, which included structured reviews of state laws and regulations, interviews with state regulators, and reviews of state complaint information. GAO also reviewed national data on rate increases implemented by companies
section_title: What GAO Found
paragraphs: Many states have made efforts to improve oversight of rate setting, though some consumers remain more likely to experience rate increases than others. NAIC estimates that since 2000 more than half of states nationwide have adopted new rate setting standards. States that adopted new standards generally moved from a single standard that was intended to prevent premium rates from being set too high to more comprehensive standards designed to enhance rate stability and provide other protections for consumers. Although a growing number of consumers will be protected by the more comprehensive standards going forward, as of 2006 many consumers had policies not protected by these standards. Regulators in most of the 10 states GAO reviewed said that they expect these more comprehensive standards will be effective, but also recognized that more time is needed to know how well the standards will work in stabilizing premium rates. State regulators in GAO's review also use other standards or practices to oversee rate setting, several of which are intended to help keep premium rates more stable. Despite state oversight efforts, some consumers remain more likely to experience rate increases than others. Specifically, consumers may face more risk of a rate increase depending on when they purchased their policy or which state is reviewing a proposed rate increase on their policy. The 10 states in GAO's review oversee claims settlement practices by monitoring consumer complaints and completing examinations in an effort to ensure that companies are complying with claims settlement standards. Claims settlement standards in these states largely focus on timely investigation and payment of claims and prompt communication with consumers, but the standards adopted and how states define timeliness vary notably across the states. Regulators told GAO that they use consumer complaints to identify trends in companies' claims settlement practices, including whether they comply with state standards, and to assist consumers in obtaining payment for claims. In addition to monitoring complaints, these regulators also said that they use examinations of company practices to identify any violations in standards that may require further action. Finally, state regulators in 6 of the 10 states in GAO's review are considering additional protections related to claims settlement. For example, regulators from 4 states said that their states were considering an independent review process for consumers appealing claims denials. Such an addition may be useful, as some regulators said that they lack authority to resolve complaints where, for example, the company and consumer disagree on a factual matter regarding a consumer's eligibility for benefits. In commenting on a draft of this report, NAIC compiled comments from its member states who said that the report was accurate but seemed to critique certain aspects of state regulation, including differences among states, and make an argument for certain reforms. The draft reported differences in states' oversight without making any conclusions or recommendations.

section_title: Letter
paragraphs: About $193 billion was spent nationwide on long-term care services in  2004, including nursing home care and other assisted-living services. Most  of this care was financed by government programs, primarily Medicaid,  and a small share of these costs—less than 10 percent—was paid by  private insurance. Elderly people—those aged 65 or older—consume  about two-thirds of all long-term care services used in the United States.  As the number of elderly Americans continues to grow, particularly with  the aging of the baby boom generation, the increasing demand for long- term care services will likely strain state and federal resources. Some  policymakers have suggested that increased use of long-term care  insurance (LTCI) may be a means of reducing the future share of long-term  care services financed by public programs such as Medicaid.
Oversight of the LTCI industry, including setting consumer protection  standards for rate setting and claims settlement practices and ensuring  that companies comply, is primarily the responsibility of states. Over time,  the National Association of Insurance Commissioners (NAIC) has  provided guidance to states on how to regulate LTCI, including adoption  of a model LTCI act in 1986 and subsequently a model regulation. NAIC  has updated these models periodically to address emerging issues in the  industry.
Federal efforts over the past 12 years have aimed to increase the use of  LTCI and ensure that consumers who purchase policies are adequately  protected. For example, the Health Insurance Portability and  Accountability Act of 1996 (HIPAA) established federal consumer  protection standards for LTCI that, if incorporated into individual policies,  would allow for favorable federal tax treatment of the benefits received  and premiums paid under such policies. Since the enactment of HIPAA,  Congress established the Federal Long Term Care Insurance Program  (FLTCIP) in 2000. It also authorized the expansion of the long-term care  Partnership programs when it passed the Deficit Reduction Act of 2005  (DRA). Policies sold through state Partnership programs as well as the  FLTCIP must meet certain consumer protection standards.
Members of Congress, state regulators, and other interested parties have  raised concerns that despite existing state and federal consumer  protection standards, increases in LTCI premiums or denials of benefit  claims may leave some consumers without LTCI coverage as they begin  needing long-term care, which could have fiscal implications for Medicaid.  Specifically, though LTCI policies are intended—but not guaranteed—to  have premiums that stay level over time, some consumers have  experienced increases in their premiums that led them to drop coverage.  In addition, recent media reports have highlighted concerns with  companies delaying or denying consumers’ claims for LTCI benefits. You  asked us to review the consumer protection standards governing LTCI  policies and how those standards are being enforced. For this report, we  examined (1) oversight of rate setting practices in the LTCI industry and  (2) oversight of claims settlement practices in the LTCI industry.
