Long-Term Care Insurance
Federal Program Has a Unique Profit Structure and Faced a Significant Marketing Challenge Gao ID: GAO-07-202 December 29, 2006Spending on long-term care services--about $193 billion in 2004--is expected to rise. In 2000, Congress passed the Long-Term Care Security Act, requiring the federal government to offer long-term care insurance. To do so, the Office of Personnel Management (OPM) contracted with Long Term Care Partners LLC (Partners) to create the Federal Long Term Care Insurance Program. This is the second of two reports required by the act on the competitiveness of the federal program. GAO's March 31, 2006, report, Long-Term Care Insurance: Federal Program Compared Favorably with Other Products, and Analysis of Claims Trend Could Inform Future Decisions (GAO-06-401), found that the federal program's benefits and premiums compared favorably with other plans, but enrollment and claims experience--the amount and number of claims payments--were lower than Partners expected. In this report, GAO compared the federal program's profit structure and marketing efforts with those of other plans and updated its analysis of the program's claims experience. GAO reviewed the contract between OPM and Partners and interviewed OPM, Partners, and insurance carrier officials, as well as actuaries and industry experts. GAO also analyzed data on claim payments for the federal program since it began in 2002.
The Federal Long Term Care Insurance Program has a unique profit structure that is explicitly defined in the contract between OPM and Partners. This profit structure consists of three distinct annual payments to Partners: (1) a guaranteed payment of 3.5 percent of the year's collected premiums, (2) a payment linked to OPM's evaluation of Partners' performance of up to 3 percent of the year's collected premiums, and (3) a guaranteed payment of 0.3 percent of the average annual assets of the program. These payments are separate from other payments made to cover the program's expenses. In contrast to the federal program, profits realized by carriers offering other long-term care insurance plans generally are not based on explicit profit structures, but rather on the experience of the programs they insure. The federal program's marketing efforts were generally similar to those used for other plans sold in the group market, but faced a significant challenge in sending information directly to eligible individuals. The federal program and other plans sold in the group market used such marketing efforts as mailing information to the homes of eligible individuals and hosting employee and retiree seminars. Of these efforts, carrier officials GAO spoke with explained that mailing to the homes of eligible individuals was critical to their marketing strategy. The federal program faced a significant challenge in mailing information to the homes of those eligible for the program because it initially did not have the home addresses for nearly all active federal civilian employees. Because of this challenge, the federal program relied heavily on marketing efforts that were less direct and less personalized, such as sending information to federal employees through agency benefits officers. The federal program's claims experience increased in the program's fourth year, but remained lower than the expectations established by Partners in its contract with OPM. This increase was generally consistent with trends since the federal program began in 2002. Overall, the federal program has paid 44 percent of the expected amount of claim payments per enrollee and 41 percent of the expected number of claims per enrollee. As of August 2006, Partners officials had not determined why the claims experience was lower than Partners' expectations. While it is generally expected that the number of claims submitted in the first few years of a long-term care insurance program will be a small portion of the total number of claims submitted over time, a program's claims experience is one of several factors that may affect its long-term financial outlook. The results of this analysis underscore GAO's prior recommendations that OPM analyze the claims experience and assumptions affecting premiums to inform forthcoming contract negotiations. In commenting on a draft of this report, OPM generally agreed with the report's findings.
GAO-07-202, Long-Term Care Insurance: Federal Program Has a Unique Profit Structure and Faced a Significant Marketing Challenge
This is the accessible text file for GAO report number GAO-07-202
entitled 'Long-Term Care Insurance: Federal Program Has a Unique Profit
Structure and Faced a Significant Marketing Challenges' which was
released on December 29, 2006.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2006:
Long-Term Care Insurance:
Federal Program Has a Unique Profit Structure and Faced a Significant
Marketing Challenge:
Federal Long-Term Care Insurance Program:
GAO-07-202:
GAO Highlights:
Highlights of GAO-07-202, a report to congressional committees
Why GAO Did This Study:
Spending on long-term care services”about $193 billion in 2004”is
expected to rise. In 2000, Congress passed the Long-Term Care Security
Act, requiring the federal government to offer long-term care
insurance. To do so, the Office of Personnel Management (OPM)
contracted with Long Term Care Partners LLC (Partners) to create the
Federal Long Term Care Insurance Program. This is the second of two
reports required by the act on the competitiveness of the federal
program. GAO‘s March 31, 2006, report, Long-Term Care Insurance:
Federal Program Compared Favorably with Other Products, and Analysis of
Claims Trend Could Inform Future Decisions (GAO-06-401), found that the
federal program‘s benefits and premiums compared favorably with other
plans, but enrollment and claims experience”the amount and number of
claims payments”were lower than Partners expected.
In this report, GAO compared the federal program‘s profit structure and
marketing efforts with those of other plans and updated its analysis of
the program‘s claims experience. GAO reviewed the contract between OPM
and Partners and interviewed OPM, Partners, and insurance carrier
officials, as well as actuaries and industry experts. GAO also analyzed
data on claim payments for the federal program since it began in 2002.
What GAO Found:
The Federal Long Term Care Insurance Program has a unique profit
structure that is explicitly defined in the contract between OPM and
Partners. This profit structure consists of three distinct annual
payments to Partners: (1) a guaranteed payment of 3.5 percent of the
year‘s collected premiums, (2) a payment linked to OPM‘s evaluation of
Partners‘ performance of up to 3 percent of the year‘s collected
premiums, and (3) a guaranteed payment of 0.3 percent of the average
annual assets of the program. These payments are separate from other
payments made to cover the program‘s expenses. In contrast to the
federal program, profits realized by carriers offering other long-term
care insurance plans generally are not based on explicit profit
structures, but rather on the experience of the programs they insure.
The federal program‘s marketing efforts were generally similar to those
used for other plans sold in the group market, but faced a significant
challenge in sending information directly to eligible individuals. The
federal program and other plans sold in the group market used such
marketing efforts as mailing information to the homes of eligible
individuals and hosting employee and retiree seminars. Of these
efforts, carrier officials GAO spoke with explained that mailing to the
homes of eligible individuals was critical to their marketing strategy.
