Long-Term Care Insurance: Carrier Interest in the Federal Program, Changes to Its Actuarial Assumptions, and OPM Oversight
Published: 2011-07-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2002, the federal government has offered long-term care insurance to its employees, retirees, and certain others through the Federal Long Term Care Insurance Program (FLTCIP). Enrollees pay the full cost of their premiums. The Office of Personnel Management (OPM) oversees the program. OPM has held two competitive processes to select contractors to insure enrollees and administer FLTCIP, although interest in and competition for these contracts has been limited. In 2009, soon after OPM's award of FLTCIP's second 7-year contract to John Hancock Life Insurance Company (John Hancock), 66 percent of enrollees were notified that their premiums would increase up to 25 percent in order to compensate for how the actuarial assumptions used to set premiums differed from the program's experience. GAO was asked to review FLTCIP. In this report, GAO describes (1) factors affecting carriers' interest in FLTCIP, (2) how the actuarial assumptions used to set FLTCIP premiums have changed since the program's inception, and (3) OPM's oversight of actuarial assumptions and experience and program communications. To do so, GAO interviewed officials from six carriers that in 2009 insured over 60 percent of all long-term care insurance policyholders. GAO also interviewed officials from OPM and John Hancock and reviewed program documentation, including FLTCIP contracts.
section_title: What GAO Found
paragraphs: A variety of factors influenced carriers' interest in FLTCIP. Carriers' business strategies had the most significant influence on their interest, though in different ways. Some carriers wanted to increase their market share and thus were attracted to FLTCIP. In contrast, some carriers wanted to grow their long-term care insurance business at a slower pace, which detracted from their interest in FLTCIP. At the time of FLTCIP's second contract, factors relating to the program's history had the second-most significant influence on carriers' interest, and generally detracted from it as a result of FLTCIP's need for a premium increase and concerns about transitioning a large, complex program from another carrier. A variety of other factors also affected carriers' interest. For example, the large number of eligible individuals and the lack of a requirement to guarantee coverage to them positively influenced carriers' interest, while the lack of a list of home addresses for the eligible population--which could have been used to market the program--and the relatively large portion of eligible individuals who were disabled detracted from carriers' interest. Since FLTCIP's inception in 2002, John Hancock has revised the program's actuarial assumptions. When setting premiums for the second contract period, John Hancock updated FLTCIP's assumptions to reflect an expectation that a larger portion of enrollees will voluntarily maintain their coverage longer and will live longer than initially expected. The carrier also reduced the amount of claims costs the program expects for enrollees of any given age. Although FLTCIP yielded a lower-than-expected return on investment during the first contract period, John Hancock did not revise this assumption when setting premiums for the second contract period. Instead, it revised the investment strategy to include considerable investments in public equities--such as stocks--which the carrier said have a higher expected rate of return. Altogether, John Hancock expects that more enrollees will continue their coverage, reach older ages, and submit claims than initially assumed. As such, the carrier increased projections for the total amount of future FLTCIP claims. As part of its assessment of carriers' proposals to insure FLTCIP enrollees and administer the program, OPM evaluated the actuarial assumptions carriers proposed for the program to ensure that the assumptions were reasonable and collectively supported the proposed premiums. Once the program's premiums were finalized with the award of the contract, OPM has monitored the program's experience by reviewing regular reports comparing the experience of the program to the actuarial assumptions used to set premiums. OPM's oversight has also included a review of all program communications for accuracy and clarity prior to their use. OPM and John Hancock provided technical comments, which have been incorporated as appropriate.

section_title: Letter
paragraphs: In 2009, about $253 billion was spent nationwide on long-term care  services, including nursing home and other assisted-living services. Most  of this care was financed by government programs, primarily Medicaid,  and a small share of these costs—about 6 percent—was paid for by  private insurance. Elderly people—those aged 65 and older—account for  the majority of spending on long-term care services. As the number of  elderly Americans continues to grow, particularly with the aging of the  baby boom population, the growing demand for long-term care services  will strain federal and state resources. Policymakers and experts have  proposed an increased use of long-term care insurance as a means of  reducing the future share of long-term care services financed by public  programs.
Since 2002, the federal government has offered long-term care insurance  to its employees, retirees, and certain others through the Federal Long  Term Care Insurance Program (FLTCIP), in accordance with the Long- Term Care Security Act. FLTCIP enrollees are required to pay the full  cost of their premiums, unlike some other employee benefits—such as  health insurance—offered by the federal government. The Office of  Personnel Management (OPM), the federal agency that administers  governmentwide compensation and benefit programs, oversees FLTCIP  and contracts with private companies to insure FLTCIP enrollees and  administer the program. To date, OPM has held two competitive  processes to select contractors for FLTCIP; however, only a few  companies have submitted proposals, resulting in limited competition for  the FLTCIP contracts. After the conclusion of the first competitive process  in 2001, OPM selected a consortium of two large insurance carriers— John Hancock Life Insurance Company (John Hancock) and Metropolitan  Life Insurance Company (MetLife)—to insure program enrollees for the  duration of the program’s initial 7-year contract. This consortium jointly  formed Long Term Care Partners, LLC (Partners) to administer the  program. As the end of the first contract period grew near, OPM  conducted its second competitive process for FLTCIP’s next 7-year  contract. In April 2009, the agency selected John Hancock as the insurer,  with Partners—which became a wholly owned subsidiary of John  Hancock—continuing to administer the program.
With 268,204 enrollees as of June 30, 2011, FLTCIP is the largest private  long-term care insurance program in the nation. As we previously  reported, the benefits and premiums offered under FLTCIP compared  favorably with those of other long-term care insurance plans. These  benefits and premiums did not change during FLTCIP’s first 7-year  contract period. However, in 2009, soon after OPM awarded the  program’s second contract, 146,415 individuals (66 percent of enrollees  at that time) were notified that their premiums were subject to an increase  of up to 25 percent. All of these enrollees had selected a particular  inflation protection option—the 5 percent automatic compound inflation  option (ACIO)—that was intended to keep enrollees’ benefits  commensurate with the cost of long-term care services by increasing their  benefits each year by 5 percent without a routine increase in premiums.  Although FLTCIP had not guaranteed that enrollees’ premiums would  remain stable, the announcement of a premium increase surprised some  FLTCIP enrollees, who thought that the program’s marketing materials  indicated that selecting the ACIO would result in premiums that would  remain constant over the life of their policies. However, FLTCIP was not  unique in raising enrollee premiums. Long-term care insurance is a  relatively new product, and carriers throughout the industry have  struggled with setting premiums at a rate sufficient to cover future costs.  Over the last decade, many carriers—including the largest in the  market—have raised premiums to compensate for how the assumptions  they used in setting premiums for this insurance product differed from  their experience.
You requested that we review FLTCIP. In this report, we describe   (1) factors affecting insurance carriers’ interest in contracting to insure  FLTCIP enrollees and administer the program; (2) key changes made to  FLTCIP since the second contract was awarded; (3) the benefit options  offered to enrollees who faced a premium increase and the options they  selected; (4) how actuarial assumptions used to set premiums for FLTCIP  have changed since the program’s inception; and (5) OPM’s oversight of  FLTCIP’s actuarial assumptions and experience, and its communications  with current and prospective enrollees.
To describe information on the factors that affected insurance carriers’  interest in FLTCIP, we interviewed officials from six of the nation’s largest  long-term care insurance carriers—Genworth Financial, John Hancock,  MetLife, Prudential Financial Inc., Transamerica Life Insurance Company,  and Unum. In 2009, these six carriers insured 61 percent of all long-term  care insurance policyholders and 79 percent of those who purchased  coverage through employers or other sponsors in the group market. In  addition, these carriers varied with respect to their interest in FLTCIP;  some submitted proposals to insure FLTCIP enrollees and administer the  program, while others had not. We asked officials from these carriers to  identify the factors that influenced the carriers’ interest in FLTCIP at the  time of the program’s first and second contracts. Specifically, we asked  these officials how factors related to carriers’ business strategies and  capabilities, FLTCIP’s history, and other aspects of the program—such as  statutory requirements—affected their interest in the program. We also  asked these officials to explain how and to what extent such factors  influenced carriers’ interest.
To describe the key changes that have been made to FLTCIP since the  second contract was awarded, we interviewed officials from OPM and  John Hancock about the changes made to the program and reviewed  program documentation, including FLTCIP contracts. We considered  changes to be key changes if officials from both OPM and John Hancock  identified them as significant and if they directly affected current or future  enrollees.
To describe the benefit options that were offered to enrollees facing a  premium increase, we interviewed OPM and John Hancock officials and  reviewed program documentation. We also assessed the extent to which  the benefit options were similar to those offered by other long-term care  insurance carriers. To do so, we interviewed officials from the six  insurance carriers noted above to obtain information on the benefit  options they have typically offered to enrollees facing a premium  increase. To describe the benefit options that FLTCIP enrollees selected  and the impact of those selections on enrollees’ premiums, we analyzed  John Hancock data. These data summarized the benefits selected by  FLTCIP enrollees facing the premium increase and the amount by which  their premiums changed as a result of those selections. We discussed the  data with knowledgeable officials from John Hancock and reviewed all  data for reasonableness and consistency; we determined that the data  were sufficiently reliable for our purposes.
To describe how the actuarial assumptions used to set premiums for  FLTCIP have changed since the program’s inception, we interviewed  OPM and John Hancock officials and reviewed program documentation,  including FLTCIP contracts. We compared the actuarial assumptions  used to set premiums for the first contract period to those used to set  premiums for the second contract period. We also examined the extent to  which the assumptions had changed since premiums for the second  contract period were set. In addition, we assessed how changes in  FLTCIP assumptions compare to those used in setting premiums for  other long-term care insurance plans. To do so, we interviewed officials  from the six insurance carriers in our analysis about the actuarial  assumptions they use, and how their assumptions have changed since  FLTCIP began in 2002. We also interviewed insurance regulators from  three states—California, Florida, and New York—about the actuarial  assumptions used in setting premiums for long-term care insurance plans  offered in their states. In 2009, these were the top three states in terms of  the amount of long-term care insurance premiums earned; they were  collectively responsible for overseeing 20 percent of all long-term care  insurance policies.
To describe OPM oversight of actuarial assumptions and experience and  program communications with current and prospective enrollees, we  interviewed officials from OPM, John Hancock, and MetLife. For context,  we interviewed officials from the six insurance carriers to gather  information regarding the oversight conducted by other employers and  state regulators.
We conducted this performance audit from September 2010 to July 2011  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Long-term care, which includes services provided to individuals in nursing  homes, in assisted-living facilities, or in their homes, can be costly. Most  of our nation’s spending for this care is paid for by government programs.  Private long-term care insurance can also be used to pay for these costs;  however, only a small portion of total long-term care costs are paid for by  such coverage. The federal government has taken steps to increase the  use of private insurance to pay for long-term care costs, including  creating FLTCIP.
subsections: section_title: Long-Term Care Costs
paragraphs: Long-term care costs vary based on the types of services provided and  the geographic area where they are rendered. For example, in 2010, the  average annual cost for care in a nursing home exceeded $83,000 and  the average annual cost for care in an assisted-living facility was nearly  $40,000. In addition, the average hourly rate for a home health aide was  $21; for example, 10 hours of such care a week would average about  $11,000 per year.
Most of the nation’s spending on long-term care services is paid for by  government programs. About $253 billion was spent nationwide on long- term care services in 2009, according to the most recently available data.  Nearly three-quarters of this amount—$183 billion—was paid for by  government programs, primarily Medicaid, and to a lesser extent,  Medicare and other government programs. Individuals paid 18 percent of  the total, or $46 billion, out of pocket, and private insurance paid for a  small portion of the total, 6 percent, or about $16 billion. (See fig. 1.)
Individuals may purchase long-term care insurance policies directly from  carriers in the individual market, or they can enroll in those offered by  groups, such as their employers. At the end of calendar year 2009,   6.7 million individuals had long-term care insurance policies, according to  data from the National Association of Insurance Commissioners (NAIC).  Nearly 70 percent of these policies were purchased in the individual  market, with the remaining portion purchased through employers or other  group sponsors.
States are generally responsible for overseeing long-term care insurance.  Through laws and regulations, states establish standards governing long- term care insurance and state insurance departments enforce those  standards. NAIC has issued model laws and regulations to assist states  in formulating their laws and regulations for long-term care insurance;  many states have adopted NAIC’s models. State regulators perform a  variety of oversight tasks that are intended to protect consumers from  unfair practices, including reviewing premiums and marketing materials  and responding to consumer complaints.
Long-term care insurance is generally structured around a number of  benefit options that applicants select. These include  the types of services covered, such as nursing home services, care in  home and community settings, or both;  the daily benefit amount, which is the maximum amount insurance will  pay on a single day;  the benefit period (or duration of coverage), which can range from   1 year to unlimited (i.e., lifetime) coverage; and  the length of the elimination or waiting period, which is the length of  time an individual has to wait before insurance will provide coverage  toward the cost of care.
An applicant can also select an inflation protection benefit to help ensure  that over time, his or her daily benefit amount remains commensurate  with the costs of care. Inflation protection benefits increase the enrollee’s  daily benefit amount at specified intervals—for example, annually.  Carriers typically provide multiple inflation protection options, including a  5 percent ACIO. Under this option, an enrollee’s daily benefit amount is  increased each year by 5 percent of the prior year’s amount without a  routine increase in premiums. For example, an individual who selected a  daily benefit amount of $100 at enrollment would have accrued a   $105 daily benefit amount that would be available to him or her at the  beginning of the second year of coverage. At the beginning of the third  year of coverage, the enrollee’s daily benefit amount would accrue by an  additional 5 percent to $110.25. Inflation protection is important because  many purchasers of long-term care insurance do not expect to need long- term care services until some time in the future; they pay premiums over  a period of years in return for a promise of future protection. This benefit  allows enrollees to take advantage of lower premium rates available to  younger enrollees, while allowing their benefits to grow over time.
Long-term care insurance premiums are affected by many factors.  Carriers charge higher premiums for richer benefits; for example, higher  daily benefit amounts, longer benefit periods, and higher levels of inflation  protection will increase premiums. In addition, premium rates vary based  on enrollees’ age at enrollment, with older individuals subject to higher  premiums than younger individuals who select the same benefits.  Premiums for some policies may also be based on the health status of  the applicant. For example, policies sold in the individual market are  generally subject to full underwriting, which entails an extensive review  of the applicant’s health and may result in premiums that vary based on  health status. In contrast, premiums for policies sold in the group market  usually do not vary based on individuals’ health status. Such policies may  be offered, during at least some periods, on a guaranteed issue basis  with no underwriting—meaning that coverage is guaranteed to all eligible  individuals. For example, some carriers guarantee coverage to a group of  eligible individuals, such as active employees, during an open enrollment  period.
In addition, carriers establish premiums on the basis of actuarial  assumptions—including lapse, mortality, morbidity, and return on  investment assumptions.    The lapse assumption reflects the expected portion of enrollees who  drop their coverage each year, for example, by voluntarily canceling  their policies. Lapse assumptions can vary based on a variety of  factors, including the enrollees’ age at enrollment and the number of  years enrollees have had their policies. In general, it is assumed that  the longer that enrollees keep their policies, the less likely they are to  lapse. After enrollees have maintained their policies for a certain  number of years—for example, after 6 or 8 years—carriers may  assume that the lapse rate will remain constant. This rate is referred  to as the ultimate lapse rate. Lapse rate assumptions greatly affect  long-term care insurance premiums because when individuals lapse,  future liabilities are immediately reduced although current assets are  not affected. Premiums that have already been paid by those who  lapse generally remain with the carrier and are used to subsidize the  cost of future claims by other enrollees.    The mortality assumption summarizes the expected death rate of the  enrollee population, by age. Similar to the lapse assumption, mortality  reduces future liabilities without affecting assets.    The morbidity assumption reflects the amount of claims costs  expected for enrollees, by age, and accounts for the portion of  enrollees of each age who file a claim and the duration of those  claims. Because carriers assume that older enrollees are more likely  to file a claim, the expected amount of claims costs increases with  age.    The return on investment assumption reflects the expected interest  rate earned on invested assets.
Because actuarial assumptions are projections about the future, they can  change over time as carriers gain more experience, especially with  relatively new products such as long-term care insurance. In addition,  these assumptions are developed based on the professional judgment of  carriers’ actuaries; therefore, actuarial assumptions—and the resulting  premiums—can differ across actuaries and carriers.
A key feature of long-term care insurance is that premiums are  designed—although not guaranteed—to remain level over time. Carriers  calculate premium rates with a goal of ensuring that the total amount of  premiums paid by all enrollees plus the interest earned on the invested  assets over the lifetime of the policy are sufficient to cover the cost of  future claims and expenses. Setting premiums at an adequate level to  cover future costs has been a challenge for some carriers. Long-term  care insurance is a relatively new product. In addition, several decades  may elapse before enrollees submit claims and carriers obtain data on  how their enrollees use their policies. As a result, many carriers have  lacked (and may continue to lack) sufficient data to accurately estimate  the revenue needed to cover costs. This has led to changes in the  marketplace as many companies have raised premiums, left the  marketplace, or consolidated to form larger companies.
In response to the growing number of premium increases for long-term  care insurance, NAIC issued revisions to its model long-term care  insurance regulation in 2000. The new model regulation established more  rigorous requirements that carriers must meet when setting initial  premium rates and when requesting premium increases. For example,  the model regulation introduced a new requirement for insurance carriers’  actuaries to certify that premiums are adequate to cover anticipated costs  over the life of a policy, even under “moderately adverse conditions,” with  no future premium increases anticipated. Moderately adverse conditions  could include, for example, below average returns on invested assets. To  fulfill this requirement, insurance carriers’ actuaries must include a margin  for error when setting premiums.
section_title: FLTCIP Oversight and Administration
paragraphs: The Long-Term Care Security Act authorizes OPM to enter into 7-year  contracts with one or more private entities to insure FLTCIP enrollees and  administer the program. The Act requires OPM to ensure that each of  these contracts is awarded on the basis of contractor qualifications, price,  and reasonable competition. The Act also tasked OPM with overseeing  FLTCIP and preempts state oversight of the program. As a result, OPM  performs functions of both a sponsoring employer and a regulator for this  program.
To obtain carriers’ proposals for FLTCIP, OPM issued two requests for  proposals (RFP)—one in 2001 for the program’s first contract, and  another in 2008 for the program’s second contract. The agency’s RFPs  summarized information about the program, including information about  the population eligible to apply for coverage, as well as program  requirements, such as covered services and benefit options that were to  be offered. The RFP for the program’s second contract included detailed  information about the experience of the program to date—including the  number of enrolled individuals and their characteristics, current  premiums, and the balance of funds available to pay for FLTCIP claims  and expenses. The RFPs for both contracts also outlined OPM’s  expectations for the program. For example, OPM’s RFP for the first  contract stated that because of efficiencies in marketing to a large group,  the agency expected that carriers would offer premiums that were 15 to  20 percent below those charged for comparable benefits in the individual  market. In its RFP for the second contract, OPM stated that carriers  should adjust premiums to ensure that they were adequate, but that  premium increases should not exceed 25 percent per enrollee. In  addition, in its RFPs for both contracts, OPM stated that it expected  carriers to follow NAIC’s 2000 model long-term care insurance regulation  by including a margin for moderately adverse conditions when setting  premiums for FLTCIP. In addition to providing information about the  program, OPM’s RFPs required carriers to submit detailed proposals for  plan premiums and benefits as well as for the administration of FLTCIP.
The FLTCIP contract includes the winning carrier’s responses to OPM’s  RFP and outlines all key aspects of the program. Once the contract is  signed, any changes made to the program during the contract term—such  as changes to enrollee premiums—must be agreed upon by OPM and the  carrier. The contract outlines the roles and responsibilities of all parties  and the type and frequency of reporting. It also includes information about  the benefits offered; the actuarial assumptions used to set premiums; the  premiums charged; and how payments for the program’s expenses, as  well as payments that are designated as profits, are determined. Unlike  other contracts between employers and insurance carriers, the FLTCIP  contract includes provisions for the management of program assets—that  is, the funds collected as premiums and used to pay claims. By statute,  such funds must remain separate from the carrier’s other businesses.
At the end of FLTCIP’s 7-year contract, OPM can again conduct a  competitive process to obtain proposals for insuring FLTCIP during its  third contract term. If a new carrier is selected, the current carrier must  transfer all FLTCIP enrollees and assets, including any positive or  negative returns related to the experience of the program, to the next  carrier. If OPM does not contract with another carrier, the current carrier  would retain its responsibility for insuring all current enrollees and would  continue to work with OPM to administer the program. Premium rates  would remain at their then current levels unless OPM and the carrier  agree on different rates, or the carrier submits new premium rates it  believes are warranted to attain funding sufficiency, at least one year prior  to the rates’ effective date. FLTCIP assets would remain available to pay  for these enrollees’ claims and expenses.
section_title: FLTCIP Eligibility and Benefits
paragraphs: The Long-Term Care Security Act also defined key aspects of FLTCIP  eligibility. For example, the statute requires that all federal and Postal  Service employees and retirees, active and retired members of the  uniformed services, their qualified relatives, and certain others be eligible  to apply for FLTCIP coverage. Almost 19 million people were estimated  to be eligible to apply for coverage as of October 15, 2001. While the Act  specifies who is eligible to apply for FLTCIP coverage, it does not require  that coverage be guaranteed to all eligible individuals. Eligibility for  coverage has been subject to underwriting, though the level of  underwriting used by the program varies. During FLTCIP open enrollment  periods, an abbreviated underwriting application has been used for active  federal employees and their spouses or same-sex domestic partners and  active members of the uniformed services and their spouses. A more  lengthy underwriting application, similar to underwriting in the individual  insurance market, is generally used for these applicants if they apply for  coverage during other times and for all other applicants, including retirees  and qualified relatives, regardless of when they apply.
Similar to other long-term care insurance plans, FLTCIP enrollees are  able to select from a range of benefits, as outlined in OPM’s contract with  the carrier. FLTCIP offers applicants the ability to choose, for example,  their daily benefit amount and benefit period. The program also offers  inflation protection benefits, including a 5 percent ACIO, which has been  offered since the program’s inception. Once an enrollee becomes eligible  for benefits, FLTCIP provides reimbursement for covered services up to  the enrollee’s accrued daily benefit amount based on the benefit options  selected. For example, FLTCIP pays for 100 percent of enrollees’  nursing home costs, up to their accrued daily benefit amount.
FLTCIP premiums vary greatly depending on the benefits selected as well  as individuals’ ages at enrollment. For example, a plan with a $150 daily  benefit amount, 3-year benefit period, and 5 percent ACIO would cost   $87 per month for coverage for an individual who enrolled at age 40, but  would cost $238 per month for an individual who enrolled at age 65.
As part of FLTCIP’s second contract, OPM and John Hancock agreed to  a premium increase of up to 25 percent for current enrollees who had  selected the program’s 5 percent ACIO benefit and were less than   70 years old at the time of their enrollment. As of October 2009, two- thirds of all FLTCIP enrollees—146,415 individuals—had 5 percent ACIO  coverage and were subject to the premium increase. OPM and John  Hancock officials have stated that the premium increase was warranted  because of projections for future program underfunding, which occurred  primarily as a result of lower-than-expected lapse and mortality rates, as  well as lower-than-expected returns on investments.
section_title: A Variety of Factors Influenced Carriers’ Interest in FLTCIP, Business Strategy Most Significantly
paragraphs: A variety of factors have influenced carriers’ interest in contracting to  insure FLTCIP enrollees and administer the program, according to  officials from the carriers we interviewed. Carriers’ business strategies  had the most significant effect on their interest in the program at the time  of both contracts, but their strategies affected their interest in different  ways. Factors relating to FLTCIP’s history generally detracted from  carriers’ interest in the program at the time of its second contract, and a  variety of other factors—including the size and characteristics of the  program—have also influenced carriers’ interest in the program since its  inception.
subsections: section_title: Business Strategy Most Significantly Influenced Carriers’ Interest in FLTCIP, but in Different Ways
paragraphs: Carriers’ business strategies had the most significant influence on their  interest in FLTCIP at the time OPM solicited proposals for the first and  second contracts, according to officials we interviewed. However, carriers  differed as to whether their business strategy had a positive or negative  effect on their interest in FLTCIP. Officials from three of the six carriers  we interviewed said that their carrier’s business strategy positively  influenced their interest in FLTCIP at the time OPM solicited proposals for  each contract. In contrast, officials from three of the carriers we  interviewed indicated that their carrier’s business strategy detracted from  their interest in FLTCIP.
Officials from the carriers who indicated that business strategy had a  positive influence on their interest noted that their companies were  interested in growing their long-term care insurance business and  believed FLTCIP would provide them with an opportunity to do so. They  also stated that insuring FLTCIP would lend them credibility, assist them  in gaining name recognition in the marketplace, and further their goals of  expanding sales of their other (nonfederal) long-term care insurance  policies. In contrast, officials from the carriers who indicated that their  business strategy detracted from their interest in FLTCIP said that they  wanted to grow their long-term care insurance business at a slower pace  or focus on other segments of the market, such as the individual market.  Officials from three carriers noted that FLTCIP had the potential to be so  large that the carrier may not have been able to insure enrollees or  administer the program independently, and some carriers also noted  concerns about partnering with other insurance carriers to do so. Finally,  two carriers told us that they had less interest in selling long-term care  insurance overall at the time of the second contract. Officials from these  carriers told us that they were uncertain about the risks associated with  long-term care insurance because of industrywide challenges in setting  actuarial assumptions that lead to adequate premium rates. As of January  2011, three of the six carriers whose officials we interviewed had  suspended sales of some or all of their long-term care insurance  policies. (See app. I for more information about how factors related to  carriers’ business strategies and capabilities influenced their interest in  FLTCIP.)
section_title: FLTCIP History Generally Detracted from Carriers’ Interest in the Second Contract
paragraphs: Factors related to FLTCIP’s history generally detracted from carriers’  interest in the program at the time of OPM’s solicitation for the second  contract and had the second most significant influence on carriers’  interest in FLTCIP at that time. When asked about how FLTCIP’s history  affected the carrier’s interest at the time of the second contract, officials  from four of the carriers noted that as a result of the program’s history— including the premiums charged for the benefits offered during the first  contract period and the actuarial experience of the program—a premium  increase was warranted. These officials raised concerns about having to  implement a premium increase for FLTCIP. Specifically, officials from  three of the carriers, none of which were involved in the program’s first  contract, raised concerns that implementing a premium increase as the  program’s new carrier would result in negative implications for the  carrier’s reputation. Additionally, officials from two carriers told us that  OPM’s 25 percent cap on premium increases was a concern because  they estimated that a larger premium increase was warranted.
Four carriers also cited concerns about transitioning the program from  other carriers. Specifically, officials from some of these carriers stated  that transitions are difficult for the smallest programs, and the large size  and complexity of FLTCIP would add to other challenges related to  transitioning the program. In addition, officials from two carriers explained  that their concerns over transitioning FLTCIP were linked to taking on the  risk of insuring a population that the carrier had no involvement in  underwriting. (See app. II for more information about how FLTCIP’s  history influenced carriers’ interest in the program.)
section_title: Other Factors, Including the Size and Characteristics of FLTCIP’s Eligible Population, Also Influenced Carriers’ Interest
paragraphs: Other factors, such as the large size and characteristics of FLTCIP’s  eligible population, also influenced carriers’ interest in the program at the  time of both the first and second contracts. The large size of the eligible  population had a positive influence on carriers’ interest in FLTCIP, but the  lack of a list of home addresses for the eligible population and the  voluntary nature of the program had a negative influence. Officials from  four of the six carriers we interviewed noted that the large number of  people eligible for FLTCIP positively influenced their interest in the  program. These officials explained that a large eligible population  increases the likelihood for a larger number of enrollees and provides a  greater potential for enrolling healthy individuals who represent a lower  risk of submitting claims. However, as OPM noted in its RFPs for both  contracts, the agency does not have a list of home addresses of active  federal employees for the carrier to use in marketing FLTCIP. All of the  carriers we interviewed noted that not having this information significantly  detracted from their interest in the program. These officials explained  that marketing directly to eligible individuals at their homes is critical for  ensuring that a large number of individuals—including a high proportion of  healthy individuals—apply for coverage. As such, not having this list  resulted in concerns that FLTCIP would attract a disproportionate share  of individuals who knew they needed coverage, which would result in a  higher risk for the program. Likewise, officials from three carriers we  interviewed also noted that offering FLTCIP as a voluntary benefit with no  government contribution to premiums detracted from their interest in the  program because carriers had concerns that the program’s enrollment  would not be as large as it could have been. In addition, officials noted  that this aspect of the program would likely attract a disproportionate  share of individuals who expected to incur long-term care costs and  would likely submit claims earlier than was typically expected. These  officials explained that if all active federal employees were automatically  enrolled in FLTCIP, or if the government paid for a portion of all active  federal employees’ premiums, FLTCIP would benefit from a larger  number of enrollees as well as a larger portion of healthy enrollees who  would have a lower risk of submitting claims.
Similarly, characteristics of the eligible population negatively affected  carriers’ interest in FLTCIP, but this was at least somewhat offset by the  fact that eligible individuals are not guaranteed coverage. Officials from all  of the carriers we interviewed cited concerns about the relatively high  portion of active federal employees who were disabled and eligible to  apply for FLTCIP coverage. In its RFP for the first contract, OPM notified  insurance carriers that the federal government employs a large  percentage of persons with self-reported disabilities. Specifically, OPM  reported that approximately 7 percent of active federal employees self- identified as disabled, noting that this estimate did not include active  postal or military employees. Insurance carrier officials told us that the  relatively large portion of disabled individuals increased the risk to  FLTCIP because disabled individuals were more likely to seek coverage  and submit claims sooner than nondisabled individuals. Officials from five  of the six carriers we interviewed said that the fact that FLTCIP has not  guaranteed coverage for all eligible individuals—and is not required to do  so—had a large positive influence on the carriers’ interest at the time of  the first and second contracts. These officials explained that the ability to  conduct at least some underwriting for applicants would enable them to  better manage the risks of the program, especially given the relatively  large portion of disabled employees. Officials from several carriers also  said that if FLTCIP guaranteed coverage to all eligible individuals at any  point in time, carrier interest in FLTCIP would likely diminish and officials  from two carriers we interviewed noted that they would not have  considered submitting a proposal for FLTCIP if the program were required  to offer coverage on a guaranteed issue basis.
Five of the six carriers we interviewed stated that having FLTCIP subject  to OPM oversight rather than states’ oversight influenced their interest in  the program, but the carriers varied with regard to how this affected their  interest. Officials from three of these carriers said that OPM’s role was  unusual, because the agency would be acting as both the employer  sponsor and insurance regulator. Officials also raised related questions  and concerns about OPM’s ability to adequately oversee such a  complicated insurance product as well as the potential for FLTCIP to be  subject to political pressure. In addition, officials from three of the carriers  we interviewed expressed concerns regarding the potential for having a  difference of opinion with OPM during the contract period regarding key  elements of the program, such as the need for a premium increase.  However, officials from four of the carriers we spoke with noted that OPM  oversight positively influenced their interest in FLTCIP, in part because it  had the potential to produce a single, large, uniform program as a result  of a more streamlined oversight process than what would otherwise be  available through state oversight. Appendix III provides more information  about how a variety of factors influenced carriers’ interest in FLTCIP.
section_title: Key Changes Have Been Made to FLTCIP Benefits, Investment Strategy, and Profit Payment Formula since the Second Contract Was Awarded
paragraphs: Since the second contract was awarded, three key changes have been  made to FLTCIP, in addition to the implementation of a premium increase  for certain enrollees. These key changes were the introduction of new  benefits for current and new enrollees, modifications to the program’s  investment strategy, and revisions to the formula used to calculate the  carrier’s profit payment.
Regarding the program’s benefit changes, FLTCIP introduced a new  benefit plan and a new inflation protection option for enrollees.    The new benefit plan—referred to as FLTCIP 2.0—was made  available to all program enrollees. In comparison to the FLTCIP   1.0 plan that was previously offered, the FLTCIP 2.0 plan provides  enhanced coverage. It offers additional benefit options, for example,  by expanding the range of daily benefit amounts and benefit periods  available to enrollees. The FLTCIP 2.0 plan also covers a greater  portion of the cost of care for some long-term care services. For  instance, the FLTCIP 2.0 plan covers 100 percent of the cost of home  care and adult day care, up to the enrollee’s accrued daily benefit  amount. This represents an increase over the FLTCIP 1.0 plan, which  covered these costs up to 75 percent of the enrollee’s accrued daily  benefit amount for those who selected comprehensive coverage. In  addition, the FLTCIP 2.0 plan provided coverage for a broader range  of services than the FLTCIP 1.0 plan. Specifically, the FLTCIP   2.0 plan expanded the services covered under its stay-at-home  benefit. This benefit pays for costs that enable enrollees to receive  long-term care services in the home, including those incurred for  home modifications and caregiver training. (See app. IV for a  comparison of selected benefits available under the FLTCIP 1.0 and  FLTCIP 2.0 plans.) John Hancock officials told us that they proposed  changes to FLTCIP’s benefits to make the program’s benefits  comparable to those offered by other long-term care insurance plans  available in the market. They further noted that these changes were  intended to ensure that FLTCIP remains competitive with other long- term care insurance plans.    FLTCIP also introduced a new inflation protection option for  enrollees—a 4 percent ACIO. This option was made available to  enrollees in addition to the other inflation protection options that  FLTCIP has offered since its inception, such as the 5 percent ACIO.  Compared with a 5 percent ACIO, a 4 percent option results in  reduced protection against increases in the cost of long-term care  services. However, a 4 percent ACIO allows enrollees to obtain a  package of benefits at a cost that is lower than that available with a   5 percent ACIO. John Hancock officials told us that they offered a   4 percent ACIO to provide enrollees with an additional inflation  protection option, and they were comfortable that this option provides  enrollees with adequate protection against inflation based on historical  increases in the cost of long-term care services. (See app. V for an  analysis of how the 4 and 5 percent ACIOs compare to changes in the  cost of long-term care services since 2002.)
Another key change made to FLTCIP was the modification of the  program’s investment strategy. John Hancock proposed a new, less  conservative investment strategy in its response to OPM’s RFP for  FLTCIP’s second contract, which later became part of the terms of the  carrier’s contract with OPM. According to John Hancock officials, the  revised strategy has a higher expected rate of return than the former  strategy. During the first contract period, FLTCIP invested 100 percent of  its assets in short-duration fixed-income bonds. FLTCIP’s new investment  strategy involves investing a portion of the program’s assets in fixed- income bonds of a longer duration, while investing another portion in  public equities. Specifically, all of the assets corresponding to the  program’s short-term liabilities—those expected to be incurred within the  next 20 years—would be invested in fixed-income bonds. However, most  of the assets corresponding to the program’s long-term liabilities—those  expected to be incurred in more than 20 years—would be invested in  public equities, which have the potential to earn a higher rate of return  than fixed-income bonds. John Hancock proposed modifications to the  investment strategy to enable FLTCIP to earn a potentially higher rate of  return on its investments over time without subjecting short-term  investments to possible fluctuations in investment returns. According to  John Hancock officials, the new strategy would also better align the  duration of the program’s investments with the program’s liabilities. John  Hancock officials told us that they hoped these changes would enable  FLTCIP to maintain more stable premiums over time.
The third key change made to FLTCIP since the second contract was  awarded was a revision to the formula used to calculate the insurance  carrier’s profit payment. While the structure of the formula remained the  same, the portion of premiums and assets used in calculating the profit  payment was reduced. Both FLTCIP contracts have explicitly defined a  profit payment that is to be paid to the program’s carrier each year of the  program’s 7-year contract period. For both contract periods, this profit  payment has consisted of three distinct payments; two of these are based  on a percentage of the premiums collected during the fiscal year, and one  is based on the average annual assets of the program. One of the  premium-based payments is subject to OPM’s evaluation of the carrier’s  performance, while the other premium-based payment is guaranteed to  the carrier. With the second contract, FLTCIP reduced the maximum  portion of premium-based profit payments from 6.5 percent of premiums  collected in each fiscal year to 4.0 percent of premiums collected in each  fiscal year. To do so, the program decreased both the portion of premium- based payments that were guaranteed and those that were subject to  OPM’s evaluation of John Hancock’s performance. In addition, FLTCIP  also reduced the portion of average annual assets used to calculate the  profit payment, from 0.3 percent to 0.15 percent. (See table 1.) John  Hancock officials told us that they proposed modifications to the profit  payment formula in order to provide greater premium stability for  enrollees over time. They also stated that had they not reduced the profit  payment formula, FLTCIP would have needed to implement a greater  increase in enrollee premiums. While the portion of premiums and assets  used in calculating the profit payment decreased with the second  contract, John Hancock’s profit payments will likely grow during the  contract period because the number of enrollees paying premiums and  the value of the program’s assets is also expected to increase over time.
In addition to the three key changes noted above, several other changes  were made to FLTCIP since the second contract was awarded. For  instance, FLTCIP eligibility was expanded in 2010 to provide coverage for  same-sex domestic partners of active and retired federal and Postal  Service employees. In addition, the performance metrics that OPM uses  to evaluate the carrier—and on which a certain percentage of profit  payment depends—were updated. Changes to these metrics included  adding a requirement that FLTCIP customer service representatives  become certified long-term care insurance specialists within 9 months of  employment and reducing the amount of time available to make benefits  determinations and to pay claims, from 10 business days to 5 business  days. (See app. VI for additional information about the changes made to  the performance metrics.)
section_title: FLTCIP Offered Enrollees Options to Change Their Benefits to Limit the Premium Increase; Nearly Half Made No Changes
paragraphs: In order to limit their premium increase, FLTCIP offered enrollees options  to change their benefits, including reducing their inflation protection  benefits. Nearly half of enrollees facing the premium increase made no  changes to their benefits and, as such, elected to pay a higher premium.
subsections: section_title: Options Offered to Enrollees Included Reducing Their Inflation Protection Benefits
paragraphs: FLTCIP offered enrollees options to change their benefits—including  reducing their inflation protection benefits—in order to avoid, or limit the  amount of, their premium increase. Specifically, in October 2009, FLTCIP  sent personalized letters to enrollees facing the premium increase to  inform them of the increase, to offer them options to adjust their benefits,  and to illustrate how these options would affect their premiums. The  enrollees who faced a premium increase—all of whom had the FLTCIP  1.0 plan with 5 percent ACIO—were offered the option to reduce their  ACIO to 4 percent while maintaining their accrued benefits. This option  would result in a premium that was similar to—within a few dollars of— enrollees’ existing monthly premiums, so long as enrollees made no  additional changes to their benefits. In addition to the option to reduce  their inflation protection benefit, enrollees were offered the option to  switch their benefits package to the new FLTCIP 2.0 plan without  additional underwriting, although such a change could lead to an increase  in their premiums. In addition, FLTCIP enrollees were reminded of their  ability to make other changes to their benefits at any time—for example,  by modifying their daily benefit amount—although those who wanted to  increase their benefits in ways other than switching to the FLTCIP   2.0 plan had to undergo underwriting.
John Hancock officials stated that they offered enrollees the option to  reduce their inflation protection coverage because this enabled them to  maintain relatively stable premiums while affecting future—but not  current—benefits. Reducing inflation protection affects the rate at which  future benefits grow over time. As such, FLTCIP enrollees who decreased  their ACIO protection to 4 percent retained their accrued daily benefit  amount; that amount would then increase at the reduced ACIO rate. In  contrast, other reductions in coverage—such as decreasing the daily  benefit amount or increasing the waiting period—result in an immediate  reduction in benefits.
Similar to FLTCIP, officials from other carriers we interviewed told us that  they have typically offered enrollees multiple options to reduce their  benefits at the time of a premium increase. These options have included  reducing their daily benefit amount or benefit period or reducing inflation  protection coverage. In addition to these options, officials from several  carriers told us that they have offered a nonforfeiture benefit to enrollees  facing a premium increase. This benefit allows enrollees who lapse to  maintain long-term care insurance coverage equal to the total amount of  premiums paid to date; the coverage will be provided in the future once  the individual becomes eligible for benefits. In contrast, FLTCIP did not  provide a similar nonforfeiture benefit to enrollees facing the premium  increase.
section_title: Forty-Six Percent of Enrollees Facing a Premium Increase Made No Changes to Their Benefits
paragraphs: The most popular option among FLTCIP enrollees facing the premium  increase was to make no changes to their benefits. Specifically,   46 percent of the 146,415 enrollees facing the premium increase, or  67,511 individuals, kept the FLTCIP 1.0 plan with 5 percent ACIO.  These enrollees elected to pay the premium increase. Many enrollees  chose to reduce their inflation protection benefits to a 4 percent ACIO,  while either switching to the FLTCIP 2.0 plan (26 percent) or retaining the  FLTCIP 1.0 plan (20 percent). In addition, 1.6 percent of enrollees facing  the premium increase, or 2,344 individuals, lapsed their coverage and as  such are no longer enrolled in FLTCIP. (See fig. 2.)
Of the 144,071 enrollees who did not lapse their FLTCIP coverage after  the premium increase was announced, 76 percent (109,114 individuals)  experienced a premium increase and 23 percent (32,787 individuals)  experienced a premium reduction as a result of their benefit selections.  Premiums did not change for the remaining enrollees. The extent to which  enrollees’ premiums changed varied considerably based on their benefit  selections. For example, over 90 percent of those who retained their   5 percent ACIO had a premium increase of 20 percent or more. In  contrast, most enrollees who selected a 4 percent ACIO experienced a  premium change of 5 percent or less. (See table 2.)
