Long-Term Care Insurance
Federal Program Compared Favorably with Other Products, and Analysis of Claims Trend Could Inform Future Decisions Gao ID: GAO-06-401 March 31, 2006The Long-Term Care Security Act required the federal government to offer long-term care insurance to its employees, their families, and others. The act also required GAO to conduct a study of the competitiveness of the Federal Long Term Care Insurance Program, which began in 2002, compared with individual and group products generally available in the private market. GAO compared the federal program's benefits, premiums, enrollment rates, and enrollee characteristics with other products over a 3-year period. GAO also compared the federal program's early claims experience with initial expectations.
Program offered benefits similar to those of other long-term care insurance products GAO reviewed. Most enrollees in the federal program and in individual and group products chose similar benefit amounts, elimination or waiting periods, and benefit periods. The federal program usually offered lower premiums than individual products for comparable benefits. Overall, annual premiums for the federal program averaged across three benefit plan designs were 46 percent lower for single people and 19 percent lower for married couples who were both the same age in comparison with similar individual products sold on March 31, 2005. The participation rate in the Federal Long Term Care Insurance Program for active federal civilian employees--5 percent--was comparable to the industry average in the group market, although enrollment in the federal program was lower than initially expected. The average age of all enrollees in the federal program was younger than the average age of enrollees in individual products and older than the average age of enrollees in group products. The Federal Long Term Care Insurance Program paid 39 percent of what it initially projected to pay for claims per enrollee. The number of claims paid per enrollee was also lower than initial projections. While the early claims experience was below expectations, it is still too early to determine whether this trend will continue or whether adjustments to the projected claims experience or premiums are indicated, because most claims are not expected to be submitted for many years.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-401, Long-Term Care Insurance: Federal Program Compared Favorably with Other Products, and Analysis of Claims Trend Could Inform Future Decisions
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
March 2006:
Long-Term Care Insurance:
Federal Program Compared Favorably with Other Products, and Analysis of
Claims Trend Could Inform Future Decisions:
GAO-06-401:
GAO Highlights:
Highlights of GAO-06-401, a report to congressional committees:
Why GAO Did This Study:
The Long-Term Care Security Act required the federal government to
offer long-term care insurance to its employees, their families, and
others. The act also required GAO to conduct a study of the
competitiveness of the Federal Long Term Care Insurance Program, which
began in 2002, compared with individual and group products generally
available in the private market. GAO compared the federal program‘s
benefits, premiums, enrollment rates, and enrollee characteristics with
other products over a 3-year period. GAO also compared the federal
program‘s early claims experience with initial expectations.
What GAO Found:
During its first 3 years, the Federal Long Term Care Insurance Program
offered benefits similar to those of other long-term care insurance
products GAO reviewed. Most enrollees in the federal program and in
individual and group products chose similar benefit amounts,
elimination or waiting periods, and benefit periods. The federal
program usually offered lower premiums than individual products for
comparable benefits. Overall, annual premiums for the federal program
averaged across three benefit plan designs were 46 percent lower for
single people and 19 percent lower for married couples who were both
the same age in comparison with similar individual products sold on
March 31, 2005.
The participation rate in the Federal Long Term Care Insurance Program
for active federal civilian employees”5 percent”was comparable to the
industry average in the group market, although enrollment in the
federal program was lower than initially expected. The average age of
all enrollees in the federal program was younger than the average age
of enrollees in individual products and older than the average age of
enrollees in group products.
The Federal Long Term Care Insurance Program paid 39 percent of what it
initially projected to pay for claims per enrollee. The number of
claims paid per enrollee was also lower than initial projections. While
the early claims experience was below expectations, it is still too
early to determine whether this trend will continue or whether
adjustments to the projected claims experience or premiums are
indicated, because most claims are not expected to be submitted for
many years.
Federal Long Term Care Insurance Program Actual Claim Payments in the
First 3 Years Compared with Expected Claim Payments over 35 Years:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that the Director of the Office of Personnel Management
(OPM) (1) analyze the reasons for lower-than-expected early claims
experience and, as appropriate, use the results to modify assumptions
about the expected claims experience and (2) analyze the projections
for the amount of premiums to be collected to pay for claims. OPM
should report both analyses to Congress prior to the next contract
negotiations for the administration of the federal program.
