Long-Term Care Insurance: Federal Program Compared Favorably with Other Products, and Analysis of Claims Trend Could Inform Future Decisions
Released: 2006-03-31T00:00:00

Letter

Background

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

Long-term Care

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

Long-term Care Insurance

People can purchase long-term care insurance directly from carriers that sell products in the individual market or can enroll in products offered by employer-sponsored and other groups. Long-term care insurance policies sold in the individual and group markets cover costs associated with long- term care. For a specified premium amount that is designed—but not guaranteed—to remain level over time, the carrier agrees to provide covered benefits under an insurance contract. First sold in the 1970s, long- term care insurance has evolved from initially offering coverage for nursing home care only to offering comprehensive coverage. Comprehensive coverage pays for care provided in facilities such as nursing homes and other settings such as a person’s home. Insurance is generally purchased for defined daily benefit amounts and benefit periods, with elimination, or waiting, periods. For example, long-term care insurance might provide coverage at $100 per day for care provided in a nursing home or in other settings for 3 years after a waiting period of 90 days. Because long-term care insurance claims might not be filed for many years after the product is purchased, the insured can purchase protection against inflation, which can increase the daily benefit amount covered. In addition, long-term care insurance products can (1) cover home care at varying percentages of the daily benefit amount; (2) offer people a range of other types of options, such as policies that return a portion of the premium payments if the person dies; and (3) include selected benefits, such as international coverage or care-coordination services that, among other things, provide information about long-term care services to the enrollee and monitor the receipt of services.

Many factors affect long-term care insurance premiums. Carriers charge higher premiums for richer benefits; for example, higher daily benefit amounts, longer benefit periods, and higher levels of inflation protection will increase the cost. Premiums are based on the age of the applicant, with premiums increasing more rapidly as age increases. Premiums are also based on the health status of the applicant. Most carriers selling coverage in the individual market assign applicants to one of three general rating categories based on health status when underwriting the coverage— preferred, standard, or substandard—with associated discounts and surcharges. In addition, carriers in the individual market usually offer discounts to married couples when both spouses purchase coverage. Products sold in the group market may be sold on a guaranteed issue basis during an open enrollment period, with no or limited underwriting for employees actively at work who enroll through an employer-sponsored program, and the products generally do not provide discounts for spouses. Carriers cannot increase a particular person’s premiums but can increase premiums for a group of people who bought the same type of policy when the carrier can demonstrate that anticipated costs will exceed premium revenue. Carrier pricing assumptions, including projected interest rates, morbidity or illness rates, and lapse rates—the number of people expected to drop their policies over time—all affect premium rates and rate setting.

Carriers estimate the total amount of premiums to be collected for long- term care insurance policies sold as well as projected claims and administrative costs for these policies using an anticipated lifetime loss ratio. This ratio describes what portion of total premiums is expected to be paid for claims for the reimbursement of the costs of long-term care over the life of a set of policies. The portion of premiums not spent on claims is used to pay for administrative costs, such as marketing, agent commissions, claims handling, overhead, and taxes, and for profits. In the past, National Association of Insurance Commissioners (NAIC) model regulations for long-term care insurance stated that carriers should spend a minimum of 60 percent of collected premiums on claims. However, in model regulations released in August 2000, NAIC recommended that carriers price their products high enough initially to prevent the need for future rate increases rather than target a minimum percentage to be spent on claims. So far, according to NAIC, a majority of states have adopted long-term care insurance regulations based on the 2000 NAIC model, while some states still require minimum loss ratios. Many large carriers set premium rates on a national rather than regional basis. Carriers also price to cover a profit margin and administrative costs as well as to meet minimum loss ratios.