On average, enrollee premiums increased 14 percent, or $16.30 per  month. Those who maintained their FLTCIP 1.0 plan with 5 percent ACIO  experienced an average premium increase of 24 percent, or $28.54 per  month. In contrast, enrollees who selected FLTCIP 1.0 plan with   4 percent ACIO experienced a small change in their premiums of about   $2 or less per month, while those who selected the FLTCIP 2.0 plan with  5 percent ACIO experienced an average premium increase of 38 percent,  or $40.56 per month. Table 3 summarizes the impact of enrollee benefit  selections on their premiums.
section_title: Changes to Actuarial Assumptions Used to Set FLTCIP Premiums Resulted in a Projected Increase in Future Claims
paragraphs: Since FLTCIP’s inception in 2002, John Hancock has revised the  actuarial assumptions used to set the program’s premiums—specifically,  those made for the program’s lapse, mortality, morbidity, and return on  investment. Collectively, changes to FLTCIP’s actuarial assumptions  resulted in a projected increase in the total amount of future claims  payments.
Changes to FLTCIP’s lapse and mortality assumptions reflect an  expectation that a larger portion of enrollees will voluntarily maintain their  coverage over time and will live longer than originally expected.  Specifically, John Hancock decreased FLTCIP’s lapse assumption for the  first few years an enrollee had a policy as well as for later years, as  reflected in the ultimate lapse rate. For example, between the first and  second contract, the assumption for FLTCIP’s ultimate lapse rate  decreased from 2 percent of enrollees lapsing per year to between   0.25 and 1.25 percent per year, with variations based on the enrollee’s  age at enrollment. John Hancock also decreased FLTCIP’s mortality  assumptions, reflecting an expectation that more FLTCIP enrollees will  reach older ages than the program originally expected. In addition to the  changes in the lapse and mortality assumptions, John Hancock revised  FLTCIP’s morbidity assumption to reflect a reduction in the amount of  claims costs FLTCIP expects for enrollees of any given age. John  Hancock officials we interviewed explained that they revised the  program’s lapse, mortality, and morbidity assumptions to reflect FLTCIP’s  experience during the first contract period. In addition, the morbidity  assumption was also updated to reflect the carrier’s experience, and  knowledge of industry experience, with long-term care insurance policies.
When setting premiums for FLTCIP’s second contract period, John  Hancock used the same return on investment assumption—6.5 percent— that it used when setting premiums for the first contract period. Despite  FLTCIP’s lower-than-expected return on investment experience during  the first contract period, John Hancock officials told us that they used the  same return on investment assumption because they revised the  program’s investment strategy. The new strategy, which invests a  considerable portion of FLTCIP assets in public equities, has a higher  expected rate of return than the investment strategy utilized during the  first contract period, according to John Hancock officials.
As a result of changes made to FLTCIP’s lapse and mortality  assumptions—and despite those made to the morbidity assumption— John Hancock increased projections for the total amount of FLTCIP  claims payments. While John Hancock expects that the amount of  claims payments made for enrollees of each age will be less than initially  assumed, it also expects more enrollees to continue their coverage and  reach older ages. Consequently, FLTCIP expects to pay claims for a  greater number of enrollees than initially expected. Additionally, since the  expected amount of claims payments increases with age, the total  amount of future claims payments is projected to be greater than initially  expected. Finally, while the amount of premiums collected each year is  also projected to grow as more enrollees maintain their coverage, John  Hancock officials told us that this additional income will likely be offset by  the higher total costs associated with future claims.
Since setting premiums for FLTCIP’s second contract period, John  Hancock has not changed the program’s lapse, mortality, or morbidity  assumptions, although it has decreased its assumptions for FLTCIP’s  return on investment. John Hancock officials stated that they reduced  FLTCIP’s return on investment assumption, from 6.5 percent (at the time  they set premiums for the second contract period) to 6.25 percent (as of  September 30, 2010), to reflect an overall decrease in investment returns  earned throughout the financial industry. John Hancock officials noted  that this change does not raise concerns about the adequacy of current  premiums and does not itself warrant an additional increase in premiums  because they had included margins for moderately adverse conditions  when setting FLTCIP premiums for the second contract period.
The changes made to FLTCIP actuarial assumptions since its inception in  2002 are generally similar to those made throughout the long-term care  insurance industry during that time frame. For example, the carriers  whose officials we interviewed generally decreased their ultimate lapse  rate assumptions since 2002, and as of 2011, all of these carriers used  ultimate lapse rate assumptions of 1.5 percent or less. Similar to  FLTCIP, five of the six carriers also reduced their mortality assumptions.  In addition, officials from all of the insurance carriers we interviewed told  us that they had reduced their return on investment assumptions to  varying degrees since 2002. As a result of these changes, five of the six  insurance carriers had also increased their projections for future claims  payments and requested premium increases for at least some of their  policies, according to the officials we interviewed. Finally, officials from  the three state insurance regulators we interviewed described similar  changes to the actuarial assumptions used in setting premiums for  policies issued in their states.
section_title: OPM’s Oversight Includes an Evaluation of FLTCIP’s Actuarial Assumptions and a Review of Program Communications
paragraphs: OPM evaluates the actuarial assumptions proposed by carriers and  monitors how the program’s experience compared to those assumptions.  In addition, OPM reviews all program communications for accuracy and  clarity.
subsections: section_title: OPM Evaluates FLTCIP’s Actuarial Assumptions and Monitors Program Experience
paragraphs: OPM evaluates the actuarial assumptions carriers propose for FLTCIP to  ensure that the assumptions are reasonable and collectively support the  premiums proposed for FLTCIP plans. In its RFPs for FLTCIP’s first and  second contracts, OPM asked carriers to include in their offers, among  other things, detailed information about the assumptions they used to  calculate premiums. In reviewing offers for both the first and second  contracts, OPM convened a panel of officials—including actuarial staff— to evaluate the actuarial assumptions carriers proposed. The panel  reviewed the actuarial assumptions, methodology, and resulting premium  rates for reasonableness and the likelihood they would achieve the goal  of FLTCIP solvency and long-term premium stability. OPM also hired an  independent actuarial firm to assist the agency in its evaluation. The  actuarial firm used its own data to evaluate the reasonableness of the  carriers’ proposed assumptions and the adequacy and appropriateness of  proposed premiums. In addition, as part of its evaluation, OPM asked  additional questions of officials from carriers that submitted offers. OPM  officials we interviewed stated that the purpose of these communications  included gaining a better understanding of how the carriers developed  their assumptions and why they considered them reasonable. OPM  officials told us that they used the information gathered throughout their  evaluation process to inform their decision making when awarding the  FLTCIP contracts. OPM’s award of each contract signified its acceptance  of the premiums proposed by the winning carrier; the premiums were  based on the actuarial assumptions outlined in the carrier’s response to  the RFP. However, OPM has acknowledged the risks involved in insuring  FLTCIP enrollees, including the potential for future premium increases.  The agency noted that such risks called for close government monitoring.
Once FLTCIP’s premiums are finalized with the award of the contract,  OPM monitors how FLTCIP’s experience compares with the actuarial  assumptions that were used to set premiums. As part of both FLTCIP  contracts, OPM required the carrier to submit regular reports about the  program’s experience. These status reports include a summary of  FLTCIP’s experience in key actuarial areas—lapse, mortality, morbidity,  and return on investment—and a comparison of this experience to the  program’s assumptions. The reports also include the carrier’s projections  about FLTCIP’s ability to pay for future claims and expenses. Beginning  in 2004, OPM required the carrier to submit these reports on an annual  basis, and the agency now requires these reports be submitted  semiannually. The agency also required the carrier to submit quarterly  reports about the experience of FLTCIP’s invested assets, which it uses  to compare the actual returns to the return on investment assumption.  OPM officials stated that the agency uses the information included in  these reports to monitor FLTCIP’s overall experience and to evaluate  whether any changes to the program are warranted.
OPM’s oversight of FLTCIP’s actuarial assumptions is similar to that of  state insurance regulators, although its oversight of the program’s  experience differs from that of states. According to insurance carrier  officials we interviewed, carriers provide a similar amount and type of  information to state insurance regulators about the actuarial assumptions  used to set premiums as is provided to OPM for FLTCIP. However, these  officials also noted that many states do not require carriers to provide any  additional information related to the experience of their plans, unless the  carrier is seeking to increase premiums for existing enrollees. Thus,  states’ ability to monitor the experience of long-term care insurance  policies issued in their states may be more limited than OPM’s ability. In  addition, OPM receives more information about FLTCIP’s actuarial  assumptions and experience compared with other employers. Officials  from the carriers we interviewed stated that they only provide employers  with information on the actuarial assumptions and experience of their  plans when such information is specifically requested, which rarely  occurs.
section_title: OPM Reviews All FLTCIP Communications for Accuracy and Clarity
paragraphs: OPM reviews all FLTCIP communications—including materials intended  for current enrollees as well as marketing materials intended for  prospective enrollees—for accuracy and clarity. As part of both FLTCIP  contracts, OPM has required the carrier to submit all communication  materials to OPM prior to their use; OPM then reviews and approves the  materials for use. Specifically, OPM program officials review all  communications materials for technical accuracy and clarity. They also  review all materials to ensure that information provided to prospective or  current enrollees is consistent across materials. In addition, some FLTCIP  communication materials undergo a second review by OPM’s Office of  Communications. Specifically, all materials intended for the general  public—for example, Web site material and advertisements—as well as  for new retirees are reviewed by OPM communications officials. These  reviews are focused on ensuring the clarity of materials distributed to the  general public, which may not be familiar with FLTCIP or long-term care  insurance. OPM officials said that their goal in reviewing communications  is to ensure that current and prospective enrollees have accurate  information so that they can make informed decisions regarding FLTCIP.  Officials also told us that their process for reviewing communication  materials has not changed since FLTCIP’s inception, but indicated that  the quality of their reviews has improved as they have gained a deeper  understanding of how to effectively communicate with the eligible  population.
OPM has taken some actions to address concerns that communications  about FLTCIP during the first contract period were not clear. For example,  in response to concerns that were raised at the time of FLTCIP’s premium  increase—namely, that some enrollees with ACIO coverage did not think  their premiums could ever increase—OPM required John Hancock to  include more prominent disclaimers on its marketing materials and  applications for enrollment to ensure that prospective enrollees  understood the potential for future premium increases.
Unlike OPM, state regulators and employers may not review and approve  all long-term care insurance communication materials prior to their use by  carriers. Not all states receive communication materials for review.  Specifically, according to officials from several carriers we interviewed,  more than half of states require carriers to submit at least some  communication materials, such as marketing materials, prior to their use.  However, not all of these states require that the materials be approved  before they are used. Additionally, according to the carriers we  interviewed, employers offering long-term care insurance generally have  a limited ability to modify the communication materials sent to their  employees. Carriers generally make a number of standard  communication materials available from which each employer can select.  Officials from the carriers we interviewed stated that some employers  review these materials, but they generally do not suggest substantive  changes to the materials since doing so would require the carrier to refile  the materials with at least some states and could thus potentially delay  program time frames, including enrollments.
section_title: Agency and Third- Party Comments
paragraphs: We provided OPM with a draft of this report and provided John Hancock  with portions of the draft report for review. OPM and John Hancock  provided technical comments, which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Director of OPM and  appropriate congressional committees. The report also will be 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) 512-7114 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 VII.
section_title: Appendix I: Influence of Carriers’ Business Strategies on Their Interest in the Federal Long Term Care Insurance Program (FLTCIP)
paragraphs: Appendix I: Influence of Carriers’ Business  Strategies on Their Interest in the Federal Long  Term Care Insurance Program (FLTCIP)
section_title: Appendix II: Influence of Program History on Carriers’ Interest in FLTCIP
section_title: Appendix III: Influence of Program Size and Other Characteristics on Carriers’ Interest in FLTCIP
section_title: Appendix IV: Selected Features of FLTCIP Benefit Plans Offered during the Program’s First and Second Contract Periods
section_title: Appendix V: Changes in the Cost of Long- Term Care Services Compared with FLTCIP Inflation Protection Options
paragraphs: To summarize changes in the cost of long-term care services from 2002  through 2010, we analyzed consumer price index data from the Bureau of  Labor Statistics on changes in the cost of nursing home care and home  care. The nursing home care index provides information about changes  in the cost of long-term care services provided in a residential setting,  such as a nursing home or an assisted-living facility. The home care  index provides information about changes in the cost of nonmedical long- term care services provided in the home, such as agency or individual  assistance with bathing, food preparation, or toileting. Using data from  these indexes, we compared the rate of growth in long-term care costs  from 2002 (the year that FLTCIP began) through 2010 to the inflation  protection offered by FLTCIP’s automatic compound inflation options  (ACIO)—5 percent ACIO and 4 percent ACIO.
We found that FLTCIP’s 4 percent and 5 percent ACIOs would both have  provided substantial protection against increases in long-term care costs  from 2002 through 2010. Specifically, according to our analysis of  consumer price index data, the cost of nursing home care increased   38 percent from 2002 through 2010, which equates to an average annual  increase of 4.1 percent. In comparison, a 5 percent ACIO would have  increased an enrollees’ daily benefit amount by 48 percent during the  same time frame, while a 4 percent ACIO would have increased an  enrollees’ benefit amount by 37 percent. (See fig. 3.) According to our  analysis of consumer price index data, the cost of home care increased   9 percent from 2006—the first year data became available—through 2010  at an average annual increase of 2.3 percent. Both the 4 percent and   5 percent ACIO would have protected enrollees fully against increases in  the cost of such care during that period. However, past increases in the  cost of long-term care services may not reflect future trends.
section_title: Appendix VI: Changes to FLTCIP Performance Metrics
paragraphs: A portion of the profit payments made to the FLTCIP carrier is based on  the Office of Personnel Management’s (OPM) evaluation of the carrier’s  performance. The FLTCIP contract outlines both the performance  measures used and the target performance values that the carrier must  meet in order to receive all of the performance-based portion of the profit  payments. With FLTCIP’s second contract, OPM and the FLTCIP carrier  agreed to modify the performance metrics used to determine the carrier’s  profit payment. These modifications included adding or removing  performance categories, revising performance measures, and changing  target performance values. Table 4 outlines changes made to FLTCIP  performance metrics since the second contract was awarded.
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Michelle B. Rosenberg, Assistant  Director; Coy J. Nesbitt; Laurie Pachter; Patricia Roy; and Brienne  Tierney made key contributions to this report.