In commenting on a draft of this report, OPM generally agreed with the
report‘s findings and said it would provide updated information on
claims experience and premium setting to Congress.
www.gao.gov/cgi-bin/getrpt?GAO-06-401.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John Dicken at (202) 512-
7119 or dickenj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Federal Long Term Care Insurance Program Offered Benefits Comparable to
Other Products, Usually at Lower Premiums:
Federal Program Participation Was Comparable to Other Group Products,
while Federal Enrollees Were Younger Than Enrollees in Individual
Products and Older Than Enrollees in Group Products:
Early Claims Experience in Federal Long Term Care Insurance Program Was
Lower Than Expected, but It Is Too Soon to Determine Whether
Adjustments Are Needed:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Data Request:
Long-term Care Insurance Interviews:
Appendix II: Federal Long Term Care Insurance Program Benefits:
Prepackaged Benefit Plans in the Federal Long Term Care Insurance
Program:
Customized Benefits in the Federal Program:
Other Benefits in the Federal Program:
Enrollment in Federal Program Benefits:
Appendix III: Annual Premiums for Three Benefit Packages Offered in the
Federal Program and at Five Carriers:
Appendix IV: Comments from the Office of Personnel Management:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Benefit Options in the Federal Long Term Care Insurance
Program and in Individual and Group Products Sold from July 1, 2002,
through March 31, 2005:
Table 2: Benefit Options Chosen by Federal Long Term Care Insurance
Program Enrollees and by Individual and Group Product Enrollees for New
Policies Sold from July 1, 2002, through March 31, 2005:
Table 3: Estimated Eligible Population and Actual Enrollees in the
Federal Long Term Care Insurance Program, by Category:
Table 4: Enrollee Characteristics of the Federal Long Term Care
Insurance Program and of Individual and Group Products, July 1, 2002,
through March 31, 2005:
Table 5: Actual Claims per Enrollee as a Percentage of Expected Claims
per Enrollee in the First 3 Years for the Federal Long Term Care
Insurance Program:
Table 6: Prepackaged Plans in the Federal Long Term Care Insurance
Program:
Table 7: Benefit Options in the Federal Long Term Care Insurance
Program:
Table 8: Federal Long Term Care Insurance Program Enrollment in
Prepackaged Benefit Plans, Customized Benefits, and Alternative
Insurance Plan from March 25, 2002, through March 31, 2005:
Table 9: Federal Long Term Care Insurance Program Enrollment in
Prepackaged Benefit Plans from March 25, 2002, through March 31, 2005:
Table 10: Annual Premiums for Single People and Married Couples Who
Were Both the Same Age for the Federal Long Term Care Insurance Program
and for Five Carriers in the Individual Insurance Market for Package 1
Sold on March 31, 2005:
Table 11: Annual Premiums for Single People and Married Couples Who
Were Both the Same Age for the Federal Long Term Care Insurance Program
and for Five Carriers in the Individual Insurance Market for Package 2
Sold on March 31, 2005:
Table 12: Annual Premiums for Single People and Married Couples Who
Were Both the Same Age for the Federal Long Term Care Insurance Program
and for Five Carriers in the Individual Insurance Market for Package 3
Sold on March 31, 2005:
Figures:
Figure 1: Average Annual Federal Premiums for Single People and for
Married Couples Who Were Both the Same Age Compared with Averages for
Individual Products, for Three Benefit Packages and Overall, Sold on
March 31, 2005:
Figure 2: Annual Premiums by Age for Single People and Married Couples
Who Were Both the Same Age for the Federal Long Term Care Insurance
Program and for Five Carriers Selling Individual Products for the Most
Popular Federal Comprehensive Benefit Package Sold on March 31, 2005:
Figure 3: Actual Claim Payments per 10,000 Enrollees in the First 3
Years Compared with Expected Claim Payments per 10,000 Enrollees over
35 Years for the Federal Long Term Care Insurance Program:
Figure 4: Actual Number of Paid Claims per 10,000 Enrollees in the
First 3 Years Compared with Expected Number of Paid Claims per 10,000
Enrollees over 35 Years for the Federal Long Term Care Insurance
Program:
Abbreviations:
ADL: activity of daily living:
CalPERS: California Public Employees' Retirement System:
HIPAA: Health Insurance Portability and Accountability Act:
NAIC: National Association of Insurance Commissioners:
OPM: Office of Personnel Management:
Partners: Long Term Care Partners, LLC:
United States Government Accountability Office:
Washington, DC 20548:
March 31, 2006:
Congressional Committees:
In 2004, about $193 billion was spent nationwide on nursing home and
other long-term care services. Private insurance covered 7 percent of
this amount, about $14 billion, while most long-term care services were
financed by government programs, primarily Medicaid. The elderly--
people 65 years old and older--consume about two-thirds of all long-
term care services. As the elderly population begins to grow with the
aging of the baby boomers, the increasing demand for long-term care
services will continue to strain federal and state resources. Some
policymakers propose that increased use of long-term care insurance,