To examine oversight of rate setting practices in the LTCI industry, we  reviewed information provided by NAIC and interviewed NAIC officials.  Specifically, we reviewed the provisions of NAIC’s LTCI model act and  model regulation related to rate setting, including changes made to the  rate setting requirements in the model regulation in 2000. In addition, to  determine the rate setting standards in place in all 50 states and the  District of Columbia, we interviewed NAIC officials, reviewed NAIC  documents describing state rate setting standards, and reviewed relevant  state laws and regulations. To supplement this information, we completed  case studies for a judgmental sample of 10 states. (We refer to these   10 states as the states in our review.) Among other considerations, we  selected states that would account for a substantial portion of active LTCI  policies in 2006 (at least 40 percent), would represent variation in the  number of active policies, and would reflect the variation in state  oversight of the product. The findings from our case studies are not  generalizable. (See app. I for the criteria used to select states.) The first  component of the case studies included a structured review of state laws  and regulations. In the reviews, which were verified by the states, we  identified the consumer protection standards and enforcement authorities  in place at the state level applicable to rate setting practices. In addition to  the reviews, we interviewed regulators from the selected states’ insurance  departments about (1) steps taken to oversee rate setting practices,   (2) challenges they faced in overseeing this aspect of the product,   (3) which standards have been effective in improving rate stability, and   (4) regulatory changes under consideration. We also reviewed national  data collected from companies and published by the California  Department of Insurance on rate increases proposed and approved in any  state from 1990 through 2006. With regard to these data, we spoke with a  state official to discuss the checks they perform to verify the accuracy of  the data and determined that these data were sufficiently reliable for our  purposes. To identify federal requirements that affect oversight of rate  setting practices, we reviewed federal laws, regulations, and guidance  related to tax-qualified policies and policies issued under state Partnership  programs. We also interviewed officials from the Internal Revenue Service  (IRS), the Centers for Medicare & Medicaid Services (CMS), and the Office  of Personnel Management (OPM). Finally, we interviewed officials from a  judgmental sample of six companies selling LTCI regarding oversight of  rate setting practices. These companies ranged in terms of market share in  2006 from 1 percent to more than 15 percent and together represented   40 percent of the market. In addition, the companies’ financial ratings  varied from superior to marginal. The views of officials from these  companies may not represent the views of officials from other companies.
In examining oversight of claims settlement practices in the LTCI industry,  our review focused on the 10 states included in our case studies. In the  reviews of state laws and regulations, we identified the consumer  protection standards and enforcement authorities in place in these states  applicable to claims settlement practices. Our interviews with regulators  from the selected states’ insurance departments included discussion of   (1) steps taken to oversee claims settlement practices, (2) challenges they  faced in overseeing this aspect of the product, (3) which standards have  been effective in ensuring fair claims practices, and (4) regulatory changes  under consideration. As part of the case studies, we also reviewed  information on consumer complaints related to LTCI from 6 states that  were able to provide this information. Five of the 6 states provided  information from 2001 through 2007 on the number of LTCI complaints  related to claims settlement practices, and 3 of the 6 states provided  information on the outcomes of complaints related to claims settlement  practices in 2006. To identify federal requirements that affect oversight of  claims settlement practices, we reviewed federal laws, regulations, and  guidance. Finally, in interviews with company officials we asked about  oversight of claims settlement practices; we also reviewed company  documents describing claims settlement practices and reporting the  number of claim denials that were appealed by consumers and overturned  by the company. We performed our work in accordance with generally  accepted government auditing standards from September 2007 through  June 2008.
subsections: section_title: Background
paragraphs: Long-term care includes services provided to individuals who have a  cognitive impairment or who, because of illness or disability, are unable to  perform certain activities of daily living (ADL)—such as bathing, dressing,  and eating—for an extended period of time. These services may be  provided in various settings, such as nursing facilities, an individual’s  home, or the community. Long-term care can be expensive, especially  when provided in nursing facilities. In 2006, the average cost of a year of  nursing facility care in a private room was about $75,000. The average  hourly rate for a home health aide in that same year was $19; as a result,   10 hours of such care a week would average close to $10,000 a year.
subsections: section_title: Long-Term Care Insurance
paragraphs: LTCI helps pay for the costs associated with long-term care services.  Individuals can purchase LTCI policies from insurance companies or  through employers or other groups. As of 2002, individual policies  represented approximately 80 percent of the market, with policies  purchased through employers representing most of the remaining   20 percent. The average age of consumers purchasing individual policies  has decreased over time from an average age of 68 in 1990 to 61 in 2005.  The number of LTCI policies sold has been relatively small—about   9 million as of the end of 2002, the most recent year of data available— with less than 10 percent of people aged 50 and older purchasing LTCI in  the majority of states.
Companies generally structure their LTCI policies around certain types of  benefits and related options.
A policy with comprehensive coverage pays for long-term care in nursing  facilities as well as for care in home and community settings, while other  policies may only provide coverage for care in one setting. While   63 percent of policies sold in 1990 covered care in nursing facilities only,  over time there has been a shift to comprehensive policies, which  represented 90 percent of policies sold in 2005.
A daily benefit amount specifies the amount a policy will pay on a daily  basis toward the cost of care, while a benefit period specifies the overall  length of time a policy will pay for care. Data on policies sold in 1995,  2000, and 2005 show that maximum daily benefits range from less than $30  to well over $100 per day, while benefit periods can range from 1 year to  lifetime coverage.
A policy’s elimination period establishes the length of time a policyholder  who has begun to receive long-term care has to wait before his or her  insurance will begin making payments toward the cost of care. For  policies sold in 2005, the elimination period was generally from 1 to   3 months.
Inflation protection increases the maximum daily benefit amount covered  by the policy and helps ensure that over time the daily benefit remains  commensurate with the costs of care. Data from 2005 show that over  three-quarters of consumers that year chose some form of inflation  protection, up from less than half in 2000.
To receive benefits claimed under an LTCI policy, the consumer must not  only obtain the covered services, but must also meet what are commonly  referred to as benefit triggers. Most policies provide benefits under two  circumstances (1) the consumer has a specified degree of functional  disability, that is, he or she cannot perform a certain number of ADLs  without assistance, or (2) the consumer requires supervision because of a  cognitive impairment, such as Alzheimer’s. In addition, benefit payments  do not begin until the policyholder has met the benefit triggers for the  length of the elimination period, such as 30 or 90 days.