The federal program faced a significant challenge in mailing
information to the homes of those eligible for the program because it
initially did not have the home addresses for nearly all active federal
civilian employees. Because of this challenge, the federal program
relied heavily on marketing efforts that were less direct and less
personalized, such as sending information to federal employees through
agency benefits officers.
The federal program‘s claims experience increased in the program‘s
fourth year, but remained lower than the expectations established by
Partners in its contract with OPM. This increase was generally
consistent with trends since the federal program began in 2002.
Overall, the federal program has paid 44 percent of the expected amount
of claim payments per enrollee and 41 percent of the expected number of
claims per enrollee. As of August 2006, Partners officials had not
determined why the claims experience was lower than Partners‘
expectations. While it is generally expected that the number of claims
submitted in the first few years of a long-term care insurance program
will be a small portion of the total number of claims submitted over
time, a program‘s claims experience is one of several factors that may
affect its long-term financial outlook. The results of this analysis
underscore GAO‘s prior recommendations that OPM analyze the claims
experience and assumptions affecting premiums to inform forthcoming
contract negotiations.
In commenting on a draft of this report, OPM generally agreed with the
report‘s findings.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-202].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John E. Dicken at (202)
512-7119 or dickenj@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Federal Program Has a Unique Profit Structure:
Federal Program Used Marketing Efforts Generally Similar to Those Used
for Other Plans but Faced a Significant Challenge:
Claims Experience in the Federal Program Increased but Remained Lower
Than Expectations:
Concluding Observations:
Agency Comments:
Appendix I: Performance Measures Used for the Federal Long Term Care
Insurance Program:
Appendix II: Comments from the Office of Personnel Management:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Profit Structure of the Federal Long Term Care Insurance
Program:
Table 2: Actual Claims per Enrollee as a Percentage of Expected Claims
per Enrollee in the First 4 Years of the Federal Long Term Care
Insurance Program:
Table 3: Federal Long Term Care Insurance Program's Short-Term
Performance Measures, Assessed Annually:
Table 4: Federal Long Term Care Insurance Program's Long-Term
Performance Measures, Assessed Every 3 Years:
Figure:
Figure 1: Actual Claim Payments per 10,000 Enrollees in the First 4
Years of the Federal Long Term Care Insurance Program Compared with
Expected Claim Payments per 10,000 Enrollees over 35 Years:
Abbreviations:
NAIC: National Association of Insurance Commissioners:
OPM: Office of Personnel Management:
United States Government Accountability Office:
Washington, DC 20548:
December 29, 2006:
Congressional Committees:
In 2004, about $193 billion was spent nationwide on long-term care
services, including nursing home care and other assisted-living
services.[Footnote 1] Most of this care was financed by government
programs, primarily by Medicaid, a joint federal-state program that
finances health insurance for certain low-income adults and children.
Elderly people--those aged 65 or older--consume about two-thirds of all
long-term care services. As the elderly population continues to grow,
particularly with the aging of the baby boom generation, the increasing
demand for long-term care services will likely strain federal and state
resources. Some policymakers propose that increased use of long-term
care insurance may be a means of reducing the future financial burden
on public programs. In 2000, Congress passed the Long-Term Care
Security Act, requiring the federal government to offer long-term care
insurance to its employees, their families, and others.[Footnote 2]
Congressional committee reports accompanying the act indicated that a
federal long-term care insurance program could encourage people to
purchase long-term care insurance, serve as a model for other employer-
sponsored programs across the nation,[Footnote 3] and encourage private
payment sources to assume some of the insurance risk.[Footnote 4]
In December 2001, at the conclusion of a competitive bidding process,
the Office of Personnel Management (OPM)--the federal agency
responsible for administering governmentwide compensation and benefit
systems--entered into a 7-year contract with Long Term Care Partners
LLC (referred to as Partners) that allows certain eligible individuals
affiliated with the federal government to apply for long-term care
insurance. Individuals eligible for the Federal Long Term Care
Insurance Program include federal and Postal Service employees and
retirees; active and retired members of the uniformed services;
qualified relatives of these individuals, such as spouses of employees
and retirees; and certain others. Partners is a joint venture formed by
two large insurance carriers that sell long-term care insurance
products in the private market--John Hancock Life Insurance Company and
Metropolitan Life Insurance Company. The contract between OPM and
Partners outlines the roles and responsibilities of all parties with
respect to the program, including how payments for program expenses and
profits are determined. Partners began marketing the Federal Long Term
Care Insurance Program in February 2002, and the program began
accepting enrollment applications on March 25, 2002. As of September
30, 2006, the federal program had 214,034 current enrollees, making it
the largest private long-term care insurance program in the
nation.[Footnote 5]
This report is the second of two reports required by the Long-Term Care
Security Act on the competitiveness of the federal program compared
with group and individual plans generally available in the private
insurance market.[Footnote 6] Our first report found that the program
compared favorably with other group and individual plans we reviewed in
terms of benefits offered and premiums. However, in its first 3 years,
from April 1, 2002, through March 31, 2005, the federal program's
enrollment and claims experience--that is, the number of paid claims
and the amount paid for those claims--were lower than the expectations
established by Partners.[Footnote 7] We recommended that the Director
of OPM analyze the reasons for the lower-than-expected claims
experience and, as appropriate, use the results to modify assumptions
about the expected claims experience. We also recommended that the
Director of OPM analyze the projections for the amount of premiums
collected to pay for claims. In response to these recommendations, OPM
indicated that it intended to provide updated information on claims
experience and premium setting in its written recommendation to
Congress before entering into a new contract for the administration of
the Federal Long Term Care Insurance Program. Partners' current
contract with OPM ends December 31, 2008.
In this report, as discussed with the committees of jurisdiction, we
examined the following questions regarding other aspects of
competitiveness:
1. How does the profit structure of the Federal Long Term Care
Insurance Program as defined by the contract compare with that of other
long-term care insurance plans?