Few claims are expected to be submitted during the early years of a long- term care insurance policy. As a result of underwriting, it is unlikely that many people could meet the eligibility requirements to buy the policy yet submit a claim within 3 years. Industry experts suggested that the effects of underwriting begin to decline and the rate of claim submissions starts to increase after about 3 to 7 years. The rate of increase in claim submissions depends on the average age of the enrollees, with most long-term care insurance claims submitted when people reach their mid-70s to mid-80s. Industry experts also noted that the rate of claim submissions in the federal program is expected to peak 25 years or more after the program began. Because the average age of enrollees in the individual market is higher than the average age of enrollees in the federal program, the rate of claim submissions is likely to peak earlier in the individual market, after 15 to 25 years. The rate of claim submissions is likely to peak after 30 to 40 years in the group market because of the younger average age of its enrollees.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) specified conditions under which long-term care insurance benefits and premiums would receive favorable federal income tax treatment and provided specific protections to people who purchased tax-qualified plans. Long-term care insurance plans must meet certain requirements contained in HIPAA to be considered tax-qualified. For example, according to HIPAA, a plan must begin coverage when a person is certified to need substantial assistance with at least two of the six ADLs and a disability is expected to last 90 or more days, or to need regular supervision because of a severe cognitive impairment. In addition, federally tax-qualified plans must comply with the NAIC long-term care insurance model act and regulations in effect as of January 1993, as incorporated into HIPAA. These provide certain consumer protections, such as preventing a carrier from (1) not renewing a long-term care insurance policy because of age or deteriorating health and (2) increasing the premium of an existing policy because of a person’s age or claims filed. Another consumer protection was that carriers had to offer inflation protection as specified in the NAIC model regulations.

Each state establishes its own long-term care insurance laws and regulations that cover areas such as benefits, premium setting, and consumer protections. As a result, product requirements in the individual and group markets can vary among the states. According to NAIC, 41 states based their long-term care insurance regulations on the NAIC model, 7 based their regulations partially on the model, and 3 did not follow the model.

Long-term Care Insurance Marketplace

The number of long-term care insurance policies sold has been small— about 9 million as of 2002, the most recent year for which data were available. About 80 percent of these policies were sold through the individual insurance market and the remaining 20 percent were sold through the group market. In March 2005, 13 percent of full-time workers in private industry had access to employer-sponsored long-term care insurance benefits; within private industry, 21 percent of workers in large establishments with 100 or more workers had access to this benefit.

People purchase policies from carriers in the individual market, usually through agents or brokers, and choose their own benefits from among a range of options the carriers offer. Groups—for example, employers, associations, or unions—purchase policies from carriers in the group market. Groups usually design the benefits, and enrollees are often given some benefit options from which to choose, for example, differing daily benefit amounts and benefit periods. However, benefit choices offered in employer-sponsored group products tend to be more limited than those that are available in the individual insurance market. Some groups offer benefit packages in which the benefit options are predetermined. In contrast to health insurance, where employers often contribute a share of the premium costs, enrollees in group long-term care insurance coverage usually pay the entire premium.

A recent downturn in the long-term care insurance industry has led to more conservative assumptions when setting premiums and consolidation among carriers. The long-term care insurance industry experienced 18 percent annual growth in the number of policies sold from 1987 through 2002, but the industry has experienced a downturn in more-recent years. Beginning in 2003, many carriers in the individual market raised premiums, left the marketplace, or consolidated to form larger companies. This activity occurred in response to several factors including high administrative expenses relative to premiums; lower-than-expected lapse rates, which increased the number of people likely to submit claims; low interest rates, which reduced the expected return on investments; and new government regulations limiting direct marketing by telephone. Many carriers revised the assumptions used in setting their premium rates, taking a more conservative approach that led to higher premiums, while state regulators increased their oversight of the industry. Currently, several large carriers dominate the coverage sold in the individual and group markets as a result of mergers and acquisitions, and sales in the group market are growing faster than in the individual market.

Federal Long Term Care Insurance Program

The federal government began offering group long-term care insurance benefits in 2002 for federal employees, retirees, and certain other people. When the Federal Long Term Care Insurance Program began, eligible people could apply for benefits during two specified time periods: (1) an early enrollment period for benefit options that were somewhat limited that ran from March 25, 2002, through May 15, 2002, intended for people who were well-informed about long-term care insurance and were eager to enroll in the federal program and (2) an open enrollment period for all benefit options that ran from July 1, 2002, through December 31, 2002. Active and retired federal and Postal Service employees, active and retired members of the uniformed services, qualified relatives, and certain others are eligible to apply for federal long-term care insurance benefits. Following the open enrollment period, eligible people could apply at any time.

The federal program determines eligibility for long-term care insurance through underwriting. During the early and open enrollment periods, the program used an abbreviated underwriting application to determine eligibility for active employees and active members of the uniformed services and their spouses who applied. All other applicants, including retirees and qualified relatives, used the full underwriting application, which was similar to underwriting in the individual insurance market. Since the conclusion of the open enrollment period, newly hired federal and Postal Service employees and newly active members of the uniformed services who apply for long-term care insurance within 60 days of employment can do so using an abbreviated application, as can their spouses. All other applicants must use the full underwriting application.

The federal program offers four prepackaged plan designs, each with a 90-day elimination period, a choice of two types of inflation protection— either automatic compound inflation protection or the future purchase option—and the following benefit options: Package 1—$100 daily benefit amount for comprehensive coverage and Package 2—$150 daily benefit amount for comprehensive coverage and Package 3—$150 daily benefit amount for comprehensive coverage and an unlimited benefit period, and Package 4—$100 daily benefit amount for facilities-only coverage and 3-year benefit period.

If not choosing a prepackaged plan, an enrollee in the federal program also has several options for customizing benefits. The federal program was designed to comply with the NAIC model regulations and HIPAA tax- qualification standards, which specify that certain benefit options be offered. (App. II provides more information on federal long-term care insurance benefits and enrollment in these benefits.)

The federal program provides reimbursement for costs of care when an enrollee is unable to perform at least two ADLs for an expected period of at least 90 days or needs substantial supervision because of a severe cognitive impairment. Reimbursement is based on the benefits chosen by the enrollee. The federal government does not contribute to the cost of coverage, so an enrollee pays the entire premium for the benefits chosen.

OPM, rather than the states, regulates the federal program, and Partners administers the program in accordance with the requirements of the contract between OPM and Partners. The contract—which was signed on December 18, 2001, and extends for a period of 7 years—defines key administrative requirements including who controls program assets and how profits are determined. The contract requires that the parent companies of Partners—John Hancock Life Insurance Company and Metropolitan Life Insurance Company—must hold federal program assets in accounts separate from all their other businesses. At the end of the contract period, OPM may decide to enter into a new contract with Partners. However, if OPM selects a different contractor at that time, the financial assets of the federal program would be transferred to the new contractor. The contract also specifies how Partners earn a profit each year. The profit formula consists of two parts: (1) some of the profit is capped at 6.5 percent of premiums collected in a year—nearly half of this type of profit is subject to performance criteria while the rest is guaranteed—and (2) some of the profit is based on the performance of the total assets of the federal program being managed by Partners to pay future claims—this type of profit consists of 0.3 percent of the total assets, called a “risk charge.” Partners must pay federal taxes on their total profit, but may charge other taxes to the federal program. Partners also collects investment-management fees that are less than 0.2 percent of total assets. No profit is allowed if the premiums are not sufficient to cover claims and expenses. While OPM expects premium rates to remain level over an enrollee’s lifetime, Partners may raise or lower premiums for groups of enrollees during the contract period with OPM’s agreement. Additionally, premium rates may be changed at the time of a new contract.

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

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

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

Long-term care insurance benefit options were similar in the federal program and in individual and group products we reviewed. While the federal program offered over 500 possible benefit option combinations in addition to the four prepackaged benefit plans, other products, especially individual products, offered more possible benefit combinations and more extensive customization in daily benefit amounts and in elimination and benefit periods. Benefits offered in the federal program and in the individual and group products we reviewed were covered by consumer protections required for HIPAA tax-qualified plans. These consumer protections included, among other provisions, that enrollees be offered an option to protect their benefits against inflation. However, some individual and group product enrollees were also offered the opportunity to purchase policies that did not meet requirements for HIPAA tax-qualified plans. In addition, according to officials at OPM and Partners, the federal program offered several unique benefits, including payment to family members providing informal care, international coverage, and a process allowing third-party review of denied claims. Table 1 summarizes the benefit options in the federal program and in the individual and group products we reviewed.

Most enrollees in the federal program chose comprehensive coverage and daily benefit amounts, elimination periods, and benefit periods similar to those chosen by enrollees in individual and group products. Most enrollees in all products chose to have the cost of long-term care services reimbursed at a rate in the range of $100 to $199 per day and chose an elimination period of 90 days or greater and a benefit period from 3 to 5 years. With regard to inflation protection, over two-thirds of federal program enrollees chose automatic compound inflation protection, a higher proportion than for enrollees in individual and group products. Federal enrollees who did not choose automatic compound inflation protection received the future purchase option as a default. Several experts and industry officials said the federal government was a leader in the group market by encouraging enrollees to choose more comprehensive inflation-protection benefits. Table 2 summarizes the benefit options chosen by enrollees in the federal program and in individual and group products.

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

Federal Long Term Care Insurance Program annual premiums were usually lower than annual premiums for individual products for three benefit packages with similar benefit options sold on March 31, 2005. Overall, the average premium in the federal program for the three benefit packages for single people was 46 percent lower than average premiums for individual products we reviewed, while premiums for married couples who were both the same age were 19 percent lower. However, the premium estimates reported for individual products do not include discounts for good-health status, which several carrier officials said were about 10 percent to 15 percent and apply to about one-third of all enrollees. Figure 1 compares average annual premiums for three benefit packages and overall for the federal program with average annual premiums for the individual products we reviewed at five carriers.

The pattern of lower premiums in the federal program compared with those in the individual products remained consistent in different age groups as well as for single people and married couples. Figure 2 shows the range in annual premiums in the individual products we reviewed relative to annual federal premiums for single people and married couples who were both the same age, by age group, for the most popular federal comprehensive benefit package. Appendix III provides more information on annual federal and individual product premiums for the benefit packages we reviewed.

When compared with premiums offered by CalPERS, the only group product for which we had premium information, average federal premiums were higher for two of the three packages. Overall, the average annual federal premium for single people and for married couples who were both the same age for the three benefit packages combined was 3 percent higher than the average annual premium for CalPERS.

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

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

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

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

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

The Federal Long Term Care Insurance Program’s employee participation rate of 5 percent after the open enrollment period for active federal civilian employees was comparable to the industry average in the group market. Experts suggested that typically 5 to 6 percent of a group’s potentially eligible population would enroll in a long-term care insurance product when initially offered coverage. Participation rates tend to increase over time, usually reaching closer to 8 percent, depending upon the average age of the eligible population. The federal program’s employee participation rates were much lower for active military members, at 0.2 percent, and for active Postal Service employees, at 0.9 percent. Active military members are young and can be difficult to reach for marketing purposes, which might explain why they were less likely to apply than active federal workers, who tend to be older and can be reached directly through their workplace. Active Postal Service employees are also difficult to reach because they are located throughout the nation rather than grouped in centralized locations, and because access to these employees for marketing purposes has been restricted during working hours.

The federal program was the largest employer-sponsored group in the nation, with more than 218,000 individuals enrolled for new policies sold from March 25, 2002, through March 31, 2005. The next largest group program was CalPERS, with more than 175,000 enrollees for policies sold from 1995 through 2005. According to Partners, the federal program accounted for 15 percent of the enrollees in the entire group market and 2 percent of the entire long-term care insurance market in 2002.

Even though it was the largest group in the nation, the federal program’s enrollment was lower than expected. Partners initially estimated in 2001 that 286,066 people would enroll during the open enrollment period, but actual enrollment was 161,048, or 44 percent lower than expected. Partners also estimated that enrollment would reach 343,280 by the third year of the program; total enrollment eventually rose to 218,890 enrollees for new policies sold from March 25, 2002, through March 31, 2005, or 36 percent lower than expected. Some of the lower-than-expected enrollment can be explained by the low participation rates for active military members and Postal Service employees. Additionally, according to Partners, the terrorist attacks in the fall of 2001 resulted in slower sales of discretionary products, such as long-term care insurance, and also resulted in temporarily reduced access to federal employees, military members, and Postal Service employees for marketing purposes during the open enrollment period. A representative of Partners and an expert knowledgeable about the federal program indicated that a pool of at least 200,000 enrollees is adequate for the federal program to achieve financial stability, although no minimum number was ever formally established.

The federal program focused its marketing efforts on a core group of nearly 6 million people out of an estimated eligible population of almost 19 million people, and the majority of the enrollees came from this core group. The core group consisted of 1.8 million active federal civilian employees, 1.4 million active military members, 0.8 million active Postal Service employees, and 1.8 million spouses of active employees and military members, as shown in table 3. Almost two-thirds of the 218,890 people enrolled from March 25, 2002, through March 31, 2005, came from this core group. According to OPM officials, the federal program also reached out to retired federal employees, retired military members, and retired Postal Service employees.

The enrollees during the first 3 years of the federal program represented about three-quarters of the applications submitted. The federal application approval rate of 74 percent was similar to the average approval rate of 75 percent for individual products, but lower than the average approval rate of 84 percent for group products, which may enroll active workers using guaranteed issue during an open enrollment period. The most common reasons for denial of an application for the federal program and for the group products were height and weight outside of insurable standards, a chronic condition such as diabetes or cardiac problems, and cognitive impairment. In addition to these reasons, the most common reasons for denial of an application for the individual products included cancer, stroke, and musculoskeletal problems.

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

The average age of federal enrollees was 56 years at the time of enrollment, compared with an average age of 60 for enrollees in individual products and 52 for enrollees in group products, as shown in table 4. The average age was 54 for enrollees in CalPERS. In the individual market, carriers typically target older adults who are planning for retirement or who have already retired. The carriers are able to market to them through direct contact from commission-based agents. In the group market, carriers typically target active employees, who are younger than enrollees typically marketed to in the individual market. The carriers market to the active employees through the employer via mailings and on-site enrollment meetings, but may not be able to obtain contact information for retirees. Unlike much of the group market, the federal program does have access to retiree contact information and is able to market to retirees through mailings to their home addresses.

More women than men enrolled in the Federal Long Term Care Insurance Program, individual products, and group products. (See table 4.) While more women than men enrolled in the federal program overall, slightly more men than women enrolled among eligible active federal employees, active military members, and active Postal Service employees. However, women in these groups enrolled in the federal program at a higher rate than their representation in the eligible population. Enrollees in the federal program from these groups were 51 percent male and 49 percent female, while the eligible population of all active federal employees, active military members, and active Postal Service employees was 67 percent male and 33 percent female.

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

The early claims experience of the Federal Long Term Care Insurance Program was below the expectations established by Partners. During its first 3 years, the federal program paid 39 percent of what it initially expected to pay for claims per enrollee; the number of claims paid per enrollee also was lower than initial expectations. It is still too early to determine whether this trend will continue or whether adjustments to the expected claims experience or premiums are needed. About half of the total amount of claim payments was spent on facility care. The most common medical conditions prompting claims in the early years of the federal program were cancer, stroke, and injuries and poisoning. Across the individual and group products we reviewed, the most common medical conditions that prompted claims were also cancer, stroke and injuries, as well as cognitive problems, musculoskeletal disorders, cardiac disease, and arthritis.

The cumulative claims experience in the first 3 years of the Federal Long Term Care Insurance Program was considerably lower than the expectations established by Partners. The program paid 39 percent of the claims expenditures expected per enrollee for long-term care services and paid 33 percent of the expected number of claims per enrollee, as shown in table 5. While the overall claims experience for the first 3 years was lower than expected, the number of claims paid as a percentage of expected claims in each consecutive year of operation was higher than the previous year. In the first year of operation, the amount paid for claims per enrollee was 40 percent of expected payments and the number of claims per enrollee was 4 percent of expected claims. By the third year of operation, the amount paid for claims per enrollee had remained level at 40 percent of expected payments, while the number of claims per enrollee had increased to 48 percent of expected claims.

It is still too early to determine whether the early claims experience will continue or whether adjustments to the expected claims experience or premiums are indicated. While having lower-than-expected claims experience is a positive financial indicator, if the claims experience is significantly lower than expected over the longer term, then it is possible that the premiums are too high. On the other hand, in accordance with NAIC premium-setting guidelines, it may be appropriate to project the claims experience assuming moderately adverse results to protect against the need to raise premiums. As noted earlier, it is expected that the number of claims submitted in the first years of a long-term care insurance program will be a small percentage of the claims submitted over time— most claims are not expected to be submitted until 25 years or more after the program begins. Additionally, the expected claims experience is sensitive to factors such as the level of underwriting, the total number of enrollees, the ages of the enrollees, and the types of enrollees—for example, active workers, retirees, or relatives. Furthermore, the claims experience is only one of many factors—such as interest rates, lapse rates, and mortality rates—that affect the long-term financial outlook of the program. The financial projections for long-term care insurance are sensitive to changes in assumptions about all these factors. Figure 3 shows the amount of paid claims per 10,000 enrollees and figure 4 shows the number of paid claims per 10,000 enrollees during the first 3 years of the program compared with the expected claims experience over the first 35 years of operation.

Facility care accounted for a considerable portion of the federal program claim payments in the first 3 years. Of the total $3.6 million it paid for claims in the 3-year period, the federal program spent 49 percent on facility care, 3 percent on home care, 22 percent on informal caregivers, and 27 percent on other care. While about half of the total claim payment amount was spent on facility care, this type of care represented less than a quarter of the total number of claims.

Generally, most early long-term care insurance claims are submitted for conditions such as cognitive problems, cancer, arthritis, stroke, and injuries. For the federal program, the most common medical conditions that prompted claims during this relatively early period were cancer, stroke, and injuries and poisoning. Across the individual and group products we reviewed, the most common medical conditions that prompted claims were also cancer, stroke and injuries, as well as cognitive problems, musculoskeletal disorders, cardiac disease, and arthritis.

Conclusions

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

Recommendations for Executive Action

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

Agency Comments

We provided a draft of this report to OPM, Partners, CalPERS, and five long-term care insurance carriers.

In its written comments, OPM generally agreed with our findings and provided comments on our recommendations. OPM stated that it intends to consider this report when performing due diligence before making a decision about a new contract for administration of the Federal Long Term Care Insurance Program, in accordance with the Long-Term Care Security Act. OPM also stated that the discussion of claims experience and premium setting in this report provides all the information currently available, precluding the need for a specific report on these issues at this time. OPM commented that it would provide updated information on claims experience and premium setting in its written recommendation to Congress prior to making a decision about the next contract. We support OPM’s willingness to consider updated information on claims experience and premium setting as it works with Congress in determining the next contract for the Federal Long Term Care Insurance Program, and we agree that a separate report will not be necessary. We believe that it is important that actuarial assumptions about future claims experience and premium setting reflect the experience of the program to date while still anticipating moderately adverse assumptions regarding claims experience and other factors in the future. In its comments, OPM also indicated that the expectations about the federal program’s enrollment and claims experience were established by Partners prior to the start of the program, rather than established by the marketplace. We revised the report to reflect that the expectations about enrollment and claims were established by Partners. (OPM’s comments are reprinted in app. IV.)

In its written comments, Partners stated that the recommendation in the draft report implied that claims experience is the determining factor in the pricing of premiums, but that other sections of the report explain that other factors in addition to claims experience affect pricing, such as interest rates and lapse rates. We clarified the recommendation to reflect that other factors in addition to claims experience affect the pricing of premiums.

OPM, Partners, and one carrier provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Director of OPM and interested congressional committees. We will also provide copies to others on request. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7119 or dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V.

Appendix I: Scope and Methodology

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

Data Request

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

Benefits

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

Premiums

We asked Partners to provide annual premiums for a policy sold on March 31, 2005, for enrollees in each of the four prepackaged benefit plans offered by the federal program, with automatic compound inflation protection. Partners provided premium data for enrollees of four different ages—40, 50, 60, and 70 years old—for the four benefit packages, with automatic compound inflation protection and with a future purchase option for inflation protection. Because the federal program provided no discounts for spouses, we doubled the premiums that single people paid to determine how much a married couple of the same age would pay annually for a long-term care insurance policy through the federal program.

To compare premiums with those in the federal program, we asked the five carriers selling products in the individual insurance market and CalPERS to provide annual premium data for the four federal benefit packages or for coverage that most closely resembled each package for people for the four ages—40, 50, 60, and 70 years old—for policies sold on March 31, 2005. Two of the five carriers selling individual products did not sell facilities-only coverage on March 31, 2005, so we did not include the premiums for facilities-only coverage in our analyses. Therefore, we compared premiums for the three comprehensive benefit packages in the federal program. Because carriers selling products in the individual market usually place people in rating categories according to their health and other criteria, we asked them to provide annual premiums for a single person underwritten into the standard rating category, which is the category most often used. Furthermore, as these carriers usually offer discounts for married couples, we asked them to provide annual premiums for a married couple of the same age underwritten into the standard rating category. The premiums the carriers reported reflected their discounts for couples, which in each case was either 30 percent or 40 percent. We also asked respondents to identify the coverage types, daily benefit amounts, elimination periods, benefit periods, and inflation protection for the packages if these benefits differed from those of the federal benefit packages. These are the benefit options that most affect premiums. We did not ask them to identify other benefits automatically included in the coverage or to identify the percentage of the daily benefit amount that the package covered for benefits such as formal home care or informal home care, if included. Other than for CalPERS—which, like the federal program, did not use rating categories or provide discounts for spouses— we did not request any premium data for other group products because of the variation that exists across the groups insured by each carrier.

To compare the amount of premium spent on claims and the costs associated with administering long-term care insurance in the federal program with that of other products, we collected information on anticipated lifetime loss ratios. The anticipated lifetime loss ratio represents the present value of the total expected claim payments compared with the present value of the total expected premiums over the life of a set of policies. This ratio describes what portion of the premium dollar is expected to pay for claims over a long period, with the balance going to administrative costs and profits. We collected these data for new policies sold from July 1, 2002 (March 25, 2002, for the federal program) through March 31, 2005. Two respondents did not provide data on loss ratios.

Enrollment and Enrollee Characteristics

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

Claims Experience

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

Long-term Care Insurance Interviews

To learn about long-term care insurance and to discuss the type of data we wanted to obtain through our data request, we interviewed officials at OPM and Partners, a CalPERS official and an official from the organization that administers the program, and officials at five carriers that sold products in the individual market—two of these carriers were also among the five largest carriers that sold products in the group market. We also conducted follow-up interviews to clarify the data provided in response to our data request, to verify reliability of the data received, and to obtain additional information.

We interviewed officials at several groups and associations as well as long- term care insurance experts. To obtain broader-based information about long-term care insurance, we interviewed the Director of Long-Term Care at America’s Health Insurance Plans and the Senior Director of Long-Term Care Insurance at the American Council of Life Insurers. We interviewed actuaries and health policy staff from the American Academy of Actuaries.

To learn more about state regulation of long-term care insurance products we contacted officials at the National Association of Insurance Commissioners. We interviewed officials at AARP to learn about long-term care insurance and the products offered through that association. We also interviewed three experts on long-term care insurance.

We also reviewed studies on long-term care insurance, including a longitudinal study on buyers and nonbuyers of long-term care insurance. In addition, we reviewed a literature review and six policy briefs commissioned by the Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, all dated August 2004.

Appendix II: Federal Long Term Care Insurance Program Benefits

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

Prepackaged Benefit Plans in the Federal Long Term Care Insurance Program

Enrollees in the Federal Long Term Care Insurance Program could choose from four prepackaged benefit plans. In each of the plans, several benefit options—daily benefit amount; coverage period; elimination period; and maximum lifetime benefit, which is a combination of the daily benefit amount and benefit period—had been preselected into the packages along with all covered services. After selecting one of the four packages, the enrollee only had to choose the type of inflation protection—either automatic compound or the future purchase option. Table 6 shows the four prepackaged plans offered in the Federal Long Term Care Insurance Program.

The federal program included care-coordination benefits and coverage for international benefits and had no war exclusion. Federal program care coordinators provide, among other services, general information about long-term care services; assess and approve need for care; develop a care plan; and monitor and reassess services. Using these services did not reduce an enrollee’s maximum lifetime benefits. Care-coordination services were also available to qualified relatives, who did not need to be enrolled in the program, although some services could be provided at an additional charge. Coverage for benefits received outside the United States was available at 80 percent of the maximum amounts that would otherwise be payable, with certain restrictions. Although the federal program did not have a war exclusion, it included a catastrophic-coverage limitation; that is, a catastrophic event could limit the benefit period.

The federal program did not include several benefits and services that could be available in other products. For example, the federal program did not offer limited pay policies, in which the long-term care insurance policy could be paid up over a limited period of time; restoration of benefit options, in which any of the policy’s maximum benefits that has been used could be replaced if the enrollee did not receive benefits for a specified period of time; or any discounts for both spouses of a married couple purchasing coverage, all of which were options available in individual products.

Customized Benefits in the Federal Program

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

Other Benefits in the Federal Program

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

Enrollment in Federal Program Benefits

Nearly two-thirds of the 218,890 people who enrolled in the federal program from March 25, 2002, through March 31, 2005, chose one of the four prepackaged benefits. As shown in table 8, 35 percent of the enrollees customized their benefits within the ranges offered by the federal program, and less than 1 percent enrolled in the Alternative Insurance Plan.

Overall, 141,195 people enrolled in one of the four prepackaged benefit plans. Of the enrollees who chose a prepackaged benefit plan, 12 percent enrolled in the facilities-only package. The remainder, 88 percent, enrolled in one of the three comprehensive packages. Most of the people who enrolled in a comprehensive package enrolled in the Comprehensive 100 package. About two-thirds of all the enrollees choosing a prepackaged benefit plan also chose automatic compound inflation protection. Table 9 shows federal program enrollment in the four prepackaged benefit plans.

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

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

Appendix IV: Comments from the Office of Personnel Management

Appendix V: GAO Contact and Staff Acknowledgments

Acknowledgments

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