Determining whether a consumer has met the benefit triggers to begin  receiving claimed benefits can be complex and companies’ processes for  doing so vary. Some companies rely on physician notes and claim forms.  Others use a structured, in-person assessment conducted by a licensed  health care practitioner, such as a registered nurse. To prove that the care  received is covered and the consumer meets the eligibility criteria,  consumers or those acting on their behalf must provide several types of  documentation, such as a plan of care written by a licensed practitioner  outlining the services that are appropriate and required to address the  claimant’s conditions and an itemized bill for the care provided. Ensuring  that services are covered and the consumer is eligible to receive benefits is  important for LTCI companies, as the average claim amount for LTCI  tends to be high given that benefits are for an extended period of time,  often beyond a year.
In the event that a consumer’s claim for benefits is denied, the consumer  generally can appeal to the insurance company to reconsider the  determination. If the company upholds the determination, the consumer  can file a complaint with the state insurance department or can seek  adjudication through the courts.
section_title: Long-Term Care Insurance Premium Rates
paragraphs: Many factors affect LTCI premium rates, including the benefits covered  and the age and health status of the applicant. For example, companies  typically charge higher premiums for comprehensive coverage as  compared to policies without such coverage, and consumers pay higher  premiums the higher the daily benefit amount, the greater the inflation  protection, and the shorter the elimination period. Similarly, premiums  typically are more expensive the older the policyholder is at the time of  purchase. For example, in California, a 55-year-old purchasing one  company’s 3-year, $100 per day comprehensive coverage policy in 2007  would pay about $2,200 per year, whereas a 70-year-old purchasing the  same policy would pay about $3,900 per year. Company assumptions  about interest rates on invested assets, mortality rates, morbidity rates,  and lapse rates—the number of people expected to drop their policies  over time—also affect premium rates.
A key feature of LTCI is that premium rates are designed—though not  guaranteed—to remain level over time. Companies calculate premium  rates to ensure that the total premiums paid by all consumers who bought  a given policy and the interest earned on invested assets over the lifetime  of the policy are sufficient to cover costs. While under most states’ laws  insurance companies cannot increase premiums for a single consumer  because of individual circumstances, such as age or health, companies can  increase premiums for entire classes of individuals, such as all consumers  with the same policy, if new data indicate that expected claims payments  will exceed the class’s accumulated premiums and expected investment  returns.
Setting LTCI premium rates at an adequate level to cover future costs has  been a challenge for some companies. Because LTCI is a relatively new  product, companies lacked and may continue to lack sufficient data to  accurately estimate the revenue needed to cover costs. For example,  according to industry experts, lapse rates, which companies initially based  on experience with other insurance products, have proven lower than  companies anticipated in initial pricing, which increased the number of  people likely to submit claims. As a result, many policies were priced too  low and subsequently premiums had to be increased, leading some  consumers to cancel coverage. As companies adjust their pricing  assumptions, for example, lowering the lapse rates assumed in pricing,  initial premiums may be higher but the likelihood of future rate increases  may also be reduced.
section_title: Long-Term Care Insurance Regulation
paragraphs: Oversight of the LTCI industry is largely the responsibility of states.  Through laws and regulations, states establish standards governing LTCI  and give state insurance departments the authority to enforce those  standards. Many states’ laws and regulations reflect standards set out in  model laws and regulations developed by NAIC. These models are  intended to assist states in formulating their laws and policies to regulate  insurance, but states can choose to adopt them or not. In 1986 NAIC  adopted the Long-Term Care Insurance Model Act and subsequently in  1987 the Long-Term Care Insurance Model Regulation, models which  suggest the minimum standards states should adopt for regulating LTCI. In  addition to the LTCI models, other NAIC insurance models, for example,  the Unfair Life, Accident, and Health Claims Settlement Practices Model  Regulation, address unfair claims settlement practices across multiple  lines of insurance, including LTCI. NAIC has revised its models over time  to address emerging issues in the industry, including revisions made to its  LTCI model regulation in 2000 designed to improve rate stability.
Beyond implementing pertinent laws and regulations, state regulators  perform a variety of oversight tasks that are intended to protect  consumers from unfair practices. These activities include reviewing policy  rates and forms, conducting market conduct examinations, and  responding to consumer complaints.
In reviewing rates and forms, state regulators examine a policy’s price,  terms, and conditions to ensure that they are consistent with state laws  and regulations. This includes reviewing the company’s pricing  assumptions, such as lapse rates. Some states allow companies to begin  selling policies before receiving approval for price and policy terms, while  others require prior approval before policies can be sold. A small number  of states do not require companies to submit rates for review.
When conducting a market conduct examination, an examiner visits a  company to evaluate practices and procedures, such as claims settlement  practices, and checks those practices and procedures against information  in the company’s files.
Consumer complaints generally lead states to request information from  the company in question. The state reviews the company’s response for  consistency with the policy contract and for violations of insurance laws  and regulations.
Although oversight of the LTCI industry is largely the responsibility of  states, the federal government also plays a role in the oversight of LTCI.  HIPAA established federal standards that affect the LTCI industry as well  as consumers purchasing policies by specifying conditions under which  LTCI benefits and premiums would receive favorable federal income tax  treatment. Under HIPAA, a tax-qualified policy must cover individuals  certified as needing substantial assistance with at least two of the six  ADLs for at least 90 days due to a loss of functional capacity, having a  similar level of disability, or requiring substantial supervision because of a  severe cognitive impairment. Tax-qualified policies under HIPAA must  also comply with certain provisions of the NAIC LTCI model act and  regulation in effect as of January 1993. For example, tax-qualified LTCI  policies must include an offer of inflation protection. The Department of  the Treasury, specifically IRS, issued regulations in 1998 implementing  some of the HIPAA standards. Under the law and regulations, a policy is  tax qualified if it complies with a state law that is the same or more  stringent than the analogous federal requirement. According to IRS  officials, the agency generally relies on states to ensure that policies  marketed as tax qualified meet HIPAA requirements. In 2002, 90 percent of  LTCI policies sold were marketed as tax qualified.