2. How do the marketing efforts for the Federal Long Term Care
Insurance Program compare with those for other long-term care insurance
plans?
3. How does the Federal Long Term Care Insurance Program's claims
experience, updated to reflect the program's fourth year, compare with
initial expectations?
To obtain information on the profit structure of the Federal Long Term
Care Insurance Program, we interviewed officials at OPM and Partners
and reviewed relevant documents, including the contract between OPM and
Partners. We limited our review to the payments that were defined in
this contract as profits. To obtain comparable information on any
profit structures used in the private sector, we interviewed officials
from four of the nation's largest long-term care insurance carriers--
Bankers Life and Casualty Company, Genworth Financial, John Hancock
Life Insurance Company, and Metropolitan Life Insurance
Company.[Footnote 8],[Footnote 9] All four insurance carriers sold
products in the individual market, and two of the four--John Hancock
Life Insurance Company and Metropolitan Life Insurance Company--were
also among the five largest carriers that sold products in the group
market. We also interviewed benefits officials from four states--
California, New Jersey, North Carolina, and Texas--that offered long-
term care insurance to state employees and certain other
groups,[Footnote 10] and we interviewed industry experts and actuaries
regarding the profit structures used in the industry.
To obtain information on marketing efforts for the Federal Long Term
Care Insurance Program, we interviewed officials from OPM and Partners
and reviewed marketing plans for the federal program. To obtain
comparable information on the marketing efforts used in the private
sector, we interviewed actuaries, industry experts, officials from the
four insurance carriers, and benefits officials from the four states.
To describe how the federal program's claims experience, updated to
reflect the program's fourth year, compared with initial expectations
as established by Partners in its contract with OPM, we analyzed data
from Partners on the number of enrollees, the number of paid claims,
and the amount of claim payments made for the federal program from
April 1, 2005, through March 31, 2006. We also included data presented
in our previous report regarding the claims experience of the federal
program in its first 3 years, from April 1, 2002, through March 31,
2005. We compared the anticipated claims experience for the federal
program as established by Partners in its contract with OPM prior to
the program's start of enrollment, with the actual number of claims
paid and the amount of claims payments during the federal program's
first 4 years--from April 1, 2002, through March 31, 2006. We also
interviewed Partners officials about the federal program's claims
experience.
We reviewed all data for reasonableness and consistency and determined
that the data were sufficiently reliable for our purposes. We performed
our work in accordance with generally accepted government auditing
standards from May 2006 through December 2006.
Results in Brief:
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 that are
separate from payments made to cover the program's expenses. Two of the
three profit payments 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. One premium-based payment and the asset-
based payment are guaranteed. The other premium-based payment is not
guaranteed, but rather is linked to OPM's evaluation of Partners'
performance, including OPM's annual evaluation in 21 measures across 4
categories: administrative expense savings, customer service,
enrollment experience, and responsiveness to OPM. In contrast to the
federal program, profits realized by carriers offering other long-term
care insurance plans generally are not based on an explicit profit
structure. Instead, carriers may realize profits according to the
experience of the programs they insure.
The federal program used marketing efforts that were generally similar
to those for other plans sold in the group market, but faced a
significant challenge in sending information directly to eligible
individuals. The federal program and other plans sold in the group
market used marketing efforts such as mailing information to the homes
of eligible individuals, sending e-mails to eligible employees at work,
posting information on a Web site, and hosting employee and retiree
seminars. Of these efforts, carrier officials we spoke with explained
that direct mail is a critical marketing strategy for long-term care
insurance. The federal program faced a significant challenge in mailing
information to the homes of those individuals eligible for the program
because it initially did not have the home addresses of nearly all
active federal civilian employees. Because of this challenge, the
federal program relied on marketing efforts that were less direct and
less personalized, such as sending information to federal employees
through agency benefits officers and working with affinity groups whose
membership consists of eligible individuals.
The federal program's claims experience--the amount of claim payments
per enrollee and the number of paid claims per enrollee--increased in
the program's fourth year, but remained lower than Partners'
expectations as established in its contract with OPM. This increase was
generally consistent with trends since the federal program began in
2002. Overall, the federal program has paid 44 percent of the expected
amount of claim payments per enrollee and 41 percent of the expected
number of claims per enrollee. As of August 2006, Partners officials
had not determined why the claims experience was lower than its
expectations. It is generally expected that the number of claims
submitted in the first few years of a long-term care insurance program
will be a small portion of the total number of claims submitted over
time. However, claims experience is one of several factors that may
affect the long-term financial outlook of a long-term care insurance
program. The results of this analysis underscore our prior
recommendations that OPM analyze the claims experience and assumptions
affecting premiums to inform forthcoming contract negotiations for the
administration of the federal program. These negotiations may occur
prior to December 31, 2008, the end of Partners' current contract.
In commenting on a draft of this report, OPM generally agreed with our
findings. Regarding the program's profit structure, OPM stated that now
that it has more operating experience with the program, it plans to
reexamine the profit structure as it renegotiates or rebids the
contract for the administration of the program. In its comments,
Partners highlighted certain distinct aspects of the federal program's
profit structure that we noted in our draft report, including that
Partners does not own federal program assets and that a profit payment
is contingent on Partners meeting specific performance standards that
Partners characterized as exceptionally high for the insurance industry
in general.
Background:
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,[Footnote 11] and in 1999, according to the most recent data
available, the average length of stay was between 2 and 3
years.[Footnote 12] 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.[Footnote 13] To help
federal employees, retirees, and others obtain coverage, the federal
government began offering long-term care insurance in 2002.
Long-Term Care Insurance:
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.[Footnote 14] Carrier assumptions about
interest rates, mortality rates, morbidity rates,[Footnote 15] 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),[Footnote 16] 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.[Footnote 17]
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 Marketplace:
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.[Footnote 18] Sales in the group
market are growing faster than sales in the individual market.[Footnote
19] 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.[Footnote 20]
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.[Footnote 21]
Employers and other groups typically contract with insurance carriers
to provide long-term care insurance to qualified individuals.[Footnote
22] 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,[Footnote 23] 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.