particularly by the baby boom generation, may be a means of reducing
some of the future financial burden on public programs. In September
2000, Congress passed the Long-Term Care Security Act. The act required
that the federal government offer long-term care insurance to its
employees, their families, and others.[Footnote 1] Congressional
committee reports accompanying this act indicated that a long-term care
insurance program could encourage more people to obtain long-term care
insurance, serve as a model for other employer-sponsored programs
across the nation,[Footnote 2] and possibly shift some of the future
burden to private payment sources.[Footnote 3]
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--contracted with Long Term Care Partners, LLC (referred to as
Partners) for 7 years to provide long-term care insurance for active
federal civilian employees, members of the uniformed services, and
Postal Service employees; federal, military, and Postal Service
retirees; qualified relatives; and certain others. Partners is a joint
venture formed by two large carriers selling long-term care insurance
products in the private market, John Hancock Life Insurance Company and
Metropolitan Life Insurance Company. The Federal Long Term Care
Insurance Program conducted limited early enrollment from March 25,
2002, through May 15, 2002, and open enrollment from July 1, 2002,
through December 31, 2002. From March 25, 2002, through March 31, 2005,
218,890 employees, retirees, relatives, and others were enrolled in the
federal program, making it the largest long-term care insurance program
in the nation.
The Long-Term Care Security Act also required that we conduct a study
of the competitiveness of the federal program with individual and group
products generally available in the private insurance market.[Footnote
4] As agreed to by the committees of jurisdiction, this report
addresses the following questions:
* How do benefits and premiums for the Federal Long Term Care Insurance
Program compare with those of other products available in the long-term
care insurance market?
* How do enrollment rates and the characteristics of enrollees in the
Federal Long Term Care Insurance Program compare with those of other
products available in the long-term care insurance market?
* How does the early claims experience of the Federal Long Term Care
Insurance Program compare with initial expectations?
To obtain data on benefits, premiums, enrollment, and enrollee
characteristics, we surveyed Partners, the California Public Employees'
Retirement System (CalPERS),[Footnote 5] and five of the largest long-
term care insurance carriers.[Footnote 6] The five insurance carriers
were AEGON USA,[Footnote 7] Bankers Life and Casualty Company, Genworth
Financial, John Hancock Life Insurance Company, and Metropolitan Life
Insurance Company. All five carriers sold products in the individual
market, and two of the five carriers--John Hancock Life Insurance
Company and Metropolitan Life Insurance Company--were also among the
five largest carriers that sold products in the group market. We
requested data from Partners on new policies sold during two time
periods: (1) from March 25, 2002, through February 7, 2003, to
correspond to the federal early enrollment and open enrollment
periods[Footnote 8] and (2) from March 25, 2002, though March 31, 2005,
to capture the full experience of the program's first 3 years. We asked
CalPERS and the five carriers to provide data for policies sold from
July 1, 2002, through March 31, 2005.[Footnote 9] We then compared the
benefits offered, enrollment, and enrollee characteristics of the
federal program, CalPERS, and the five carriers. To compare premiums,
we asked CalPERS and the carriers to price the benefit packages offered
in the federal program. In addition, we obtained data from Partners on
the expected and early claims experience of the federal program to
provide an early indicator of financial performance. Because of the
proprietary nature of the data provided by the five carriers, we
aggregated data across the individual and group carriers for reporting
purposes. While we aggregated the CalPERS data with the private market
group data in all cases, we also separately reported publicly available
CalPERS data in two places because its experience in managing benefits
for large numbers of public employees, retirees, and their families is
most comparable to the federal program.
To supplement the data we collected, we interviewed officials at OPM,
Partners, CalPERS and the organization that administers its program,
the five carriers, and five trade associations representing groups such
as insurers and actuaries. We also interviewed three experts on long-
term care insurance. In addition, we reviewed several studies,
including recent studies addressing (1) the long-term care insurance
market, (2) buyers of a long-term care insurance product and those who
considered buying coverage but decided not to buy, and (3) claims
experience. We assessed the reliability of the data we obtained from
Partners, CalPERS, and the five carriers and determined that the data
were sufficiently reliable for the purposes of our study. (App. I
provides more-detailed information on our methodology.) We performed
our work from March 2005 through March 2006 in accordance with
generally accepted government auditing standards.
Results in Brief:
Benefits offered during the first 3 years of the Federal Long Term Care
Insurance Program and premiums associated with these benefits generally
compared favorably with those offered by other long-term care insurance
products sold during the same period. Compared to individual and group
products, the federal program offered similar benefits--long-term care
services provided in facilities and in the home with coverage for
specified dollar amounts and periods to begin after a predetermined
waiting period. However, the federal program offered fewer options
within these benefits, especially compared with individual products.
Most federal program enrollees and enrollees in individual and group
products chose benefits in similar ranges. Annual premiums in the
federal program averaged across the three most commonly purchased
federal benefit packages were 46 percent lower for single people and 19
percent lower for married couples who were both the same age than the
premiums for similar individual products. Although the premium
estimates reported for individual products included discounts for
married couples, they did not include discounts for enrollees who were
considered to be in good health. Annual premiums for each of the three
different federal benefit packages were always lower for single
enrollees compared with premiums for the individual products we
reviewed, while premiums were lower in the federal program for married
couples who were both the same age in most, but not all, cases. In
contrast, annual federal premiums averaged across the three benefit
packages were 3 percent higher than those at CalPERS, the one group
product for which we had premium data.
Five percent of eligible active federal civilian employees enrolled in
the federal program, which is similar to the enrollment rates of other
groups. Yet overall enrollment was 36 percent lower than the initial
expectations established by Partners, in part because active military
members and Postal Service employees enrolled in low numbers. During
the 3-year period covered by our study, the average age of enrollees in
the federal program at the time of enrollment was 56 years old, which
is younger than the average age of 60 for individual products we
reviewed and older than the average age of 52 for group products we
reviewed. As was true for the individual and group products, more women
than men purchased coverage in the federal program during the 3-year
period.
The early claims experience of the Federal Long Term Care Insurance
Program was below the expectations established by Partners. The federal
program paid 39 percent of what it expected to pay for claims per
enrollee during the first 3 years of the program. The number of paid
claims per enrollee was also below expected levels. While there was a
discrepancy between the actual and expected claims experience during
these early years, it is not known whether the discrepancy indicates
the future trend or is a brief departure from the expected claims
experience over the long term. In general, the expected claims
experience in the first years of a long-term care insurance program is
very low relative to the longer term because the majority of claims are
unlikely to be submitted for many years. Furthermore, the claims
experience is only one of many factors affecting premiums. While about
half of the total claims payment amount was spent on facility care
during the first 3 years, this type of care represented less than a
quarter of the total number of claims. The most common medical
conditions prompting claims in the early years of a policy for the
federal program were cancer, stroke, and injuries and poisoning. Across
the individual and group products we reviewed, the most common medical
conditions prompting claims were also cancer, stroke, and injuries, as
well as cognitive problems, musculoskeletal disorders, cardiac disease,
and arthritis.
We recommend that the Director of OPM take the following two actions.
First, the Director should analyze the reasons for the lower-than-
expected early claims experience and, as appropriate, use the results
of this analysis to modify assumptions about the expected claims
experience. Second, the Director should analyze the projections for the
amount of premiums to be collected to pay for claims, including an
analysis of the assumptions made for the projections that are related
to future claims experience and other factors affecting premiums. OPM
should report both analyses to Congress prior to the next contract
negotiations.
In its written comments on a draft of this report, OPM generally agreed
with the report's findings. In response to our recommendations, OPM
indicated that it intends to provide updated information on claims
experience and premium setting in its written recommendation to
Congress before entering into a new contract for administration of the
Federal Long Term Care Insurance Program, in accordance with the Long-
Term Care Security Act. OPM stated that it believes an additional
report on the issues of claims experience and projections for the
amount of premiums to be collected is not needed. OPM also indicated in
its comments that the expectations about enrollment and claims
experience were established by Partners prior to the start of the
federal program, rather than established by the marketplace, and we
revised the report accordingly.
Background:
Long-term care services assist people who need help in performing
activities of daily living (ADLs), such as eating, bathing, and
dressing.[Footnote 10] As some of these services can be expensive,
especially services provided in a nursing home, long-term care
insurance helps people pay for the cost of care. However, relatively
few people have obtained long-term care insurance through products sold
in the individual and group markets. To help federal employees,
retirees, and others obtain coverage, the federal government began
offering the opportunity to apply for long-term care insurance in 2002
through an employer-sponsored group program in which enrollees pay the
entire cost of their premium.
Long-term Care:
Long-term care refers to a range of support services provided to people
who, because of illness or disability, generally are unable to perform
ADLs for an extended period. Long-term care services include medical,
social, and personal services. Care may be provided in various
settings, including facilities such as nursing homes or assisted living
facilities, a person's own home, or the community. Both paid and unpaid
caregivers may provide long-term care services. As a person ages, his
or her ability to perform basic physical functions typically declines,
increasing the likelihood that he or she will need long-term care
services.
Long-term Care Insurance:
People can purchase long-term care insurance directly from carriers
that sell products in the individual market or can enroll in products
offered by employer-sponsored and other groups.[Footnote 11] Long-term
care insurance policies sold in the individual and group markets cover
costs associated with long-term care. For a specified premium amount
that is designed--but not guaranteed--to remain level over time, the
carrier agrees to provide covered benefits under an insurance contract.
First sold in the 1970s, long-term care insurance has evolved from
initially offering coverage for nursing home care only to offering
comprehensive coverage. Comprehensive coverage pays for care provided
in facilities such as nursing homes and other settings such as a
person's home. Insurance is generally purchased for defined daily
benefit amounts and benefit periods, with elimination, or waiting,
periods. For example, long-term care insurance might provide coverage
at $100 per day for care provided in a nursing home or in other
settings for 3 years after a waiting period of 90 days. Because long-
term care insurance claims might not be filed for many years after the
product is purchased, the insured can purchase protection against
inflation, which can increase the daily benefit amount covered. In
addition, long-term care insurance products can (1) cover home care at
varying percentages of the daily benefit amount; (2) offer people a
range of other types of options, such as policies that return a portion
of the premium payments if the person dies; and (3) include selected
benefits, such as international coverage or care-coordination services
that, among other things, provide information about long-term care
services to the enrollee and monitor the receipt of services.
Many factors affect long-term care insurance premiums. Carriers charge
higher premiums for richer benefits; for example, higher daily benefit
amounts, longer benefit periods, and higher levels of inflation
protection will increase the cost. Premiums are based on the age of the
applicant, with premiums increasing more rapidly as age increases.
Premiums are also based on the health status of the applicant. Most
carriers selling coverage in the individual market assign applicants to
one of three general rating categories based on health status when
underwriting the coverage--preferred, standard, or substandard--with
associated discounts and surcharges.[Footnote 12] In addition, carriers
in the individual market usually offer discounts to married couples
when both spouses purchase coverage. Products sold in the group market
may be sold on a guaranteed issue basis during an open enrollment
period, with no or limited underwriting for employees actively at work
who enroll through an employer-sponsored program, and the products
generally do not provide discounts for spouses. Carriers cannot
increase a particular person's premiums but can increase premiums for a
group of people who bought the same type of policy when the carrier can
demonstrate that anticipated costs will exceed premium revenue. Carrier
pricing assumptions, including projected interest rates, morbidity or
illness rates, and lapse rates--the number of people expected to drop
their policies over time--all affect premium rates and rate setting.
Carriers estimate the total amount of premiums to be collected for long-
term care insurance policies sold as well as projected claims and
administrative costs for these policies using an anticipated lifetime
loss ratio. This ratio describes what portion of total premiums is
expected to be paid for claims for the reimbursement of the costs of
long-term care over the life of a set of policies.[Footnote 13] The
portion of premiums not spent on claims is used to pay for
administrative costs, such as marketing, agent commissions, claims
handling, overhead, and taxes, and for profits. In the past, National
Association of Insurance Commissioners (NAIC) model regulations for
long-term care insurance stated that carriers should spend a minimum of
60 percent of collected premiums on claims.[Footnote 14] However, in
model regulations released in August 2000, NAIC recommended that
carriers price their products high enough initially to prevent the need
for future rate increases rather than target a minimum percentage to be
spent on claims. So far, according to NAIC, a majority of states have
adopted long-term care insurance regulations based on the 2000 NAIC
model, while some states still require minimum loss ratios. Many large
carriers set premium rates on a national rather than regional basis.
Carriers also price to cover a profit margin and administrative costs
as well as to meet minimum loss ratios.
Few claims are expected to be submitted during the early years of a
long-term care insurance policy. As a result of underwriting, it is
unlikely that many people could meet the eligibility requirements to
buy the policy yet submit a claim within 3 years. Industry experts
suggested that the effects of underwriting begin to decline and the
rate of claim submissions starts to increase after about 3 to 7 years.
The rate of increase in claim submissions depends on the average age of
the enrollees, with most long-term care insurance claims submitted when
people reach their mid-70s to mid-80s. Industry experts also noted that
the rate of claim submissions in the federal program is expected to
peak 25 years or more after the program began. Because the average age
of enrollees in the individual market is higher than the average age of
enrollees in the federal program, the rate of claim submissions is
likely to peak earlier in the individual market, after 15 to 25 years.
The rate of claim submissions is likely to peak after 30 to 40 years in
the group market because of the younger average age of its enrollees.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
specified conditions under which long-term care insurance benefits and
premiums would receive favorable federal income tax treatment and
provided specific protections to people who purchased tax-qualified
plans.[Footnote 15] Long-term care insurance plans must meet certain
requirements contained in HIPAA to be considered tax-
qualified.[Footnote 16] For example, according to HIPAA, a plan must
begin coverage when a person is certified to need substantial
assistance with at least two of the six ADLs and a disability is
expected to last 90 or more days, or to need regular supervision
because of a severe cognitive impairment. In addition, federally tax-
qualified plans must comply with the NAIC long-term care insurance
model act and regulations in effect as of January 1993, as incorporated
into HIPAA.[Footnote 17] These provide certain consumer protections,
such as preventing a carrier from (1) not renewing a long-term care
insurance policy because of age or deteriorating health and (2)
increasing the premium of an existing policy because of a person's age
or claims filed. Another consumer protection was that carriers had to
offer inflation protection as specified in the NAIC model regulations.
Each state establishes its own long-term care insurance laws and
regulations that cover areas such as benefits, premium setting, and
consumer protections.[Footnote 18] As a result, product requirements in
the individual and group markets can vary among the states. According
to NAIC, 41 states based their long-term care insurance regulations on
the NAIC model, 7 based their regulations partially on the model, and 3
did not follow the model.
Long-term Care Insurance Marketplace:
The number of long-term care insurance policies sold has been small--
about 9 million as of 2002, the most recent year for which data were
available.[Footnote 19] About 80 percent of these policies were sold
through the individual insurance market and the remaining 20 percent
were sold through the group market. In March 2005, 13 percent of full-
time workers in private industry had access to employer-sponsored long-
term care insurance benefits; within private industry, 21 percent of
workers in large establishments with 100 or more workers had access to
this benefit.[Footnote 20]
People purchase policies from carriers in the individual market,
usually through agents or brokers, and choose their own benefits from
among a range of options the carriers offer. Groups--for example,
employers, associations, or unions--purchase policies from carriers in
the group market. Groups usually design the benefits, and enrollees are
often given some benefit options from which to choose, for example,
differing daily benefit amounts and benefit periods. However, benefit
choices offered in employer-sponsored group products tend to be more
limited than those that are available in the individual insurance
market. Some groups offer benefit packages in which the benefit options
are predetermined. In contrast to health insurance, where employers
often contribute a share of the premium costs, enrollees in group long-
term care insurance coverage usually pay the entire premium.
A recent downturn in the long-term care insurance industry has led to
more conservative assumptions when setting premiums and consolidation
among carriers. The long-term care insurance industry experienced 18
percent annual growth in the number of policies sold from 1987 through
2002, but the industry has experienced a downturn in more-recent years.
Beginning in 2003, many carriers in the individual market raised
premiums, left the marketplace, or consolidated to form larger
companies. This activity occurred in response to several factors
including high administrative expenses relative to premiums; lower-than-
expected lapse rates, which increased the number of people likely to
submit claims; low interest rates, which reduced the expected return on
investments; and new government regulations limiting direct marketing
by telephone. Many carriers revised the assumptions used in setting
their premium rates, taking a more conservative approach that led to
higher premiums, while state regulators increased their oversight of
the industry. Currently, several large carriers dominate the coverage
sold in the individual and group markets as a result of mergers and
acquisitions, and sales in the group market are growing faster than in
the individual market.
Federal Long Term Care Insurance Program:
The federal government began offering group long-term care insurance
benefits in 2002 for federal employees, retirees, and certain other
people. When the Federal Long Term Care Insurance Program began,
eligible people could apply for benefits during two specified time
periods: (1) an early enrollment period for benefit options that were
somewhat limited[Footnote 21] that ran from March 25, 2002, through May
15, 2002, intended for people who were well-informed about long-term
care insurance and were eager to enroll in the federal program and (2)
an open enrollment period for all benefit options that ran from July 1,
2002, through December 31, 2002. Active and retired federal and Postal
Service employees, active and retired members of the uniformed
services, qualified relatives, and certain others are eligible to apply
for federal long-term care insurance benefits.[Footnote 22] Following
the open enrollment period, eligible people could apply at any time.