The same consumer protections established under HIPAA for tax-qualified  policies were included in DRA for Partnership policies. However, DRA  provides for certain additional consumer protections to be included in  Partnership policies. For example, states establishing Partnership  programs must ensure that issuers of Partnership policies develop and use  suitability standards consistent with the NAIC models. These standards  are intended to determine whether LTCI is appropriate for each consumer  considering purchasing a policy. Although CMS is responsible for  approving the amendments to states’ Medicaid plans required to  implement long-term care Partnership programs, state insurance  departments are responsible for certifying that Partnership policies  comply with DRA standards. As of February 2008, 18 states had received  CMS approval to begin Partnership programs subject to DRA standards, of  which 8 had begun certifying policies. Partnership policies must also  comply with state laws and regulations. States are responsible for  reviewing Partnership policy forms and rates and overseeing claims  settlement practices for companies that issue these policies.
In addition to the responsibilities of CMS and IRS in the federal  government, OPM has oversight responsibility for the FLTCIP. As of March  2008, the federal program included nearly 220,000 enrollees. The  contractor that administers the program must comply with provisions of  the 2000 version of the NAIC LTCI models, such as the requirement that  consumers be offered certain options in the event of a large rate increase.  Policies sold under the federal program are not required to meet state  insurance laws and regulations.
section_title: States Have Made Efforts to Improve Oversight of Rate Setting, Though Some Consumers Remain More Likely to Experience Rate Increases Than Others
paragraphs: In recent years, many states have made efforts to improve oversight of rate  setting, though some consumers remain more likely to experience rate  increases than others. Since 2000, NAIC estimates that more than half of  all states have adopted new rate setting standards. States that adopted  new standards generally moved from a single standard focused on  ensuring that rates were not set too high to more comprehensive  standards designed primarily to enhance rate stability and provide  increased protections for consumers. The more comprehensive standards  were based on changes made to NAIC’s LTCI model regulation in 2000.  While regulators in most of the 10 states we reviewed told us that they  expect these more comprehensive standards will be successful, they noted  that more time is needed to know how well the standards will work.  Regulators from the states in our review also use other standards or  practices to oversee rate setting, several of which are intended to keep  premium rates more stable. Despite states implementing more  comprehensive standards and using other oversight efforts intended to  enhance rate stability, some consumers may remain more likely to  experience rate increases than others. Specifically, consumers may face  more risk of a rate increase depending on when they purchased their  policy, from which company their policy was purchased, and which state  is reviewing a proposed rate increase on their policy.
subsections: section_title: Many States Adopted More Comprehensive Rate Setting Standards since 2000, but It Is Too Soon to Determine the Effectiveness of the Standards
paragraphs: Since 2000, NAIC estimates that more than half of states nationwide have  adopted new rate setting standards for LTCI. States that adopted new  standards generally moved from the use of a single standard designed to  ensure that premiums were not set too high to the use of more  comprehensive standards designed to enhance rate stability and provide  other protections for consumers. Prior to 2000, most states used a single,  numerical standard when reviewing premium rates. This standard—called  the loss ratio—was included in NAIC’s LTCI model regulation. Specifically,  NAIC’s pre-2000 model stated that insurance companies must demonstrate  an expected loss ratio of at least 60 percent when setting premium rates,  meaning that the companies could be expected to spend a minimum of   60 percent of the premium on paying claims. For all policies where initial  rates were subject to this loss ratio standard, proposed rate increases are  subject to the same standard.
While the loss ratio standard was designed to ensure that premium rates  were not set too high in relation to expected claims costs, over time NAIC  identified two key weaknesses in the standard. First, the standard does not  prevent premium rates from being set too low to cover the costs of claims  over the life of the policy. Second, the standard provides no disincentive  for companies to raise rates, and leaves room for companies to gain  financially from premium increases. In identifying these two weaknesses,  NAIC noted that there have been cases where, under the loss ratio, initial  premium rates proved inadequate, resulting in large rate increases and  significant loss of LTCI coverage from consumers allowing their policies to  lapse.
To address the weaknesses in the loss ratio standard as well as to respond  to the growing number of premium increases occurring for LTCI policies,  NAIC developed new, more comprehensive model rate setting standards in  2000. These more comprehensive standards were designed to accomplish  several goals, including improving rate stability. Among other things, the  standards established more rigorous requirements companies must meet  when setting initial LTCI rates and rate increases. For example, instead of  a loss ratio requirement to demonstrate that a proposed premium is not  too high, the standards require company actuaries to certify that a  premium is adequate to cover anticipated costs over the life of a policy,  even under “moderately adverse conditions,” with no future rate increases  anticipated. Moderately adverse conditions could include, for example,  below average returns on invested assets. To fulfill this requirement,  company actuaries must include a margin for error in their pricing  assumptions. Several regulators told us that allowing a margin for error  may result in higher, but more stable, premium rates over the long term. In  addition, while the more comprehensive standards no longer require  companies to meet a loss ratio for initial premium rates, they establish a  more stringent loss ratio—85 percent—for companies to meet when  proposing premium increases. According to NAIC, this new loss ratio is  intended to limit the financial benefits companies may gain from a rate  increase.
In addition to improving rate stability, the more comprehensive standards  were also designed to inform consumers about the potential for rate  increases and provide protections for consumers facing rate increases. To  inform consumers about the potential for LTCI rate increases, the more  comprehensive standards include, for example, a requirement for  companies to disclose past rate increases to consumers applying for LTCI  coverage. The standards also establish some additional protections for  consumers facing rate increases, including providing certain consumers  with the option of reducing their benefits. Table 1 describes selected rate  setting standards added to NAIC’s LTCI model regulation in 2000 and the  purpose of each standard in more detail.
Although a growing number of consumers will be protected by the more  comprehensive standards going forward, as of 2006 many consumers had  policies that were not protected by these standards. Following the  revisions to NAIC’s LTCI model in 2000, many states began to replace their  loss ratio standard with more comprehensive rate setting standards based  on NAIC’s changes. NAIC estimates that by 2006 more than half of states  nationwide had adopted the more comprehensive standards. However,  many consumers have policies not protected by the more comprehensive  standards, either because they live in states that have not adopted these  standards or because they bought policies issued prior to implementation  of these standards. For example, as of December 2006, according to our  analysis of NAIC and industry information, at least 30 percent of policies  in force were issued in states that had not adopted the more  comprehensive rate setting standards. Further, in states that have adopted  the more comprehensive standards, many policies in force were likely to  have been issued before states began adopting these standards in the early  2000s. The extent to which more states will adopt the more  comprehensive standards is unclear. We found that of the 2 states in our  10-state review that had not adopted these standards as of January 2008,   1 state planned to adopt the standards. A regulator from the other state  told us that the state had chosen not to adopt the standards, at least in part  because its regulatory environment is already sufficiently rigorous.
In states that have not adopted the more comprehensive standards for  LTCI policies generally, federal standards for state Partnership programs  provide additional protections for consumers purchasing Partnership  policies in these states. In expanding authorization for Partnership  programs, DRA required that Partnership policies adhere to certain of the  rate setting standards added to NAIC’s LTCI model regulation in 2000,  such as disclosure of past rate increases to consumers applying for  coverage. Other standards, such as actuarial certification, were not  required. As of February 2008, CMS reported that 24 states either had an  approved Partnership program subject to DRA standards or a request to  implement one pending. Of these 24 states, 7 had not implemented at least  one of the more comprehensive rate setting standards required by DRA.
Regulators from most of the states in our review said that they expect the  rate setting standards added to NAIC’s model regulation in 2000 will  improve rate stability and provide increased protections for consumers,  though regulators also recognized that it is too soon to determine the  effectiveness of the standards. Of the states in our review, regulators in all  but one of the eight states that had adopted the more comprehensive  standards told us that the standards would likely be successful. For  example, regulators from one state emphasized that a significant amount  of collaboration between regulators, insurance companies, and consumer  advocates went into development of the standards. However, regulators in  these eight states also said that not enough time has passed since  implementation to know how well these standards will work, particularly  in stabilizing LTCI rates. Some regulators explained that it might be as  much as a decade before they are able to assess the effectiveness of these  standards. Regulators from one state explained that rate increases on LTCI  policies sold in the 1980s did not begin until the late 1990s, when  consumers began claiming benefits and companies were faced with the  costs of paying their claims. Further, though the more comprehensive  standards aim to enhance rate stability, LTCI is still a relatively young  product, and initial rates continue to be based on assumptions that may  eventually require revision. For example, several company officials told us  that estimates of lapse rates and other LTCI pricing assumptions have  become more reliable over time. However, officials from some companies  also told us that companies still face uncertainties in pricing LTCI,  including forecasting investment returns and predicting the cost of long- term care in a delivery system that continues to evolve.
section_title: State Regulators Use Other Standards or Practices to Oversee Rate Setting
paragraphs: State regulators from the 10 states in our review use other standards— beyond those included in NAIC’s LTCI model regulation—or practices to  oversee rate setting, including several that are intended to enhance rate  stability. Regulators from 3 of the states in our review told us that their  state has standards intended to enhance the reliability of data used to  justify rate increases. For example, 1 state has a standard that requires  companies to justify rate increases using data combined or “pooled” from  all policies that offer similar benefits—including data on the premium  revenues and claims costs associated with these policies—rather than  using only the data on the policy subject to the increase. The regulators  from this state explained that such a standard improves reliability by  normalizing data so that, for example, newer, more adequately priced  policies offset older, underpriced policies. Regulators from 2 states in our  review also told us that these standards are among their states’ most  effective tools for improving rate stability.
In addition to standards to enhance the reliability of data used to set rates,  some states in our review have standards that limit the extent to which  LTCI rates can increase. For example, one of the states we reviewed has a  standard in place to cap premium rates at prevailing market rates for  policies no longer being sold. Regulators from this state explained that  capping premium rates on these policies sets an upper limit that  companies can charge when requesting a rate increase. Regulators from  another state told us that they have authority to fine companies for  instituting cumulative rate increases that exceed a certain cap. Officials  from one company confirmed that some states have standards to cap  premium increase amounts.
Beyond implementing rate setting standards, regulators from all 10 states  in our review use their authority to review rates to reduce the size of rate  increases or to phase in rate increases over multiple years. For example,  state regulators told us that they may require companies to implement  smaller increases than requested or negotiate with companies to reach an  agreement on a smaller increase. In addition to working to reduce the  size of the increases, regulators from some states said that to mitigate the  effect of rate increases on consumers they may suggest that a company  phase the increase in over multiple years. However, this approach only  provides consumers with short-term relief. While state regulators work to  reduce the effect of rate increases on consumers, regulators from six  states explained that increases can be necessary to maintain companies’  financial solvency.
section_title: Some Consumers May Remain More Likely to Experience Rate Increases Than Others
paragraphs: Although some states are working to improve oversight of rate setting and  to help ensure LTCI rate stability by adopting the more comprehensive  standards and through other efforts, there are other reasons why some  consumers may remain more likely to experience rate increases than  others. In particular, consumers who purchased policies when there were  more limited data available to inform pricing assumptions may continue to  experience rate increases. Regulators from seven states in our review told  us that rate increases are mainly affecting consumers with older policies.  For example, regulators from one state told us that there are not as many  rate increases proposed for policies issued after the mid-1990s. Regulators  in five states explained that incorrect pricing assumptions on older  policies are largely responsible for rate increases. Specifically, regulators  explained that inaccurate assumptions about the number of consumers  who would allow their policies to lapse led to rate increases. Officials from  more than one company confirmed that mistakes in pricing older LTCI  policies, including overestimating lapse rates, have played a significant  role in the rate increases that have occurred. However, officials from one  company told us that there are now more data available, including claims  data compiled by the industry, increasing the company’s confidence in  pricing LTCI.
Consumers’ likelihood of experiencing a rate increase also may depend on  the company from which they bought their policy. In our review of  national data on rate increases by four judgmentally selected companies  that together represented 36 percent of the LTCI market in 2006, we found  variation in the extent to which they have implemented increases. For  example, one company that has been selling LTCI for 30 years has  increased rates on multiple policies since 1995, with many of the increases  ranging from 30 to 50 percent. Another company that has been in the  market since the mid-1980s has increased rates on multiple policies since  1991, with increases approved on one policy totaling 70 percent. In  contrast, officials from a third company that has been selling LTCI since  1975 told us that the company was implementing its first increase as of  February 2008. The company reported that this increase, affecting a  number of policies, will range from a more modest 8 to 12 percent.  Another company that also instituted only one rate increase explained that  in cases where initial pricing assumptions were wrong, the company has  been willing to accept lower profit margins rather than increase rates.  While past rate increases do not necessarily increase the likelihood of  future rate increases, they do provide consumers with information on a  company’s record in having stable premiums.
Finally, consumers in some states may be more likely to experience rate  increases than those in other states, which company officials noted may  raise equity concerns. Of the six companies we spoke with, officials from  every company that has instituted a rate increase told us that there is  variation in the extent to which states approve proposed rate increases.  For example, officials from one company told us that when requesting rate  increases they have seen some states deny a request and other states  approve an 80 percent increase on the same rate request with the same  data supporting it. Officials from another company told us that if they filed  for a 25 percent increase in all states, they would expect to have varying  amounts approved and have some states deny the proposed increase.  Officials from two companies noted that such differences across states  raises an equity issue for consumers. While some company officials told us  that initial LTCI premiums are largely the same across states, variation in  state approval of rate increases may mean that consumers with the same  LTCI policy could face very different premium rates depending on where  they live. Though some consumers may face higher increases than others,  company officials also told us that they provide options to all consumers  facing a rate increase, such as the option to reduce their benefits to avoid  all or part of a rate increase.
Our review of data on state approvals of rate increases requested by one  LTCI company operating nationwide also indicated that consumers in  some states may be more likely to experience rate increases. Specifically,  since 1995 one company has requested over 30 increases, each of which  affected consumers in 30 or more states. While the majority of states  approved the full amounts requested in these cases, there was notable  variation across states in 18 of the 20 cases in which the request was for an  increase of over 15 percent. For example, for one policy, the company  requested a 50 percent increase in 46 states, including the District of  Columbia. Of those 46 states, over one quarter (14 states) either did not  did not approve the rate increase request (2 states) or approved less than  the 50 percent requested (12 states), with amounts approved ranging from  15 to 45 percent. The remaining 32 states approved the full amount  requested, though at least 4 of these states phased in the amount by  approving smaller rate increases over 2 years. (See fig. 1.)
Variation in state approval of rate increase requests may have significant  implications for consumers. In the above example, if the initial, annual  premium for the policy was, for example, $2,000, consumers would see  their annual premium rise by $1,000 in Colorado, a state that approved the  full increase requested; increase by only $300 in New York, where a   15 percent increase was approved; and stay level in Connecticut, where  the increase was not approved. While a smaller number of states  approved a lesser amount of the rate increase than requested compared to  the 32 states that approved the full increase, 3 of the states approving  lesser amounts cumulatively represented nearly 20 percent of all active  LTCI policies in 2006. To the extent that states with a large share of the  LTCI market regularly approve lower rate increases than the amounts  requested, more LTCI consumers could experience smaller rate increases.  Although state regulators in our 10-state review told us that most rate  increases have occurred for policies subject to the loss ratio standard,  variation in state approval of proposed rate increases may continue for  policies protected by the more comprehensive standards. States may  implement the standards differently, and other oversight efforts, such as  the extent to which states work with companies, also affect approval of  increases.
section_title: States in Our Review Oversee Claims Settlement Practices Using Consumer Complaints and Examinations, and Several States Are Considering Additional Protections
paragraphs: States in our review oversee claims settlement practices by monitoring  consumer complaints and conducting market conduct examinations in an  effort to ensure that companies are complying with claims settlement  standards. Claims settlement standards in these states largely focus on  timeliness, but there is notable variation in which standards states adopted  and how states define timeliness. To identify violations of these standards,  regulators from all 10 states in our review told us that they review  consumer complaints and conduct examinations of companies’ claims  settlement practices, with regulators from 7 states reporting one or more  examinations under way as of March 2008. State regulators in several  states told us that they are considering additional protections related to  claims settlement, with some states awaiting the outcomes of ongoing  examinations to determine what additions may be necessary. For example,  regulators from 4 states told us that their state is considering an  independent review process for consumer appeals of claims denials.
subsections: section_title: States’ Claims Settlement Standards Largely Focus on Ensuring Timely Practices, Though States Differ in Specific Standards Adopted and in Definitions of Timeliness
paragraphs: The 10 states in our review have standards established by law and  regulations for governing claims settlement practices. The majority of the  standards, some of which apply specifically to LTCI and others that apply  more broadly to various insurance products are designed to ensure that  claims settlement practices are conducted in a timely manner. Specifically,  the standards are designed to ensure the timely investigation and payment  of claims and prompt communication with consumers about claims. In  addition to these timeliness standards, states have established other  standards, such as requirements for how companies are to make benefit  determinations.
While the 10 states we reviewed all have standards governing claims  settlement practices, the states vary in the specific standards they have  adopted as well as in how they define timeliness. For example, 1 state  does not have a standard that requires companies to pay claims in a timely  manner. For the 9 states that do have a standard, the definition of “timely”  the states use varies notably—from 5 days to 45 days, with 2 states not  specifying a time frame. In addition, 2 of 10 states do not require  companies to provide explanation of delays in resolving claims, and the   8 that do require companies to explain delays vary in how many days the  state allows delays to go unexplained. Federal laws governing tax-qualified  and Partnership policies do not address the timely investigation and  payment of claims or prompt communication with consumers about  claims. The absence of certain standards and the variation in states’  definitions of “timely” may leave consumers in some states less protected  from, for example, delays in payment than consumers in other states. (See  table 2 for key claims settlement standards adopted by the 10 states in our  review and examples of the variation in standards.)
Given state variation, officials from four companies, which together  represented 26 percent of the LTCI market in 2006, told us that they tailor  their claims settlement practices nationwide to adhere to the most  rigorous state standards. For example, officials from one company noted  that they have adopted nationwide the most stringent state standard for  timely payment of claims. Several officials added that they monitor  changes in state standards in order to adjust their claims settlement  practices. By tailoring their practices to adhere to the most rigorous state  standards, companies may provide more uniform protection for  consumers than would be provided under varying state standards.
section_title: States in Our Review Monitor Companies’ Compliance with Claims Settlement Standards Primarily through Consumer Complaints and Examinations
paragraphs: The states in our review primarily use two ways to monitor companies’  compliance with claims settlement standards (1) reviewing consumer  complaints and (2) conducting market conduct examinations. The first  way the states monitor compliance is by reviewing consumer complaints  on a case-by-case basis and in the aggregate to identify trends in company  practices. Regulators in all 10 of the states we reviewed said that  monitoring LTCI complaints is one of the primary methods for overseeing  compliance with claims settlement standards. When responding to  complaints on a case-by-case basis, regulators in some states told us that  they determine whether they can work with the consumer and the  company to resolve the complaint or determine whether there has been a  violation of claims settlement standards that requires further action. State  regulators frequently resolve individual complaints by assisting consumers  in obtaining payment. Regulators from 6 states told us that in response to  complaints related to LTCI claims, state staff works with the company in  question, for example, to determine if the consumer needs to provide  additional documentation for a claim to be paid. In reviewing information  on complaints related to LTCI from 3 states, we found that in 2006, about  50 percent of the 116 complaints related to either delays or denials  eventually resulted in consumers receiving payment, with amounts in 1  state ranging from $954 to $29,910 per complaint. Regulators in some  states also resolve consumer complaints by providing explanation to  consumers or their family members for why a claim was denied.  Regulators from 6 states told us that consumers sometimes do not  understand or are not aware of the terms of their policies. For example,  although most policies include an elimination period, state regulators in 1  state noted that consumers often do not understand it and submit claims  for services received during this period, which are subsequently denied by  the company.
Regulators from four states also told us that they regularly review  complaint data to identify trends in company practices over time or across  companies, including practices that may violate claims settlement  standards. Three of these states review these data as part of broader  analyses of the LTCI market during which they also review, for example,  financial data and information on companies’ claims settlement practices.  However, regulators in three states noted that a challenge in using  complaint data to identify trends is the small number of LTCI consumer  complaints that their state receives. For example, information on  complaints provided by one state shows that the state received only 54  LTCI complaints in 2007, and only 20 were related to claims settlement  issues. State regulators told us that they expect the number of complaints  to increase in the future as more consumers begin claiming benefits. In  our review of complaint information from five states, we did not find that  an upward trend in the number of complaints has begun, though the  information indicates that the proportion of complaints related to claims  settlement issues has increased over time. Specifically, we found that from  2001 to 2007, the percentage of all complaints about LTCI that were  related to claims settlement issues increased from about 25 percent (215  of 846) to 44 percent (318 of 721) (see table 3).
In addition to consumer complaints, the second way that states monitor  company compliance with claims settlement standards is using market  conduct examinations. These examinations may be regularly scheduled or,  if regulators find patterns in consumer complaints about a company, they  may initiate an examination, which generally includes a review of the  company’s files for evidence of violations of claims settlement standards.  For example, one state initiated an examination of a company’s consumer  complaint files for 2005 through 2007 on the basis of three LTCI  complaints made to the state. These complaints indicated a number of  potential problems with the company’s claims settlement practices,  including delays in payment and improper claims denials. Some states also  coordinate market conduct examinations with other states—efforts  known as multistate examinations—during which all participating states  examine the claims settlement practices of designated companies. If state  regulators identify violations of claims settlement standards during market  conduct examinations, they may take enforcement actions, such as  imposing fines or suspending the company’s license. As of March 2008, 4  of 10 states in our review reported taking enforcement actions against  LTCI companies for violating claims settlement standards. Regulators  from one state, for example, told us that they fined one company $100,000  for failure to promptly and properly pay LTCI claims.
