Following are portions of a new GAO report examining the premium increases and changes in benefits in the Federal Long Term Care Insurance Program that took effect in late 2009 to early 2010.
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. 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. 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. 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. 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. 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.
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. 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. 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. 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.
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. 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.
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. 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. 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.