Long-term care, which includes services provided to individuals in nursing homes, in assisted-living facilities, or in their homes, can be costly. Most of our nation’s spending for this care is paid for by government programs. Private long-term care insurance can also be used to pay for these costs; however, only a small portion of total long-term care costs are paid for by such coverage. The federal government has taken steps to increase the use of private insurance to pay for long-term care costs, including creating FLTCIP. Long-term care costs vary based on the types of services provided and the geographic area where they are rendered. For example, in 2010, the average annual cost for care in a nursing home exceeded $83,000 and the average annual cost for care in an assisted-living facility was nearly $40,000. In addition, the average hourly rate for a home health aide was $21; for example, 10 hours of such care a week would average about $11,000 per year. Most of the nation’s spending on long-term care services is paid for by government programs. About $253 billion was spent nationwide on long- term care services in 2009, according to the most recently available data. Nearly three-quarters of this amount—$183 billion—was paid for by government programs, primarily Medicaid, and to a lesser extent, Medicare and other government programs. Individuals paid 18 percent of the total, or $46 billion, out of pocket, and private insurance paid for a small portion of the total, 6 percent, or about $16 billion. (See fig. 1.) Individuals may purchase long-term care insurance policies directly from carriers in the individual market, or they can enroll in those offered by groups, such as their employers. At the end of calendar year 2009, 6.7 million individuals had long-term care insurance policies, according to data from the National Association of Insurance Commissioners (NAIC). Nearly 70 percent of these policies were purchased in the individual market, with the remaining portion purchased through employers or other group sponsors. States are generally responsible for overseeing long-term care insurance. Through laws and regulations, states establish standards governing long- term care insurance and state insurance departments enforce those standards. NAIC has issued model laws and regulations to assist states in formulating their laws and regulations for long-term care insurance; many states have adopted NAIC’s models. State regulators perform a variety of oversight tasks that are intended to protect consumers from unfair practices, including reviewing premiums and marketing materials and responding to consumer complaints. Long-term care insurance is generally structured around a number of benefit options that applicants select. These include the types of services covered, such as nursing home services, care in home and community settings, or both; the daily benefit amount, which is the maximum amount insurance will pay on a single day; the benefit period (or duration of coverage), which can range from 1 year to unlimited (i.e., lifetime) coverage; and the length of the elimination or waiting period, which is the length of time an individual has to wait before insurance will provide coverage toward the cost of care. An applicant can also select an inflation protection benefit to help ensure that over time, his or her daily benefit amount remains commensurate with the costs of care. Inflation protection benefits increase the enrollee’s daily benefit amount at specified intervals—for example, annually. Carriers typically provide multiple inflation protection options, including a 5 percent ACIO. Under this option, an enrollee’s daily benefit amount is increased each year by 5 percent of the prior year’s amount without a routine increase in premiums. For example, an individual who selected a daily benefit amount of $100 at enrollment would have accrued a $105 daily benefit amount that would be available to him or her at the beginning of the second year of coverage. At the beginning of the third year of coverage, the enrollee’s daily benefit amount would accrue by an additional 5 percent to $110.25. Inflation protection is important because many purchasers of long-term care insurance do not expect to need long- term care services until some time in the future; they pay premiums over a period of years in return for a promise of future protection. This benefit allows enrollees to take advantage of lower premium rates available to younger enrollees, while allowing their benefits to grow over time. Long-term care insurance premiums are affected by many factors. Carriers charge higher premiums for richer benefits; for example, higher daily benefit amounts, longer benefit periods, and higher levels of inflation protection will increase premiums. In addition, premium rates vary based on enrollees’ age at enrollment, with older individuals subject to higher premiums than younger individuals who select the same benefits. Premiums for some policies may also be based on the health status of the applicant. For example, policies sold in the individual market are generally subject to full underwriting, which entails an extensive review of the applicant’s health and may result in premiums that vary based on health status. In contrast, premiums for policies sold in the group market usually do not vary based on individuals’ health status. Such policies may be offered, during at least some periods, on a guaranteed issue basis with no underwriting—meaning that coverage is guaranteed to all eligible individuals. For example, some carriers guarantee coverage to a group of eligible individuals, such as active employees, during an open enrollment period. In addition, carriers establish premiums on the basis of actuarial assumptions—including lapse, mortality, morbidity, and return on investment assumptions.  The lapse assumption reflects the expected portion of enrollees who drop their coverage each year, for example, by voluntarily canceling their policies. Lapse assumptions can vary based on a variety of factors, including the enrollees’ age at enrollment and the number of years enrollees have had their policies. In general, it is assumed that the longer that enrollees keep their policies, the less likely they are to lapse. After enrollees have maintained their policies for a certain number of years—for example, after 6 or 8 years—carriers may assume that the lapse rate will remain constant. This rate is referred to as the ultimate lapse rate. Lapse rate assumptions greatly affect long-term care insurance premiums because when individuals lapse, future liabilities are immediately reduced although current assets are not affected. Premiums that have already been paid by those who lapse generally remain with the carrier and are used to subsidize the cost of future claims by other enrollees.  The mortality assumption summarizes the expected death rate of the enrollee population, by age. Similar to the lapse assumption, mortality reduces future liabilities without affecting assets.  The morbidity assumption reflects the amount of claims costs expected for enrollees, by age, and accounts for the portion of enrollees of each age who file a claim and the duration of those claims. Because carriers assume that older enrollees are more likely to file a claim, the expected amount of claims costs increases with age.  The return on investment assumption reflects the expected interest rate earned on invested assets. Because actuarial assumptions are projections about the future, they can change over time as carriers gain more experience, especially with relatively new products such as long-term care insurance. In addition, these assumptions are developed based on the professional judgment of carriers’ actuaries; therefore, actuarial assumptions—and the resulting premiums—can differ across actuaries and carriers. A key feature of long-term care insurance is that premiums are designed—although not guaranteed—to remain level over time. Carriers calculate premium rates with a goal of ensuring that the total amount of premiums paid by all enrollees plus the interest earned on the invested assets over the lifetime of the policy are sufficient to cover the cost of future claims and expenses. Setting premiums at an adequate level to cover future costs has been a challenge for some carriers. Long-term care insurance is a relatively new product. In addition, several decades may elapse before enrollees submit claims and carriers obtain data on how their enrollees use their policies. As a result, many carriers have lacked (and may continue to lack) sufficient data to accurately estimate the revenue needed to cover costs. This has led to changes in the marketplace as many companies have raised premiums, left the marketplace, or consolidated to form larger companies. In response to the growing number of premium increases for long-term care insurance, NAIC issued revisions to its model long-term care insurance regulation in 2000. The new model regulation established more rigorous requirements that carriers must meet when setting initial premium rates and when requesting premium increases. For example, the model regulation introduced a new requirement for insurance carriers’ actuaries to certify that premiums are adequate to cover anticipated costs over the life of a policy, even under “moderately adverse conditions,” with no future premium increases anticipated. Moderately adverse conditions could include, for example, below average returns on invested assets. To fulfill this requirement, insurance carriers’ actuaries must include a margin for error when setting premiums. The Long-Term Care Security Act authorizes OPM to enter into 7-year contracts with one or more private entities to insure FLTCIP enrollees and administer the program. The Act requires OPM to ensure that each of these contracts is awarded on the basis of contractor qualifications, price, and reasonable competition. The Act also tasked OPM with overseeing FLTCIP and preempts state oversight of the program. As a result, OPM performs functions of both a sponsoring employer and a regulator for this program. To obtain carriers’ proposals for FLTCIP, OPM issued two requests for proposals (RFP)—one in 2001 for the program’s first contract, and another in 2008 for the program’s second contract.