Long-Term Care Insurance
Carrier Interest in the Federal Program, Changes to Its Actuarial Assumptions, and OPM Oversight Gao ID: GAO-11-630 July 11, 2011Since 2002, the federal government has offered long-term care insurance to its employees, retirees, and certain others through the Federal Long Term Care Insurance Program (FLTCIP). Enrollees pay the full cost of their premiums. The Office of Personnel Management (OPM) oversees the program. OPM has held two competitive processes to select contractors to insure enrollees and administer FLTCIP, although interest in and competition for these contracts has been limited. In 2009, soon after OPM's award of FLTCIP's second 7-year contract to John Hancock Life Insurance Company (John Hancock), 66 percent of enrollees were notified that their premiums would increase up to 25 percent in order to compensate for how the actuarial assumptions used to set premiums differed from the program's experience. GAO was asked to review FLTCIP. In this report, GAO describes (1) factors affecting carriers' interest in FLTCIP, (2) how the actuarial assumptions used to set FLTCIP premiums have changed since the program's inception, and (3) OPM's oversight of actuarial assumptions and experience and program communications. To do so, GAO interviewed officials from six carriers that in 2009 insured over 60 percent of all long-term care insurance policyholders. GAO also interviewed officials from OPM and John Hancock and reviewed program documentation, including FLTCIP contracts.
A variety of factors influenced carriers' interest in FLTCIP. Carriers' business strategies had the most significant influence on their interest, though in different ways. Some carriers wanted to increase their market share and thus were attracted to FLTCIP. In contrast, some carriers wanted to grow their long-term care insurance business at a slower pace, which detracted from their interest in FLTCIP. At the time of FLTCIP's second contract, factors relating to the program's history had the second-most significant influence on carriers' interest, and generally detracted from it as a result of FLTCIP's need for a premium increase and concerns about transitioning a large, complex program from another carrier. A variety of other factors also affected carriers' interest. For example, the large number of eligible individuals and the lack of a requirement to guarantee coverage to them positively influenced carriers' interest, while the lack of a list of home addresses for the eligible population--which could have been used to market the program--and the relatively large portion of eligible individuals who were disabled detracted from carriers' interest. Since FLTCIP's inception in 2002, John Hancock has revised the program's actuarial assumptions. When setting premiums for the second contract period, John Hancock updated FLTCIP's assumptions to reflect an expectation that a larger portion of enrollees will voluntarily maintain their coverage longer and will live longer than initially expected. The carrier also reduced the amount of claims costs the program expects for enrollees of any given age. Although FLTCIP yielded a lower-than-expected return on investment during the first contract period, John Hancock did not revise this assumption when setting premiums for the second contract period. Instead, it revised the investment strategy to include considerable investments in public equities--such as stocks--which the carrier said have a higher expected rate of return. Altogether, John Hancock expects that more enrollees will continue their coverage, reach older ages, and submit claims than initially assumed. As such, the carrier increased projections for the total amount of future FLTCIP claims. As part of its assessment of carriers' proposals to insure FLTCIP enrollees and administer the program, OPM evaluated the actuarial assumptions carriers proposed for the program to ensure that the assumptions were reasonable and collectively supported the proposed premiums. Once the program's premiums were finalized with the award of the contract, OPM has monitored the program's experience by reviewing regular reports comparing the experience of the program to the actuarial assumptions used to set premiums. OPM's oversight has also included a review of all program communications for accuracy and clarity prior to their use. OPM and John Hancock provided technical comments, which have been incorporated as appropriate.
GAO-11-630, Long-Term Care Insurance: Carrier Interest in the Federal Program, Changes to Its Actuarial Assumptions, and OPM Oversight
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
July 2011:
Long-Term Care Insurance:
Carrier Interest in the Federal Program, Changes to Its Actuarial
Assumptions, and OPM Oversight:
GAO-11-630:
GAO Highlights:
Highlights of GAO-11-630, a report to congressional requesters.
Why GAO Did This Study:
Since 2002, the federal government has offered long-term care
insurance to its employees, retirees, and certain others through the
Federal Long Term Care Insurance Program (FLTCIP). Enrollees pay the
full cost of their premiums. The Office of Personnel Management (OPM)
oversees the program. OPM has held two competitive processes to select
contractors to insure enrollees and administer FLTCIP, although
interest in and competition for these contracts has been limited. In
2009, soon after OPM‘s award of FLTCIP‘s second 7-year contract to
John Hancock Life Insurance Company (John Hancock), 66 percent of
enrollees were notified that their premiums would increase up to 25
percent in order to compensate for how the actuarial assumptions used
to set premiums differed from the program‘s experience.
GAO was asked to review FLTCIP. In this report, GAO describes (1)
factors affecting carriers‘ interest in FLTCIP, (2) how the actuarial
assumptions used to set FLTCIP premiums have changed since the
program‘s inception, and (3) OPM‘s oversight of actuarial assumptions
and experience and program communications. To do so, GAO interviewed
officials from six carriers that in 2009 insured over 60 percent of
all long-term care insurance policyholders. GAO also interviewed
officials from OPM and John Hancock and reviewed program
documentation, including FLTCIP contracts.
What GAO Found:
A variety of factors influenced carriers‘ interest in FLTCIP. Carriers‘
business strategies had the most significant influence on their
interest, though in different ways. Some carriers wanted to increase
their market share and thus were attracted to FLTCIP. In contrast,
some carriers wanted to grow their long-term care insurance business
at a slower pace, which detracted from their interest in FLTCIP. At
the time of FLTCIP‘s second contract, factors relating to the
program‘s history had the second-most significant influence on carriers‘
interest, and generally detracted from it as a result of FLTCIP‘s need
for a premium increase and concerns about transitioning a large,
complex program from another carrier. A variety of other factors also
affected carriers‘ interest. For example, the large number of eligible
individuals and the lack of a requirement to guarantee coverage to
them positively influenced carriers‘ interest, while the lack of a
list of home addresses for the eligible population”which could have
been used to market the program”and the relatively large portion of
eligible individuals who were disabled detracted from carriers‘
interest.
Since FLTCIP‘s inception in 2002, John Hancock has revised the
program‘s actuarial assumptions. When setting premiums for the second
contract period, John Hancock updated FLTCIP‘s assumptions to reflect
an expectation that a larger portion of enrollees will voluntarily
maintain their coverage longer and will live longer than initially
expected. The carrier also reduced the amount of claims costs the
program expects for enrollees of any given age. Although FLTCIP
yielded a lower-than-expected return on investment during the first
contract period, John Hancock did not revise this assumption when
setting premiums for the second contract period. Instead, it revised
the investment strategy to include considerable investments in public
equities”such as stocks”which the carrier said have a higher expected
rate of return. Altogether, John Hancock expects that more enrollees
will continue their coverage, reach older ages, and submit claims than
initially assumed. As such, the carrier increased projections for the
total amount of future FLTCIP claims.
As part of its assessment of carriers‘ proposals to insure FLTCIP
enrollees and administer the program, OPM evaluated the actuarial
assumptions carriers proposed for the program to ensure that the
assumptions were reasonable and collectively supported the proposed
premiums. Once the program‘s premiums were finalized with the award of
the contract, OPM has monitored the program‘s experience by reviewing
regular reports comparing the experience of the program to the
actuarial assumptions used to set premiums. OPM‘s oversight has also
included a review of all program communications for accuracy and
clarity prior to their use.
OPM and John Hancock provided technical comments, which have been
incorporated as appropriate.
View [hyperlink, http://www.gao.gov/products/GAO-11-630] or key
components. For more information, contact John E. Dicken at (202) 512-
7114 or dickenj@gao.gov.
[End of section]
Contents:
Letter:
Background:
A Variety of Factors Influenced Carriers' Interest in FLTCIP, Business
Strategy Most Significantly:
Key Changes Have Been Made to FLTCIP Benefits, Investment Strategy,
and Profit Payment Formula since the Second Contract Was Awarded:
FLTCIP Offered Enrollees Options to Change Their Benefits to Limit the
Premium Increase; Nearly Half Made No Changes:
Changes to Actuarial Assumptions Used to Set FLTCIP Premiums Resulted
in a Projected Increase in Future Claims:
OPM's Oversight Includes an Evaluation of FLTCIP's Actuarial
Assumptions and a Review of Program Communications:
Agency and Third-Party Comments:
Appendix I: Influence of Carriers' Business Strategies on Their
Interest in the Federal Long Term Care Insurance Program (FLTCIP):
Appendix II: Influence of Program History on Carriers' Interest in
FLTCIP:
Appendix III: Influence of Program Size and Other Characteristics on
Carriers' Interest in FLTCIP:
Appendix IV: Selected Features of FLTCIP Benefit Plans Offered during
the Program's First and Second Contract Periods:
Appendix V: Changes in the Cost of Long-Term Care Services Compared
with FLTCIP Inflation Protection Options:
Appendix VI: Changes to FLTCIP Performance Metrics:
Appendix VII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Profit Structure of the Federal Long Term Care Insurance
Program (FLTCIP) under Its First and Second Contracts:
Table 2: Distribution of Premium Changes Experienced by Federal Long
Term Care Insurance Program (FLTCIP) Enrollees Subject to the Premium
Increase, by Benefit Selection:
Table 3: Summary of Premium Changes Experienced by Federal Long Term
Care Insurance Program (FLTCIP) Enrollees Subject to the Premium
Increase, by Benefit Selection:
Table 4: Federal Long Term Care Insurance Program (FLTCIP) Performance
Metrics, by Contract:
Figures:
Figure 1: Percentage of Nationwide Spending on Long-Term Care
Services, by Payment Source (2009):
Figure 2: Benefit Selections of Federal Long Term Care Insurance
Program (FLTCIP) Enrollees Facing the Premium Increase:
Figure 3: Percentage Change in the Cost of Nursing Home Care, 2002
through 2010, Compared with Automatic Compound Inflation Options
(ACIO) Available under the Federal Long Term Care Insurance Program
(FLTCIP):
Abbreviations:
ACIO: automatic compound inflation option:
FLTCIP: Federal Long Term Care Insurance Program:
NAIC: National Association of Insurance Commissioners:
OPM: Office of Personnel Management:
RFP: request for proposal:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 11, 2011:
Congressional Requesters:
In 2009, about $253 billion was spent nationwide on long-term care
services, including nursing home and other assisted-living services.
[Footnote 1] Most of this care was financed by government programs,
primarily Medicaid,[Footnote 2] and a small share of these costs--
about 6 percent--was paid for by private insurance. Elderly people--
those aged 65 and older--account for the majority of spending on long-
term care services. As the number of elderly Americans continues to
grow, particularly with the aging of the baby boom population, the
growing demand for long-term care services will strain federal and
state resources. Policymakers and experts have proposed an increased
use of long-term care insurance as a means of reducing the future
share of long-term care services financed by public programs.
Since 2002, the federal government has offered long-term care
insurance to its employees, retirees, and certain others through the
Federal Long Term Care Insurance Program (FLTCIP), in accordance with
the Long-Term Care Security Act.[Footnote 3] FLTCIP enrollees are
required to pay the full cost of their premiums, unlike some other
employee benefits--such as health insurance--offered by the federal
government. The Office of Personnel Management (OPM), the federal
agency that administers governmentwide compensation and benefit
programs, oversees FLTCIP and contracts with private companies to
insure FLTCIP enrollees and administer the program.[Footnote 4] To
date, OPM has held two competitive processes to select contractors for
FLTCIP; however, only a few companies have submitted proposals,
resulting in limited competition for the FLTCIP contracts. After the
conclusion of the first competitive process in 2001, OPM selected a
consortium of two large insurance carriers--John Hancock Life
Insurance Company (John Hancock) and Metropolitan Life Insurance
Company (MetLife)--to insure program enrollees for the duration of the
program's initial 7-year contract. This consortium jointly formed Long
Term Care Partners, LLC (Partners) to administer the program. As the
end of the first contract period grew near, OPM conducted its second
competitive process for FLTCIP's next 7-year contract. In April 2009,
the agency selected John Hancock as the insurer, with Partners--which
became a wholly owned subsidiary of John Hancock--continuing to
administer the program.[Footnote 5]
With 268,204 enrollees as of June 30, 2011, FLTCIP is the largest
private long-term care insurance program in the nation. As we
previously reported, the benefits and premiums offered under FLTCIP
compared favorably with those of other long-term care insurance plans.
[Footnote 6] These benefits and premiums did not change during
FLTCIP's first 7-year contract period. However, in 2009, soon after
OPM awarded the program's second contract, 146,415 individuals (66
percent of enrollees at that time) were notified that their premiums
were subject to an increase of up to 25 percent. All of these
enrollees had selected a particular inflation protection option--the 5
percent automatic compound inflation option (ACIO)--that was intended
to keep enrollees' benefits commensurate with the cost of long-term
care services by increasing their benefits each year by 5 percent
without a routine increase in premiums. Although FLTCIP had not
guaranteed that enrollees' premiums would remain stable, the
announcement of a premium increase surprised some FLTCIP enrollees,
who thought that the program's marketing materials indicated that
selecting the ACIO would result in premiums that would remain constant
over the life of their policies. However, FLTCIP was not unique in
raising enrollee premiums. Long-term care insurance is a relatively
new product, and carriers throughout the industry have struggled with
setting premiums at a rate sufficient to cover future costs. Over the
last decade, many carriers--including the largest in the market--have
raised premiums to compensate for how the assumptions they used in
setting premiums for this insurance product differed from their
experience.
You requested that we review FLTCIP. In this report, we describe (1)
factors affecting insurance carriers' interest in contracting to
insure FLTCIP enrollees and administer the program; (2) key changes
made to FLTCIP since the second contract was awarded; (3) the benefit
options offered to enrollees who faced a premium increase and the
options they selected; (4) how actuarial assumptions used to set
premiums for FLTCIP have changed since the program's inception; and
(5) OPM's oversight of FLTCIP's actuarial assumptions and experience,
and its communications with current and prospective enrollees.
To describe information on the factors that affected insurance
carriers' interest in FLTCIP, we interviewed officials from six of the
nation's largest long-term care insurance carriers--Genworth
Financial, John Hancock, MetLife, Prudential Financial Inc.,
Transamerica Life Insurance Company, and Unum.[Footnote 7] In 2009,
these six carriers insured 61 percent of all long-term care insurance
policyholders and 79 percent of those who purchased coverage through
employers or other sponsors in the group market. In addition, these
carriers varied with respect to their interest in FLTCIP; some
submitted proposals to insure FLTCIP enrollees and administer the
program, while others had not. We asked officials from these carriers
to identify the factors that influenced the carriers' interest in
FLTCIP at the time of the program's first and second contracts.
Specifically, we asked these officials how factors related to
carriers' business strategies and capabilities, FLTCIP's history, and
other aspects of the program--such as statutory requirements--affected
their interest in the program. We also asked these officials to
explain how and to what extent such factors influenced carriers'
interest.
To describe the key changes that have been made to FLTCIP since the
second contract was awarded, we interviewed officials from OPM and
John Hancock about the changes made to the program and reviewed
program documentation, including FLTCIP contracts. We considered
changes to be key changes if officials from both OPM and John Hancock
identified them as significant and if they directly affected current
or future enrollees.
To describe the benefit options that were offered to enrollees facing
a premium increase, we interviewed OPM and John Hancock officials and
reviewed program documentation. We also assessed the extent to which
the benefit options were similar to those offered by other long-term
care insurance carriers. To do so, we interviewed officials from the
six insurance carriers noted above to obtain information on the
benefit options they have typically offered to enrollees facing a
premium increase. To describe the benefit options that FLTCIP
enrollees selected and the impact of those selections on enrollees'
premiums, we analyzed John Hancock data. These data summarized the
benefits selected by FLTCIP enrollees facing the premium increase and
the amount by which their premiums changed as a result of those
selections. We discussed the data with knowledgeable officials from
John Hancock and reviewed all data for reasonableness and consistency;
we determined that the data were sufficiently reliable for our
purposes.
To describe how the actuarial assumptions used to set premiums for
FLTCIP have changed since the program's inception, we interviewed OPM
and John Hancock officials and reviewed program documentation,
including FLTCIP contracts. We compared the actuarial assumptions used
to set premiums for the first contract period to those used to set
premiums for the second contract period. We also examined the extent
to which the assumptions had changed since premiums for the second
contract period were set. In addition, we assessed how changes in
FLTCIP assumptions compare to those used in setting premiums for other
long-term care insurance plans. To do so, we interviewed officials
from the six insurance carriers in our analysis about the actuarial
assumptions they use, and how their assumptions have changed since
FLTCIP began in 2002. We also interviewed insurance regulators from
three states--California, Florida, and New York--about the actuarial
assumptions used in setting premiums for long-term care insurance
plans offered in their states. In 2009, these were the top three
states in terms of the amount of long-term care insurance premiums
earned; they were collectively responsible for overseeing 20 percent
of all long-term care insurance policies.
To describe OPM oversight of actuarial assumptions and experience and
program communications with current and prospective enrollees, we
interviewed officials from OPM, John Hancock, and MetLife. For
context, we interviewed officials from the six insurance carriers to
gather information regarding the oversight conducted by other
employers and state regulators.
We conducted this performance audit from September 2010 to July 2011
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
Long-term care, which includes services provided to individuals in
nursing homes, in assisted-living facilities, or in their homes, can
be costly. Most of our nation's spending for this care is paid for by
government programs. Private long-term care insurance can also be used
to pay for these costs; however, only a small portion of total long-
term care costs are paid for by such coverage. The federal government
has taken steps to increase the use of private insurance to pay for
long-term care costs, including creating FLTCIP.
Long-Term Care Costs:
Long-term care costs vary based on the types of services provided and
the geographic area where they are rendered. For example, in 2010, the
average annual cost for care in a nursing home exceeded $83,000 and
the average annual cost for care in an assisted-living facility was
nearly $40,000. In addition, the average hourly rate for a home health
aide was $21; for example, 10 hours of such care a week would average
about $11,000 per year.[Footnote 8]
Most of the nation's spending on long-term care services is paid for
by government programs. About $253 billion was spent nationwide on
long-term care services in 2009, according to the most recently
available data. Nearly three-quarters of this amount--$183 billion--
was paid for by government programs, primarily Medicaid, and to a
lesser extent, Medicare and other government programs. Individuals
paid 18 percent of the total, or $46 billion, out of pocket, and
private insurance paid for a small portion of the total, 6 percent, or
about $16 billion.[Footnote 9] (See figure 1.)
Figure 1: Percentage of Nationwide Spending on Long-Term Care
Services, by Payment Source (2009):
[Refer to PDF for image: pie-chart]
Government spending (72 percent):
Medicaid[A]: 44%;
Medicare[B]: 25%;
Other government[C]: 3%;
Other spending (27 percent):
Out-of-pocket spending: 18%;
Private insurance: 6%;
Other[D]: 3%.
Source: Centers for Medicare & Medicaid Services' Office of the
Actuary estimate based on 2009 National Health Expenditures data
and other unpublished sources.
Notes: This estimate includes spending on nursing home care, home
health care, and hospital-based nursing and home health care, as well
as spending through Medicaid home-and community-based waiver programs
that provide certain low-income individuals in some states with access
to home-and community-based long-term care services. Percentages do
not sum to 100 because of rounding.
[A] Medicaid is a joint federal-state program that finances health
care for certain categories of low-income individuals.
[B] Medicare is the federal program that finances health care for
seniors aged 65 and older, certain disabled individuals, and
individuals with end-stage renal disease.
[C] Other government spending includes coverage financed by the
Department of Veterans Affairs as well as other state and local
programs.
[D] Other includes private revenues, such as philanthropy.
[End of figure]
Long-Term Care Insurance:
Individuals may purchase long-term care insurance policies directly
from carriers in the individual market, or they can enroll in those
offered by groups, such as their employers. At the end of calendar
year 2009, 6.7 million individuals had long-term care insurance
policies, according to data from the National Association of Insurance
Commissioners (NAIC). Nearly 70 percent of these policies were
purchased in the individual market, with the remaining portion
purchased through employers or other group sponsors.
States are generally responsible for overseeing long-term care
insurance. Through laws and regulations, states establish standards
governing long-term care insurance and state insurance departments
enforce those standards. NAIC has issued model laws and regulations to
assist states in formulating their laws and regulations for long-term
care insurance; many states have adopted NAIC's models. State
regulators perform a variety of oversight tasks that are intended to
protect consumers from unfair practices, including reviewing premiums
and marketing materials and responding to consumer complaints.
Long-term care insurance is generally structured around a number of
benefit options that applicants select. These include:
* the types of services covered, such as nursing home services, care
in home and community settings, or both;
* the daily benefit amount, which is the maximum amount insurance will
pay on a single day;
* the benefit period (or duration of coverage), which can range from 1
year to unlimited (i.e., lifetime) coverage; and:
* the length of the elimination or waiting period, which is the length
of time an individual has to wait before insurance will provide
coverage toward the cost of care.
An applicant can also select an inflation protection benefit to help
ensure that over time, his or her daily benefit amount remains
commensurate with the costs of care. Inflation protection benefits
increase the enrollee's daily benefit amount at specified intervals--
for example, annually. Carriers typically provide multiple inflation
protection options, including a 5 percent ACIO. Under this option, an
enrollee's daily benefit amount is increased each year by 5 percent of
the prior year's amount without a routine increase in premiums. For
example, an individual who selected a daily benefit amount of $100 at
enrollment would have accrued a $105 daily benefit amount that would
be available to him or her at the beginning of the second year of
coverage. At the beginning of the third year of coverage, the
enrollee's daily benefit amount would accrue by an additional 5
percent to $110.25. Inflation protection is important because many
purchasers of long-term care insurance do not expect to need long-term
care services until some time in the future; they pay premiums over a
period of years in return for a promise of future protection. This
benefit allows enrollees to take advantage of lower premium rates
available to younger enrollees, while allowing their benefits to grow
over time.
Long-term care insurance premiums are affected by many factors.
Carriers charge higher premiums for richer benefits; for example,
higher daily benefit amounts, longer benefit periods, and higher
levels of inflation protection will increase premiums. In addition,
premium rates vary based on enrollees' age at enrollment, with older
individuals subject to higher premiums than younger individuals who
select the same benefits. Premiums for some policies may also be based
on the health status of the applicant. For example, policies sold in
the individual market are generally subject to full underwriting,
[Footnote 10] which entails an extensive review of the applicant's
health and may result in premiums that vary based on health status. In
contrast, premiums for policies sold in the group market usually do
not vary based on individuals' health status. Such policies may be
offered, during at least some periods, on a guaranteed issue basis
with no underwriting--meaning that coverage is guaranteed to all
eligible individuals. For example, some carriers guarantee coverage to
a group of eligible individuals, such as active employees, during an
open enrollment period.
In addition, carriers establish premiums on the basis of actuarial
assumptions--including lapse, mortality, morbidity, and return on
investment assumptions.
* The lapse assumption reflects the expected portion of enrollees who
drop their coverage each year, for example, by voluntarily canceling
their policies. Lapse assumptions can vary based on a variety of
factors, including the enrollees' age at enrollment and the number of
years enrollees have had their policies. In general, it is assumed
that the longer that enrollees keep their policies, the less likely
they are to lapse. After enrollees have maintained their policies for
a certain number of years--for example, after 6 or 8 years--carriers
may assume that the lapse rate will remain constant. This rate is
referred to as the ultimate lapse rate. Lapse rate assumptions greatly
affect long-term care insurance premiums because when individuals
lapse, future liabilities are immediately reduced although current
assets are not affected. Premiums that have already been paid by those
who lapse generally remain with the carrier and are used to subsidize
the cost of future claims by other enrollees.[Footnote 11]
* The mortality assumption summarizes the expected death rate of the
enrollee population, by age. Similar to the lapse assumption,
mortality reduces future liabilities without affecting assets.
* The morbidity assumption reflects the amount of claims costs
expected for enrollees, by age, and accounts for the portion of
enrollees of each age who file a claim and the duration of those
claims. Because carriers assume that older enrollees are more likely
to file a claim, the expected amount of claims costs increases with
age.
* The return on investment assumption reflects the expected interest
rate earned on invested assets.
Because actuarial assumptions are projections about the future, they
can change over time as carriers gain more experience, especially with
relatively new products such as long-term care insurance. In addition,
these assumptions are developed based on the professional judgment of
carriers' actuaries; therefore, actuarial assumptions--and the
resulting premiums--can differ across actuaries and carriers.
A key feature of long-term care insurance is that premiums are
designed--although not guaranteed--to remain level over time. Carriers
calculate premium rates with a goal of ensuring that the total amount
of premiums paid by all enrollees plus the interest earned on the
invested assets over the lifetime of the policy are sufficient to
cover the cost of future claims and expenses. Setting premiums at an
adequate level to cover future costs has been a challenge for some
carriers. Long-term care insurance is a relatively new product. In
addition, several decades may elapse before enrollees submit claims
and carriers obtain data on how their enrollees use their policies. As
a result, many carriers have lacked (and may continue to lack)
sufficient data to accurately estimate the revenue needed to cover
costs. This has led to changes in the marketplace as many companies
have raised premiums, left the marketplace, or consolidated to form
larger companies.[Footnote 12]
In response to the growing number of premium increases for long-term
care insurance, NAIC issued revisions to its model long-term care
insurance regulation in 2000. The new model regulation established
more rigorous requirements that carriers must meet when setting
initial premium rates and when requesting premium increases. For
example, the model regulation introduced a new requirement for
insurance carriers' actuaries to certify that premiums are adequate to
cover anticipated costs over the life of a policy, even under
"moderately adverse conditions," with no future premium increases
anticipated. Moderately adverse conditions could include, for example,
below average returns on invested assets. To fulfill this requirement,
insurance carriers' actuaries must include a margin for error when
setting premiums.[Footnote 13]
FLTCIP Oversight and Administration:
The Long-Term Care Security Act authorizes OPM to enter into 7-year
contracts with one or more private entities to insure FLTCIP enrollees
and administer the program. The Act requires OPM to ensure that each
of these contracts is awarded on the basis of contractor
qualifications, price, and reasonable competition. The Act also tasked
OPM with overseeing FLTCIP and preempts state oversight of the
program.[Footnote 14] As a result, OPM performs functions of both a
sponsoring employer and a regulator for this program.
To obtain carriers' proposals for FLTCIP, OPM issued two requests for
proposals (RFP)--one in 2001 for the program's first contract, and
another in 2008 for the program's second contract. The agency's RFPs
summarized information about the program, including information about
the population eligible to apply for coverage, as well as program
requirements, such as covered services and benefit options that were
to be offered. The RFP for the program's second contract included
detailed information about the experience of the program to date--
including the number of enrolled individuals and their
characteristics, current premiums, and the balance of funds available
to pay for FLTCIP claims and expenses. The RFPs for both contracts
also outlined OPM's expectations for the program. For example, OPM's
RFP for the first contract stated that because of efficiencies in
marketing to a large group, the agency expected that carriers would
offer premiums that were 15 to 20 percent below those charged for
comparable benefits in the individual market. In its RFP for the
second contract, OPM stated that carriers should adjust premiums to
ensure that they were adequate, but that premium increases should not
exceed 25 percent per enrollee.[Footnote 15] In addition, in its RFPs
for both contracts, OPM stated that it expected carriers to follow
NAIC's 2000 model long-term care insurance regulation by including a
margin for moderately adverse conditions when setting premiums for
FLTCIP. In addition to providing information about the program, OPM's
RFPs required carriers to submit detailed proposals for plan premiums
and benefits as well as for the administration of FLTCIP.
The FLTCIP contract includes the winning carrier's responses to OPM's
RFP and outlines all key aspects of the program. Once the contract is
signed, any changes made to the program during the contract term--such
as changes to enrollee premiums--must be agreed upon by OPM and the
carrier. The contract outlines the roles and responsibilities of all
parties and the type and frequency of reporting. It also includes
information about the benefits offered; the actuarial assumptions used
to set premiums; the premiums charged; and how payments for the
program's expenses, as well as payments that are designated as
profits, are determined. Unlike other contracts between employers and
insurance carriers, the FLTCIP contract includes provisions for the
management of program assets--that is, the funds collected as premiums
and used to pay claims. By statute, such funds must remain separate
from the carrier's other businesses.[Footnote 16]
At the end of FLTCIP's 7-year contract, OPM can again conduct a
competitive process to obtain proposals for insuring FLTCIP during its
third contract term. If a new carrier is selected, the current carrier
must transfer all FLTCIP enrollees and assets, including any positive
or negative returns related to the experience of the program, to the
next carrier. If OPM does not contract with another carrier, the
current carrier would retain its responsibility for insuring all
current enrollees and would continue to work with OPM to administer
the program. Premium rates would remain at their then current levels
unless OPM and the carrier agree on different rates, or the carrier
submits new premium rates it believes are warranted to attain funding
sufficiency, at least one year prior to the rates' effective date.
FLTCIP assets would remain available to pay for these enrollees'
claims and expenses.
FLTCIP Eligibility and Benefits:
The Long-Term Care Security Act also defined key aspects of FLTCIP
eligibility. For example, the statute requires that all federal and
Postal Service employees and retirees, active and retired members of
the uniformed services, their qualified relatives, and certain others
be eligible to apply for FLTCIP coverage.[Footnote 17] Almost 19
million people were estimated to be eligible to apply for coverage as
of October 15, 2001. While the Act specifies who is eligible to apply
for FLTCIP coverage, it does not require that coverage be guaranteed
to all eligible individuals. Eligibility for coverage has been subject
to underwriting, though the level of underwriting used by the program
varies. During FLTCIP open enrollment periods, an abbreviated
underwriting application has been used for active federal employees
and their spouses or same-sex domestic partners and active members of
the uniformed services and their spouses.[Footnote 18] A more lengthy
underwriting application, similar to underwriting in the individual
insurance market, is generally used for these applicants if they apply
for coverage during other times and for all other applicants,
including retirees and qualified relatives, regardless of when they
apply.[Footnote 19]
Similar to other long-term care insurance plans, FLTCIP enrollees are
able to select from a range of benefits, as outlined in OPM's contract
with the carrier. FLTCIP offers applicants the ability to choose, for
example, their daily benefit amount and benefit period. The program
also offers inflation protection benefits, including a 5 percent ACIO,
which has been offered since the program's inception. Once an enrollee
becomes eligible for benefits, FLTCIP provides reimbursement for
covered services up to the enrollee's accrued daily benefit amount
based on the benefit options selected.[Footnote 20] For example,
FLTCIP pays for 100 percent of enrollees' nursing home costs, up to
their accrued daily benefit amount.
FLTCIP premiums vary greatly depending on the benefits selected as
well as individuals' ages at enrollment. For example, a plan with a
$150 daily benefit amount, 3-year benefit period, and 5 percent ACIO
would cost $87 per month for coverage for an individual who enrolled
at age 40, but would cost $238 per month for an individual who
enrolled at age 65.
As part of FLTCIP's second contract, OPM and John Hancock agreed to a
premium increase of up to 25 percent for current enrollees who had
selected the program's 5 percent ACIO benefit and were less than 70
years old at the time of their enrollment. As of October 2009, two-
thirds of all FLTCIP enrollees--146,415 individuals--had 5 percent
ACIO coverage and were subject to the premium increase.[Footnote 21]
OPM and John Hancock officials have stated that the premium increase
was warranted because of projections for future program underfunding,
which occurred primarily as a result of lower-than-expected lapse and
mortality rates, as well as lower-than-expected returns on investments.
A Variety of Factors Influenced Carriers' Interest in FLTCIP, Business
Strategy Most Significantly:
A variety of factors have influenced carriers' interest in contracting
to insure FLTCIP enrollees and administer the program, according to
officials from the carriers we interviewed. Carriers' business
strategies had the most significant effect on their interest in the
program at the time of both contracts, but their strategies affected
their interest in different ways. Factors relating to FLTCIP's history
generally detracted from carriers' interest in the program at the time
of its second contract, and a variety of other factors--including the
size and characteristics of the program--have also influenced
carriers' interest in the program since its inception.
Business Strategy Most Significantly Influenced Carriers' Interest in
FLTCIP, but in Different Ways:
Carriers' business strategies had the most significant influence on
their interest in FLTCIP at the time OPM solicited proposals for the
first and second contracts, according to officials we interviewed.
However, carriers differed as to whether their business strategy had a
positive or negative effect on their interest in FLTCIP. Officials
from three of the six carriers we interviewed said that their
carrier's business strategy positively influenced their interest in
FLTCIP at the time OPM solicited proposals for each contract. In
contrast, officials from three of the carriers we interviewed
indicated that their carrier's business strategy detracted from their
interest in FLTCIP.[Footnote 22]
Officials from the carriers who indicated that business strategy had a
positive influence on their interest noted that their companies were
interested in growing their long-term care insurance business and
believed FLTCIP would provide them with an opportunity to do so. They
also stated that insuring FLTCIP would lend them credibility, assist
them in gaining name recognition in the marketplace, and further their
goals of expanding sales of their other (nonfederal) long-term care
insurance policies. In contrast, officials from the carriers who
indicated that their business strategy detracted from their interest
in FLTCIP said that they wanted to grow their long-term care insurance
business at a slower pace or focus on other segments of the market,
such as the individual market. Officials from three carriers noted
that FLTCIP had the potential to be so large that the carrier may not
have been able to insure enrollees or administer the program
independently, and some carriers also noted concerns about partnering
with other insurance carriers to do so. Finally, two carriers told us
that they had less interest in selling long-term care insurance
overall at the time of the second contract. Officials from these
carriers told us that they were uncertain about the risks associated
with long-term care insurance because of industrywide challenges in
setting actuarial assumptions that lead to adequate premium rates. As
of January 2011, three of the six carriers whose officials we
interviewed had suspended sales of some or all of their long-term care
insurance policies.[Footnote 23] (See appendix I for more information
about how factors related to carriers' business strategies and
capabilities influenced their interest in FLTCIP.)
FLTCIP History Generally Detracted from Carriers' Interest in the
Second Contract:
Factors related to FLTCIP's history generally detracted from carriers'
interest in the program at the time of OPM's solicitation for the
second contract and had the second most significant influence on
carriers' interest in FLTCIP at that time. When asked about how
FLTCIP's history affected the carrier's interest at the time of the
second contract, officials from four of the carriers noted that as a
result of the program's history--including the premiums charged for
the benefits offered during the first contract period and the
actuarial experience of the program--a premium increase was warranted.
These officials raised concerns about having to implement a premium
increase for FLTCIP. Specifically, officials from three of the
carriers, none of which were involved in the program's first contract,
raised concerns that implementing a premium increase as the program's
new carrier would result in negative implications for the carrier's
reputation. Additionally, officials from two carriers told us that
OPM's 25 percent cap on premium increases was a concern because they
estimated that a larger premium increase was warranted.
Four carriers also cited concerns about transitioning the program from
other carriers. Specifically, officials from some of these carriers
stated that transitions are difficult for the smallest programs, and
the large size and complexity of FLTCIP would add to other challenges
related to transitioning the program. In addition, officials from two
carriers explained that their concerns over transitioning FLTCIP were
linked to taking on the risk of insuring a population that the carrier
had no involvement in underwriting. (See appendix II for more
information about how FLTCIP's history influenced carriers' interest
in the program.)
Other Factors, Including the Size and Characteristics of FLTCIP's
Eligible Population, Also Influenced Carriers' Interest:
Other factors, such as the large size and characteristics of FLTCIP's
eligible population, also influenced carriers' interest in the program
at the time of both the first and second contracts. The large size of
the eligible population had a positive influence on carriers' interest
in FLTCIP, but the lack of a list of home addresses for the eligible
population and the voluntary nature of the program had a negative
influence. Officials from four of the six carriers we interviewed
noted that the large number of people eligible for FLTCIP positively
influenced their interest in the program. These officials explained
that a large eligible population increases the likelihood for a larger
number of enrollees and provides a greater potential for enrolling
healthy individuals who represent a lower risk of submitting claims.
However, as OPM noted in its RFPs for both contracts, the agency does
not have a list of home addresses of active federal employees for the
carrier to use in marketing FLTCIP. All of the carriers we interviewed
noted that not having this information significantly detracted from
their interest in the program.[Footnote 24] These officials explained
that marketing directly to eligible individuals at their homes is
critical for ensuring that a large number of individuals--including a
high proportion of healthy individuals--apply for coverage. As such,
not having this list resulted in concerns that FLTCIP would attract a
disproportionate share of individuals who knew they needed coverage,
which would result in a higher risk for the program. Likewise,
officials from three carriers we interviewed also noted that offering
FLTCIP as a voluntary benefit with no government contribution to
premiums detracted from their interest in the program because carriers
had concerns that the program's enrollment would not be as large as it
could have been. In addition, officials noted that this aspect of the
program would likely attract a disproportionate share of individuals
who expected to incur long-term care costs and would likely submit
claims earlier than was typically expected. These officials explained
that if all active federal employees were automatically enrolled in
FLTCIP, or if the government paid for a portion of all active federal
employees' premiums, FLTCIP would benefit from a larger number of
enrollees as well as a larger portion of healthy enrollees who would
have a lower risk of submitting claims.
Similarly, characteristics of the eligible population negatively
affected carriers' interest in FLTCIP, but this was at least somewhat
offset by the fact that eligible individuals are not guaranteed
coverage. Officials from all of the carriers we interviewed cited
concerns about the relatively high portion of active federal employees
who were disabled and eligible to apply for FLTCIP coverage. In its
RFP for the first contract, OPM notified insurance carriers that the
federal government employs a large percentage of persons with self-
reported disabilities.[Footnote 25] Specifically, OPM reported that
approximately 7 percent of active federal employees self-identified as
disabled, noting that this estimate did not include active postal or
military employees. Insurance carrier officials told us that the
relatively large portion of disabled individuals increased the risk to
FLTCIP because disabled individuals were more likely to seek coverage
and submit claims sooner than nondisabled individuals. Officials from
five of the six carriers we interviewed said that the fact that FLTCIP
has not guaranteed coverage for all eligible individuals--and is not
required to do so--had a large positive influence on the carriers'
interest at the time of the first and second contracts. These
officials explained that the ability to conduct at least some
underwriting for applicants would enable them to better manage the
risks of the program, especially given the relatively large portion of
disabled employees. Officials from several carriers also said that if
FLTCIP guaranteed coverage to all eligible individuals at any point in
time, carrier interest in FLTCIP would likely diminish and officials
from two carriers we interviewed noted that they would not have
considered submitting a proposal for FLTCIP if the program were
required to offer coverage on a guaranteed issue basis.
Five of the six carriers we interviewed stated that having FLTCIP
subject to OPM oversight rather than states' oversight influenced
their interest in the program, but the carriers varied with regard to
how this affected their interest. Officials from three of these
carriers said that OPM's role was unusual, because the agency would be
acting as both the employer sponsor and insurance regulator. Officials
also raised related questions and concerns about OPM's ability to
adequately oversee such a complicated insurance product as well as the
potential for FLTCIP to be subject to political pressure. In addition,
officials from three of the carriers we interviewed expressed concerns
regarding the potential for having a difference of opinion with OPM
during the contract period regarding key elements of the program, such
as the need for a premium increase. However, officials from four of
the carriers we spoke with noted that OPM oversight positively
influenced their interest in FLTCIP, in part because it had the
potential to produce a single, large, uniform program as a result of a
more streamlined oversight process than what would otherwise be
available through state oversight. Appendix III provides more
information about how a variety of factors influenced carriers'
interest in FLTCIP.
Key Changes Have Been Made to FLTCIP Benefits, Investment Strategy,
and Profit Payment Formula since the Second Contract Was Awarded:
Since the second contract was awarded, three key changes have been
made to FLTCIP, in addition to the implementation of a premium
increase for certain enrollees. These key changes were the
introduction of new benefits for current and new enrollees,
modifications to the program's investment strategy, and revisions to
the formula used to calculate the carrier's profit payment.
Regarding the program's benefit changes, FLTCIP introduced a new
benefit plan and a new inflation protection option for enrollees.
* The new benefit plan--referred to as FLTCIP 2.0--was made available
to all program enrollees.[Footnote 26] In comparison to the FLTCIP 1.0
plan that was previously offered, the FLTCIP 2.0 plan provides
enhanced coverage. It offers additional benefit options, for example,
by expanding the range of daily benefit amounts and benefit periods
available to enrollees. The FLTCIP 2.0 plan also covers a greater
portion of the cost of care for some long-term care services. For
instance, the FLTCIP 2.0 plan covers 100 percent of the cost of home
care and adult day care, up to the enrollee's accrued daily benefit
amount. This represents an increase over the FLTCIP 1.0 plan, which
covered these costs up to 75 percent of the enrollee's accrued daily
benefit amount for those who selected comprehensive coverage.[Footnote
27] In addition, the FLTCIP 2.0 plan provided coverage for a broader
range of services than the FLTCIP 1.0 plan. Specifically, the FLTCIP
2.0 plan expanded the services covered under its stay-at-home benefit.
This benefit pays for costs that enable enrollees to receive long-term
care services in the home, including those incurred for home
modifications and caregiver training. (See appendix IV for a
comparison of selected benefits available under the FLTCIP 1.0 and
FLTCIP 2.0 plans.) John Hancock officials told us that they proposed
changes to FLTCIP's benefits to make the program's benefits comparable
to those offered by other long-term care insurance plans available in
the market. They further noted that these changes were intended to
ensure that FLTCIP remains competitive with other long-term care
insurance plans.
* FLTCIP also introduced a new inflation protection option for
enrollees--a 4 percent ACIO. This option was made available to
enrollees in addition to the other inflation protection options that
FLTCIP has offered since its inception, such as the 5 percent ACIO.
Compared with a 5 percent ACIO, a 4 percent option results in reduced
protection against increases in the cost of long-term care services.
[Footnote 28] However, a 4 percent ACIO allows enrollees to obtain a
package of benefits at a cost that is lower than that available with a
5 percent ACIO. John Hancock officials told us that they offered a 4
percent ACIO to provide enrollees with an additional inflation
protection option, and they were comfortable that this option provides
enrollees with adequate protection against inflation based on
historical increases in the cost of long-term care services. (See
appendix V for an analysis of how the 4 and 5 percent ACIOs compare to
changes in the cost of long-term care services since 2002.)
Another key change made to FLTCIP was the modification of the
program's investment strategy. John Hancock proposed a new, less
conservative investment strategy in its response to OPM's RFP for
FLTCIP's second contract, which later became part of the terms of the
carrier's contract with OPM. According to John Hancock officials, the
revised strategy has a higher expected rate of return than the former
strategy. During the first contract period, FLTCIP invested 100
percent of its assets in short-duration fixed-income bonds. FLTCIP's
new investment strategy involves investing a portion of the program's
assets in fixed-income bonds of a longer duration, while investing
another portion in public equities. Specifically, all of the assets
corresponding to the program's short-term liabilities--those expected
to be incurred within the next 20 years--would be invested in fixed-
income bonds. However, most of the assets corresponding to the
program's long-term liabilities--those expected to be incurred in more
than 20 years--would be invested in public equities, which have the
potential to earn a higher rate of return than fixed-income bonds.
[Footnote 29] John Hancock proposed modifications to the investment
strategy to enable FLTCIP to earn a potentially higher rate of return
on its investments over time without subjecting short-term investments
to possible fluctuations in investment returns. According to John
Hancock officials, the new strategy would also better align the
duration of the program's investments with the program's liabilities.
John Hancock officials told us that they hoped these changes would
enable FLTCIP to maintain more stable premiums over time.
The third key change made to FLTCIP since the second contract was
awarded was a revision to the formula used to calculate the insurance
carrier's profit payment.[Footnote 30] While the structure of the
formula remained the same, the portion of premiums and assets used in
calculating the profit payment was reduced. Both FLTCIP contracts have
explicitly defined a profit payment that is to be paid to the
program's carrier each year of the program's 7-year contract period.
For both contract periods, this profit payment has consisted of three
distinct payments; two of these are based on a percentage of the
premiums collected during the fiscal year, and one is based on the
average annual assets of the program. One of the premium-based
payments is subject to OPM's evaluation of the carrier's performance,
while the other premium-based payment is guaranteed to the carrier.
With the second contract, FLTCIP reduced the maximum portion of
premium-based profit payments from 6.5 percent of premiums collected
in each fiscal year to 4.0 percent of premiums collected in each
fiscal year. To do so, the program decreased both the portion of
premium-based payments that were guaranteed and those that were
subject to OPM's evaluation of John Hancock's performance. In
addition, FLTCIP also reduced the portion of average annual assets
used to calculate the profit payment, from 0.3 percent to 0.15
percent. (See table 1.) John Hancock officials told us that they
proposed modifications to the profit payment formula in order to
provide greater premium stability for enrollees over time. They also
stated that had they not reduced the profit payment formula, FLTCIP
would have needed to implement a greater increase in enrollee
premiums. While the portion of premiums and assets used in calculating
the profit payment decreased with the second contract, John Hancock's
profit payments will likely grow during the contract period because
the number of enrollees paying premiums and the value of the program's
assets is also expected to increase over time.
Table 1: Profit Structure of the Federal Long Term Care Insurance
Program (FLTCIP) under Its First and Second Contracts:
Premium-based payments:
Payment type: Guaranteed;
First contract: 3.5 percent of the premiums collected during the
fiscal year;
Second contract: 2.0 percent of the premiums collected during the
fiscal year.
Payment type: Performance-based;
First contract: Up to 3.0 percent of the premiums collected during the
fiscal year--the actual amount is determined by OPM based on its
assessment of the contractor's performance;
Second contract: Up to 2.0 percent of the premiums collected during
the fiscal year--the actual amount is determined by OPM based on its
assessment of the contractor's performance.
Payment type: Maximum total premium-based payments;
First contract: Up to 6.5 percent of premiums collected during the
fiscal year;
Second contract: Up to 4.0 percent of premiums collected during the
fiscal year.
Asset-based payments:
Payment type: Guaranteed;
First contract: 0.3 percent of FLTCIP's average annual assets;
Second contract: 0.15 percent of FLTCIP's average annual assets.
Source: GAO analysis of OPM's first and second contracts for FLTCIP.
[End of table]
In addition to the three key changes noted above, several other
changes were made to FLTCIP since the second contract was awarded. For
instance, FLTCIP eligibility was expanded in 2010 to provide coverage
for same-sex domestic partners of active and retired federal and
Postal Service employees.[Footnote 31] In addition, the performance
metrics that OPM uses to evaluate the carrier--and on which a certain
percentage of profit payment depends--were updated. Changes to these
metrics included adding a requirement that FLTCIP customer service
representatives become certified long-term care insurance specialists
within 9 months of employment and reducing the amount of time
available to make benefits determinations and to pay claims, from 10
business days to 5 business days. (See appendix VI for additional
information about the changes made to the performance metrics.)
FLTCIP Offered Enrollees Options to Change Their Benefits to Limit the
Premium Increase; Nearly Half Made No Changes:
In order to limit their premium increase, FLTCIP offered enrollees
options to change their benefits, including reducing their inflation
protection benefits. Nearly half of enrollees facing the premium
increase made no changes to their benefits and, as such, elected to
pay a higher premium.
Options Offered to Enrollees Included Reducing Their Inflation
Protection Benefits:
FLTCIP offered enrollees options to change their benefits--including
reducing their inflation protection benefits--in order to avoid, or
limit the amount of, their premium increase. Specifically, in October
2009, FLTCIP sent personalized letters to enrollees facing the premium
increase to inform them of the increase, to offer them options to
adjust their benefits, and to illustrate how these options would
affect their premiums. The enrollees who faced a premium increase--all
of whom had the FLTCIP 1.0 plan with 5 percent ACIO--were offered the
option to reduce their ACIO to 4 percent while maintaining their
accrued benefits. This option would result in a premium that was
similar to--within a few dollars of--enrollees' existing monthly
premiums, so long as enrollees made no additional changes to their
benefits.[Footnote 32] In addition to the option to reduce their
inflation protection benefit, enrollees were offered the option to
switch their benefits package to the new FLTCIP 2.0 plan without
additional underwriting, although such a change could lead to an
increase in their premiums.[Footnote 33] In addition, FLTCIP enrollees
were reminded of their ability to make other changes to their benefits
at any time--for example, by modifying their daily benefit amount--
although those who wanted to increase their benefits in ways other
than switching to the FLTCIP 2.0 plan had to undergo underwriting.
John Hancock officials stated that they offered enrollees the option
to reduce their inflation protection coverage because this enabled
them to maintain relatively stable premiums while affecting future--
but not current--benefits. Reducing inflation protection affects the
rate at which future benefits grow over time. As such, FLTCIP
enrollees who decreased their ACIO protection to 4 percent retained
their accrued daily benefit amount; that amount would then increase at
the reduced ACIO rate. In contrast, other reductions in coverage--such
as decreasing the daily benefit amount or increasing the waiting
period--result in an immediate reduction in benefits.
Similar to FLTCIP, officials from other carriers we interviewed told
us that they have typically offered enrollees multiple options to
reduce their benefits at the time of a premium increase. These options
have included reducing their daily benefit amount or benefit period or
reducing inflation protection coverage. In addition to these options,
officials from several carriers told us that they have offered a
nonforfeiture benefit to enrollees facing a premium increase. This
benefit allows enrollees who lapse to maintain long-term care
insurance coverage equal to the total amount of premiums paid to date;
the coverage will be provided in the future once the individual
becomes eligible for benefits. In contrast, FLTCIP did not provide a
similar nonforfeiture benefit to enrollees facing the premium
increase.[Footnote 34]
Forty-Six Percent of Enrollees Facing a Premium Increase Made No
Changes to Their Benefits:
The most popular option among FLTCIP enrollees facing the premium
increase was to make no changes to their benefits. Specifically, 46
percent of the 146,415 enrollees facing the premium increase, or
67,511 individuals, kept the FLTCIP 1.0 plan with 5 percent ACIO.
[Footnote 35] These enrollees elected to pay the premium increase.
Many enrollees chose to reduce their inflation protection benefits to
a 4 percent ACIO, while either switching to the FLTCIP 2.0 plan (26
percent) or retaining the FLTCIP 1.0 plan (20 percent). In addition,
1.6 percent of enrollees facing the premium increase, or 2,344
individuals, lapsed their coverage and as such are no longer enrolled
in FLTCIP.[Footnote 36] (See figure 2.)
Figure 2: Benefit Selections of Federal Long Term Care Insurance
Program (FLTCIP) Enrollees Facing the Premium Increase:
[Refer to PDF for image: pie-chart]
No change (FLTCIP 1.0 plan with 5% ACIO): 46.1%;
FLTCIP 2.0 plan with 4% ACIO: 25.7%;
FLTCIP 1.0 plan with 4% ACIO: 20.0%;
FLTCIP 2.0 plan with 5% ACIO: 5.6%;
Lapse: 1.6%;
Other benefit changes[A]: 0.5%;
No selection[B]: 0.4%.
Source: GAO analysis of John Hancock data.
Notes: This figure reflects the benefits selections of the 146,415
enrollees facing the premium increase. The FLTCIP 1.0 plan was offered
to enrollees during the program's first contract period, and the
FLTCIP 2.0 plan was offered to enrollees during the second contract
period. ACIO stands for automatic compound inflation option.
Percentages do not sum to 100 because of rounding.
[A] Other benefit changes include, for example, changing a daily
benefit amount.
[B] No selection includes enrollees who died or became claimants prior
to the effective date of the premium increase.
[End of figure]
Of the 144,071 enrollees who did not lapse their FLTCIP coverage after
the premium increase was announced, 76 percent (109,114 individuals)
experienced a premium increase and 23 percent (32,787 individuals)
experienced a premium reduction as a result of their benefit
selections. Premiums did not change for the remaining enrollees. The
extent to which enrollees' premiums changed varied considerably based
on their benefit selections.[Footnote 37] For example, over 90 percent
of those who retained their 5 percent ACIO had a premium increase of
20 percent or more. In contrast, most enrollees who selected a 4
percent ACIO experienced a premium change of 5 percent or less. (See
table 2.)
Table 2: Distribution of Premium Changes Experienced by Federal Long
Term Care Insurance Program (FLTCIP) Enrollees Subject to the Premium
Increase, by Benefit Selection:
Premium change: Decrease more than 5%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 18;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0;
Other benefits changes[B] (n=779): 42;
All enrollees[C] (n=144,071): 5.
Premium change: Decrease 0.1% to 5%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 59;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 21;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0;
Other benefits changes[B] (n=779): 2;
All enrollees[C] (n=144,071): 18.
Premium change: No change;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 5;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 0;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0;
Other benefits changes[B] (n=779): 0;
All enrollees[C] (n=144,071): 2.
Premium change: Increase up to 5%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 35;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 32;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0;
Other benefits changes[B] (n=779): 4;
All enrollees[C] (n=144,071): 17.
Premium change: Increase 5.1% to 10%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 20;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0;
Other benefits changes[B] (n=779): 4;
All enrollees[C] (n=144,071): 6.
Premium change: Increase 10.1% to 15%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 5;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 1;
Other benefits changes[B] (n=779): 2;
All enrollees[C] (n=144,071): 2.
Premium change: Increase 15.1% to 20%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 0;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 4;
Other benefits changes[B] (n=779): 3;
All enrollees[C] (n=144,071): 1.
Premium change: Increase 20.1% to 25%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 91;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 2;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 4;
Other benefits changes[B] (n=779): 1;
All enrollees[C] (n=144,071): 43.
Premium change: Increase more than 25%;
Enrollee benefit selections (percent):
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 2;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 91;
Other benefits changes[B] (n=779): 42;
All enrollees[C] (n=144,071): 6.
Source: GAO analysis of John Hancock data.
Notes: The FLTCIP 1.0 plan was offered to enrollees during the
program's first contract period, and the FLTCIP 2.0 plan was offered
to enrollees during the second contract period. ACIO stands for
automatic compound inflation option. Enrollees' premium changes varied
greatly depending on their age at enrollment and the benefits they had
prior to the premium increase, as well as those they selected as a
result of the increase. OPM's 25 percent cap on premium increases did
not apply to enrollees who made any modifications to their benefits--
including changing their inflation protection coverage or benefit
plan. This table does not include 2,344 individuals who were subject
to the premium increase but subsequently lapsed their coverage. Some
percentages do not sum to 100 because of rounding.
[A] If an enrollee's decision to keep the FLTCIP 1.0 plan and switch
to the 4 percent ACIO resulted in a premium decrease, John Hancock
increased the enrollee's daily benefit amount so that the monthly
premium remained within 2 dollars of the original premium.
[B] Other benefit changes include, for example, changing a daily
benefit amount.
[C] "All enrollees" includes 533 individuals who made no selection
because they died or became claimants prior to the effective date of
the premium increase.
[End of table]
On average, enrollee premiums increased 14 percent, or $16.30 per
month. Those who maintained their FLTCIP 1.0 plan with 5 percent ACIO
experienced an average premium increase of 24 percent, or $28.54 per
month. In contrast, enrollees who selected FLTCIP 1.0 plan with 4
percent ACIO experienced a small change in their premiums of about $2
or less per month, while those who selected the FLTCIP 2.0 plan with 5
percent ACIO experienced an average premium increase of 38 percent, or
$40.56 per month. Table 3 summarizes the impact of enrollee benefit
selections on their premiums.
Table 3: Summary of Premium Changes Experienced by Federal Long Term
Care Insurance Program (FLTCIP) Enrollees Subject to the Premium
Increase, by Benefit Selection:
Average change;
Enrollee benefit selections:
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 24%;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0%;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 1%;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 38%;
Other benefits changes[B] (n=779): 28%;
All enrollees[C] (n=144,071): 14%.
Average change, in dollars per month;
Enrollee benefit selections:
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): $28.54;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): -$0.12;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): $2.14;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): $40.56;
Other benefits changes[B] (n=779): $20.71;
All enrollees[C] (n=144,071): $16.30.
Range of changes;
Enrollee benefit selections:
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2% to 25%;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): -6% to 2%;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): -32% to 37%;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): -1% to 46%;
Other benefits changes[B] (n=779): -89% to 881%;
All enrollees[C] (n=144,071): -89% to 881%.
Range of changes, in dollars per month;
Enrollee benefit selections:
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): $2.62 to $177.90;
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): -$1.85 to $2.14;
FLTCIP 2.0 plan with 4% ACIO (n=37,648): -$75.54 to $73.16;
FLTCIP 2.0 plan with 5% ACIO (n=8,240): -$3.71 to $189.91;
Other benefits changes[B] (n=779): -$253.41 to $691.32;
All enrollees[C] (n=144,071): -$253.41 to $691.32.
Source: John Hancock data.
Notes: The FLTCIP 1.0 plan was offered to enrollees during the
program's first contract period, and the FLTCIP 2.0 plan was offered
to enrollees during the second contract period. ACIO stands for
automatic compound inflation option. Enrollees' premium changes varied
greatly depending on their age at enrollment and the benefits they had
prior to the premium increase, as well as those they selected as a
result of the increase. OPM's 25 percent cap on premium increases did
not apply to enrollees who made any modifications to their benefits--
including changing their inflation protection coverage or benefit
plan. This table does not include the 2,344 individuals who were
subject to the premium increase and subsequently lapsed their coverage.
[A] If an enrollee's decision to keep the FLTCIP 1.0 plan and switch
to the 4 percent ACIO resulted in a premium decrease, John Hancock
increased the enrollee's daily benefit amount so that the monthly
premium remained within 2 dollars of the original premium.
[B] Other benefit changes include, for example, changing a daily
benefit amount.
[C] "All enrollees" includes 533 individuals who made no selection
because they died or became claimants prior to the effective date of
the premium increase.
[End of table]
Changes to Actuarial Assumptions Used to Set FLTCIP Premiums Resulted
in a Projected Increase in Future Claims:
Since FLTCIP's inception in 2002, John Hancock has revised the
actuarial assumptions used to set the program's premiums--
specifically, those made for the program's lapse, mortality,
morbidity, and return on investment. Collectively, changes to FLTCIP's
actuarial assumptions resulted in a projected increase in the total
amount of future claims payments.
Changes to FLTCIP's lapse and mortality assumptions reflect an
expectation that a larger portion of enrollees will voluntarily
maintain their coverage over time and will live longer than originally
expected. Specifically, John Hancock decreased FLTCIP's lapse
assumption for the first few years an enrollee had a policy as well as
for later years, as reflected in the ultimate lapse rate. For example,
between the first and second contract, the assumption for FLTCIP's
ultimate lapse rate decreased from 2 percent of enrollees lapsing per
year to between 0.25 and 1.25 percent per year, with variations based
on the enrollee's age at enrollment. John Hancock also decreased
FLTCIP's mortality assumptions, reflecting an expectation that more
FLTCIP enrollees will reach older ages than the program originally
expected. In addition to the changes in the lapse and mortality
assumptions, John Hancock revised FLTCIP's morbidity assumption to
reflect a reduction in the amount of claims costs FLTCIP expects for
enrollees of any given age. John Hancock officials we interviewed
explained that they revised the program's lapse, mortality, and
morbidity assumptions to reflect FLTCIP's experience during the first
contract period. In addition, the morbidity assumption was also
updated to reflect the carrier's experience, and knowledge of industry
experience, with long-term care insurance policies.
When setting premiums for FLTCIP's second contract period, John
Hancock used the same return on investment assumption--6.5 percent--
that it used when setting premiums for the first contract period.
Despite FLTCIP's lower-than-expected return on investment experience
during the first contract period, John Hancock officials told us that
they used the same return on investment assumption because they
revised the program's investment strategy.[Footnote 38] The new
strategy, which invests a considerable portion of FLTCIP assets in
public equities, has a higher expected rate of return than the
investment strategy utilized during the first contract period,
according to John Hancock officials.
As a result of changes made to FLTCIP's lapse and mortality
assumptions--and despite those made to the morbidity assumption--John
Hancock increased projections for the total amount of FLTCIP claims
payments.[Footnote 39] While John Hancock expects that the amount of
claims payments made for enrollees of each age will be less than
initially assumed, it also expects more enrollees to continue their
coverage and reach older ages. Consequently, FLTCIP expects to pay
claims for a greater number of enrollees than initially expected.
Additionally, since the expected amount of claims payments increases
with age, the total amount of future claims payments is projected to
be greater than initially expected. Finally, while the amount of
premiums collected each year is also projected to grow as more
enrollees maintain their coverage, John Hancock officials told us that
this additional income will likely be offset by the higher total costs
associated with future claims.
Since setting premiums for FLTCIP's second contract period, John
Hancock has not changed the program's lapse, mortality, or morbidity
assumptions, although it has decreased its assumptions for FLTCIP's
return on investment. John Hancock officials stated that they reduced
FLTCIP's return on investment assumption, from 6.5 percent (at the
time they set premiums for the second contract period) to 6.25 percent
(as of September 30, 2010), to reflect an overall decrease in
investment returns earned throughout the financial industry. John
Hancock officials noted that this change does not raise concerns about
the adequacy of current premiums and does not itself warrant an
additional increase in premiums because they had included margins for
moderately adverse conditions when setting FLTCIP premiums for the
second contract period.
The changes made to FLTCIP actuarial assumptions since its inception
in 2002 are generally similar to those made throughout the long-term
care insurance industry during that time frame. For example, the
carriers whose officials we interviewed generally decreased their
ultimate lapse rate assumptions since 2002, and as of 2011, all of
these carriers used ultimate lapse rate assumptions of 1.5 percent or
less.[Footnote 40] Similar to FLTCIP, five of the six carriers also
reduced their mortality assumptions. In addition, officials from all
of the insurance carriers we interviewed told us that they had reduced
their return on investment assumptions to varying degrees since 2002.
[Footnote 41] As a result of these changes, five of the six insurance
carriers had also increased their projections for future claims
payments and requested premium increases for at least some of their
policies, according to the officials we interviewed.[Footnote 42]
Finally, officials from the three state insurance regulators we
interviewed described similar changes to the actuarial assumptions
used in setting premiums for policies issued in their states.
OPM's Oversight Includes an Evaluation of FLTCIP's Actuarial
Assumptions and a Review of Program Communications:
OPM evaluates the actuarial assumptions proposed by carriers and
monitors how the program's experience compared to those assumptions.
In addition, OPM reviews all program communications for accuracy and
clarity.
OPM Evaluates FLTCIP's Actuarial Assumptions and Monitors Program
Experience:
OPM evaluates the actuarial assumptions carriers propose for FLTCIP to
ensure that the assumptions are reasonable and collectively support
the premiums proposed for FLTCIP plans. In its RFPs for FLTCIP's first
and second contracts, OPM asked carriers to include in their offers,
among other things, detailed information about the assumptions they
used to calculate premiums. In reviewing offers for both the first and
second contracts, OPM convened a panel of officials--including
actuarial staff--to evaluate the actuarial assumptions carriers
proposed. The panel reviewed the actuarial assumptions, methodology,
and resulting premium rates for reasonableness and the likelihood they
would achieve the goal of FLTCIP solvency and long-term premium
stability. OPM also hired an independent actuarial firm to assist the
agency in its evaluation. The actuarial firm used its own data to
evaluate the reasonableness of the carriers' proposed assumptions and
the adequacy and appropriateness of proposed premiums. In addition, as
part of its evaluation, OPM asked additional questions of officials
from carriers that submitted offers. OPM officials we interviewed
stated that the purpose of these communications included gaining a
better understanding of how the carriers developed their assumptions
and why they considered them reasonable. OPM officials told us that
they used the information gathered throughout their evaluation process
to inform their decision making when awarding the FLTCIP contracts.
OPM's award of each contract signified its acceptance of the premiums
proposed by the winning carrier; the premiums were based on the
actuarial assumptions outlined in the carrier's response to the RFP.
However, OPM has acknowledged the risks involved in insuring FLTCIP
enrollees, including the potential for future premium increases. The
agency noted that such risks called for close government monitoring.
Once FLTCIP's premiums are finalized with the award of the contract,
OPM monitors how FLTCIP's experience compares with the actuarial
assumptions that were used to set premiums. As part of both FLTCIP
contracts, OPM required the carrier to submit regular reports about
the program's experience. These status reports include a summary of
FLTCIP's experience in key actuarial areas--lapse, mortality,
morbidity, and return on investment--and a comparison of this
experience to the program's assumptions. The reports also include the
carrier's projections about FLTCIP's ability to pay for future claims
and expenses. Beginning in 2004, OPM required the carrier to submit
these reports on an annual basis, and the agency now requires these
reports be submitted semiannually.[Footnote 43] The agency also
required the carrier to submit quarterly reports about the experience
of FLTCIP's invested assets, which it uses to compare the actual
returns to the return on investment assumption. OPM officials stated
that the agency uses the information included in these reports to
monitor FLTCIP's overall experience and to evaluate whether any
changes to the program are warranted.
OPM's oversight of FLTCIP's actuarial assumptions is similar to that
of state insurance regulators, although its oversight of the program's
experience differs from that of states. According to insurance carrier
officials we interviewed, carriers provide a similar amount and type
of information to state insurance regulators about the actuarial
assumptions used to set premiums as is provided to OPM for FLTCIP.
However, these officials also noted that many states do not require
carriers to provide any additional information related to the
experience of their plans, unless the carrier is seeking to increase
premiums for existing enrollees. Thus, states' ability to monitor the
experience of long-term care insurance policies issued in their states
may be more limited than OPM's ability. In addition, OPM receives more
information about FLTCIP's actuarial assumptions and experience
compared with other employers. Officials from the carriers we
interviewed stated that they only provide employers with information
on the actuarial assumptions and experience of their plans when such
information is specifically requested, which rarely occurs.
OPM Reviews All FLTCIP Communications for Accuracy and Clarity:
OPM reviews all FLTCIP communications--including materials intended
for current enrollees as well as marketing materials intended for
prospective enrollees--for accuracy and clarity. As part of both
FLTCIP contracts, OPM has required the carrier to submit all
communication materials to OPM prior to their use; OPM then reviews
and approves the materials for use. Specifically, OPM program
officials review all communications materials for technical accuracy
and clarity. They also review all materials to ensure that information
provided to prospective or current enrollees is consistent across
materials. In addition, some FLTCIP communication materials undergo a
second review by OPM's Office of Communications. Specifically, all
materials intended for the general public--for example, Web site
material and advertisements--as well as for new retirees are reviewed
by OPM communications officials. These reviews are focused on ensuring
the clarity of materials distributed to the general public, which may
not be familiar with FLTCIP or long-term care insurance. OPM officials
said that their goal in reviewing communications is to ensure that
current and prospective enrollees have accurate information so that
they can make informed decisions regarding FLTCIP. Officials also told
us that their process for reviewing communication materials has not
changed since FLTCIP's inception, but indicated that the quality of
their reviews has improved as they have gained a deeper understanding
of how to effectively communicate with the eligible population.
OPM has taken some actions to address concerns that communications
about FLTCIP during the first contract period were not clear. For
example, in response to concerns that were raised at the time of
FLTCIP's premium increase--namely, that some enrollees with ACIO
coverage did not think their premiums could ever increase--OPM
required John Hancock to include more prominent disclaimers on its
marketing materials and applications for enrollment to ensure that
prospective enrollees understood the potential for future premium
increases.
Unlike OPM, state regulators and employers may not review and approve
all long-term care insurance communication materials prior to their
use by carriers. Not all states receive communication materials for
review. Specifically, according to officials from several carriers we
interviewed, more than half of states require carriers to submit at
least some communication materials, such as marketing materials, prior
to their use. However, not all of these states require that the
materials be approved before they are used. Additionally, according to
the carriers we interviewed, employers offering long-term care
insurance generally have a limited ability to modify the communication
materials sent to their employees. Carriers generally make a number of
standard communication materials available from which each employer
can select. Officials from the carriers we interviewed stated that
some employers review these materials, but they generally do not
suggest substantive changes to the materials since doing so would
require the carrier to refile the materials with at least some states
and could thus potentially delay program time frames, including
enrollments.
Agency and Third-Party Comments:
We provided OPM with a draft of this report and provided John Hancock
with portions of the draft report for review. OPM and John Hancock
provided technical comments, which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the
Director of OPM and appropriate congressional committees. The report
also will be 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) 512-7114 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 VII.
Signed by:
John E. Dicken:
Director, Health Care:
[End of section]
List of Requesters:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Herb Kohl:
Chairman:
The Honorable Bob Corker:
Ranking Member:
Special Committee on Aging:
United States Senate:
The Honorable Daniel K. Akaka:
Chairman:
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 Ron Wyden:
United States Senate:
[End of section]
Appendix I: Influence of Carriers‘ Business Strategies on Their
Interest in the Federal Long Term Care Insurance Program (FLTCIP):
Table:
[Detract goes from 0 to -5. Attract goes from 0 to +5]
Carriers‘ business strategies, including plans related to their long-
term care insurance product line:
First contract:
Mean: 0;
Range of responses: -5 to +5;
Response of an individual carrier: -5,-4,-4, +4, +4, +5;
Second contract:
Mean: -1;
Range of responses: -5 to +5;
Response of an individual carrier: -5, -5, -4, +2, +4, +5.
Carriers‘ abilities to independently insure FLTCIP enrollees:
First contract:
Mean: -1;
Range of responses: -4 to +3;
Response of an individual carrier: -4, -4, -3, 0, 0, +3;
Second contract:
Mean: 0;
Range of responses: -5 to +4;
Response of an individual carrier: -5, -3, 0, 0, +3, +4.
Carriers‘ abilities to independently administer FLTCIP:
First contract:
Mean: -1;
Range of responses: -4 to +5;
Response of an individual carrier: -4, -4, -3, 0, 0, +5;
Second contract:
Mean: 0;
Range of responses: -4 to +5;
Response of an individual carrier: -4, -3, 0, 0, +4, +5.
Carriers‘ abilities or interests in finding a partner to insure
enrollees or administer FLTCIP:
First contract:
Mean: +1;
Range of responses: -3 to +5;
Response of an individual carrier: -3, -2, -1, 0, +4, +5;
Second contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4, 0, 0, 0, 0, 0.
Carriers‘ interests in obtaining name recognition in the long-term
care insurance market:
First contract:
Mean: +1;
Range of responses: -4 to +4;
Response of an individual carrier: -4, 0, 0, +4, +4, +5;
Second contract:
Mean: +1;
Range of responses: +1;
Response of an individual carrier: 0, 0, 0, 0, +1, +4.
Potential for FLTCIP to affect carriers‘ services to other clients:
First contract:
Mean: -3;
Range of responses: -5 to 0;
Response of an individual carrier: -5, -5, -2, -1, -1, 0.
Second contract:
Mean: -2;
Range of responses: -5 to 0;
Response of an individual carrier: -5, -4, -1, -1, 0, 0.
Carriers‘ interests in establishing or maintaining contracting ties
with the federal government:
First contract:
Mean: 0;
Range of responses: -3 to +3;
Response of an individual carrier: -3, -1, 0, 0, 0, +3;
Second contract:
Mean: 0;
Range of responses: -5 to +3;
Response of an individual carrier: -5, -1, 0, 0, +3, +3.
Carriers‘ abilities to cover program start-up costs, although such
costs would be reimbursed by the program:
First contract:
Mean: 0;
Range of responses: -2 to +2;
Response of an individual carrier: -2, 0, 0, 0, 0, +2;
Second contract:
Mean: 0;
Range of responses: -2 to 0;
Response of an individual carrier: -2, 0, 0, 0, 0, 0.
Carriers‘ abilities to meet the requirement to be licensed in every
state:
First contract:
Mean: 0;
Range of responses: 0 to +2;
Response of an individual carrier: 0, 0, 0, 0, 0, +2;
Second contract:
Mean: 0;
Range of responses: 0 to +2;
Response of an individual carrier: 0, 0, 0, 0, 0, +2.
Source: GAO interviews with insurance carrier officials.
Notes: Officials from each of the six carriers we interviewed were
asked whether each factor affected the carrier‘s interest in FLTCIP.
If the factor influenced the carrier‘s interest, then the officials
specified whether the factor had a negative or positive effect and
rated the extent of the effect on a five-point scale, with 1
indicating a minimal effect and 5 indicating a large effect. A score
of -5 reflects a large negative influence on a carrier‘s interest, and
a score of +5 indicates a large positive influence on carrier‘s
interest in FLTCIP. A score of 0 indicates that the factor did not
have an influence.
[End of table]
[End of section]
Appendix II: Influence of Program History on Carriers‘ Interest in
FLTCIP:
Table:
[Detract goes from 0 to -5. Attract goes from 0 to +5]
FLTCIP history:
First contract: Not applicable;
Second contract:
Mean: -2;
Range of responses: -5 to +3;
Response of an individual carrier: -5, -4, -4, -2, 0; +3.
Need to transition the program from another carrier:
First contract: Not applicable;
Second contract:
Mean: -2;
Range of responses: -5 to 0;
Response of an individual carrier: -5, -4, -3, 0, 0, 0.
Likely presence of proposals from incumbent contractors:
First contract: Not applicable;
Second contract:
Mean: -1;
Range of responses: -5 to 0;
Response of an individual carrier: -5, -3, 0, 0, 0, 0.
Source: GAO interviews with insurance carrier officials.
Notes: Officials from each of the six carriers we interviewed were
asked whether each factor affected the carrier‘s interest in FLTCIP.
If the factor influenced the carrier‘s interest, then the officials
specified whether the factor had a negative or positive effect and
rated the extent of the effect on a five-point scale, with 1
indicating a minimal effect and 5 indicating a large effect. A score
of -5 reflects a large negative influence on a carrier‘s interest, and
a score of +5 indicates a large positive influence on carrier‘s
interest in FLTCIP. A score of 0 indicates that the factor did not
have an influence.
[End of table]
[End of section]
Appendix III: Influence of Program Size and Other Characteristics on
Carriers‘ Interest in FLTCIP:
Table:
Large size of the eligible population:
First contract:
Mean: +2;
Range of responses: 0 to +5;
Response of an individual carrier: 0, 0, +1, +4, +4, +5;
Second contract:
Mean: +1;
Range of responses: 0 to +5;
Response of an individual carrier: 0, 0, 0, 0, +4, +5.
A list of the names and addresses of all eligible individuals is
unavailable:
First contract:
Mean: -4;
Range of responses: -5 to 0;
Response of an individual carrier: -5, -4, -4, -4, -4, -1;
Second contract:
Mean: -2;
Range of responses: -5 to 0;
Response of an individual carrier: -5, -4, -4, -2, 0, 0.
Characteristics of the eligible population, which include a relatively
high portion of disabled individuals:
First contract:
Mean: -2;
Range of responses: -4 to +2;
Response of an individual carrier: -4, -3, 0, 0, +2;
Second contract:
Mean: -1;
Range of responses: -4 to +3;
Response of an individual carrier: -4, -3, 0, 0, 0, +3.
FLTCIP not required to guarantee coverage to all eligible individuals;
all enrollees have been subject to some underwriting:
First contract:
Mean: +3;
Range of responses: 0 to +5;
Response of an individual carrier: 0, 0, +3, +3, +5, +5;
Second contract:
Mean: +2;
Range of responses: 0 to +5;
Response of an individual carrier: 0, 0, 0, +3, +5, +5.
FLTCIP is offered as a voluntary benefit; enrollees pay the full
amount of their premiums with no employer contribution:
First contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4, -2, -1, 0, 0, 0;
Second contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4, -2, 0, 0, 0, 0.
FLTCIP is exempt from state oversight but is subject to OPM oversight:
First contract:
Mean: +2;
Range of responses: -2 to +5;
Response of an individual carrier: -2, 0, _1, +4, +4, +5;
Second contract:
Mean: +1;
Range of responses: -2 to +5;
Response of an individual carrier: -2, 0, 0, 0, +4, +5.
OPM and the carrier must agree to all program features and any changes
to these features:
First contract:
Mean: -2;
Range of responses: -4 to +1;
Response of an individual carrier: -4, -4, -2, -2, 0, +1;
Second contract:
Mean: -1;
Range of responses: -4 to +1;
Response of an individual carrier: -4, 0, 0, 0, 0, +1.
OPM must approve all expenses charged to the program:
First contract:
Mean: -1;
Range of responses: -2 to 0;
Response of an individual carrier: -2, -1, 0, 0, 0, 0;
Second contract:
Mean: 0;
Range of responses: -2 to 0;
Response of an individual carrier: -2, 0, 0, 0, 0, 0.
OPM and the carrier must agree on the timing of an open enrollment
period:
First contract:
Mean: 0;
Range of responses: 0;
Response of an individual carrier: 0, 0, 0, 0, 0, 0;
Second contract:
Mean: 0;
Range of responses: 0;
Response of an individual carrier: 0, 0, 0, 0, 0, 0.
The carrier must provide OPM with regular reports regarding FLTCIP:
First contract:
Mean: 0;
Range of responses: 0;
Response of an individual carrier: 0, 0, 0, 0, 0, 0;
Second contract:
Mean: 0;
Range of responses: 0;
Response of an individual carrier: 0, 0, 0, 0, 0, 0.
Some of the carrier‘s profit payment is based on a percentage of
premiums; carrier is not rewarded based on risk:
First contract:
Mean: -2;
Range of responses: -4 to +2;
Response of an individual carrier: -4, -3, -3, -2, 0, +2;
Second contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4, -3, -1; 0, 0, 0.
Some of the carrier‘s profit payment is subject to OPM‘s evaluation of
the carrier‘s performance:
First contract:
Mean: -1;
Range of responses: -2 to +1;
Response of an individual carrier: -2, -2, -1, 0, 0, +1;
Second contract:
Mean: 0;
Range of responses: -1 to +1;
Response of an individual carrier: -1, 0, 0, 0, 0, +1.
FLTCIP is offered under a time-limited, 7-year contract with OPM:
First contract:
Mean: +1;
Range of responses: -3 to +5;
Response of an individual carrier: -3, 0, 0, 0, +3; +5;
Second contract:
Mean: +1;
Range of responses: -1 to +5;
Response of an individual carrier: -1, 0, 0, 0, 0, +5.
After contract term, all funding/enrollees could either transfer to
new carrier or carrier may have to continue service:
First contract:
Mean: -1;
Range of responses: -3 to 0;
Response of an individual carrier: -3, -0, 0, 0, 0, 0;
Second contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4; 0, 0, 0, 0, 0.
FLTCIP contract is not automatically renewable; carriers must submit
new bids:
First contract:
Mean: +1;
Range of responses: -3 to +5;
Response of an individual carrier: -3, 0, 0, 0, +3, +5;
Second contract:
Mean: +1;
Range of responses: -2 to +5;
Response of an individual carrier: -2, 0, 0, 0, 0, +5.
The carrier is required to account for all program funds in a separate
account:
First contract:
Mean: +1;
Range of responses: 0 to +5;
Response of an individual carrier: 0, 0, 0, 0, 0, +5;
Second contract:
Mean: +1;
Range of responses: 0 to +5;
Response of an individual carrier: 0, 0, 0, 0, 0, +5.
Potential for federal audits as a result of contracting with federal
government:
First contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4, -1, 0, 0, 0, 0;
Second contract:
Mean: -1;
Range of responses: -4 to 0;
Response of an individual carrier: -4, -1, 0, 0, 0, 0.
Source: GAO interviews with insurance carrier officials.
Notes: Officials from each of the six carriers we interviewed were
asked whether each factor affected the carrier‘s interest in FLTCIP.
If the factor influenced the carrier‘s interest, then the officials
specified whether the factor had a negative or positive effect and
rated the extent of the effect on a five-point scale, with 1
indicating a minimal effect and 5 indicating a large effect. A score
of -5 reflects a large negative influence on a carrier‘s interest, and
a score of +5 indicates a large positive influence on carrier‘s
interest in FLTCIP. A score of 0 indicates that the factor did not
have an influence.
[End of table]
[End of section]
Appendix IV: Selected Features of FLTCIP Benefit Plans Offered during
the Program‘s First and Second Contract Periods:
Benefit options:
Plan feature: Coverage type:
FLTCIP 1.0 plan: Comprehensive or facilities-only[A];
FLTCIP 2.0 plan: Comprehensive.
Plan feature: Daily benefit amount[B];
FLTCIP 1.0 plan: $50 to $300, in $25 increments[C];
FLTCIP 2.0 plan: $100 to $450, in $50 increments.
Plan feature: Elimination/waiting period[D];
FLTCIP 1.0 plan: 30 or 90 service days, with incurred expenses
required;
FLTCIP 2.0 plan: 90 calendar days, no incurred expenses required.
Plan feature: Benefit period[E];
FLTCIP 1.0 plan: 3 years, 5 years, or unlimited:
FLTCIP 2.0 plan: 2 years, 3 years, 5 years, or unlimited.
Payment for covered services[F]:
Plan feature: Nursing home and assisted-living facility;
FLTCIP 1.0 plan: 100% of daily benefit amount;
FLTCIP 2.0 plan: 100% of daily benefit amount.
Plan feature: Home care and adult day care;
FLTCIP 1.0 plan: 75% of daily benefit amount;
FLTCIP 2.0 plan: 100% of daily benefit amount.
Plan feature: Hospice care;
FLTCIP 1.0 plan: 100% of daily benefit amount;
FLTCIP 2.0 plan: 100% of daily benefit amount.
Plan feature: Respite care;
FLTCIP 1.0 plan: 100% of daily benefit amount, limited to 30 times the
daily benefit amount per calendar year;
FLTCIP 2.0 plan: 100% of daily benefit amount, limited to 30 times the
daily benefit amount per calendar year.
Plan feature: Informal care provided by family members;
FLTCIP 1.0 plan: 75% of daily benefit amount, limited to 365 days in a
lifetime;
FLTCIP 2.0 plan: 100% of daily benefit amount, limited to 500 days in
a lifetime.
Plan feature: Stay-at-home benefits;
FLTCIP 1.0 plan: Caregiver training covered at seven times the daily
benefit amount per lifetime;
FLTCIP 2.0 plan: Up to 30 times the daily benefit amount for a range
of benefits, including:
* caregiver training”payable up to seven times the daily benefit
amount per lifetime,
* care planning visits,
* durable medical equipment, and,
* home modifications.
Benefits paid for these services do not otherwise reduce the total
amount of benefits payable under the plan.
Source: GAO analysis of FLTCIP program materials.
Notes: The FLTCIP 1.0 plan was available to all individuals who
enrolled during the program‘s first contract period, beginning March
25, 2002, and the FLTCIP 2.0 plan was available to those who enrolled
beginning October 1, 2009”during the program‘s second contract period.
Individuals who enrolled in the FLTCIP 1.0 plan during the first
contract period were also offered the option to switch to the FLTCIP
2.0 plan.
[A] Comprehensive coverage provides reimbursement for everything
facilities-only coverage provides plus formal or informal care at
home, care in adult day care centers, hospice care at home, and
respite services at home. Facilities-only coverage provides
reimbursement for services such as those provided in a nursing home,
assisted-living facility, hospice facility, and respite care facility,
as well as caregiver training.
[B] The daily benefit amount is the maximum amount insurance will pay
for services on a single day.
[C] Instead of a daily benefit amount, FLTCIP 1.0 enrollees with
comprehensive coverage could select a weekly benefit amount equal to
seven times the daily benefit amount.
[D] The elimination or waiting period is the length of time an
enrollee has to wait before insurance will provide coverage toward the
cost of care. Elimination periods can be specified on either a service
day (i.e., the number of days an individual must receive services
before insurance will provide coverage toward his or her cost of care)
or a calendar day basis.
[E] An enrollee‘s benefit period represents the length of time an
enrollee‘s insurance will pay for covered services at the maximum
daily benefit amount.
[F] Information about FLTCIP‘s payment for covered services is
applicable only to the comprehensive coverage option; the facilities-
only option was only available with the FLTCIP 1.0 plan.
[End of table]
[End of section]
Appendix V: Changes in the Cost of Long-Term Care Services Compared
with FLTCIP Inflation Protection Options:
To summarize changes in the cost of long-term care services from 2002
through 2010, we analyzed consumer price index data from the Bureau of
Labor Statistics on changes in the cost of nursing home care and home
care.[Footnote 44] The nursing home care index provides information
about changes in the cost of long-term care services provided in a
residential setting, such as a nursing home or an assisted-living
facility.[Footnote 45] The home care index provides information about
changes in the cost of nonmedical long-term care services provided in
the home, such as agency or individual assistance with bathing, food
preparation, or toileting.[Footnote 46] Using data from these indexes,
we compared the rate of growth in long-term care costs from 2002 (the
year that FLTCIP began) through 2010 to the inflation protection
offered by FLTCIP‘s automatic compound inflation options (ACIO)-”5
percent ACIO and 4 percent ACIO.[Footnote 47]
We found that FLTCIP‘s 4 percent and 5 percent ACIOs would both have
provided substantial protection against increases in long-term care
costs from 2002 through 2010. Specifically, according to our analysis of
consumer price index data, the cost of nursing home care increased
38 percent from 2002 through 2010, which equates to an average annual
increase of 4.1 percent. In comparison, a 5 percent ACIO would have
increased an enrollees‘ daily benefit amount by 48 percent during the
same time frame, while a 4 percent ACIO would have increased an
enrollees‘ benefit amount by 37 percent. (See figure 3.) According to
our analysis of consumer price index data, the cost of home care
increased 9 percent from 2006”-the first year data became available”-
through 2010 at an average annual increase of 2.3 percent. Both the 4
percent and 5 percent ACIO would have protected enrollees fully
against increases in the cost of such care during that period.
However, past increases in the cost of long-term care services may not
reflect future trends.
Figure 3: Percentage Change in the Cost of Nursing Home Care, 2002
through 2010, Compared with Automatic Compound Inflation Options
(ACIO) Available under the Federal Long Term Care Insurance Program
(FLTCIP):
[Refer to PDF for image: multiple line graph]
Year: 2002;
Nursing home care[A]: 0;
4% ACIO: 0;
5% ACIO: 0.
Year: 2003;
Nursing home care[A]: 6%;
4% ACIO: 4%;
5% ACIO: 5%.
Year: 2004;
Nursing home care[A]: 10%;
4% ACIO: 8%;
5% ACIO: 10%.
Year: 2005;
Nursing home care[A]: 13%;
4% ACIO: 12%;
5% ACIO: 16%.
Year: 2006;
Nursing home care[A]: 18%;
4% ACIO: 17%;
5% ACIO: 22%.
Year: 2007;
Nursing home care[A]: 25%;
4% ACIO: 22%;
5% ACIO: 28%.
Year: 2008;
Nursing home care[A]: 29%;
4% ACIO: 27%;
5% ACIO: 34%.
Year: 2009;
Nursing home care[A]: 34%;
4% ACIO: 32%;
5% ACIO: 41%.
Year: 2010;
Nursing home care[A]: 38%;
4% ACIO: 37%;
5% ACIO: 48%.
Source: GAO analysis of consumer price index data from the Bureau of
Labor Statistics and FLTCIP benefit options.
Notes: FLTCIP began offering the 4 percent ACIO in 2009.
[A] The Bureau of Labor Statistics refers to this index as ’nursing
home and adult day care services.“ However, changes in the index
reflect the cost of residential facility-based services, such as those
provided at nursing homes and assisted-living facilities, but not
those associated with adult day care services.
[End of figure]
[End of section]
Appendix VI: Changes to FLTCIP Performance Metrics:
A portion of the profit payments made to the FLTCIP carrier is based on
the Office of Personnel Management‘s (OPM) evaluation of the carrier‘s
performance. The FLTCIP contract outlines both the performance
measures used and the target performance values that the carrier must
meet in order to receive all of the performance-based portion of the
profit payments. With FLTCIP‘s second contract, OPM and the FLTCIP
carrier agreed to modify the performance metrics used to determine the
carrier‘s profit payment. These modifications included adding or
removing performance categories, revising performance measures, and
changing target performance values. Table 4 outlines changes made to
FLTCIP performance metrics since the second contract was awarded.
Table 4: Federal Long Term Care Insurance Program (FLTCIP) Performance
Metrics, by Contract:
Administrative expense savings:
Performance measure: Actual administrative expenses less than budget;
Target performance values:
First contract: Actual administrative expenses less than 105% of
budget;
Second contract: Actual administrative expenses less than 100% of
budget.
Claims experience:
Performance measure: Cumulative claims experience compared with
expectations[A];
Target performance values: First contract: Cumulative
claims experience is no greater than 110% of expectations;
Second contract: Not included.
Customer service:
Performance measure: Billing: timeliness of posting payroll and annuity
payments;
Target performance values:
First contract: 90% of payments posted within 2 business days;
Second contract: Same.
Performance measure: Billing: timeliness of processing automatic bank
withdraw reversals[B];
Target performance values:
First contract: 90% of reversals processed within 2 business days;
Second contract: Same.
Performance measure: Billing: timeliness of processing billing changes;
Target performance values: First contract: 90% of billing changes
processed within 3 business days;
Target performance values: Second
contract: Same.
Performance measure: Billing: timeliness of sending payroll bills;
Target performance values:
First contract: 95% of payroll bills sent within requisite time frame;
Second contract: Same.
Performance measure: Call center: call abandonment rate;
Target performance values:
First contract: 3% or fewer calls abandoned;
Second contract: Not included.
Performance measure: Call center: call answering speed;
Target performance values:
First contract: 85% of calls answered within 20 seconds;
Second contract: Same.
Performance measure: Call center: customer satisfaction;
Target performance values:
First contract: 90% of surveyed customers rate their satisfaction
level with customer service as satisfied or very
satisfied;
Second contract: Same.
Performance measure: Call center: portion of customer service
representatives certified as long-term care insurance specialists;
Target performance values:
First contract: Not included;
Second contract: 95% of customer service representatives are certified
as long-term care insurance specialists within 9 months of assuming
duties.
Performance measure: Call center: timeliness of callbacks;
Target performance values:
First contract: 90% of calls returned within 1 business day, and 99
percent of calls returned within 2 business days;
Second contract: Same.
Performance measure: Call center: timeliness of response to written or
e-mail inquiries;
Target performance values:
First contract: 90% of inquires responded to within 5 business days;
Second contract: 90% of inquires responded to within 5 business days,
and 99% of inquiries responded to within 10 business days.
Performance measure: Care coordination: customer satisfaction;
Target performance values:
First contract: 94% of surveyed customers rate their satisfaction
level with care coordination as satisfied or very satisfied;
Second contract: 95% of surveyed customers rate their satisfaction
level with care coordination as satisfied or very satisfied.
Performance measure: Care coordination: timeliness of benefit
determinations;
Target performance values:
First contract: 95% of determinations completed within 10 business
days;
Second contract: 95% of determinations completed within 5 business
days, and 99% of determinations completed within 10 business days.
Performance measure: Claims: accuracy of claims payments;
Target performance values:
First contract: 98% of claims are paid accurately the first time;
Second contract: Same.
Performance measure: Claims: timeliness of claims payments;
Target performance values:
First contract: 98% of claims paid within 10 business days;
Second contract: 98% of claims paid within 5 business days.
Performance measure: Underwriting: timeliness of initial underwriting
decisions;
Target performance values:
First contract: 95% of applications underwritten within 5 business
days, and 97% of applications underwritten within 10 business days;
Second contract: Same.
Performance measure: Underwriting: timeliness of reconsideration
decisions;
Target performance values:
First contract: 95% of initial reconsiderations completed within 10
business days, and 97% of initial reconsiderations completed within 15
business days; 97% of secondary reconsiderations completed within 30
days;
Second contract: 95% of initial reconsiderations completed within 10
business days, and 97% of initial reconsiderations completed within 15
business days; 99% of secondary reconsiderations completed within 30
business days.
Enrollment:
Performance measure: Actual enrollment compared with enrollment goals;
Target performance values:
First contract: Actual enrollment is 90% of enrollment goal;
Second contract: Not included.
Marketing and education effectiveness:
Performance measure: Success in increasing positive awareness of FLTCIP
among employees;
Target performance values:
First contract: Not included;
Second contract: Conduct agreed-upon marketing and outreach
activities, and 90% of surveyed Web users, callers, and seminar
attendees say that their awareness of FLTCIP has increased.
Responsiveness to OPM:
Performance measure: Timeliness of reporting significant events to
OPM[C];
Target performance values:
First contract: Significant events reported within 10 business days;
Second contract: Same.
Performance measure: Timeliness of addressing deficiencies reported by
OPM;
Target performance values:
First contract: Detailed plans for correcting deficiencies provided
within 10 business days following OPM notification of deficiencies;
Second contract: Same.
Performance measure: General working relationship with OPM;
Target performance values:
First contract: No documented inattention or indifference to effective
operations or responsiveness to OPM;
Second contract: Same.
Performance measure: Monitoring and reporting on industry trends to
OPM;
Target performance values:
First contract: Monthly updates on industry trends and program
recommendations provided to OPM;
Second contract: Not included.
Performance measure: Measures initiated by contractor to enhance
productivity or reduce costs;
Target performance values: First contract: Not included;
Second contract: OPM evaluation of contractor reports and audited
financial statements.
Web site:
Performance measure: Web site availability;
Target performance values:
First contract: Not included;
Second contract: 99% of the time Web servers remain accessible and
fully functional for FLTCIP customers.
Performance measure: Web site satisfaction;
Target performance values:
First contract: Not included;
Second contract: 90% of surveyed enrollees rate their Web site
satisfaction level as satisfied or very satisfied.
Return on investment:
Performance measure: Investment performance[A];
Target performance values:
First contract: Meet or exceeded the investment return benchmark;
Second contract: Not included.
Source: GAO analysis of FLTCIP contracts.
Notes: Unless otherwise noted, the carrier's performance on the metric
was to be assessed annually. For the first contract period, OPM
evaluated the FLTCIP carrier's performance in these metrics beginning
in fiscal year 2006. OPM used different metrics to assess the carrier's
performance prior to fiscal year 2006.
[A] During the first contract period, this performance metric was
assessed every 3 years.
[B] Individuals may allow FLTCIP to deduct money from their bank
accounts to pay premiums through automatic bank withdrawal. Reversals
of these withdrawals may occur as a result of insufficient funds.
[C] Significant events are those that may be expected to have a
material effect upon the carrier's ability to meet its contractual
obligations to OPM. Such events may include the disposal of 25 percent
or more of FLTCIP assets within a 6-month period, the termination of a
contract or subcontract that may have an effect on the carrier's
ability to meet its contractual obligations, or the discovery of fraud.
[End of table]
[End of section]
Appendix VII GAO Contact and Staff Acknowledgments:
GAO Contact:
John E. Dicken, (202) 512-7114 or dickenj@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Michelle B. Rosenberg,
Assistant Director; Coy J. Nesbitt; Laurie Pachter; Patricia Roy; and
Brienne Tierney made key contributions to this report.
[End of section]
Footnotes:
[1] Long-term care refers to a range of support services provided to
people who, because of cognitive impairment, 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.
[2] Medicaid is a joint federal-state program that finances health
care for certain categories of low-income individuals.
[3] Pub. L. No. 106-265, 114 Stat. 762 (2000).
[4] Program administration duties include items such as marketing,
communicating with enrollees, and paying claims.
[5] In this report, we use ’John Hancock“ to refer to both John
Hancock and its subsidiary Partners when we are referring to FLTCIP‘s
second contract period.
[6] See GAO, Long-Term Care Insurance: Federal Program Compared
Favorably with Other Products, and Analysis of Claims Trend Could
Inform Future Decisions, [hyperlink,
http://www.gao.gov/products/GAO-06-401] (Washington, D.C.: Mar. 31,
2006).
[7] We also contacted another insurance carrier that declined our
request for an interview, but nonetheless provided us with some
information regarding the factors that affected its interest in FLTCIP.
[8] Metropolitan Life Insurance Company, Market Survey of Long-Term
Care Costs (Westport, Conn., October 2010).
[9] This estimate includes spending on nursing home care, home health
care, and hospital-based nursing and home health care, as well as
spending through Medicaid home- and community-based waiver programs
that provide certain low-income individuals in some states with access
to home- and community-based long-term care services. The estimate
was prepared by the Centers for Medicare & Medicaid Services‘ Office
of the Actuary based on 2009 National Health Expenditures data and
other unpublished sources.
[10] Underwriting is the process of reviewing an applicant‘s responses
to questions, including medical and health-related questions, 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. In some cases, underwriting also includes a review
of the applicant‘s medical records and the results of the applicant‘s
interview with a nurse.
[11] Some plans offer a nonforfeiture benefit option, which allows
enrollees who lapse to obtain coverage for their long-term care costs,
up to the total amount of premiums the enrollees‘ paid prior to
lapsing. As such, premiums paid by those who lapse but who had
nonforfeiture benefits would subsidize other enrollees‘ claims to a
smaller extent, or possibly not at all.
[12] In 2009, the top four carriers offering long-term care insurance
accounted for over 50 percent of all covered lives.
[13] There is no standard definition of ’moderately adverse conditions;“
rather, the actuary must determine for each long-term care insurance
policy the appropriate margin for error for the assumptions used to
calculate premiums.
[14] Pub. L. No. 106-265, §§ 9003(a), (d)(1); 9005(a); 114 Stat. 762,
764-66, 767-8 (codified at 5 U.S.C. §§ 9003(a), (d)(1); 9005(a)).
[15] The 25 percent cap on premium increases applied only to those who
made no changes to their benefits.
[16] Pub. L. No. 106-265, § 9004(e), 114 Stat. 762, 767 (codified at 5
U.S.C. § 9004(e)).
[17] Qualified relatives include current spouses of employees and
retirees, as well as same-sex domestic partners of active and retired
federal and Postal Service employees; 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.
[18] FLTCIP held its first open enrollment period when the program
first began in 2002 and held its second open enrollment from April 4,
2011, through June 24, 2011. Same-sex domestic partners were not
eligible to apply for FLTCIP coverage during the program‘s first open
enrollment period in 2002; they first became eligible for coverage in
July 2010.
[19] Newly hired federal and Postal Service employees and newly active
members of the uniformed services who apply for FLTCIP coverage within
60 days of their employment may do so using an abbreviated
underwriting application, as can their spouses.
[20] FLTCIP enrollees become eligible for benefits once a licensed
health care practitioner certifies, and the program agrees, that the
enrollee (1) is unable to perform at least two activities of daily
living without substantial assistance for a period expected to last at
least 90 days or (2) needs substantial supervision because of a severe
cognitive impairment, such as Alzheimer‘s disease.
[21] Although FLTCIP did not guarantee that premiums would remain
stable, some individuals who selected the 5 percent ACIO benefit”which
increases enrollees benefits each year without a routine increase in
premiums”believed that their premiums would never increase. At an
October 14, 2009, joint hearing of the Senate Special Committee on
Aging and the Subcommittee on Oversight of Government Management, the
Federal Workforce and the District of Columbia of the Senate Committee
on Homeland Security and Governmental Affairs, members of Congress and
others questioned the clarity of FLTCIP‘s marketing of this benefit.
[22] At the time of both of OPM‘s RFPs, business strategy had a
positive influence on three of the carriers‘ interest in FLTCIP and a
negative influence on three of the carriers‘ interest. However, the
influence on specific carriers differed for the first and second
solicitations. Specifically, business strategy had a positive
influence on two carriers for both solicitations and a negative
influence on two carriers for both solicitations. For the remaining
two carriers, business strategy affected their interests differently
at the time of the first and second solicitations.
[23] Specifically, in 2009, Unum halted sales of long-term care
insurance policies in the individual market, and in 2010, John Hancock
stopped sales of long-term care insurance policies in the group
market. MetLife discontinued sales of all of its long-term care
insurance policies in 2011. In addition, the carrier that we contacted
but that declined our request for an interview discontinued sales of
long-term care insurance policies in the individual market in 2003.
[24] In our prior work, we noted that the lack of home addresses posed
a significant marketing challenge for FLTCIP because the insurance
carriers we interviewed told us that mailing information directly to
eligible individuals‘ homes is critical to market long-term care
insurance plans. See GAO, Long-Term Care Insurance: Federal Program
Has a Unique Profit Structure and Faced a Significant Marketing
Challenge, [hyperlink, http://www.gao.gov/products/GAO-07-202]
(Washington, D.C.: Dec. 29, 2006).
[25] The federal government has taken steps to increase the
recruitment, hiring, and retention of people with disabilities, and to
provide these individuals with benefits.
[26] New program enrollees were automatically enrolled in the FLTCIP
2.0 plan, while individuals already enrolled in FLTCIP were able to
switch to the FLTCIP 2.0 plan.
[27] The FLTCIP 1.0 plan offered applicants the ability to select
between comprehensive and facilities-only coverage, whereas the FLTCIP
2.0 plan only offers comprehensive coverage. Comprehensive coverage
provides reimbursement for everything that facilities-only coverage
provides plus formal or informal care at home, care in adult day care
centers, hospice care at home, and respite services at home.
[28] OPM and John Hancock have agreed to provide a method for an
enrollee to adjust his or her daily benefit amount if they determine
that the cumulative change in the cost of long-term care services is
significantly higher than the enrollee‘s selected ACIO rate.
Increasing the daily benefit amount to account for a higher rate of
inflation would result in a higher premium.
[29] ’Public equities“ refers to assets invested in public companies”
for example, via the purchase of stocks. John Hancock plans to invest
75 percent of the assets corresponding to FLTCIP‘s long-term
liabilities in public equities. However, the portion of total program
assets corresponding to FLTCIP‘s long-term liabilities will change
over time. As of the end of 2010, 42 percent of FLTCIP‘s total assets”
including 58 percent of assets corresponding to long-term liabilities”
were invested in public equities.
[30] The profit payments are intended as profits, but do not ensure
that the carrier realizes a profit because the payments are not linked
to the carrier‘s actual costs. In addition to profit payments, FLTCIP
pays for the program‘s expenses, such as those for marketing,
underwriting, and claims administration. For additional information on
the unique nature of the FLTCIP profit structure, see GAO-07-202.
[31] 5 C.F.R. § 875.213 (2011).
[32] If an enrollee‘s decision to keep the FLTCIP 1.0 plan and switch
to the 4 percent ACIO resulted in a premium decrease, John Hancock
increased the enrollee‘s daily benefit amount so that the monthly
premium remained within 2 dollars of the original premium.
[33] Enrollees with certain benefit options-”those with an unlimited
benefit period or facilities-only coverage-”could only switch to the
FLTCIP 2.0 plan if they also reduced their inflation protection
benefit to the 4 percent ACIO.
[34] FLTCIP does, however, provide all enrollees with a standard
contingent nonforfeiture benefit. To qualify for this benefit, an
enrollee‘s premium must have increased, over the lifetime of the
policy, from 10 to 200 percent, depending on the individual‘s age at
the time he or she applied for coverage. No FLTCIP enrollees qualified
for this benefit at the time of the premium increase.
[35] Keeping the FLTCIP 1.0 plan with 5 percent ACIO (i.e., making no
changes to benefits) was the default provided to enrollees facing the
premium increase and thus required no action by the enrollees.
[36] John Hancock officials reported that the 1.6 percent lapse rate
was consistent with lapse rates reported by other long-term care
insurance carriers following a premium increase.
[37] Changes to enrollees‘ premiums were also affected by individuals‘
age at the time they applied for coverage and the benefits they had
prior to the premium increase. In addition, OPM‘s 25 percent cap on
premium increases did not apply to enrollees who made any
modifications to their benefits-”including changing their inflation
protection coverage or benefit plan.
[38] According to John Hancock officials, the return on investment
assumption used to set premiums would have decreased had they not
changed FLTCIP‘s investment strategy.
[39] John Hancock officials told us that the increased projections for
the program‘s claims payments were driven primarily by decreases in
the program‘s lapse and mortality rate assumptions.
[40] As of 2011, these carriers‘ ultimate lapse rate assumptions
ranged from 0.25 to 1.5 percent.
[41] Specifically, officials from the four carriers that provided
detailed information on this assumption stated that the carriers‘
return on investment assumptions decreased from between 5.75 and 7
percent in 2002 to between 4.5 and 6 percent in 2011.
[42] Since 2002, the carriers‘ requests for premium increases ranged
from 8 to 42 percent, according to the officials we interviewed. As of
February 2011, some carriers‘ requests for premium increases were
pending state approval; all premium increases are subject to states‘
approval, so the amount of increases implemented can vary by state.
[43] OPM did not require the submission of a status report in 2008
because the agency was in the process of requesting proposals for the
program‘s second contract.
[44] These indexes each make up about 2 percent of the broader
consumer price index for medical care, which provides information on
the changes in cost of medical goods and services.
[45] The Bureau of Labor Statistics refers to this index as ’nursing
home and adult day care services.“ However, according to an agency
official, while data are collected on consumer spending for adult day
care services, this index does not reflect changes in the cost of care
for these services. Rather, changes in the index only reflect the cost
of residential facility-based services, such as those provided at
nursing homes and assisted-living facilities.
[46] This index, which was established by the Bureau of Labor
Statistics in 2006, is referred to as ’care of invalids and elderly at
home,“ although it reflects the costs of care provided to individuals
of any age who are convalescing at home.
[47] The inflation protection options are intended to help ensure that
enrollees‘ benefits remain commensurate with the costs of long-term
care. Since its inception, FLTCIP has offered a 5 percent ACIO, which
increases an enrollee‘s daily benefit amount-”the maximum amount
insurance will pay on a single day-”by 5 percent each year. FLTCIP
began offering a 4 percent ACIO in 2009.
[End of section]
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