Long-term care, which may include care provided in nursing homes, assisted-living facilities, or a person’s home, can be expensive. In 2005, the average cost of a year in a nursing home was more than $70,000, and in 1999, according to the most recent data available, the average length of stay was between 2 and 3 years. Long-term care insurance helps individuals pay for costs associated with long-term care services. Yet relatively few individuals have obtained coverage. As of 2002, about 9 million people nationwide had obtained long-term care insurance. To help federal employees, retirees, and others obtain coverage, the federal government began offering long-term care insurance in 2002. Long-term care insurance helps pay for the costs associated with long- term care services. People can purchase long-term care insurance directly from carriers that sell products in the individual market, or they can enroll in plans offered by employers or other groups. For a specified premium that is designed—but not guaranteed—to remain level over time, the carrier agrees to provide covered benefits under an insurance contract. Long-term care insurance premiums are affected by many factors, including the benefits offered and the age and health status of the applicant. Carriers review the health status of the applicant during the underwriting process. Carrier assumptions about interest rates, mortality rates, morbidity rates, and lapse rates—the number of people expected to drop their policies over time—also affect premium rates. Carriers set premium rates to cover the anticipated cost of enrollee benefits (which means paying approved claims), administrative costs (which includes marketing costs, claims handling, overhead, and taxes), and profits. Few claims are expected to be submitted during the early years of an enrollee’s long-term care insurance policy. As a result of underwriting, it is unlikely that many people could meet the eligibility requirements to buy a policy yet submit an approved claim within 3 years. Industry experts suggest that the rate of claim submissions begins to increase after about 3 to 7 years. Claims experience is one of many factors—such as interest rates and lapse rates—that affect the long-term financial outlook of a long-term care program. While having a lower-than-expected claims experience is a positive financial indicator, if the claims experience is significantly lower than expected over the long term, then it is possible that the premiums are too high. On the other hand, in accordance with the National Association of Insurance Commissioners (NAIC) premium-setting guidelines, it may be appropriate to project the claims experience assuming moderately adverse results to protect against the need to raise premiums. Insurance carriers’ long-term care insurance profits—defined as the excess of revenues over expenses—are affected by many factors, including the amount of risk the insurance carrier assumes. In general, the more risk a carrier assumes, the greater the carrier’s expected profits. Over time, carriers’ ability to meet or exceed their initial projections regarding interest rates, mortality rates, morbidity rates, and lapse rates, as well as their ability to contain costs, ultimately affects their profits. Carriers are also subject to state requirements, which may affect their ability to realize profits. Long-term care insurance is sold in two primary markets—the individual and group markets. Of the nearly 9 million policies sold as of 2002, the most recent year for which data were available, about 80 percent were sold through the individual market, and the remaining 20 percent were sold through the group market. Sales in the group market are growing faster than sales in the individual market. In March 2006, 13 percent of full-time employees in private industry had access to employer-sponsored long-term care insurance benefits; 20 percent of employees of establishments with 100 or more employees had access to this benefit. The individual market includes plans sold by insurance carriers to individuals, usually through agents or brokers. Individuals may choose benefits from a range of options offered by the carriers, including the duration and amount of daily benefit payments. Those who purchase coverage through the individual market typically pay the full premium. The carrier generally owns program assets and bears the risk of insuring enrollees for the terms of enrollees’ policies. The group market includes long-term care insurance plans offered to individuals through employers and other groups, such as professional associations. In this market, the groups usually design the benefits, and enrollees are often given some benefit options from which to choose, including the duration and amount of daily benefit payments. However, benefit options offered in the group market tend to be fewer than those offered in the individual market. Individuals who purchase long-term care insurance in the group market typically pay the full premium, similar to those who purchase coverage in the individual market. Employers and other groups typically contract with insurance carriers to provide long-term care insurance to qualified individuals. These contracts may be time-limited, lasting, for example, 3 to 5 years. Under these contracts, carriers are usually required to bear the risk of insuring enrollees for the terms of enrollees’ policies; the term of enrollees’ policies may be independent from, and therefore longer than, the length of an employer’s contract with a carrier. These carriers also generally own all program assets. As a result, if a carrier’s contract with an employer was not renewed, the carrier would usually be required by its contract to continue insuring those individuals for whom it issued policies. Several large carriers dominated the long-term care insurance coverage sold in the individual and group markets, as of December 31, 2005. While the long-term care insurance industry experienced 18 percent annual growth in the number of policies sold from 1987 through 2002, the industry has experienced a downturn in more recent years, according to industry experts. Specifically, carriers faced several challenges, including higher-than-expected administrative expenses relative to premiums; lower- than-expected lapse rates, which increased the number of people likely to submit claims; low interest rates, which reduced the actual return on investments below what had been assumed; and new state regulations that limited direct marketing by telephone. As a result, beginning in 2003, for example, many carriers in the individual market raised premiums, left the marketplace, or consolidated to form larger companies. In addition, many carriers have revised the assumptions used in setting premiums, taking a more conservative approach that has led to higher premiums, while state regulators have increased their oversight of the industry. The federal government began offering a group long-term care insurance program in 2002 whereby certain eligible individuals affiliated with more than 125 federal agencies may apply for coverage. Individuals eligible for the Federal Long Term Care Insurance Program include federal and Postal Service employees and retirees; active and retired members of the uniformed services; qualified relatives of these individuals; and certain others. Almost 19 million people were estimated to be eligible for coverage as of October 15, 2001. With more than 214,000 current enrollees as of September 2006, the federal program is the largest employer- sponsored group program in the nation. When the Federal Long Term Care Insurance Program began, eligible individuals could apply for enrollment during two specified periods: an early enrollment period held from March 25, 2002, through May 15, 2002, and an open enrollment period held from July 1, 2002, through December 31, 2002. Following the open enrollment period, eligible individuals could apply for coverage at any time. As is typical for other plans sold in the group market, enrollees pay the entire cost of their premium. As we noted in our March 2006 report, the federal program offered benefits similar to those of other long term- care insurance products, usually at lower premiums for comparable benefits, and the federal program’s early enrollment and claims were lower than initially expected. OPM oversees the federal program, and Partners administers the program in accordance with the requirements of a 7-year contract between OPM and Partners. The contract, signed December 18, 2001, defines key administrative requirements, including OPM’s oversight of the program and how payments for the federal program’s expenses, as well as payments that are earmarked as profits, are determined. Unlike other contracts between employers and carriers, the federal program’s contract includes requirements for the management of federal program assets— that is, the funds collected as premiums and used to pay claims—because the federal program does not give Partners ownership of federal program assets. By statute, OPM’s contract with Partners is for 7 years and is not automatically renewable. At the end of the 7-year term, OPM can either renegotiate the contract with Partners, or allow the contract to terminate and select a new carrier. If a new carrier is selected, Partners must transfer all federal program enrollees and assets, including any positive or negative returns related to the experience of the program, to the federal program’s next carrier. However, if OPM does not contract with another carrier, Partners would continue insuring the individuals who enrolled in the federal program through Partners. In this case, the federal program’s assets would remain available to Partners to pay for claims and expenses. The federal program has a unique profit structure that is explicitly defined in the contract between OPM and Partners. This profit structure consists of three distinct annual payments to Partners to compensate Partners for the risks it assumes under the program’s 7-year contract. Of these payments, two are based on a percentage of the premiums collected during the year and one is based on the average annual assets of the federal program. (See table 1.) These three payments are allowed only if premiums are sufficient to cover the federal program’s current claims and expenses. In contrast to the federal program, profits realized by carriers offering other long-term care insurance plans generally are not based on explicit profit structures. Instead, under the terms of their contracts, carriers assume the risk of insuring enrollees for the terms of enrollees’ policies and own program assets—and are thus able to realize profits or losses according to the experience of the programs they insure.