Federal Long Term Care Insurance Program:
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.[Footnote 24] 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.[Footnote 25] Following the open enrollment period, eligible
individuals could apply for coverage at any time.[Footnote 26] 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.[Footnote 27]
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.[Footnote 28] 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.
Federal Program Has a Unique Profit Structure:
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.[Footnote 29] 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.
Table 1: Profit Structure of the Federal Long Term Care Insurance
Program:
Payment type: Premium-based payments: Guaranteed;
Payment amount: 3.5 percent of the premiums collected during the year.
Payment type: Premium-based payments: Performance-based;
Payment amount: Up to 3.0 percent of the premiums collected during the
year--the actual amount is determined by OPM based on its assessment of
Partners' performance.
Payment type: Asset-based payment: Guaranteed;
Payment amount: 0.3 percent of the average annual assets of the federal
program.
Source: GAO analysis of OPM's contract with Partners.
Note: These three payments are allowed only if premiums are sufficient
to cover the federal program's current claims and expenses.
[End of table]
The federal program guarantees one annual premium-based payment to
Partners. This payment equals 3.5 percent of the premiums collected in
a year. For other long-term care insurance plans offered in the group
and individual markets, carriers' profits were generally not
guaranteed, according to carrier officials and industry experts.
Similar to the federal program, one source of carriers' revenue is
enrollee premiums, which include an amount for anticipated profits.
However, carriers may realize profits or losses according to the
experience of the programs they insure, subject to applicable state
regulations.[Footnote 30]
The federal program links the second annual premium-based payment to
OPM's evaluation of Partners' performance. This payment can equal up to
3 percent of the premiums collected in a year. Under an agreement which
amended the contract between OPM and Partners and became effective
beginning fiscal year 2006, OPM evaluates Partners' performance each
year on 21 short-term performance measures across 4 categories:
administrative expense savings, customer service, enrollment
experience, and responsiveness to OPM.[Footnote 31] Each performance
measure has a corresponding payment equivalent to a percentage of the
total performance-based payment of 3 percent of premiums. If Partners'
performance does not meet stated expectations in a measure, the payment
corresponding to that measure is placed into a retained profit account.
In addition, every 3 years, OPM evaluates Partners' performance in two
long-term performance measures: return on investment and claims
experience. If Partners meets expectations in one measure and funds are
present in the retained profit account, one-half of the amount present
in the retained profit account is paid to Partners. If Partners meets
expectations in both measures and funds are present in the retained
profit account, the total amount present in the retained profit account
is paid to Partners. As of September 2006, Partners has been awarded
the full performance-based payment each year since the federal program
began. Appendix I provides a complete list of the performance measures
used for the federal program.
Unlike the federal program, most other sponsors of plans offered in the
group market usually did not link carrier profits to performance
evaluations, according to carrier officials and industry experts.
Carrier officials estimated that about 10 percent to 20 percent of
employers required their long-term care insurance carrier to relinquish
a certain percentage (for example, 2 percent to 4 percent) of premiums
if their performance did not meet agreed-upon expectations.[Footnote
32] However, employers may require carriers to guarantee a certain
level of performance in their contracts to ensure that enrollees are
provided with standard levels of service, according to state
officials.[Footnote 33] These performance measures and guarantees may
include those related to the timeliness of underwriting decisions and
call center performance. The federal program used all of the
performance measures that industry experts and carrier officials cited
as those commonly used throughout in the group market, in addition to
other measures such as administrative expense savings and claims
experience.
The federal program's third payment is guaranteed and is based on the
average annual assets of the program. This annual payment--0.3 percent
of the average annual assets of the federal program--is defined in the
contract between OPM and Partners as a profit payment. The federal
program developed this payment to recognize that insurers in general
are required to hold risk-based capital. Risk-based capital is the
capital that an insurance carrier is required to hold in reserve,
separate from any other funds used to back insurance liabilities or
other lines of business, to protect the carrier from
insolvency.[Footnote 34] OPM does not require Partners to use the third
payment to fund risk-based capital and both OPM and Partners consider
this payment another form of profit for administering the program.
Similar to the federal program, carriers use enrollee premium funds to
fund risk-based capital requirements, according to OPM officials.
However, risk-based capital may be considered an expense to carriers.
Federal Program Used Marketing Efforts Generally Similar to Those Used
for Other Plans but Faced a Significant Challenge:
The federal program used marketing efforts that were generally similar
to those used for other plans sold in the group market.[Footnote 35]
For example, the types of marketing efforts used for the federal
program and other plans offered in the group market, according to our
review of federal program documents and the carrier and state officials
we spoke with, included:
* mailing information directly to the homes of eligible individuals,
* sending e-mails to eligible employees at work,
* posting information on a Web site,
* hosting employee and retiree seminars, and:
* working with affinity groups whose membership consists of eligible
individuals.
Of these efforts, carrier officials we spoke with told us that direct
mail, which may include a personalized letter, is a critical marketing
effort for long-term care insurance plans. One carrier official also
explained that direct mail was so critical to the carrier's marketing
strategy that it generally would not work with employers who neither
provide the home addresses of employees nor assist in mailing materials
to employees.
The federal program faced a significant challenge in sending
information directly to eligible individuals, particularly through
direct mail. Specifically, the federal program was initially unable to
mail information directly to the homes of about 60 percent of the
program's core group of eligible individuals that Partners deemed most
likely to enroll in the federal program--including nearly all active
federal civilian employees--because neither OPM nor Partners had the
home addresses of these individuals. OPM officials told us that a
centralized database of this information does not exist. According to
OPM officials, OPM did not request federal employees' home address
information from other federal agencies because they felt it would be
too burdensome to comply with certain Privacy Act requirements[Footnote
36] and gather accurate information from each of the agencies in a
timely manner. Despite this challenge, the federal program initially
mailed information directly to the homes of those for whom it had
addresses, which included about 40 percent of the program's core group
of eligible individuals, as well as other non-core groups such as
retired military personnel and annuitants under the Civil Service
Retirement System and the Federal Employees Retirement System,
according to our analysis of Partners' data.[Footnote 37] As of October
2006, Partners officials noted that direct mail efforts were still
limited because of the federal program's inability to mail information
directly to the homes of most active federal civilian
employees.[Footnote 38] Before signing its contract with OPM, Partners
was aware of the federal program's limitations regarding direct mail.
As a result of the federal program's limited ability to send direct
mail to many eligible individuals, the federal program relied heavily
on marketing efforts that were less direct and less personalized,
including sending information to federal employees through agency
benefits officers and working with affinity groups. Because neither OPM
nor Partners has direct access to federal employees through e-mail,
Partners has worked with more than 150 agency benefits officers to
distribute program information to federal employees through e-mail,
internal office mail, or other means.[Footnote 39] For example,
Partners relies on agency benefits officers to send e-mails about the
federal program.[Footnote 40] While Partners officials may be notified
by agency benefits officers when they send program information,
Partners is unable to determine whether all eligible federal employees
receive this information. In addition, Partners has worked with several
affinity groups, such as Federally Employed Women and the National
Active and Retired Federal Employees Association, to educate their
members about the need for long-term care insurance and to advertise in
publications and at sponsored events. Through these efforts, Partners
has gained direct access to the groups' members.
Claims Experience in the Federal Program Increased but Remained Lower
Than Expectations:
In the federal program's fourth year, claims experience--the amount of
claim payments per enrollee and the number of paid claims per enrollee-
-increased from that of the program's third year, but remained lower
than Partners' expectations as established in its contract with OPM.
This increase was generally consistent with trends since the federal
program began in 2002. As we reported in March 2006, claims experience
in the federal program's first 3 years was lower than the initial
expectations set by Partners.[Footnote 41] Our analysis of Partners'
data showed that claims experience also remained lower than expected
for the federal program's fourth year. As of March 31, 2006, the end of
the federal program's fourth year, the federal program had cumulatively
paid 44 percent of the expected amount of claim payments per enrollee
and 41 percent of the expected number of claims per enrollee, across
the 4 years, as shown in table 2. Figure 1 shows the amount of claims
payments per 10,000 enrollees. As of August 2006, Partners had not
determined why the claims experience was lower than Partners'
expectations. Claims experience is one of many factors--such as
interest rates and lapse rates--that affect the long-term financial
outlook of a long-term care insurance program. While it is generally
expected that the number of claims submitted in the first few years of
a long-term care insurance program will be a small portion of the total
number of claims submitted over time, the rate of claim submissions
usually begins to increase after about 3 to 7 years, according to
industry experts.
Table 2: Actual Claims per Enrollee as a Percentage of Expected Claims
per Enrollee in the First 4 Years of the Federal Long Term Care
Insurance Program:
Claims experience: Amount of claim payments per enrollee as a
percentage of expected claims per enrollee;
Year 1: 40%;
Year 2: 39%;
Year 3: 40%;
Year 4: 50%;
Cumulative: 44%.
Claims experience: Number of paid claims per enrollee as a percentage
of expected claims per enrollee;
Year 1: 4%;
Year 2: 37%;
Year 3: 48%;
Year 4: 56%;
Cumulative: 41%.
Source: GAO analysis of data provided by Partners.
Notes: Partners established expectations for enrollment and claims in
its contract with OPM. We reviewed claims data for the first 4 years of
the federal program, April 1, 2002, through March 31, 2006.
[End of table]
Figure 1: Actual Claim Payments per 10,000 Enrollees in the First 4
Years of the Federal Long Term Care Insurance Program Compared with
Expected Claim Payments per 10,000 Enrollees over 35 Years:
[See PDF for image]
Source: GAO analysis of data provided by Partners.
Notes: Partners established expectations for enrollment and claims in
its contract with OPM. We reviewed claims data for the first 4 years of
the federal program, April 1, 2002, through March 31, 2006.
[End of figure]
Concluding Observations:
Our findings from two reports together show that the Federal Long Term
Care Insurance Program compared favorably with other plans, has a
unique profit structure, and used marketing efforts that were generally
similar to those of other plans, but faced a significant challenge.
Specifically, our initial report found that the federal program offered
benefits similar to those of other long-term care insurance products,
usually at lower premiums for comparable benefits. In this, our second
report, we examined other components of the federal program's
competitiveness, including the federal program's profit structure and
marketing efforts. We found that the federal program has a unique
profit structure, created to compensate Partners for the risks it
assumed for the program. The risks borne by Partners, however, are not
as great as those assumed by carriers selling other plans because,
unlike with other plans, the federal program's assets are owned by the
program, not by the insurer. Because of this structure, the program
does not link Partners' profits to the overall experience of the
program. Rather, the program guarantees some profit payments, links
some profit payments to OPM's evaluation of Partners' performance, and
requires Partners to assume a potentially time-limited risk, after
which all program assets and enrollees may be transferred to another
carrier. Insurance carriers' profits are linked to the amount of risk
they bear, and Partners assumes less risk for insuring the federal
program than do carriers for insuring other long-term care insurance
plans. Therefore, the federal program's profit payments would likely be
lower than the profits realized by carriers selling other plans. In
addition, while the federal program used marketing efforts that were
generally similar to those used for other plans sold in the group
market, the program faced a significant challenge in providing
personalized marketing communications directly to eligible individuals
and instead relied heavily on other marketing efforts.
In our initial report we found that the federal program's claims
experience--the amount and number of claims payments per enrollee--was
lower than expected in the first 3 years of the program. While it is
generally expected that the number of claims submitted in the first few
years of a long-term care insurance program will be a small portion of
the total number of claims submitted over time, a program's claims
experience is one of several factors that may affect the long-term
financial outlook of the program. In response to our recommendation in
the initial report that OPM analyze the claims experience and
assumptions affecting premiums to inform forthcoming contract
negotiations, OPM indicated that it intended to provide updated
information on claims experience and premium setting in its written
recommendation to Congress before entering into the next contract for
the administration of the Federal Long Term Care Insurance Program.