The federal program determines eligibility for long-term care insurance
through underwriting. During the early and open enrollment periods, the
program used an abbreviated underwriting application to determine
eligibility for active employees and active members of the uniformed
services and their spouses who applied. All other applicants, including
retirees and qualified relatives, used the full underwriting
application, which was similar to underwriting in the individual
insurance market. Since the conclusion of the open enrollment period,
newly hired federal and Postal Service employees and newly active
members of the uniformed services who apply for long-term care
insurance within 60 days of employment can do so using an abbreviated
application, as can their spouses.[Footnote 23] All other applicants
must use the full underwriting application.
The federal program offers four prepackaged plan designs, each with a
90-day elimination period, a choice of two types of inflation
protection--either automatic compound inflation protection or the
future purchase option[Footnote 24]--and the following benefit options:
* Package 1--$100 daily benefit amount for comprehensive coverage and 3-
year benefit period,
* Package 2--$150 daily benefit amount for comprehensive coverage and 5-
year benefit period,
* Package 3--$150 daily benefit amount for comprehensive coverage and
an unlimited benefit period, and:
* Package 4--$100 daily benefit amount for facilities-only coverage and
3-year benefit period.
If not choosing a prepackaged plan, an enrollee in the federal program
also has several options for customizing benefits. The federal program
was designed to comply with the NAIC model regulations and HIPAA tax-
qualification standards, which specify that certain benefit options be
offered. (App. II provides more information on federal long-term care
insurance benefits and enrollment in these benefits.)
The federal program provides reimbursement for costs of care when an
enrollee is unable to perform at least two ADLs for an expected period
of at least 90 days or needs substantial supervision because of a
severe cognitive impairment. Reimbursement is based on the benefits
chosen by the enrollee. The federal government does not contribute to
the cost of coverage, so an enrollee pays the entire premium for the
benefits chosen.
OPM, rather than the states, regulates the federal program, and
Partners administers the program in accordance with the requirements of
the contract between OPM and Partners. The contract--which was signed
on December 18, 2001, and extends for a period of 7 years--defines key
administrative requirements including who controls program assets and
how profits are determined. The contract requires that the parent
companies of Partners--John Hancock Life Insurance Company and
Metropolitan Life Insurance Company--must hold federal program assets
in accounts separate from all their other businesses. At the end of the
contract period, OPM may decide to enter into a new contract with
Partners. However, if OPM selects a different contractor at that time,
the financial assets of the federal program would be transferred to the
new contractor. The contract also specifies how Partners earn a profit
each year. The profit formula consists of two parts: (1) some of the
profit is capped at 6.5 percent of premiums collected in a year--nearly
half of this type of profit is subject to performance criteria while
the rest is guaranteed--and (2) some of the profit is based on the
performance of the total assets of the federal program being managed by
Partners to pay future claims--this type of profit consists of 0.3
percent of the total assets, called a "risk charge." Partners must pay
federal taxes on their total profit, but may charge other taxes to the
federal program. Partners also collects investment-management fees that
are less than 0.2 percent of total assets. No profit is allowed if the
premiums are not sufficient to cover claims and expenses. While OPM
expects premium rates to remain level over an enrollee's lifetime,
Partners may raise or lower premiums for groups of enrollees during the
contract period with OPM's agreement. Additionally, premium rates may
be changed at the time of a new contract.
Federal Long Term Care Insurance Program Offered Benefits Comparable to
Other Products, Usually at Lower Premiums:
The federal program offered benefits that were similar to those of
other long-term care insurance products we reviewed and usually offered
lower premiums for comparable benefits in individual products. While
federal program enrollees could choose from many options to customize
their benefits, a broader range of options was available in the other
products we reviewed, especially in the individual products. However,
despite the broader range of options available in the other products,
most enrollees in the federal program and in individual and group
products chose similar daily benefit amounts, elimination periods, and
benefit periods. A greater percentage of federal enrollees chose
automatic compound inflation protection compared with enrollees in
other products. Overall, annual premiums in the federal program
averaged across three benefit plan designs were lower for both single
people and married couples who were both the same age compared with
similar individual products sold on March 31, 2005.[Footnote 25]
Moreover, of total premiums projected to be collected over the life of
the coverage sold during the study period, the federal program expected
to pay a higher percentage in claim payments and a lower percentage in
administrative costs compared with individual and group products.
Federal Program Benefits Were Similar to Those in Individual and Group
Products:
Long-term care insurance benefit options were similar in the federal
program and in individual and group products we reviewed. While the
federal program offered over 500 possible benefit option combinations
in addition to the four prepackaged benefit plans, other products,
especially individual products, offered more possible benefit
combinations and more extensive customization in daily benefit amounts
and in elimination and benefit periods.[Footnote 26] Benefits offered
in the federal program and in the individual and group products we
reviewed were covered by consumer protections required for HIPAA tax-
qualified plans. These consumer protections included, among other
provisions, that enrollees be offered an option to protect their
benefits against inflation. However, some individual and group product
enrollees were also offered the opportunity to purchase policies that
did not meet requirements for HIPAA tax-qualified plans. In addition,
according to officials at OPM and Partners, the federal program offered
several unique benefits, including payment to family members providing
informal care, international coverage, and a process allowing third-
party review of denied claims. Table 1 summarizes the benefit options
in the federal program and in the individual and group products we
reviewed.
Table 1: Benefit Options in the Federal Long Term Care Insurance
Program and in Individual and Group Products Sold from July 1, 2002,
through March 31, 2005:
Benefit options: Coverage type;
Federal program[A]: Comprehensive or Facilities-only; Individual
products: Comprehensive, Facilities-only, or Home-care-only[B];
Group products: Comprehensive or Facilities-only.
Benefit options: Daily benefit amounts;
Federal program[A]: $50 to $300;
Individual products: $18 to $500[C];
Group products: $35 to $465.
Benefit options: Elimination periods;
Federal program[A]: 30 days or 90 days;
Individual products: 0 days to 730 days;
Group products: 20 days to 180 days.
Benefit options: Benefit periods;
Federal program[A]: 3 years, 5 years, or lifetime;
Individual products: 1 year to lifetime;
Group products: 1 year to lifetime.
Benefit options: Inflation protection[D];
Federal program[A]: Automatic compound or Future purchase option;
Individual products: Automatic compound, Simple, Future purchase
option, Other, or None;
Group products: Automatic compound, Future purchase option, Other, or
None.
Source: GAO analysis of data provided by Partners, five carriers
selling individual products, CalPERS, and two carriers selling group
products.
[A] Some federal enrollees, members of the uniformed services, and
their spouses who could apply for the federal program using an
abbreviated application, but who were denied regular coverage, were
offered coverage in the Alternative Insurance Plan. This Plan covered
nursing homes only, had a 180-day elimination period, provided coverage
for 2 years, and started with a weekly benefit amount of $200.
[B] One carrier reported selling individual products with home-care-
only coverage.
[C] One carrier reported that one policy was sold with a daily benefit
amount of $822.
[D] With automatic compound inflation protection, benefit amounts
increase by a stated percentage of the previous year's amount with
generally no change in premiums. For example, a $100 daily benefit
amount with automatic compound inflation protection of 5 percent will
go up by $5 to $105 at the beginning of the second year. At the
beginning of the third year, benefits will go up by 5 percent of $105
or by $5.25 to $110.25. Simple inflation protection increases benefits
by the same amount each year with generally no change in premiums. For
example, a $100 daily benefit amount with simple inflation protection
of 5 percent will go up by $5 each year. The future purchase option
offers the ability to increase benefits at predetermined time intervals
for an additional cost. Other inflation-protection options include a
deferred inflation option, where the enrollee can increase benefits at
a later date chosen by the enrollee.
[End of table]
Most enrollees in the federal program chose comprehensive coverage and
daily benefit amounts, elimination periods, and benefit periods similar
to those chosen by enrollees in individual and group products. Most
enrollees in all products chose to have the cost of long-term care
services reimbursed at a rate in the range of $100 to $199 per day and
chose an elimination period of 90 days or greater[Footnote 27] and a
benefit period from 3 to 5 years. With regard to inflation protection,
over two-thirds of federal program enrollees chose automatic compound
inflation protection, a higher proportion than for enrollees in
individual and group products. Federal enrollees who did not choose
automatic compound inflation protection received the future purchase
option as a default. Several experts and industry officials said the
federal government was a leader in the group market by encouraging
enrollees to choose more comprehensive inflation-protection benefits.
Table 2 summarizes the benefit options chosen by enrollees in the
federal program and in individual and group products.
Table 2: Benefit Options Chosen by Federal Long Term Care Insurance
Program Enrollees and by Individual and Group Product Enrollees for New
Policies Sold from July 1, 2002, through March 31, 2005:
Coverage type: Comprehensive;
Percentage choosing benefit option: Federal program enrollees[A]: 89;
Percentage choosing benefit option: Average for individual product
enrollees: 91;
Percentage choosing benefit option: Average for group product
enrollees: 91.
Coverage type: Facilities-only;
Percentage choosing benefit option: Federal program enrollees[A]: 11;
Percentage choosing benefit option: Average for individual product
enrollees: 3;
Percentage choosing benefit option: Average for group product
enrollees: 9.
Coverage type: Other;
Percentage choosing benefit option: Federal program enrollees[A]:
