Long-Term Care Insurance: State Oversight of Rate Setting and Claims Settlement Practices
Released: 2008-07-24T00:00:00

Letter

Background

LTCI helps pay for the costs associated with long-term care services, which can be expensive. However, the number of LTCI policies sold has been relatively small—about 9 million as of the end of 2002, the most recent year of data available. To receive benefits under an LTCI policy, the consumer must not only obtain the covered services, but must also meet what are commonly referred to as benefit triggers. Most policies provide benefits under two circumstances (1) the consumer cannot perform a certain number of activities of daily living (ADL)—such as bathing, dressing, and eating—without assistance, or (2) the consumer requires supervision because of a cognitive impairment. In addition, benefit payments do not begin until the policyholder has met the benefit triggers for the length of their elimination period. Elimination periods establish the amount of time a policyholder must receive services before his or her insurance will begin making payments, for example, 30 or 90 days. Determining whether a consumer has met the benefit triggers can be complex and companies’ processes for doing so vary. In the event that a consumer’s claim for benefits is denied, the consumer generally can appeal to the insurance company. If the company upholds the denial, the consumer can file a complaint with the state insurance department or can seek adjudication through the courts.

Many factors affect LTCI premium rates, including the benefits covered and the age and health status of the applicant. For example, companies typically charge higher premiums for comprehensive coverage as compared to policies without such coverage, and consumers pay higher premiums the higher the daily benefit amount and the shorter the elimination period. Similarly, premiums typically are more expensive the older the policyholder is at the time of purchase. Company assumptions about interest rates on invested assets, mortality rates, morbidity rates, and lapse rates—the number of people expected to drop their policies over time—also affect premium rates.

A key feature of LTCI is that premium rates are designed—though not guaranteed—to remain level over time. While under most states’ laws insurance companies cannot increase premiums for a single consumer because of individual circumstances, such as age or health, companies can increase premiums for entire classes of individuals, such as all consumers with the same policy, if new data indicate that expected claims payments will exceed the class’s accumulated premiums and expected investment returns. Setting LTCI premium rates at an adequate level to cover future costs has been a challenge for some companies. Because LTCI is a relatively new product, companies lacked and may continue to lack sufficient data to accurately estimate the revenue needed to cover costs. For example, lapse rates have proven lower than companies anticipated in initial pricing, which increased the number of people likely to submit claims. As a result, many policies were priced too low and subsequently premiums had to be increased, leading some consumers to cancel coverage.

Oversight of the LTCI industry is largely the responsibility of states. Through laws and regulations, states establish standards governing LTCI and give state insurance departments the authority to enforce those standards. Many states’ laws and regulations reflect standards set out in model laws and regulations developed by NAIC. These models are intended to assist states in formulating their laws and policies to regulate insurance, but states can choose to adopt them or not. Beyond implementing pertinent laws and regulations, state regulators perform a variety of oversight tasks that are intended to protect consumers from unfair practices. These activities include reviewing policy rates and forms to ensure that they are consistent with state laws and regulations; conducting market conduct examinations—where an examiner visits a company to evaluate practices and procedures and checks those practices and procedures against information in the company’s files; and responding to consumer complaints.

Although oversight of the LTCI industry is largely the responsibility of states, the federal government also plays a role in the oversight of LTCI. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) established federal standards that specify the conditions under which LTCI benefits and premiums can receive favorable federal income tax treatment. Under HIPAA, a tax-qualified policy must cover individuals certified as needing substantial assistance with at least two of the six ADLs for at least 90 days due to a loss of functional capacity, having a similar level of disability, or requiring substantial supervision because of a severe cognitive impairment. Tax-qualified policies under HIPAA must also comply with certain provisions of the NAIC LTCI model act and regulation in effect as of January 1993. The Department of the Treasury, specifically the Internal Revenue Service (IRS), issued regulations in 1998 implementing some of the HIPAA standards. However, according to IRS officials, the agency generally relies on states to ensure that policies marketed as tax qualified meet HIPAA requirements. In 2002, 90 percent of LTCI policies sold were marketed as tax qualified.

States Have Made Efforts to Improve Oversight of Rate Setting, Though Some Consumers Remain More Likely to Experience Rate Increases Than Others

In recent years, many states have made efforts to improve oversight of rate setting, though some consumers remain more likely to experience rate increases than others. Since 2000, NAIC estimates that more than half of all states have adopted new rate setting standards. States that adopted new standards generally moved from a single standard focused on ensuring that rates were not set too high to more comprehensive standards designed primarily to enhance rate stability and provide increased protections for consumers. The more comprehensive standards were based on changes made to NAIC’s LTCI model regulation in 2000. While regulators in most of the 10 states we reviewed told us that they expect these more comprehensive standards will be successful, they noted that more time is needed to know how well the standards will work. Regulators from the states in our review also use other standards or practices to oversee rate setting, several of which are intended to keep premium rates more stable. Despite states implementing more comprehensive standards and using other oversight efforts intended to enhance rate stability, some consumers may remain more likely to experience rate increases than others. Specifically, consumers may face more risk of a rate increase depending on when they purchased their policy, from which company their policy was purchased, and which state is reviewing a proposed rate increase on their policy.

Many States Adopted More Comprehensive Rate Setting Standards since 2000, but It Is Too Soon to Determine the Effectiveness of the Standards

Since 2000, NAIC estimates that more than half of states nationwide have adopted new rate setting standards for LTCI. States that adopted new standards generally moved from the use of a single standard designed to ensure that premiums were not set too high to the use of more comprehensive standards designed to enhance rate stability and provide other protections for consumers. Prior to 2000, most states used a single, numerical standard when reviewing premium rates. This standard—called the loss ratio—was included in NAIC’s LTCI model regulation. For all policies where initial rates were subject to this loss ratio standard, proposed rate increases are subject to the same standard.

While the loss ratio standard was designed to ensure that premium rates were not set too high in relation to expected claims costs, over time NAIC identified two key weaknesses in the standard. First, the standard does not prevent premium rates from being set too low to cover the costs of claims over the life of the policy. Second, the standard provides no disincentive for companies to raise rates, and leaves room for companies to gain financially from premium increases. In identifying these two weaknesses, NAIC noted that there have been cases where, under the loss ratio, initial premium rates proved inadequate, resulting in large rate increases and significant loss of LTCI coverage from consumers allowing their policies to lapse.

To address the weaknesses in the loss ratio standard as well as to respond to the growing number of premium increases occurring for LTCI policies, NAIC developed new, more comprehensive model rate setting standards in 2000. These more comprehensive standards were designed to accomplish several goals, including improving rate stability. Among other things, the standards established more rigorous requirements companies must meet when setting initial LTCI rates and rate increases, which several state regulators told us may result in higher, but more stable, premium rates over the long term. The more comprehensive standards were also designed to inform consumers about the potential for rate increases and provide protections for consumers facing rate increases. Table 1 describes selected rate setting standards added to NAIC’s LTCI model regulation in 2000 and the purpose of each standard in more detail.

Although a growing number of consumers will be protected by the more comprehensive standards going forward, as of 2006 many consumers had policies that were not protected by these standards. Following the revisions to NAIC’s LTCI model in 2000, many states began to replace their loss ratio standard with more comprehensive rate setting standards based on NAIC’s changes. NAIC estimates that by 2006 more than half of states nationwide had adopted the more comprehensive standards. However, many consumers have policies not protected by the more comprehensive standards, either because they live in states that have not adopted these standards or because they bought policies issued prior to implementation of these standards. For example, as of December 2006, according to our analysis of NAIC and industry information, at least 30 percent of policies in force were issued in states that had not adopted the more comprehensive rate setting standards. Further, in states that have adopted the more comprehensive standards, many policies in force were likely to have been issued before states began adopting these standards in the early 2000s.

Regulators from most of the 10 states in our review said that they expect the rate setting standards added to NAIC’s model regulation in 2000 will improve rate stability and provide increased protections for consumers, though regulators also recognized that it is too soon to determine the effectiveness of the standards. Some regulators explained that it might be as much as a decade before they are able to assess the effectiveness of these standards. Regulators from 1 state explained that rate increases on LTCI policies sold in the 1980s did not begin until the late 1990s, when consumers began claiming benefits and companies were faced with the costs of paying their claims. Further, though the more comprehensive standards aim to enhance rate stability, LTCI is still a relatively young product, and initial rates continue to be based on assumptions that may eventually require revision.

State regulators from the 10 states in our review use other standards— beyond those included in NAIC’s LTCI model regulation—or practices to oversee rate setting, including several that are intended to enhance rate stability. Regulators from 3 of the states in our review told us that their state has standards intended to enhance the reliability of data used to justify rate increases, and regulators from 2 states told us that they have standards to limit the extent to which LTCI rates can increase. Beyond implementing rate setting standards, regulators from all 10 states in our review use their authority to review rates to reduce the size of rate increases or to phase in rate increases over multiple years. While state regulators work to reduce the effect of rate increases on consumers, regulators from 6 states explained that increases can be necessary to maintain companies’ financial solvency.

Some Consumers May Remain More Likely to Experience Rate Increases Than Others

Although some states are working to improve oversight of rate setting and to help ensure LTCI rate stability by adopting the more comprehensive standards and through other efforts, there are other reasons why some consumers may remain more likely to experience rate increases than others. In particular, consumers who purchased policies when there were more limited data available to inform pricing assumptions may continue to experience rate increases. Regulators from seven states in our review told us that rate increases are mainly affecting consumers with older policies. For example, regulators from one state told us that there are not as many rate increases proposed for policies issued after the mid-1990s. Regulators in five states explained that incorrect pricing assumptions on older policies are largely responsible for rate increases.

Consumers’ likelihood of experiencing a rate increase also may depend on the company from which they bought their policy. In our review of national data on rate increases by four judgmentally selected companies that together represented 36 percent of the LTCI market in 2006, we found variation in the extent to which they have implemented increases. For example, one company that has been selling LTCI for 30 years has increased rates on multiple policies since 1995, with many of the increases ranging from 30 to 50 percent. Another company that has been in the market since the mid-1980s has increased rates on multiple policies since 1991, with increases approved on one policy totaling 70 percent. In contrast, officials from a third company that has been selling LTCI since 1975 told us that the company was implementing its first increase as of February 2008. The company reported that this increase, affecting a number of policies, will range from a more modest 8 to 12 percent. Another company that also instituted only one rate increase explained that in cases where initial pricing assumptions were wrong, the company has been willing to accept lower profit margins rather than increase rates. While past rate increases do not necessarily increase the likelihood of future rate increases, they do provide consumers with information on a company’s record in having stable premiums.

Finally, consumers in some states may be more likely to experience rate increases than those in other states, which officials from two companies noted may raise equity concerns. Of the six companies we spoke with, officials from every company that has instituted a rate increase told us that there is variation in the extent to which states approve proposed rate increases. For example, officials from one company told us that when requesting rate increases they have seen some states deny a request and other states approve an 80 percent increase on the same rate request with the same data supporting it. While some consumers may face higher increases than others, company officials also told us that they provide options to all consumers facing a rate increase, such as the option to reduce their benefits to avoid all or part of a rate increase.

Our review of data on state approvals of rate increases requested by one LTCI company operating nationwide also indicated that consumers in some states may be more likely to experience rate increases. Specifically, since 1995 one company has requested over 30 increases, each of which affected consumers in 30 or more states. While the majority of states approved the full amounts requested in these cases, there was notable variation across states in 18 of the 20 cases in which the request was for an increase of over 15 percent. For example, for one policy, the company requested a 50 percent increase in 46 states, including the District of Columbia. Of those 46 states, over one quarter (14 states) either did not approve the rate increase request (2 states) or approved less than the 50 percent requested (12 states), with amounts approved ranging from 15 to 45 percent. The remaining 32 states approved the full amount requested, though at least 4 of these states phased in the amount by approving smaller rate increases over 2 years. (See fig. 1.)

Variation in state approval of rate increase requests may have significant implications for consumers. In the above example, if the initial, annual premium for the policy was, for example, $2,000, consumers would see their annual premium rise by $1,000 in Colorado, a state that approved the full increase requested; increase by only $300 in New York, where a 15 percent increase was approved; and stay level in Connecticut, where the increase was not approved. Although state regulators in our 10-state review told us that most rate increases have occurred for policies subject to the loss ratio standard, variation in state approval of proposed rate increases may continue for policies protected by the more comprehensive standards. States may implement the standards differently, and other oversight efforts, such as the extent to which states work with companies, also affect approval of increases.

States in Our Review Oversee Claims Settlement Practices Using Consumer Complaints and Examinations, and Several States Are Considering Additional Protections

The 10 states in our review have standards established by law and regulations for governing claims settlement practices. The majority of the standards, some of which apply specifically to LTCI and others that apply more broadly to various insurance products, are designed to ensure that claims settlement practices are conducted in a timely manner. Specifically, the standards are designed to ensure the timely investigation and payment of claims and prompt communication with consumers about claims. In addition to these timeliness standards, states have established other standards, such as requirements for how companies are to make benefit determinations.

While the 10 states we reviewed all have standards governing claims settlement practices, the states vary in the specific standards they have adopted as well as in how they define timeliness. For example, 1 state does not have a standard that requires companies to pay claims in a timely manner. For the 9 states that do have a standard, the definition of “timely” the states use varies notably—from 5 days to 45 days, with 2 states not specifying a time frame. In addition, federal laws governing tax-qualified policies do not address the timely investigation and payment of claims or prompt communication with consumers about claims. The absence of certain standards and the variation in states’ definitions of “timely” may leave consumers in some states less protected from, for example, delays in payment than consumers in other states. (See table 2 for key claims settlement standards adopted by the 10 states in our review and examples of the variation in standards.)

The states in our review primarily use two ways to monitor companies’ compliance with claims settlement standards. One way the states monitor compliance is by reviewing consumer complaints on a case-by-case basis and in the aggregate to identify trends in company practices. When responding to complaints on a case-by-case basis, regulators in some states told us that they determine whether they can work with the consumer and the company to resolve the complaint or determine whether there has been a violation of claims settlement standards that requires further action.

Regulators from four states also told us that they regularly review complaint data to identify trends in company practices over time or across companies, including practices that may violate claims settlement standards. Three of these states review these data as part of broader analyses of the LTCI market during which they also review, for example, financial data and information on companies’ claims settlement practices. However, regulators in three states noted that a challenge in using complaint data to identify trends is the small number of LTCI consumer complaints that their state receives. For example, information on complaints provided by one state shows that the state received only 54 LTCI complaints in 2007, and only 20 were related to claims settlement issues. State regulators told us that they expect the number of complaints to increase in the future as more consumers begin claiming benefits.

The second way that states monitor company compliance with claims settlement standards is by using market conduct examinations. These examinations may be regularly scheduled or, if regulators find patterns in consumer complaints about a company, they may initiate an examination, which generally includes a review of the company’s files for evidence of violations of claims settlement standards. Some states also coordinate market conduct examinations with other states—efforts known as multistate examinations—during which all participating states examine the claims settlement practices of designated companies. If state regulators identify violations of claims settlement standards during market conduct examinations, they may take enforcement actions, such as imposing fines or suspending the company’s license. As of March 2008, 4 of the 10 states in our review reported taking enforcement actions against LTCI companies for violating claims settlement standards and 7 reported having ongoing examinations into companies’ claims settlement practices.

In addition to their efforts to monitor compliance with claims settlement standards, regulators from six of the states in our review reported that their state is considering or may consider adopting additional consumer protections related to claims settlement. The additional protection most frequently considered by the state regulators we interviewed is the inclusion of an independent review process, which would allow consumers appealing LTCI claims denials to have their issue reviewed by a third party independent from their insurance company without having to engage in legal action. Also, a group of representatives from NAIC member states was formed in March 2008 to consider whether to recommend developing provisions to include an independent review process in the NAIC LTCI models. Such an addition may be useful, as regulators from three states told us that they lack the authority to resolve complaints involving a question of fact, for example, when the consumer and company disagree on a factual matter regarding a consumer’s eligibility for benefits. Further, there is some evidence to suggest that due to errors or incomplete information companies frequently overturn LTCI denials during the appeals process. Specifically, data provided by four companies we contacted showed that the average percentage of denials overturned was 20 percent in 2006, ranging from 7 percent in one company to 34 percent in another.

Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or other members of the committee may have.

For future contacts regarding this statement, please contact John E. Dicken at (202) 512-7114 or at dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Kristi Peterson, Assistant Director; Krister Friday; and Rachel Moskowitz made key contributions to this statement.

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