Long-Term Care Insurance: Federal Program Has a Unique Profit Structure and Faced a Significant Marketing Challenge
Published: 2006-12-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Spending on long-term care services--about $193 billion in 2004--is expected to rise. In 2000, Congress passed the Long-Term Care Security Act, requiring the federal government to offer long-term care insurance. To do so, the Office of Personnel Management (OPM) contracted with Long Term Care Partners LLC (Partners) to create the Federal Long Term Care Insurance Program. This is the second of two reports required by the act on the competitiveness of the federal program. GAO's March 31, 2006, report, Long-Term Care Insurance: Federal Program Compared Favorably with Other Products, and Analysis of Claims Trend Could Inform Future Decisions (GAO-06-401), found that the federal program's benefits and premiums compared favorably with other plans, but enrollment and claims experience--the amount and number of claims payments--were lower than Partners expected. In this report, GAO compared the federal program's profit structure and marketing efforts with those of other plans and updated its analysis of the program's claims experience. GAO reviewed the contract between OPM and Partners and interviewed OPM, Partners, and insurance carrier officials, as well as actuaries and industry experts. GAO also analyzed data on claim payments for the federal program since it began in 2002.
section_title: What GAO Found
paragraphs: The Federal Long Term Care Insurance Program has a unique profit structure that is explicitly defined in the contract between OPM and Partners. This profit structure consists of three distinct annual payments to Partners: (1) a guaranteed payment of 3.5 percent of the year's collected premiums, (2) a payment linked to OPM's evaluation of Partners' performance of up to 3 percent of the year's collected premiums, and (3) a guaranteed payment of 0.3 percent of the average annual assets of the program. These payments are separate from other payments made to cover the program's expenses. In contrast to the federal program, profits realized by carriers offering other long-term care insurance plans generally are not based on explicit profit structures, but rather on the experience of the programs they insure. The federal program's marketing efforts were generally similar to those used for other plans sold in the group market, but faced a significant challenge in sending information directly to eligible individuals. The federal program and other plans sold in the group market used such marketing efforts as mailing information to the homes of eligible individuals and hosting employee and retiree seminars. Of these efforts, carrier officials GAO spoke with explained that mailing to the homes of eligible individuals was critical to their marketing strategy. The federal program faced a significant challenge in mailing information to the homes of those eligible for the program because it initially did not have the home addresses for nearly all active federal civilian employees. Because of this challenge, the federal program relied heavily on marketing efforts that were less direct and less personalized, such as sending information to federal employees through agency benefits officers. The federal program's claims experience increased in the program's fourth year, but remained lower than the expectations established by Partners in its contract with OPM. This increase was generally consistent with trends since the federal program began in 2002. Overall, the federal program has paid 44 percent of the expected amount of claim payments per enrollee and 41 percent of the expected number of claims per enrollee. As of August 2006, Partners officials had not determined why the claims experience was lower than Partners' expectations. While it is generally expected that the number of claims submitted in the first few years of a long-term care insurance program will be a small portion of the total number of claims submitted over time, a program's claims experience is one of several factors that may affect its long-term financial outlook. The results of this analysis underscore GAO's prior recommendations that OPM analyze the claims experience and assumptions affecting premiums to inform forthcoming contract negotiations. In commenting on a draft of this report, OPM generally agreed with the report's findings.

section_title: Letter
paragraphs: In 2004, about $193 billion was spent nationwide on long-term care  services, including nursing home care and other assisted-living services.  Most of this care was financed by government programs, primarily by  Medicaid, a joint federal-state program that finances health insurance for  certain low-income adults and children. Elderly people—those aged 65 or  older—consume about two-thirds of all long-term care services. As the  elderly population continues to grow, particularly with the aging of the  baby boom generation, the increasing demand for long-term care services  will likely strain federal and state resources. Some policymakers propose  that increased use of long-term care insurance may be a means of reducing  the future financial burden on public programs. In 2000, Congress passed  the Long-Term Care Security Act, requiring the federal government to offer  long-term care insurance to its employees, their families, and others.  Congressional committee reports accompanying the act indicated that a  federal long-term care insurance program could encourage people to  purchase long-term care insurance, serve as a model for other employer- sponsored programs across the nation, and encourage private payment  sources to assume some of the insurance risk.
In December 2001, at the conclusion of a competitive bidding process, the  Office of Personnel Management (OPM)—the federal agency responsible  for administering governmentwide compensation and benefit systems— entered into a 7-year contract with Long Term Care Partners LLC (referred  to as Partners) that allows certain eligible individuals affiliated with the  federal government to apply for long-term care insurance. Individuals  eligible for the Federal Long Term Care Insurance Program include federal  and Postal Service employees and retirees; active and retired members of  the uniformed services; qualified relatives of these individuals, such as  spouses of employees and retirees; and certain others. Partners is a joint  venture formed by two large insurance carriers that sell long-term care  insurance products in the private market—John Hancock Life Insurance  Company and Metropolitan Life Insurance Company. The contract  between OPM and Partners outlines the roles and responsibilities of all  parties with respect to the program, including how payments for program  expenses and profits are determined. Partners began marketing the  Federal Long Term Care Insurance Program in February 2002, and the  program began accepting enrollment applications on March 25, 2002. As of  September 30, 2006, the federal program had 214,034 current enrollees,  making it the largest private long-term care insurance program in the  nation.
This report is the second of two reports required by the Long-Term Care  Security Act on the competitiveness of the federal program compared with  group and individual plans generally available in the private insurance  market. Our first report found that the program compared favorably with  other group and individual plans we reviewed in terms of benefits offered  and premiums. However, in its first 3 years, from April 1, 2002, through  March 31, 2005, the federal program’s enrollment and claims experience— that is, the number of paid claims and the amount paid for those claims— were lower than the expectations established by Partners. We  recommended that the Director of OPM analyze the reasons for the lower- than-expected claims experience and, as appropriate, use the results to  modify assumptions about the expected claims experience. We also  recommended that the Director of OPM analyze the projections for the  amount of premiums collected to pay for claims. In response to these  recommendations, OPM indicated that it intended to provide updated  information on claims experience and premium setting in its written  recommendation to Congress before entering into a new contract for the  administration of the Federal Long Term Care Insurance Program.  Partners’ current contract with OPM ends December 31, 2008.
In this report, as discussed with the committees of jurisdiction, we  examined the following questions regarding other aspects of  competitiveness:  1.  How does the profit structure of the Federal Long Term Care  Insurance Program as defined by the contract compare with that of  other long-term care insurance plans?  2.  How do the marketing efforts for the Federal Long Term Care  Insurance Program compare with those for other long-term care  insurance plans?  3.  How does the Federal Long Term Care Insurance Program’s claims  experience, updated to reflect the program’s fourth year, compare with  initial expectations?
To obtain information on the profit structure of the Federal Long Term  Care Insurance Program, we interviewed officials at OPM and Partners  and reviewed relevant documents, including the contract between OPM  and Partners. We limited our review to the payments that were defined in  this contract as profits. To obtain comparable information on any profit  structures used in the private sector, we interviewed officials from four of  the nation’s largest long-term care insurance carriers—Bankers Life and  Casualty Company, Genworth Financial, John Hancock Life Insurance  Company, and Metropolitan Life Insurance Company. All four insurance  carriers sold products in the individual market, and two of the four—John  Hancock Life Insurance Company and Metropolitan Life Insurance  Company—were also among the five largest carriers that sold products in  the group market. We also interviewed benefits officials from four states— California, New Jersey, North Carolina, and Texas—that offered long-term  care insurance to state employees and certain other groups, and we  interviewed industry experts and actuaries regarding the profit structures  used in the industry.
To obtain information on marketing efforts for the Federal Long Term  Care Insurance Program, we interviewed officials from OPM and Partners  and reviewed marketing plans for the federal program. To obtain  comparable information on the marketing efforts used in the private  sector, we interviewed actuaries, industry experts, officials from the four  insurance carriers, and benefits officials from the four states.
To describe how the federal program’s claims experience, updated to  reflect the program’s fourth year, compared with initial expectations as  established by Partners in its contract with OPM, we analyzed data from  Partners on the number of enrollees, the number of paid claims, and the  amount of claim payments made for the federal program from April 1,  2005, through March 31, 2006. We also included data presented in our  previous report regarding the claims experience of the federal program in  its first 3 years, from April 1, 2002, through March 31, 2005. We compared  the anticipated claims experience for the federal program as established  by Partners in its contract with OPM prior to the program’s start of  enrollment, with the actual number of claims paid and the amount of  claims payments during the federal program’s first 4 years—from April 1,  2002, through March 31, 2006. We also interviewed Partners officials about  the federal program’s claims experience.
We reviewed all data for reasonableness and consistency and determined  that the data were sufficiently reliable for our purposes. We performed our  work in accordance with generally accepted government auditing  standards from May 2006 through December 2006.
subsections: section_title: Background
paragraphs: Long-term care, which may include care provided in nursing homes,  assisted-living facilities, or a person’s home, can be expensive. In 2005, the  average cost of a year in a nursing home was more than $70,000, and in  1999, according to the most recent data available, the average length of  stay was between 2 and 3 years. Long-term care insurance helps  individuals pay for costs associated with long-term care services. Yet  relatively few individuals have obtained coverage. As of 2002, about   9 million people nationwide had obtained long-term care insurance. To  help federal employees, retirees, and others obtain coverage, the federal  government began offering long-term care insurance in 2002.
subsections: section_title: Long-Term Care Insurance
paragraphs: Long-term care insurance helps pay for the costs associated with long- term care services. People can purchase long-term care insurance directly  from carriers that sell products in the individual market, or they can enroll  in plans offered by employers or other groups. For a specified premium  that is designed—but not guaranteed—to remain level over time, the  carrier agrees to provide covered benefits under an insurance contract.
Long-term care insurance premiums are affected by many factors,  including the benefits offered and the age and health status of the  applicant. Carriers review the health status of the applicant during the  underwriting process. Carrier assumptions about interest rates, mortality  rates, morbidity rates, and lapse rates—the number of people expected to  drop their policies over time—also affect premium rates. Carriers set  premium rates to cover the anticipated cost of enrollee benefits (which  means paying approved claims), administrative costs (which includes  marketing costs, claims handling, overhead, and taxes), and profits.
Few claims are expected to be submitted during the early years of an  enrollee’s long-term care insurance policy. As a result of underwriting, it is  unlikely that many people could meet the eligibility requirements to buy a  policy yet submit an approved claim within 3 years. Industry experts  suggest that the rate of claim submissions begins to increase after about 3  to 7 years.
Claims experience is one of many factors—such as interest rates and lapse  rates—that affect the long-term financial outlook of a long-term care  program. While having a lower-than-expected claims experience is a  positive financial indicator, if the claims experience is significantly lower  than expected over the long term, then it is possible that the premiums are  too high. On the other hand, in accordance with the National Association  of Insurance Commissioners (NAIC) premium-setting guidelines, it may be  appropriate to project the claims experience assuming moderately adverse  results to protect against the need to raise premiums.
Insurance carriers’ long-term care insurance profits—defined as the  excess of revenues over expenses—are affected by many factors,  including the amount of risk the insurance carrier assumes. In general, the  more risk a carrier assumes, the greater the carrier’s expected profits.  Over time, carriers’ ability to meet or exceed their initial projections  regarding interest rates, mortality rates, morbidity rates, and lapse rates,  as well as their ability to contain costs, ultimately affects their profits.  Carriers are also subject to state requirements, which may affect their  ability to realize profits.
section_title: Long-Term Care Insurance Marketplace
paragraphs: Long-term care insurance is sold in two primary markets—the individual  and group markets. Of the nearly 9 million policies sold as of 2002, the  most recent year for which data were available, about 80 percent were  sold through the individual market, and the remaining 20 percent were  sold through the group market. Sales in the group market are growing  faster than sales in the individual market. In March 2006, 13 percent of  full-time employees in private industry had access to employer-sponsored  long-term care insurance benefits; 20 percent of employees of  establishments with 100 or more employees had access to this benefit.
The individual market includes plans sold by insurance carriers to  individuals, usually through agents or brokers. Individuals may choose  benefits from a range of options offered by the carriers, including the  duration and amount of daily benefit payments. Those who purchase  coverage through the individual market typically pay the full premium. The  carrier generally owns program assets and bears the risk of insuring  enrollees for the terms of enrollees’ policies.
The group market includes long-term care insurance plans offered to  individuals through employers and other groups, such as professional  associations. In this market, the groups usually design the benefits, and  enrollees are often given some benefit options from which to choose,  including the duration and amount of daily benefit payments. However,  benefit options offered in the group market tend to be fewer than those  offered in the individual market. Individuals who purchase long-term care  insurance in the group market typically pay the full premium, similar to  those who purchase coverage in the individual market.
Employers and other groups typically contract with insurance carriers to  provide long-term care insurance to qualified individuals. These contracts  may be time-limited, lasting, for example, 3 to 5 years. Under these  contracts, carriers are usually required to bear the risk of insuring  enrollees for the terms of enrollees’ policies; the term of enrollees’ policies  may be independent from, and therefore longer than, the length of an  employer’s contract with a carrier. These carriers also generally own all  program assets. As a result, if a carrier’s contract with an employer was  not renewed, the carrier would usually be required by its contract to  continue insuring those individuals for whom it issued policies.
Several large carriers dominated the long-term care insurance coverage  sold in the individual and group markets, as of December 31, 2005. While  the long-term care insurance industry experienced 18 percent annual  growth in the number of policies sold from 1987 through 2002, the  industry has experienced a downturn in more recent years, according to  industry experts. Specifically, carriers faced several challenges, including  higher-than-expected administrative expenses relative to premiums; lower- than-expected lapse rates, which increased the number of people likely to  submit claims; low interest rates, which reduced the actual return on  investments below what had been assumed; and new state regulations that  limited direct marketing by telephone. As a result, beginning in 2003, for  example, many carriers in the individual market raised premiums, left the  marketplace, or consolidated to form larger companies. In addition, many  carriers have revised the assumptions used in setting premiums, taking a  more conservative approach that has led to higher premiums, while state  regulators have increased their oversight of the industry.
section_title: Federal Long Term Care Insurance Program
paragraphs: The federal government began offering a group long-term care insurance  program in 2002 whereby certain eligible individuals affiliated with more  than 125 federal agencies may apply for coverage. Individuals eligible for  the Federal Long Term Care Insurance Program include federal and Postal  Service employees and retirees; active and retired members of the  uniformed services; qualified relatives of these individuals; and certain  others. Almost 19 million people were estimated to be eligible for  coverage as of October 15, 2001. With more than 214,000 current enrollees  as of September 2006, the federal program is the largest employer- sponsored group program in the nation. When the Federal Long Term Care  Insurance Program began, eligible individuals could apply for enrollment  during two specified periods: an early enrollment period held from   March 25, 2002, through May 15, 2002, and an open enrollment period held  from July 1, 2002, through December 31, 2002. Following the open  enrollment period, eligible individuals could apply for coverage at any  time. As is typical for other plans sold in the group market, enrollees pay  the entire cost of their premium. As we noted in our March 2006 report,  the federal program offered benefits similar to those of other long term- care insurance products, usually at lower premiums for comparable  benefits, and the federal program’s early enrollment and claims were  lower than initially expected.
OPM oversees the federal program, and Partners administers the program  in accordance with the requirements of a 7-year contract between OPM  and Partners. The contract, signed December 18, 2001, defines key  administrative requirements, including OPM’s oversight of the program  and how payments for the federal program’s expenses, as well as  payments that are earmarked as profits, are determined. Unlike other  contracts between employers and carriers, the federal program’s contract  includes requirements for the management of federal program assets— that is, the funds collected as premiums and used to pay claims—because  the federal program does not give Partners ownership of federal program  assets.
By statute, OPM’s contract with Partners is for 7 years and is not  automatically renewable. At the end of the 7-year term, OPM can either  renegotiate the contract with Partners, or allow the contract to terminate  and select a new carrier. If a new carrier is selected, Partners must  transfer all federal program enrollees and assets, including any positive or  negative returns related to the experience of the program, to the federal  program’s next carrier. However, if OPM does not contract with another  carrier, Partners would continue insuring the individuals who enrolled in  the federal program through Partners. In this case, the federal program’s  assets would remain available to Partners to pay for claims and expenses.
section_title: Federal Program Has a Unique Profit Structure
paragraphs: The federal program has a unique profit structure that is explicitly defined  in the contract between OPM and Partners. This profit structure consists  of three distinct annual payments to Partners to compensate Partners for  the risks it assumes under the program’s 7-year contract. Of these  payments, two are based on a percentage of the premiums collected  during the year and one is based on the average annual assets of the  federal program. (See table 1.) These three payments are allowed only if  premiums are sufficient to cover the federal program’s current claims and  expenses. In contrast to the federal program, profits realized by carriers  offering other long-term care insurance plans generally are not based on  explicit profit structures. Instead, under the terms of their contracts,  carriers assume the risk of insuring enrollees for the terms of enrollees’  policies and own program assets—and are thus able to realize profits or  losses according to the experience of the programs they insure.
The federal program guarantees one annual premium-based payment to  Partners. This payment equals 3.5 percent of the premiums collected in a  year. For other long-term care insurance plans offered in the group and  individual markets, carriers’ profits were generally not guaranteed,  according to carrier officials and industry experts. Similar to the federal  program, one source of carriers’ revenue is enrollee premiums, which  include an amount for anticipated profits. However, carriers may realize  profits or losses according to the experience of the programs they insure,  subject to applicable state regulations.
The federal program links the second annual premium-based payment to  OPM’s evaluation of Partners’ performance. This payment can equal up to  3 percent of the premiums collected in a year. Under an agreement which  amended the contract between OPM and Partners and became effective  beginning fiscal year 2006, OPM evaluates Partners’ performance each  year on 21 short-term performance measures across 4 categories:  administrative expense savings, customer service, enrollment experience,  and responsiveness to OPM. Each performance measure has a  corresponding payment equivalent to a percentage of the total  performance-based payment of 3 percent of premiums. If Partners’  performance does not meet stated expectations in a measure, the payment  corresponding to that measure is placed into a retained profit account. In  addition, every 3 years, OPM evaluates Partners’ performance in two long- term performance measures: return on investment and claims experience.  If Partners meets expectations in one measure and funds are present in the  retained profit account, one-half of the amount present in the retained  profit account is paid to Partners. If Partners meets expectations in both  measures and funds are present in the retained profit account, the total  amount present in the retained profit account is paid to Partners. As of  September 2006, Partners has been awarded the full performance-based  payment each year since the federal program began. Appendix I provides a  complete list of the performance measures used for the federal program.
Unlike the federal program, most other sponsors of plans offered in the  group market usually did not link carrier profits to performance  evaluations, according to carrier officials and industry experts. Carrier  officials estimated that about 10 percent to 20 percent of employers  required their long-term care insurance carrier to relinquish a certain  percentage (for example, 2 percent to 4 percent) of premiums if their  performance did not meet agreed-upon expectations. However,  employers may require carriers to guarantee a certain level of performance  in their contracts to ensure that enrollees are provided with standard  levels of service, according to state officials. These performance  measures and guarantees may include those related to the timeliness of  underwriting decisions and call center performance. The federal program  used all of the performance measures that industry experts and carrier  officials cited as those commonly used throughout in the group market, in  addition to other measures such as administrative expense savings and  claims experience.
The federal program’s third payment is guaranteed and is based on the  average annual assets of the program. This annual payment—0.3 percent  of the average annual assets of the federal program—is defined in the  contract between OPM and Partners as a profit payment. The federal  program developed this payment to recognize that insurers in general are  required to hold risk-based capital. Risk-based capital is the capital that an  insurance carrier is required to hold in reserve, separate from any other  funds used to back insurance liabilities or other lines of business, to  protect the carrier from insolvency. OPM does not require Partners to use  the third payment to fund risk-based capital and both OPM and Partners  consider this payment another form of profit for administering the  program. Similar to the federal program, carriers use enrollee premium  funds to fund risk-based capital requirements, according to OPM officials.  However, risk-based capital may be considered an expense to carriers.
section_title: Federal Program Used Marketing Efforts Generally Similar to Those Used for Other Plans but Faced a Significant Challenge
paragraphs: The federal program used marketing efforts that were generally similar to  those used for other plans sold in the group market. For example, the  types of marketing efforts used for the federal program and other plans  offered in the group market, according to our review of federal program  documents and the carrier and state officials we spoke with, included    mailing information directly to the homes of eligible individuals,    sending e-mails to eligible employees at work,    posting information on a Web site,    hosting employee and retiree seminars, and    working with affinity groups whose membership consists of eligible  individuals.
Of these efforts, carrier officials we spoke with told us that direct mail,  which may include a personalized letter, is a critical marketing effort for  long-term care insurance plans. One carrier official also explained that  direct mail was so critical to the carrier’s marketing strategy that it  generally would not work with employers who neither provide the home  addresses of employees nor assist in mailing materials to employees.
The federal program faced a significant challenge in sending information  directly to eligible individuals, particularly through direct mail.  Specifically, the federal program was initially unable to mail information  directly to the homes of about 60 percent of the program’s core group of  eligible individuals that Partners deemed most likely to enroll in the  federal program—including nearly all active federal civilian employees— because neither OPM nor Partners had the home addresses of these  individuals. OPM officials told us that a centralized database of this  information does not exist. According to OPM officials, OPM did not  request federal employees’ home address information from other federal  agencies because they felt it would be too burdensome to comply with  certain Privacy Act requirements and gather accurate information from  each of the agencies in a timely manner. Despite this challenge, the federal  program initially mailed information directly to the homes of those for  whom it had addresses, which included about 40 percent of the program’s  core group of eligible individuals, as well as other non-core groups such as  retired military personnel and annuitants under the Civil Service  Retirement System and the Federal Employees Retirement System,  according to our analysis of Partners’ data. As of October 2006, Partners  officials noted that direct mail efforts were still limited because of the  federal program’s inability to mail information directly to the homes of  most active federal civilian employees. Before signing its contract with  OPM, Partners was aware of the federal program’s limitations regarding  direct mail.
As a result of the federal program’s limited ability to send direct mail to  many eligible individuals, the federal program relied heavily on marketing  efforts that were less direct and less personalized, including sending  information to federal employees through agency benefits officers and  working with affinity groups. Because neither OPM nor Partners has direct  access to federal employees through e-mail, Partners has worked with  more than 150 agency benefits officers to distribute program information  to federal employees through e-mail, internal office mail, or other means.  For example, Partners relies on agency benefits officers to send e-mails  about the federal program. While Partners officials may be notified by  agency benefits officers when they send program information, Partners is  unable to determine whether all eligible federal employees receive this  information. In addition, Partners has worked with several affinity groups,  such as Federally Employed Women and the National Active and Retired  Federal Employees Association, to educate their members about the need  for long-term care insurance and to advertise in publications and at  sponsored events. Through these efforts, Partners has gained direct access  to the groups’ members.
section_title: Claims Experience in the Federal Program Increased but Remained Lower Than Expectations
paragraphs: In the federal program’s fourth year, claims experience—the amount of  claim payments per enrollee and the number of paid claims per enrollee— increased from that of the program’s third year, but remained lower than  Partners’ expectations as established in its contract with OPM. This  increase was generally consistent with trends since the federal program  began in 2002. As we reported in March 2006, claims experience in the  federal program’s first 3 years was lower than the initial expectations set  by Partners. Our analysis of Partners’ data showed that claims experience  also remained lower than expected for the federal program’s fourth year.  As of March 31, 2006, the end of the federal program’s fourth year, the  federal program had cumulatively paid 44 percent of the expected amount  of claim payments per enrollee and 41 percent of the expected number of  claims per enrollee, across the 4 years, as shown in table 2. Figure 1 shows  the amount of claims payments per 10,000 enrollees. As of August 2006,  Partners had not determined why the claims experience was lower than  Partners’ expectations. Claims experience is one of many factors—such as  interest rates and lapse rates—that affect the long-term financial outlook  of a long-term care insurance program. While it is generally expected that  the number of claims submitted in the first few years of a long-term care  insurance program will be a small portion of the total number of claims  submitted over time, the rate of claim submissions usually begins to  increase after about 3 to 7 years, according to industry experts.
section_title: Concluding Observations
paragraphs: Our findings from two reports together show that the Federal Long Term  Care Insurance Program compared favorably with other plans, has a  unique profit structure, and used marketing efforts that were generally  similar to those of other plans, but faced a significant challenge.  Specifically, our initial report found that the federal program offered  benefits similar to those of other long-term care insurance products,  usually at lower premiums for comparable benefits. In this, our second  report, we examined other components of the federal program’s  competitiveness, including the federal program’s profit structure and  marketing efforts. We found that the federal program has a unique profit  structure, created to compensate Partners for the risks it assumed for the  program. The risks borne by Partners, however, are not as great as those  assumed by carriers selling other plans because, unlike with other plans,  the federal program’s assets are owned by the program, not by the insurer.  Because of this structure, the program does not link Partners’ profits to  the overall experience of the program. Rather, the program guarantees  some profit payments, links some profit payments to OPM’s evaluation of  Partners’ performance, and requires Partners to assume a potentially time- limited risk, after which all program assets and enrollees may be  transferred to another carrier. Insurance carriers’ profits are linked to the  amount of risk they bear, and Partners assumes less risk for insuring the  federal program than do carriers for insuring other long-term care  insurance plans. Therefore, the federal program’s profit payments would  likely be lower than the profits realized by carriers selling other plans. In  addition, while the federal program used marketing efforts that were  generally similar to those used for other plans sold in the group market,  the program faced a significant challenge in providing personalized  marketing communications directly to eligible individuals and instead  relied heavily on other marketing efforts.
In our initial report we found that the federal program’s claims  experience—the amount and number of claims payments per enrollee— was lower than expected in the first 3 years of the program. While it is  generally expected that the number of claims submitted in the first few  years of a long-term care insurance program will be a small portion of the  total number of claims submitted over time, a program’s claims experience  is one of several factors that may affect the long-term financial outlook of  the program. In response to our recommendation in the initial report that  OPM analyze the claims experience and assumptions affecting premiums  to inform forthcoming contract negotiations, OPM indicated that it  intended to provide updated information on claims experience and  premium setting in its written recommendation to Congress before  entering into the next contract for the administration of the Federal Long  Term Care Insurance Program. Partners’ current contract with OPM for  the administration of the federal program ends December 31, 2008. After  reviewing a fourth year of claims data, we note that the program’s claims  experience increased from that of the program’s third year, but still  remains lower than Partners’ expectations. These results underscore the  importance of our prior recommendations that OPM analyze the claims  experience and assumptions as it considers its recommendations to  Congress regarding a future contract.
section_title: Agency Comments
paragraphs: We provided a draft of this report to OPM and Partners. In its written  comments, OPM generally agreed with our findings. OPM’s comments are  reprinted in appendix II.
With regard to the program’s unique profit structure, OPM stated that now  that it has more operating experience with the program, it plans to  reexamine the profit structure as it renegotiates or rebids the contract for  the administration of the program. OPM agreed that the marketing efforts  for the federal program are more challenging for Partners than for other  insurers because, among other reasons, home addresses for federal  employees are generally not available. OPM noted that this will continue  to be a constraint for the program in the future. In addition, OPM  highlighted, as we noted in our draft report, that the ratio of actual to  expected claims experience has narrowed and stated that it would  continue to closely monitor the claims experience of the program. We  support this effort and continue to encourage OPM to analyze the  program’s claims experience and ensure that premiums and actuarial  assumptions about future claims reflect the experience of the program.
In its comments, Partners highlighted certain distinct aspects of its profit  structure that we noted in our draft report, including that Partners does  not own federal program assets and that a profit payment is contingent on  meeting specific performance standards that Partners characterized as  exceptionally high for the insurance industry in general. Partners also  stated that profit payments are paid only if the federal program’s assets are  sufficient to cover the risks incurred by the program, as our draft report  noted. Regarding the marketing efforts used for the federal program,  Partners noted that the terrorist attacks of 2001 and the anthrax scare,  which caused heightened security at federal buildings, added to the  marketing challenge acknowledged in the report. We revised the report to  reflect these circumstances. Finally, Partners commented, and as we noted  in our draft report, that in addition to a program’s claims experience,  premium rates are affected by a number of factors, including lapse rates  and interest rates.
OPM and Partners provided technical comments and clarifications, which  we incorporated as appropriate.
We are sending copies of this report to the Director of OPM and interested  congressional committees. We will also provide copies to others on  request. In addition, this report is available at no charge on the GAO Web  site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Performance Measures Used for the Federal Long Term Care Insurance Program
paragraphs: The Federal Long Term Care Insurance Program makes some profit  payments to Long Term Care Partners LLC (Partners) according to the  Office of Personnel Management’s (OPM) evaluation of Partners’  performance. Beginning in fiscal year 2006, OPM evaluates Partners’  performance each year on 21 short-term performance measures across   4 categories: administrative expense savings, customer service, enrollment  experience, and responsiveness to OPM (see table 3). Every 3 years, OPM  also evaluates Partners’ performance in two long-term performance  measures: claims experience and return on investment (see table 4).
section_title: Appendix II: Comments from the Office of Personnel Management
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Christine Brudevold, Assistant  Director; Patricia Roy; Timothy Walker; and Rasanjali Wickrema made key  contributions to this report.
section_title: Related GAO Products
paragraphs: Long-Term Care Insurance: Federal Program Compared Favorably with  Other Products, and Analysis of Claims Trend Could Inform Future  Decisions. GAO-06-401. Washington, D.C.: March 31, 2006.
Overview of Long-Term Care Partnership Program. GAO-05-1021R.  Washington, D.C.: September 9, 2005.
Long-Term Care Financing: Growing Demand and Cost of Services Are  Straining Federal and State Budgets. GAO-05-564T. Washington, D.C.:  April 27, 2005.