As of March 2008, regulators from 7 of the 10 states reported having  ongoing examinations into companies’ claims settlement practices.  Specifically, regulators from 2 states reported having an ongoing  examination focused on a company’s practices in their state, regulators  from 2 states reported participating in ongoing multistate examinations,  and regulators from 3 states reported having both types of examinations  under way. In addition to ongoing examinations, regulators in 1 state told  us that the state is analyzing trends in claims settlement practices among  the 14 companies with the largest LTCI market share in the state. If  concerns are identified, regulators told us that this analysis may lead to a  market conduct examination. Company officials that we spoke with noted  that states have increased their scrutiny of claims settlement practices  since mid-2007, after media reports of consumers experiencing problems  receiving payments for claims. Officials in four companies we  interviewed told us that their company had received requests for  information about company claims settlement practices from several  states. In addition, officials from three companies noted that states are  examining companies’ claims settlement practices in more detail than they  had previously. For example, officials from one company said that the  rigor of states’ market conduct examinations has increased, both in terms  of the number of case files state regulators examine and in terms of the  scope of the information that regulators collect.
section_title: Several States Are Considering Additional Protections Related to Claims Settlement
paragraphs: Regulators from six of the states in our review reported that their state is  considering or may consider adopting additional consumer protections  related to claims settlement, such as additional standards. Of these six  states, four have completed or expect to complete in-depth reviews of  LTCI in their states, and two of the completed reviews have resulted in  recommendations for additional claims settlement standards. For  example, a report completed by Iowa in 2007 included a recommendation  for adopting a standard requiring timely payment of claims by companies  selling LTCI policies. As of March 2008, regulators from two of the six  states told us that they were awaiting the results of ongoing NAIC data  collection efforts or ongoing market conduct examinations before  considering specific protections.
The additional protection most frequently considered by the state  regulators we interviewed is the inclusion of an independent review  process for consumers appealing LTCI claims denials. Regulators from  four of the states in our review told us that their states were considering  establishing a means for consumers to have their claims issues reviewed  by a third party independent from their insurance company without having  to engage in legal action. Further, a group of representatives from NAIC  member states was formed in March 2008 to consider whether to  recommend developing provisions to include an independent review  process in the NAIC LTCI models. Such an addition may be useful, as  regulators from three states told us that they lack the authority to resolve  complaints involving a question of fact, for example, when the consumer  and company disagree on a factual matter regarding a consumer’s  eligibility for benefits. Further, there is some evidence to suggest that due  to errors or incomplete information companies frequently overturn LTCI  denials. Specifically, data provided by four companies we contacted  indicate that denials are frequently overturned by companies during the  appeals process, with the percentage of denials overturned averaging   20 percent in 2006 among the four companies and ranging from 7 percent  in one company to 34 percent in another.
There is precedent for an independent review process for denied claims.  For example, one state reported that an independent review process is  available under its state law for appeals of denials of health insurance  claims. Further, officials from one company in our review told us that the  company had started implementing an independent review option for its  LTCI consumers, though it had not selected the third-party reviewer as of  February 2008. Finally, the FLTCIP includes an independent review  process. However, the FLTCIP process remains largely untested as,  according to OPM officials, only three consumers had made appeals as of  April 2008.
section_title: Agency Comments and Our Evaluation
paragraphs: We received comments on a draft of this report from NAIC. NAIC  compiled and summarized comments from its member states, and NAIC  officials stated that member states found the report to be an accurate  reflection of the current LTCI marketplace. However, NAIC officials also  reported that states were concerned that the report seemed to critique  certain aspects of state regulation without a balanced discussion and  seemed to be making an argument for certain reforms. In particular, NAIC  officials noted that states said the draft report highlighted the differences  in state regulation of rates and the fact that new regulations are not   typically made retroactive. NAIC officials also noted that as in every other  area of state regulation, state laws differ based on markets, consumer  needs, and political realities. NAIC officials added that state lawmakers  and regulators must balance many different factors when developing rules  and one size often does not fit all. Our draft reported differences in states’  oversight of rate setting and claims settlement practices without making  any conclusions or recommendations. We reported both the extent to  which NAIC model standards have been adopted and other standards and  practices states have in place.
Further, NAIC officials noted that states expend considerable resources to  educate consumers so that they make informed decisions. While this may  be the case, our review was focused on the oversight of rate setting and  claims settlement practices because of recent concerns in these areas. We  did not review states’ broader consumer education efforts related to long  term care insurance.
Finally, certain NAIC member states provided technical comments, which  we incorporated into the report as appropriate.
As arranged with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  issue date. At that time, we will send copies of this report to NAIC and  other interested parties. We will also make copies available to others on  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 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 II.
section_title: Appendix I: Methodology for Selecting States for Case Studies
paragraphs: To conduct case studies on oversight of long-term care insurance (LTCI),  we selected a judgmental sample of 10 states on the basis of several  criteria. First, we selected states that together accounted for at least   40 percent of all policies in force in 2006 and represented variation in  terms of the number of policies in force. In addition, we selected states  that were both congruent and not congruent with the National Association  of Insurance Commissioners (NAIC) LTCI model act and regulation to  reflect the variation in state oversight of the product. We also selected  states that represented geographic variation. Finally, we considered the  number of complaints the state reported receiving related to LTCI in 2006.  (See table 4 for the list of selected states.)
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Kristi Peterson, Assistant  Director; Susan Barnidge; Krister Friday; Julian Klazkin; Rachel  Moskowitz; and Sara Pelton made key contributions to this report.