Partners' current contract with OPM for the administration of the
federal program ends December 31, 2008. After reviewing a fourth year
of claims data, we note that the program's claims experience increased
from that of the program's third year, but still remains lower than
Partners' expectations. These results underscore the importance of our
prior recommendations that OPM analyze the claims experience and
assumptions as it considers its recommendations to Congress regarding a
future contract.
Agency Comments:
We provided a draft of this report to OPM and Partners. In its written
comments, OPM generally agreed with our findings. OPM's comments are
reprinted in appendix II.
With regard to the program's unique profit structure, OPM stated that
now that it has more operating experience with the program, it plans to
reexamine the profit structure as it renegotiates or rebids the
contract for the administration of the program. OPM agreed that the
marketing efforts for the federal program are more challenging for
Partners than for other insurers because, among other reasons, home
addresses for federal employees are generally not available. OPM noted
that this will continue to be a constraint for the program in the
future. In addition, OPM highlighted, as we noted in our draft report,
that the ratio of actual to expected claims experience has narrowed and
stated that it would continue to closely monitor the claims experience
of the program. We support this effort and continue to encourage OPM to
analyze the program's claims experience and ensure that premiums and
actuarial assumptions about future claims reflect the experience of the
program.
In its comments, Partners highlighted certain distinct aspects of its
profit structure that we noted in our draft report, including that
Partners does not own federal program assets and that a profit payment
is contingent on meeting specific performance standards that Partners
characterized as exceptionally high for the insurance industry in
general. Partners also stated that profit payments are paid only if the
federal program's assets are sufficient to cover the risks incurred by
the program, as our draft report noted. Regarding the marketing efforts
used for the federal program, Partners noted that the terrorist attacks
of 2001 and the anthrax scare, which caused heightened security at
federal buildings, added to the marketing challenge acknowledged in the
report. We revised the report to reflect these circumstances. Finally,
Partners commented, and as we noted in our draft report, that in
addition to a program's claims experience, premium rates are affected
by a number of factors, including lapse rates and interest rates.
OPM and Partners provided technical comments and clarifications, which
we incorporated as appropriate.
We are sending copies of this report to the Director of OPM and
interested congressional committees. We will also provide copies to
others on request. In addition, this report is available at no charge
on the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-7119 or dickenj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix III.
Signed by:
John E. Dicken:
Director, Health Care:
List of Committees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable George V. Voinovich:
Chairman:
The Honorable Daniel K. Akaka:
Ranking Minority Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Duncan L. Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Jon C. Porter:
Chairman:
The Honorable Danny K. Davis:
Ranking Minority Member:
Subcommittee on the Federal Workforce and Agency Organization:
Committee on Government Reform:
House of Representatives:
[End of section]
Appendix I: Performance Measures Used for the Federal Long Term Care
Insurance Program:
The Federal Long Term Care Insurance Program makes some profit payments
to Long Term Care Partners LLC (Partners) according to the Office of
Personnel Management's (OPM) evaluation of Partners' performance.
Beginning in fiscal year 2006, OPM evaluates Partners' performance each
year on 21 short-term performance measures across 4 categories:
administrative expense savings, customer service, enrollment
experience, and responsiveness to OPM (see table 3). Every 3 years, OPM
also evaluates Partners' performance in two long-term performance
measures: claims experience and return on investment (see table 4).
Table 3: Federal Long Term Care Insurance Program's Short-Term
Performance Measures, Assessed Annually:
Category: Administrative expense savings;
Performance measure: Actual administrative expenses compared to
budgeted amounts set by OPM and Partners.
Category: Customer service;
Performance measure: Billing: timeliness of posting payroll and annuity
payments.
Category: Customer service;
Performance measure: Billing: timeliness of processing automatic bank
withdrawal reversals[A].
Category: Customer service;
Performance measure: Billing: timeliness of processing billing changes.
Category: Customer service;
Performance measure: Billing: timeliness of sending payroll bills to
payroll providers.
Category: Customer service;
Performance measure: Call center: call abandonment rate.
Category: Customer service;
Performance measure: Call center: call answering speed.
Category: Customer service;
Performance measure: Call center: customer satisfaction with customer
service.
Category: Customer service;
Performance measure: Call center: timeliness of callbacks.
Category: Customer service;
Performance measure: Call center: timeliness of response to written or
e-mail inquiries.
Category: Customer service;
Performance measure: Claims: accuracy of claims payments.
Category: Customer service;
Performance measure: Claims: timeliness of claims payments.
Category: Customer service;
Performance measure: Care coordination: customer satisfaction with care
coordination services.
Category: Customer service;
Performance measure: Care coordination: timeliness of benefit
determinations.
Category: Customer service;
Performance measure: Underwriting: timeliness of initial underwriting
decisions.
Category: Customer service;
Performance measure: Underwriting: timeliness of reconsideration
decisions.
Category: Enrollment experience;
Performance measure: Actual enrollment compared with enrollment goals
set by OPM and Partners.
Category: Responsiveness to the Office of Personnel Management (OPM);
Performance measure: General working relationship with OPM.
Category: Responsiveness to the Office of Personnel Management (OPM);
Performance measure: Monitoring and reporting on industry trends to
OPM.
Category: Responsiveness to the Office of Personnel Management (OPM);
Performance measure: Timeliness of submitting plans that address
deficiencies reported by OPM.
Category: Responsiveness to the Office of Personnel Management (OPM);
Performance measure: Timeliness of reporting significant events to
OPM[B].
Source: OPM.
[A] Individuals may allow the federal program to deduct money from
their bank account to pay premiums through automatic bank withdrawal.
Reversals of these withdrawals may occur as a result of insufficient
funds.
[B] Significant events are those that may be expected to have a
material effect upon Partners' ability to meet its contractual
obligations to OPM. Such events may include the disposal of 25 percent
or more of Partners' assets within a 6-month period, the termination of
a contract or subcontract that may have an effect on Partners' ability
to meet its contractual obligations, or the discovery of fraud related
to the federal program.
[End of table]
Table 4: Federal Long Term Care Insurance Program's Long-Term
Performance Measures, Assessed Every 3 Years:
Category: Claims experience;
Performance measure: Claims experience compared with expectations, as
set by Partners in its contract with OPM, adjusted to reflect the
demographic characteristics of actual enrollees.
Category: Return on investment;
Performance measure: Investment performance compared with contractual
benchmark.
Source: OPM.
[End of table]
[End of section]
Appendix II: Comments from the Office of Personnel Management:
United States Office Of Personnel Management:
Washington, DC 20415:
The Director:
December 15, 2006:
Mr. John E. Dicken:
Director, Health Care:
Government Accountability Office:
Washington, DC 20548:
Dear Mr. Dicken:
This is in response to your request for review of the draft report
entitled Long-Term Care Insurance: Federal Program Has a Unique Profit
Structure and Faced a Significant Marketing Challenge (GAO-07-202).
The report discusses the marketing efforts by Metropolitan Life and
John Hancock, the carriers that created Long Term Care Partners LLC,
(Partners) which administers the Federal Long Term Care Insurance
Program (FLTCIP); the claims experience for the program; and the profit
structure negotiated with the contractor.
We agree with your report that the marketing effort is more challenging
for Partners than other insurers. This begins with the fact that the
individual market, which is the FLTCIP's true competition, employs
insurance agents and brokers while group plans, including FLTCIP, do
not. Compounding the situation is the fact that most employer groups
can provide employee home addresses. Since home addresses for federal
employees are generally not available, marketing efforts were
constrained during and after the first Open Season. And, importantly,
this will continue to be a constraint into the future.
As stated in this report and the earlier GAO report, Long-Term Care
Insurance: Federal Program Compared Favorably with Other Products and
Analysis of Claims Trend Could Inform Future Decisions (GAO-06-401),
claims experience is an important variable in the financial health of
any long term care insurance program. Because FLTCIP enrollees are
subject to initial underwriting, their claims rates are expected to
increase over time. To date, the ratio of actual to expected claims
experience has narrowed with each successive year of policy duration.
We will continue to closely monitor the experience of the program to be
as informed as possible about this aspect of the program when we move
into the next round of contract negotiations. But it is difficult to
predict with any certainty the future claims patterns for this maturing
group based on the first few years of program experience.
On the profit structure, as noted in the report, we do have a complex
formula which was developed as we were implementing a new group
insurance program where the costs would be borne by enrollees and where
there were no reserves at start-up. In fact, we believe that the
portion of the profit formula that emphasizes contractor performance
has been an excellent motivator for Long Term Care Partners to provide
exemplary service to our group. However, now that we have more
operating experience with this Program, we intend to reexamine the
formula when we either renegotiate or rebid the contract to make sure
that it continues to serve the best interests of enrollees and the
Government.
We also have some technical comments for the body of the report, which
we will send by email. If you have any questions on our reply, please
contact John Salamone in my office (john.salamone@opm.gov or 202-606-
1000).
Sincerely,
Signed by:
Linda M. Springer:
Director:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
John E. Dicken, (202) 512-7119 or dickenj@gao.gov:
Acknowledgments:
In addition to the contact named above, Christine Brudevold, Assistant
Director; Patricia Roy; Timothy Walker; and Rasanjali Wickrema made key
contributions to this report.
[End of section]
Related GAO Products:
Long-Term Care Insurance: Federal Program Compared Favorably with Other
Products, and Analysis of Claims Trend Could Inform Future Decisions.
GAO-06-401. Washington, D.C.: March 31, 2006.
Overview of Long-Term Care Partnership Program. GAO-05-1021R.
Washington, D.C.: September 9, 2005.
Long-Term Care Financing: Growing Demand and Cost of Services Are
Straining Federal and State Budgets. GAO-05-564T. Washington, D.C.:
April 27, 2005.
FOOTNOTES
[1] Long-term care refers to a range of support services provided to
people who, because of illness or disability, generally are unable to
perform activities of daily living for an extended period. Such
activities include eating, bathing, dressing, using the toilet, getting
in and out of bed, and getting around the house. Some people may also
need help in performing instrumental activities of daily living, which
include preparing meals, shopping for groceries, and getting around
outside.
[2] Pub. L. No. 106-265, 114 Stat. 762, 764 (2000).
[3] Senate Committee on Governmental Affairs, S. Rep. No. 106-344, at
18 (2000).
[4] House Committee on Government Reform, H.R. Rep. No. 106-610, at 8
(2000).
[5] From March 25, 2002, through September 30, 2006, the federal
program enrolled 231,664 people. This number includes past enrollees as
well as those enrolled as of September 30, 2006.
[6] Pub. L. No. 106-265, 114 Stat. 768. The group market includes plans
offered by employers to employees and plans offered by other groups,
such as professional organizations. The individual market includes
plans sold by insurance carriers to individuals, usually through agents
or brokers.
[7] See GAO, Long-Term Care Insurance: Federal Program Compared
Favorably with Other Products, and Analysis of Claims Trend Could
Inform Future Decisions, GAO-06-401 (Washington, D.C.: Mar. 31, 2006).
See also Related GAO Products at the end of this report.
[8] We selected the four carriers based on their total number of
policies and total annualized premiums--the sum of enrollee premiums
adjusted to reflect a full year of coverage--in effect in the
individual market as of December 31, 2005.
[9] Throughout this report, we use the term carrier officials to refer
to officials of these four insurance carriers and not to officials of
Partners.
[10] In addition to offering long-term care insurance benefits to their
employees, retirees, and other qualified relatives, such as spouses of
employees and retirees, all four states offered benefits to other
groups of public employees, such as public university employees.
[11] Metropolitan Life Insurance Company, The MetLife Market Survey of
Nursing Home & Home Care Costs (Westport, Conn.: September 2005).
[12] U.S. Department of Health and Human Services, Centers for Disease
Control and Prevention, National Center for Health Statistics, The
National Nursing Home Survey: 1999 Summary (Hyattsville, Md.: June
2002).
[13] America's Health Insurance Plans, Research Findings, Long-Term
Care Insurance in 2002 (Washington, D.C.: June 2004).
[14] Underwriting is the process of reviewing an applicant's responses
to questions, including medical and health-related questions, in an
application for the carrier to determine if the applicant is insurable
and the premium rate is appropriate, given the level of risk the
applicant presents for the insurance coverage.
[15] The term morbidity refers to the incidence of illness, injury, or
disability.
[16] For the purposes of this report, a claim refers to the series of
payments made to reimburse the provider or the policyholder for the
costs of an episode of care.
[17] State insurance regulators established NAIC to help promote
effective insurance regulation, to encourage uniformity in approaches
to regulation, and to help coordinate states' activities. Among other
activities, NAIC develops model laws and regulations to assist states
in formulating their policies to regulate insurance.
[18] America's Health Insurance Plans, Research Findings.
[19] Jonathan Shreve and Ksenia Whittal, "Group LTC Continues Its Solid
Advance," National Underwriter Life & Health, vol. 110, no. 37 (2006),
p. 20.
[20] U.S. Department of Labor, Bureau of Labor Statistics, National
Compensation Survey: Employee Benefits in Private Industry in the
United States, March 2006 (Washington, D.C.: August 2006).
[21] In contrast, individuals who purchase health insurance plans in
the group market typically do not pay the full premium because
employers often pay a share of the premium.
[22] Alternatively, employers may self-fund their long-term care
insurance plans.
[23] America's Health Insurance Plans, Research Findings.
[24] Qualified relatives include current spouses of employees and
retirees; adult children at least 18 years old--including natural,
adopted, and stepchildren, but not foster children--of living employees
and retirees; and parents, parents-in-law, and stepparents of living
employees, but not of retirees. Selected military reservists; employees
and retirees of the Tennessee Valley Authority; District of Columbia
government employees and retirees first employed before October 1,
1987; and employees and retirees of the District of Columbia courts are
also eligible to apply for coverage.
[25] During the early enrollment period, enrollees' choices for some of
the benefit options, such as the benefit period and type of coverage,
were limited, whereas enrollees were able to select from all of the
program's benefit options during the open enrollment period. During
both of these 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. For all
other applicants, the program used a full underwriting application. The
federal program's abbreviated underwriting application consists of
fewer health-related questions than the program's full underwriting
application.
[26] Since the open enrollment period, the program has used an
abbreviated underwriting application to determine eligibility for newly
hired federal and Postal Service employees and newly active members of
the uniformed services and their spouses who apply for coverage within
60 days of employment. For all other applicants, the program has used a
full underwriting application.
[27] GAO-06-401.
[28] Pub. L. No. 106-265, 114 Stat. 765-766.
[29] The profit payments are intended as profits, but do not ensure
that Partners realizes a profit because the payments are not linked to
Partners' actual costs for the program. In addition to profit payments,
the federal program pays Partners for the program's expenses, such as
those for marketing, underwriting, and claims administration.
[30] The terms of contracts under the federal program relating to
coverage or benefits, including those pertaining to carrier profit,
will supersede and preempt applicable state regulations. Pub. L. No.
106-265, 114 Stat. 768, 5 U.S.C. § 9005 (2005); 5 C.F.R. § 875.107
(2006).
[31] From the beginning of the program through fiscal year 2005, the
federal program subjected the same portion of profit payments to OPM's
annual evaluation of Partners' performance and rated Partners'
performance in 10 or 11 categories as exceeding, meeting, or not
meeting expectations. In fiscal year 2005, OPM and Partners
renegotiated the performance evaluation agreement at OPM's request to
make it more challenging. The new performance evaluation agreement,
beginning in fiscal year 2006, allowed ratings of only meeting or not
meeting expectations in 21 measures across 4 categories. Partners
officials told us that the new performance evaluation agreement was
more challenging for them to meet than the prior agreement.
[32] The carrier officials we spoke with explained that the carriers
they represent had never had to relinquish profits as a result of a
poor performance rating.
[33] Employers may impose nominal fines (for example, $25 to $50 per
violation) on carriers who do not meet performance guarantees.
[34] Carriers determine the amount of capital to be held as risk-based
capital based on their assessment of the risks they assume according to
standards issued by the NAIC.
[35] In the individual market, carrier officials we spoke with said
that they perform limited direct marketing to potential enrollees.
Instead, carriers rely on individual agents to identify prospective
applicants and sell a plan, at times in a one-on-one setting.
[36] The Privacy Act of 1974, outside a framework of specified
exceptions, prohibits an agency from disclosing a record to any person
or another agency, except at the request of, or with the prior consent
of, the individual to whom that record pertains. See 5 U.S.C. § 552a
(2000).
[37] In total, the federal program mailed information to about 6.6
million eligible individuals during the open enrollment period,
according to Partners' data. These individuals represented about 35
percent of the total estimated 18.6 million individuals eligible for
coverage as of October 15, 2001.
[38] Partners officials told us that they had obtained addresses for
about 22 percent of all active federal civilian employees as of October
2006. This percentage includes current enrollees as well as other
eligible individuals.
[39] Partners officials also noted that increased security measures
taken in the fall of 2001 in response to the terrorist attacks of
September 11, 2001, and the anthrax scare temporarily reduced access to
federal employees for marketing purposes during the program's open
enrollment period.
[40] Partners is able to directly e-mail information to those who
provided their e-mail address in response to a marketing solicitation.
[41] GAO-06-401.
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site.
To have GAO e-mail you a list of newly posted products every afternoon,
go to www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548:
Public Affairs:
Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548:
