[Senate Hearing 111-401]
[From the U.S. Government Publishing Office]
S. Hrg. 111-401
STICKER SHOCK: WHAT'S THE TRUE COST OF FEDERAL LONG-TERM CARE INSURANCE
=======================================================================
JOINT HEARING
before the
SPECIAL COMMITTEE ON AGING
and
SUBCOMITTEE ON OVERSIGHT
OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE, AND THE DISTRICT OF
COLUMBIA
of the
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
OCTOBER 14, 2009
__________
Serial No. 111-13
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
----------
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SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
------
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware JOHN McCAIN, Arizona
MARK L. PRYOR, Arkansas GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri LINDSEY GRAHAM, South Carolina
JON TESTER, Montana ROBERT F. BENNETT, Utah
ROLAND W. BURRIS, Illinois
PAUL G. KIRK, Jr., Massachusetts
Michael L. Alexander, Staff Director
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
Trina Driessnack Tyrer, Chief Clerk
------
SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL
WORKFORCE, AND THE DISTRICT OF COLUMBIA
DANIEL K. AKAKA, Hawaii, Chairman
CARL LEVIN, Michigan GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana LINDSEY GRAHAM, South Carolina
ROLAND W. BURRIS, Illinois ROBERT F. BENNETT, Utah
PAUL G. KIRK, Jr., Massachusetts
Lisa M. Powell, Staff Director
Kata C. Sybenga, Professional Staff Member
Jennifer A. Hemingway, Minority Staff Director
Benjamin B. Rhodeside, Chief Clerk
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Opening Statement of Senator Daniel Akaka........................ 2
Opening Statement of Senator George Voinovich.................... 4
Opening Statement of Senator Bob Corker.......................... 5
Opening Statement of Senator Susan Collins....................... 6
Opening Statement of Senator Ron Wyden........................... 8
Opening Statement of Senator George LeMieux...................... 9
Opening Statement of Senator Paul Kirk........................... 9
Opening Statement of Senator Roland Burris....................... 10
Panel of Witnesses
Statement of Daniel Green, Deputy Associate Director, Employee
Support and Family Policy, Office of Personnel Management,
Washington, DC................................................. 12
Statement of Margaret L. Baptiste, President, National
Association of Retired Federal Employees, Alexandria, VA....... 18
Statement of Colleen M. Kelley, President, National Treasury
Employees Union, Washington, DC................................ 31
Statement of Chester Joy, Individual Federal Long Term Care
Policyholder, Washington, DC................................... 41
Statement of Mary Beth Senkewicz, Deputy Commissioner, Florida
Office of Insurance Regulation, Tallahassee, FL................ 56
Statement of Marianne Harrison, President, Long Term Care, John
Hancock Financial Services, Inc., Boston, MA................... 67
APPENDIX
Dan Green's Responses to Senator Voinovich Questions............. 105
Colleen Kelly Response to Senator Voinovich Question............. 107
Mary Beth Senkewicz Responses to Senator Voinovich Questions..... 107
Marriane Harrison's Responses to Senator Voinovich Questions..... 117
Statement submitted by American Federation of State, County and
Municipal Employees (AFSCME)................................... 121
Statement submitted by Daniel DeSimone........................... 124
(iii)
STICKER SHOCK: WHAT'S THE TRUE COST OF FEDERAL LONG-TERM CARE INSURANCE
---------- --
WEDNESDAY, OCTOBER 14, 2009
U.S. Senate,
Special Committee on Aging, Subcommittee on Oversight of
Government Management, the Federal Workforce, and the
District of Columbia, Committee on Homeland Security and
Governmental Affairs,
Washington, DC.
The Committees met at 2:35 p.m. in room SD-342, Dirksen
Senate Office Building, Hon. Herb Kohl, Chairman of the Special
Committee on Aging, presiding.
Members Present: Senators Kohl [presiding], Wyden, Kirk,
Corker, LeMieux, Akaka, Burris, Collins, and Voinovich.
OPENING STATEMENT OF SENATOR HERB KOHL, RANKING MEMBER
The Chairman. Good afternoon, everybody. We appreciate your
being here.
At this time we will commence with this hearing.
We are glad to be joining forces today with Senator Akaka's
subcommittee to talk about the Federal long-term care insurance
program. It is important that we begin this hearing with an
understanding of the crucial role long-term care insurance can
play for so many Americans both now and also as our country
ages at such a quick and unprecedented rate. Planning for the
long-term care needs of ourselves, our spouses, and our parents
is a source of growing anxiety all across our country.
Many people do not realize that our current public and
private health insurance programs do not cover long-term care.
Elderly individuals who cannot take care of themselves must
exhaust nearly all of their savings and then, and only then,
will Medicaid pay for their care. For the relatively few who
have it, long-term care insurance allows them to avoid this
scenario. It goes a long way toward alleviating the immense
strain on State and Federal Medicaid budgets, so we do want
this product to work. In fact, we do need it to work.
This brings us to the topic of today's hearing which is the
Federal Long Term Care Insurance Program, the largest program
of its kind. In 2003, OPM was trying to help Federal employees
prepare for their long-term care needs when they rolled out
their long-term care insurance program. Their intentions in
providing this benefit were good, but 7 years later, red flags
have been raised concerning OPM's role as a regulator of this
insurance program and as a source of consumer education for its
policyholders. One recent announcement from OPM has over
140,000 policyholders feeling extreme sticker shock. Come
January, well over half of the program's policyholders will
face a 25 percent increase in their monthly premium payments.
Today we hope to hear that OPM has a plan for avoiding such
high increases in the future. Hindsight being 20/20, the best
thing OPM can do is learn from its mistakes by ramping up
consumer education and ensuring that all marketing materials
accurately represent the coverage and the true costs of these
policies.
The fact is that the problems we are seeing with the
Federal Long Term Care Insurance Program are occurring with
long-term care insurance products nationwide. If State and
Federal Governments are going to promote these products, then
it is their duty to be sure that consumer interests are
protected, that premium increases are kept at a minimum, that
insurance agents use proper marketing materials, and that
complaints and appeals are addressed in a timely manner.
Senator Wyden and I have introduced legislation to bring
these and other improvements to all long-term care insurance
policies. We are hopeful it will be enacted this year.
We thank you all for being here today at this joint
hearing, and after I finish, as I am now, I will turn to
Senator Akaka for his statement, and after that, we will be
turning to Senator Voinovich and to all the members on the
panel for their statements. Thank you very much. Senator Akaka?
OPENING STATEMENT OF SENATOR DANIEL AKAKA
Chairman Akaka. Thank you. Thank you very much, Chairman
Kohl. I want to add my welcome to all of our witnesses and
thank you so much for being here at our joint hearing of the
Special Committee on Aging and the Subcommittee on Oversight of
Government Management, the Federal Workforce, and the District
of Columbia.
It is fitting that these two committees would join forces
to look into this program and the long-term care insurance
market. It demonstrates just how concerned we are. My Federal
Workforce Subcommittee takes great interest in the management
of the Federal program, which is the largest in the country.
Addressing the problems with the Federal program will guide
reforms of other long-term care insurance programs.
There is a great and growing need to help Americans provide
dignified and appropriate long-term care for their families. At
least 70 percent of people over age 85 will require some
services, such as the home health services or nursing home
care, at some point in their lives. Health insurance generally
does not cover, as was mentioned, long-term care. Medicaid
provides some support, but many senior citizens are forced to
spend their savings and other assets before they qualify for
coverage. Long-term care insurance fills this important gap.
Seeing this increasing need, Congress established the
Federal Long Term Care Insurance Program in 2000. There are
over 275,000 Federal employees and retirees enrolled in this
program. More than half of enrollees chose the compound
inflation option. With this option, participants paid more
initially but they were told that their benefits would
automatically increase by 5 percent every year, with no
increase in their premiums.
Yet, earlier this year, OPM announced premium increases of
up to 25 percent for participants who selected this option.
According to OPM, over 146,000 participants, including close to
2,500 in Hawaii, will have some increase in their monthly
premiums. Many of the affected enrollees are angry because they
feel they were misled when they joined the program. In these
difficult economic times, this unexpected increase is
unacceptable.
OPM has told us it followed national standards in setting
the rates for the program. I am puzzled by why such a large
premium increase is necessary now. I hope the witnesses will
address these rate standards and how to make sure that future
increases will not occur.
OPM is giving participants an option to keep their premiums
steady, but their benefit amounts will increase by only 4
percent instead of 5 percent each year. Those who may be
interested in the option have no way of knowing whether 4
percent increases will be enough. It is important that those
paying for insurance year after year know whether the benefits
will be sufficient to cover their costs when needed. I look
forward to hearing from our witnesses about this issue.
This program should serve as a model for the private sector
and State and local governments. Right now, it is falling short
of this goal. I hope that today's hearing will help determine
how to keep the program affordable and stable for our federal
employee participants.
Thank you very much, Mr. Chairman.
[The prepared statement of Senator Akaka follows:]
Statement of Chairman Daniel K. Akaka
I want to join Chairman Kohl in welcoming our witnesses and
thanking them for joining us today to discuss the Federal Long-
Term Care Insurance Program. I also want to thank my friend
Chairman Kohl for inviting me to conduct this hearing with him
today.
That these two committees would join forces to look into
the Federal Long-Term Care Insurance Program and the long-term
care insurance market demonstrates just how seriously we are
concerned with its well being. My Subcommittee on Oversight of
Government Management, the Federal Workforce, and the District
of Columbia takes great interest in the management of the
federal program, which is the largest long-term care insurance
program in the country. Addressing the problems with the
federal program will guide reforms of other long-term care
insurance programs throughout the country.
The need for long-term care is great. In 2008, the average
cost for one year of nursing home care was nearly $70,000.
According to the U.S. Department of Health and Human Services,
at least 70 percent of people over age 65 will require some
long-term care services, such as home health services or
nursing home care, at some point in their lives. Many Americans
mistakenly believe that Medicare and their regular health
insurance programs will pay for long-term care. They do not.
Although Medicaid provides some long-term care support, it only
covers eligible beneficiaries. Many senior citizens are forced
to spend their savings and other assets before they qualify for
coverage. Long-term care insurance fills this important gap.
Throughout the country, there is a great and growing need
to help Americans provide dignified and appropriate long-term
care to their families. This unmet need is a particular concern
in my home state of Hawaii, because we have a severe shortage
of long-term care.
Seeing the increasing need, Congress established the
Federal Long Term Care Insurance Program in 2000 to provide
federal workers with an option for long-term care coverage.
This program, overseen by the Office of Personnel Management
(OPM), began in 2003. There are currently over 275,000 federal
employees and retirees enrolled in the program.
More than half of enrollees in the program chose the
Automatic Compound Inflation Option. With this option,
participants paid more initially but they were told--quoting
from a previous version of the benefits booklet--that their
``benefit will automatically increase by 5 percent compounded
every year with NO corresponding increase in your premium''
(emphasis in the original).
Yet, earlier this year, OPM announced premium increases of
up to 25 percent for participants in the program who selected
this option.
Many of the affected enrollees understood that if they
chose the automatic compound inflation option, their premiums
would never increase. They are angry because they feel they
were misled when they joined the program. I understand that OPM
acknowledges that it did not expect a future premium increase,
so it did not emphasize that possibility, although some program
materials did state that it was possible.
According to OPM, over 146,000 participants will have some
increase in their monthly premiums, including close to 2,500
enrollees in my home state of Hawaii. In these difficult
economic times, this unexpected increase is unacceptable.
The National Association of Insurance Commissioners, which
is represented by one of our witnesses today, has developed
standards to help ensure the stability of long-term care
premiums over time. OPM has told us it used these standards in
setting the rates for the federal program. I am puzzled by why
such a large premium increase is necessary now. I hope the
witnesses will address these rate standards and how to make
sure that future increases will not occur.
OPM is giving participants an option to keep their premiums
steady, but their benefit amounts will increase by only 4
percent instead of 5 percent each year. Those who may be
interested in this option have no way of knowing whether 4
percent increases will be enough.
I understand that predicting the cost of long-term care
into the future is an inherent problem within the long-term
care insurance industry. However, it is critical that
participants paying for this insurance year after year know
whether the benefits will be sufficient to cover their costs
when needed. I look forward to hearing from our witnesses about
this issue.
The federal government is the largest employer in the
country, and the federal long-term care insurance program is
the largest of its kind. This program should serve as a model
for the private sector and state and local governments. Right
now, the program is falling short of this goal. I hope that
today's hearing will help determine how to keep the program
affordable and stable for our federal employee participants.
The Chairman. Thank you, Senator Akaka.
Senator Voinovich.
OPENING STATEMENT OF SENATOR GEORGE VOINOVICH
Senator Voinovich. Thank you, Chairman Kohl and Chairman
Akaka, for holding this joint hearing.
As is the case usually when Senator Akaka and I have
hearings, he does such a good job of laying out the issues that
anything I say right now would be redundant. So I am going to
pass on a longer statement. I am anxious to hear the witnesses.
[The prepared statement of Senator Voinovich follows:]
Prepared Statement of Senator George V. Voinovich
Chairmen Kohl and Akaka, thank you for calling today's
hearing to discuss the future of the Federal Employees Long-
Term Insurance Program.
More than a decade ago, Congress began exploring solutions
to the growing problem of financing the cost of long-term care.
With the support of the Administration, we enacted bipartisan
legislation to give federal employees, including our men and
women in uniform, a tool to finance their anticipated long-term
care needs.
Following a competitive bidding process, the Office of
Personnel Management began marketing the long-term care
insurance product to federal employees, retirees, and their
families. OPM's materials encouraged the purchase of long-term
care insurance by federal employees at younger ages when
premiums were lower and more affordable.
Although federal employees were offered a number of
options, the materials emphasized the purchase of the automatic
compound inflation option as a way to increase the daily
benefit amount with no corresponding increase in premium.
Employees were told ``your benefits increase year after year,
while your premium remains level.''
Seven years after the initial enrollment period, OPM
recently announced up to a twenty-five percent premium increase
for a majority of enrollees, including those who selected
automatic compound inflation protection. OPM subsequently
modified its brochure by adding the phrase ``However, premiums
are not guaranteed.''
The federal government set an example in 2002 by offering
our nation's civil servants an important benefit to safeguard
their hard-earned savings and assets. Many federal employees
were led to believe they were locking in affordable premiums
for life. Others viewed the availability of the plan as the
government's Good Housekeeping Seal of Approval for this type
of insurance product.
While OPM exceeded enrollment projections in 2002, it
underestimated the number of employees who would let their
coverage lapse and failed to act on the information provided
during the life of the initial contract of the need for
possible adjustments to the product.
Now, we have the potential for buyer's remorse and
confusion, leading to lapses in coverage or a significant
reduction in allowable benefits at a time when enrollees are
closer to needing long-term care.
I'm anxious to hear and from OPM about the mistakes that
have been made and so are the employees who believe they were
misled. I also hope today's hearing will help educate current
and future enrollees on the options available to them so they
can make informed decisions. We owe it to the roughly quarter
of a million civil servants who have enrolled and the millions
of eligible enrollees to ensure the product provides
affordable, comprehensive coverage that meets the insurance
needs of employees beyond the next seven years.
Thank you.
The Chairman. Thank you very much, Senator Voinovich.
Senator Corker.
OPENING STATEMENT OF SENATOR BOB CORKER
Senator Corker. Yes, Mr. Chairman, both of you. Thank you
for having the hearing.
I think we are addressing a very important issue today that
is not just important to Federal employees, but also people
throughout the country. I think it is also interesting at this
time when we are debating health care and talking about the
public's role in health care, we are seeing some frailties
here, if you will, that exist within OPM, much of which exist
in programs like Medicare where we are not honest with people
about the true cost and some of the liabilities that are
created over time.
But I do say I really appreciate the authors' desire to
ensure that people around this country, when they buy long-term
care insurance plans, they know that it is going to be there
and that it is real.
While I appreciate all the witnesses being here today, I
find it hard to understand that the Director of OPM would not
be here today. This is a pretty important issue and a very
large problem. But notwithstanding that, I look forward to what
the witnesses have to say and hopefully together we will figure
out a way to deal with this in a very productive manner.
The Chairman. Thank you very much.
Senator Collins.
OPENING STATEMENT OF SENATOR SUSAN COLLINS
Senator Collins. Thank you, Mr. Chairman. I want to thank
both chairmen for holding this important hearing this
afternoon.
I have a lengthy statement that I am going to submit for
the record with the chairman's permission. But I do want to
make a few comments, given my long association with this
program.
As at least two of the witnesses are aware--the National
Association of Retired Federal Employees and Colleen Kelley
from the National Treasury Employees Union know--I worked very
hard 9 years ago to craft this law with Senator Grassley and
Senator Barbara Mikulski. At that time, we said that the
Federal Government should lead the way. The Federal Government
should be offering a long-term care insurance policy that
Federal employees and retirees would be encouraged to
participate in. We were hoping that that would encourage more
private sector employers to offer the same benefit because, as
Chairman Kohl has pointed out, so many of our senior citizens
have an alarming surprise when they need long-term care and
they find out that the Medicare program does not cover it other
than for very short stays.
So I was very excited about this new law. I was so excited
about it that I signed up myself very quickly, and I will tell
you, having gone through the analysis, I too was under the
impression, as Mr. Joy was--when I read your comments, they
were exactly my own--that by signing up at a relatively early
age and by paying a higher rate, that I would avoid premium
increases down the road.
Now, Mr. Chairman, clearly I can afford--I do not like it,
but I can afford--the premium increase that is coming my way,
but many other Federal employees and retirees who chose to
participate in this program cannot. I can tell you that just as
it came as a shock to Mr. Joy and to me, it is coming as a
shock to the nearly 150,000 participants that all of a sudden
are going to see their premiums skyrocket, in some cases as
high as 25 percent, come next January.
This is a real problem, and I must say I too think that the
head of OPM should be here today. We need to know how OPM got
it so wrong. We need to hear from the insurers what happened
because I too went through all the disclosures, and clearly the
impression that was left is that if you signed up early and
paid more in the early years, there would not be a hike in
premiums.
So I am very glad that we are having this oversight
hearing.
Let me say that OPM has pointed out that an alternative to
the higher premiums is to downgrade the coverage. Again, that
was not the deal that more than 100,000 Federal employees
thought they were signing up for. So I do not see that as a
great alternative. We know how expensive nursing home care is,
and we encourage participation in this program. So this failure
is certainly no model and it is no way to set an example for
private sector employers to follow.
Thank you, Mr. Chairman.
[The prepared statement of Senator Collins follows:]
Prepared Statement of Senator Susan M. Collins
I want to thank Senators Akaka and Voinovich and Senators
Kohl and Corker for holding this important hearing this
afternoon. This hearing will give us an opportunity to
determine why the Office of Personnel Management got it so
wrong when the agency originally calculated the premiums for
the Federal Long-Term Care Insurance program.
Long-term care is the major catastrophic health expense
facedby older Americans today, and these costs will only
increase with the aging of the baby boomers. That is why I
joined Senators Grassley and Mikulski nine years ago in
introducing the legislation to make affordable long-term care
insurance available to federal employees, members of the
uniformed services, and civilian and military retirees. The
intent of our legislation, which was signed into law, was to
have the federal long-term care insurance program serve as the
model for private employers whose workforce will be facing the
same long-term care needs.
It is alarming that today, despite earlier assurances by
OPM, more than 147,000 federal long-term care insurance
enrollees will be facing soaring premium increases, in many
cases as high as 25 percent, in January.
This is simply unacceptable, particularly given the fact
that OPM began to recognize the real possibility of increases
as early as 2003. Yet, the agency gave little warning to
federal workers and retirees that there would be an increase.
To be aware of this possibility, plan participants would
have had to search the fine print in their policy documents.
There was no straightforward disclosure. To the contrary, the
implication was that by signing up at a relatively early age
and by paying a higher rate, one could avoid premium increases.
OPM made absolutely no effort to educate participants. This
failure is certainly no model; no way to set an example for
others to follow.
An alternative offered by OPM to avoid paying these higher
premiums is to downgrade coverage--substantially reducing the
daily benefits provided under the plan. For example, a
participant who enrolled at age 55 and stayed in the program
for 40 years was supposed to receive $1,056 in daily benefits.
Now, if that same participant can't afford the higher premiums
and is forced to downgrade coverage to pay the same premium
amount, the daily benefits would be reduced by $336. This
represents a cut of nearly 33 percent in coverage. It is a
decrease that no plan participant who thought they were locking
in at a stable, long-term rate should have expected.
Seventy-eight million baby boomers are approaching
retirement, and most are concerned about whether they have
sufficient savings and retirement income to cover all of their
daily needs. Few, however, have planned for the very real
possibility that they may develop a chronic illness or
cognitive impairment like Alzheimer's that will require long-
term care. In fact today, fewer than ten percent of individuals
age 50 and older have long-term care insurance.
Americans need to plan for their future long-term care
needs just as they plan for their retirement or purchase life
insurance to protect their families. This is particularly true
given that, in 2009, the annual cost of a nursing home stay is
between $66,000 and $75,000. Furthermore, the cost of care in
the home can range from $19 an hour for personal unskilled care
to $46 an hour for skilled care from a visiting nurse.
Moreover, these costs will inevitably continue to rise, which
makes planning for the future even more important.
Most Americans mistakenly believe that Medicare or their
private insurance policies will cover the costs of long-term
care. A 2006 survey by AARP showed that only one in five
respondents between the ages of 45 and 64 knew that Medicare
does not cover an extended stay in a nursing home.
Unfortunately, far too many Americans discover that they do not
have coverage until they are confronted with the shocking
realization that, without long-term care insurance, they will
either have to spend down to Medicaid eligibility levels or
cover the costs themselves.
How can we expect Americans to invest money and plan for
their future needs when programs like the Federal Long-Term
Care Insurance Program cannot be trusted from one year to the
next?
I look forward to hearing from the witnesses on how OPM can
more effectively educate and assist federal employees and
retirees with their long-term health care planning so that the
federal program can become the model for the nation that we
intended it to be.
The Chairman. Thank you, Senator Collins.
Senator Wyden.
OPENING STATEMENT OF SENATOR RON WYDEN
Senator Wyden. Thank you, Mr. Chairman. Let me commend you
for your good work and particularly you, Chairman Akaka, and
Senator Voinovich, for tackling these issues in a bipartisan
kind of way.
It seems to me seniors, when they get ripped off, they are
not interested in politics. They are not interested in
Democrats and Republicans. They are interested in results.
I will tell you, Mr. Chairman, having been involved in
these issues now for almost 3 decades since I was Director of
the Gray Panthers back when I had a full head of hair and
rugged good looks, one of the issues that I think you look at
first, with respect to these kinds of problems, is the way
insurance policies are written and particularly the fact that
there continually seems to be a difference between the
promotional materials and then what you get in the small print.
So I have got one of the promotional materials, and in
fact, I think you have got that up there, Mr. Chairman. The
last sentence states in the promotional materials--and this is
for the Automatic Compound Inflation Option. It states--and I
quote--``Your benefits increase year after year without causing
an increase in your premium.'' So that reflects the comment
that Senator Collins just made very eloquently. People went
into this thinking that their premiums were going to be flat.
That was what was promoted, and it looks like they put a big
effort into trying to send that impression out.
Now, what the staff has just picked up--and I commend the
staff for their efforts, Mr. Chairman--is OPM noted that the
fine print of the contract later is really quite different, and
it states--and I will quote here--``Your premium will not
change because you get older or your health changes for any
reason related solely to you. We may only increase your premium
if you are among a group of enrollees whose premiums is [sic]
determined to be inadequate. While the group policy is in
effect, OPM must approve the change.'' So obviously, people
thought that they were going to get the level of premiums when
down in the small print there was a very real prospect of
people's premiums being increased if someone down the road
determined that the premium level was inadequate. That was not
disclosed in the promotional material.
I will tell you, Mr. Chairman, this is a very important
hearing, and certainly going into this, I think that the
agency, the Office of Personnel Management, ought to be
changing their marketing policies so as to be straight with
Federal workers with respect to what they are actually getting
into when they purchase a long-term care policy.
So, Mr. Chairman, I look forward to working with you. We
are going to push very hard to get your legislation into the
health reform package that comes before the Senate. It deserves
bipartisan support, and I look forward to working with you on
it.
The Chairman. Thank you very much, Senator Wyden.
Senator LeMieux.
OPENING STATEMENT OF SENATOR GEORGE LeMIEUX
Senator LeMieux. Thank you, Mr. Chairman. Thank you,
Chairman Akaka. I appreciate the opportunity to be here.
Representing a State that has the oldest population in the
country, this is certainly a concern. Long-term care is an
essential component of our citizens planning out their future.
We have a large percentage of Federal employees who I know will
be affected by this.
I am not going to belabor the point because we are going to
go through these questions, but what Senator Wyden and Senator
Collins have spoken about, Senator Corker, concerning the
information that was provided to these employees is right there
in that chart, and it is the last sentence that Senator Wyden
just read from. ``Your benefits increase year after year
without causing an increase in your premium.''
The chart shows two options. So we gave our Federal
employees the chance to do the right thing, which was to buy at
a higher price now and have a locked-in premium over time. The
chart shows the flat line going forward as opposed to the steep
increase on the left side. This looks like the typical example
of the large print giveth and the small print taketh away. I
have just been looking at the document that Senator Wyden
referenced where there can be this other amorphous way where
your premium can go up. Well, you know what? This is what the
chart is that the people relied upon. They do not read the
small print. They read the big print, and they look at the
graph.
They should not have a 25 percent increase. We should not
let them have the increase. If we got it wrong in the
Government, they should not have to pay more. It is not their
fault. They did the right thing.
So I look forward to hearing from the folks here on the
panel, explaining why the people, the employees, who went by
the language that was given to them, are going to have to
suffer for the mistakes that were made by the Government.
Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. LeMieux.
Senator Kirk.
OPENING STATEMENT OF SENATOR PAUL KIRK
Senator Kirk. Thank you, Mr. Chairman, Chairman Akaka.
Thank you very much for convening this hearing.
This is basically, in my view, a question of fundamental
fairness. There would be tens of thousands of Federal workers
and retirees who will be hit with a major increase here,
believing that that would not happen. Two thousand of those are
from my State of Massachusetts, and we are living in a time
when budgets are squeezed. People on fixed income measure every
dollar. They plan ahead. They plan prudently so that they
balance what their needs are, and this is a situation, as has
been mentioned, where people relied on the written word and the
spoken word and find that the group that pays a higher premium
today to protect against inflation tomorrow are the very people
who now are going to pay the harshest price.
So I associate with those who are really not only
disappointed but outraged at what are misleading statements
about these policies and what their future portend for the
folks on retirement or on fixed income who are looking ahead.
I look forward to the testimony of our witnesses and the
questions from this panel. I thank you for the opportunity to
be here, Mr. Chairman.
[The prepared statement of Senator Kirk follows:]
Prepared Statement of Senator Paul Kirk
Chairman Kohl and Chairman Akaka, I commend you both for
holding today's hearing. It is extraordinarily important to the
tens of thousands of federal employees enrolled in the Long
Term Care Insurance program who face a sharp hike in their
premiums next year. We need to get to the bottom of this issue.
In coming days, nearly 2,000 federal employees and retirees
in Massachusetts will learn that the choice they made to enroll
in this program- and join the group that pays higher premiums
today to protect against inflation tomorrow- will cost them
even more, despite assurances by OPM and the insurer that
enrollees wouldn't face premium increases.
For persons on fixed incomes, this increase will mean an
especially difficult decision- either accept the rate increase
by cutting elsewhere in their family budget, or abandon the
investment they've made in this program over the years. The
news is certainly not a good advertisement for their Long Term
Care Insurance, which was supposed to make such care affordable
if they have severe health needs in retirement.
I commend Chairman Kohl for sponsorship of the ``Confidence
in Long-Term Care Insurance Act,'' which will give consumers
the support they need to navigate the jungle of different plans
with varying benefit levels and conditions. It will also give
greater oversight to the states of insurers' marketing
materials.
Long Term Care Insurance is obviously an essential part of
bringing health costs under control. As many as two-thirds of
Americans who are 65 today will spend some time at home in need
of long-term care services in the years ahead. These expenses
can quickly exhaust a family's savings, and drive them into
poverty and onto Medicaid.
Senator Kennedy was the chief sponsor of pending
legislation, the CLASS Act, which will establish an alternative
to Medicaid and make Long Term Care more affordable. It would
be a voluntary program paid for by payroll withholding, and I'm
optimistic that it will be enacted this year.
In the meantime, for federal employees and retirees facing
this surprise rate increase, it is clear that reform cannot
wait. Again, I commend our colleagues for holding this hearing,
and I look forward to the testimony of our witnesses.
The Chairman. Thank you very much, Senator Kirk.
Senator Burris.
OPENING STATEMENT OF SENATOR ROLAND BURRIS
Senator Burris. Thank you, Mr. Chairman, Chairman Kohl,
Chairman Akaka.
I would like my opening statement to be placed in the
record. I will not make it.
But I just want to set the tone in reference to what my
colleagues have said. I am not so sure that I want to see the
employees pay higher premiums. I want to see the Office of
Personnel Management and John Hancock figure out a way how they
can follow what they told these persons that they would not see
increases in premiums. That is what I want to hear. If we do
not hear it, I am going to try my best to get the Senate to
come up with something that will not put this burden on those
policyholders. This is not their fault. They were misled. OPM
and evidently John Hancock, you all did not communicate.
Evidently OPM cannot read the fine language that is in a
contract, and they misled the individuals.
I do not want to see a senior citizen, a person who holds a
long-term policy, have to pay one dime under this ACI program.
I do not want to see them to have to pay one dime. You all have
to eat it and still give them the coverage. Take it out of the
dividends that Hancock would pay. I do not want to see one
policyholder pay an extra increase in their premiums. You are
already trying to lower their coverage. It should be restored
to its original contractual agreement in your brochures that
you put out to the public.
So OPM, you and Hancock get together and figure out how you
are going to help these policyholders. If not, we are going to
find out how Congress can deal with you all for such a mistake
that you are going to put a burden on these policyholders of
this magnitude. It is unconscionable. It is unacceptable, and I
do not see how we can allow this to take place.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Burris.
We will turn now to our witnesses. Our first witness today
will be Dan Green, the Deputy Associate Director of Employee
Support and Family Policy at the Office of Personnel
Management. Mr. Green is responsible for developing Federal
employee benefit policy relating to the multi-billion dollar
retirement and insurance programs administered by OPM and for
promoting important employee and family support programs.
Our next witness today will be Margaret Baptiste, who has
been an active member of the National Association of Retired
Federal Employees. Having served the organization in a number
of capacities, she was reelected as the organizational National
President in 2008.
Next we will be hearing from Colleen Kelley, National
President of the National Treasury Employees Union. As the
organization's top elected official, she is an advocate for
fair treatment of employees across the Federal Government.
Fourth, we will be hearing from Chester Joy. Mr. Joy worked
as a Senior Natural Resources Analyst with the Government
Accountability Office for over 30 years. He is a nationally
recognized expert on wildland fire and ecosystem management and
has lectured on these topics across the country. He is also a
policyholder with the Federal Long Term Care Insurance Program.
Our next witness will be Mary Beth Senkewicz, the Deputy
Commissioner for Life and Health with Florida's Office of
Insurance Regulation. Ms. Senkewicz formerly served as Senior
Health Policy Counsel and Legislative Advisor at the National
Association of Insurance Commissioners for over 11 years. In
April, she appeared before the Aging Committee to testify about
life settlement issues, and we welcome her back.
Then we will be hearing from Marianne Harrison, who is the
Executive Vice President and General Manager of Long-Term Care
Insurance for the John Hancock Life Insurance Company. In this
role, she is responsible for all facets of the long-term care
insurance business for John Hancock.
We welcome you all here today, and we will start with you,
Mr. Green.
STATEMENT OF DANIEL GREEN, DEPUTY ASSOCIATE DIRECTOR, EMPLOYEE
SUPPORT AND FAMILY POLICY, OFFICE OF PERSONNEL MANAGEMENT,
WASHINGTON, DC
Mr. Green. Chairman Kohl, Ranking Member Corker, Chairman
Akaka, Ranking Member Voinovich, and members of the committee
and subcommittee, thank you for the opportunity to testify
today on behalf of OPM Director John Berry about the Federal
Long Term Care Insurance Program.
I am not only an official at the Office of Personnel
Management. I am also an enrollee in the Long Term Care
Insurance Program, as is my wife. We are both subject to the
upcoming premium increase. So are many of the OPM employees who
work on the long-term care insurance contract. None of us are
pleased about the rate increase either in our professional or
personal capacities. I am here today to address this issue and
to talk about the changes coming this year and next.
This program is designed to help protect enrollees against
the high costs of long-term care. Enrollees pay the full
premiums for insurance coverage, and all applications for
coverage are underwritten with either abbreviated or full
underwriting requirements. The Long Term Care Insurance Program
offers flexible benefit options to meet the diverse needs of
the Federal family.
The established framework provides for a 7-year contract.
The initial contract was awarded to a consortium arrangement
between Metropolitan Life and John Hancock Life & Health
Insurance Company. The initial contract term expired this year,
and OPM has selected John Hancock as the insurer for the second
contract term, which began October 1. The new contract includes
new benefit options with increased home health care
reimbursement, new benefit periods, higher daily benefit
amounts, increased payment limits on informal care provided by
family members, and new premium rates.
After a careful and considered evaluation of the program,
we determined premium increases would be necessary for most
current enrollees beginning January 2010. The enrollees
affected by the increase are those who have the Automatic
Compound Inflation Option, or ACI. Long-term care premiums are
age-based, and the amount of the premium increase will depend
on the ages of the enrollees when they first purchased
coverage. Premiums will increase for ACI enrollees who were
under age 70 when they purchased the coverage and who choose to
keep the same coverage.
Of the almost 225,000 total enrollees, about 144,000 have
the ACI option and will be subject to the premium increase. Of
those, about 133,000 enrollees will see the maximum 25 percent
increase in premiums. The remaining enrollees will receive
somewhat lower increases depending on their ages at purchase.
While we are not pleased with these premium increases, they
will be the first since the program began 7 years ago and are
consistent with increases in other public sector long-term care
insurance programs.
For enrollees who selected the Future Purchase Option,
there will be no premium increase. Under this option, increases
in the cost of living are included in a rate change that occurs
every other year. By contrast, enrollees with the ACI option
are eligible for a 5 percent compounded increase in benefits
each year. The premiums for this option were intended to be
structured to prefund their future benefit increases. However,
that means any changes in the underlying assumptions about
those premium levels have a direct effect on the amount of
funds needed in advance to support the future benefits.
Without this adjustment, the long-term care program faces a
projected shortfall in funding for the enrollees in the ACI
option. The actual and projected program experience differs
from the assumptions used when the original premiums were
established 7 years ago. Projections are sensitive to certain
assumptions about future program experience, mostly enrollee
persistency and investment return, and the original estimates
are now deemed inadequate. In order for sufficient funds will
be available to pay benefits to enrollees in the future, we
believe it would be irresponsible not to increase premiums at
this time.
We recently announced a Special Decision Period for current
enrollees from October 1 to December 14. Enrollees will receive
a personalized options letter that will outline their insurance
choices during this period. One of the options for affected
enrollees will allow them to keep their premiums approximately
the same as they now pay by making an adjustment to their long-
term care insurance benefits. For example, they can change
their current 5 percent ACI rate to 4 percent and keep their
premiums about the same. Making this change would not decrease
current benefit levels, but would cause the daily benefit
amount to increase more slowly, by 4 percent per year rather
than 5 percent. Other options open to these enrollees include
moving to the plan under our new contract with John Hancock,
which has new benefits, but at new rates.
Thank you again for the opportunity to testify before you
today. I will be glad to answer any questions.
[The prepared statement of Mr. Green follows:]
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The Chairman. Thank you, Mr. Green.
Ms. Baptiste.
STATEMENT OF MARGARET L. BAPTISTE, PRESIDENT, NATIONAL
ASSOCIATION OF RETIRED FEDERAL EMPLOYEES, ALEXANDRIA, VA
Ms. Baptiste. Thank you. Chairman Kohl, Chairman Akaka, and
members of the committees, I am Margaret Baptiste, President of
the National Active and Retired Federal Employees Association.
We are proud of the leading role NARFE played in creating
the Federal Long Term Care Insurance Program, and those efforts
make even deeper our disappointment with the 25 percent premium
increase announced for thousands of enrollees.
Before FLTCIP's creation, we took a dim view of long-term
care insurance. It was very expensive, offered limited
coverage, and premiums often increased. But the group insurance
industry asserted that the marketplace had all changed and that
their product had matured. Indeed, when the program was
launched, OPM and Long Term Care Partners said that a rate hike
would be unlikely because in setting premiums, they used the
conservative assumptions of the National Association of
Insurance Commissioners about benefit claims, premium and
investment income, and lapse rates. In fact, consumers would
have to wade through 20 pages of the 38-page benefit booklet to
find an explanation about the possibility of rate hikes.
After reviewing the program's history, we are concerned
that early warning signs within the program were not heeded.
Indeed, GAO's 2006 report on the program cited trouble
beginning in 2003 regarding lower-than-expected lapse rates and
low interest rates.
If these problems started in 2003, we have to ask when did
low lapse rates and low interest rates in FLTCIP become
apparent. When did either Long Term Care Partners or OPM
consider whether rates should be adjusted to address the
shortfall?
While OPM used the 2000 NAIC model to set premiums, such
standards are meant to be a floor. Nothing prevents either
States or OPM from requiring more protective standards. NARFE
has to wonder if the premium increase could have been avoided
or minimized had OPM required more stringent standards. We
would like to believe that the more protective standards that
have been included in the second contract will better safeguard
FLTCIP enrollees from future rate hikes. But this year, the
very people who prudently selected the Automatic Compound
Inflation Option have been singled out to shoulder a 25 percent
premium increase or trade it away for reduced coverage.
I do not have to imagine their outrage because I hear their
anger every day from our members. Many of them have invested
tens of thousands of dollars in their policies and are
confronted with choices that go from bad to worse.
We believe that enrollees should have been given the option
to trade their ACI for a higher benefit amount. Indeed, when
coverage was first offered, some financial planners suggested
to certain clients that they buy a benefit amount in excess of
current costs as an alternative to the ACI's hedge against
inflation. In fact, those who took this advice are not facing a
rate hike.
We think its wrong to expose workers and annuitants to
additional underwriting if their coverage changes result in an
overall benefits increase. Why should enrollees who played by
the rules through no fault of their own be penalized for the
decisions of others?
We do not believe that there will be enough time for
participants to consider all of the benefit options during the
Special Decision Period. The materials we sent to enrollees
must be clear and easy to understand if we are to make informed
decisions. A long-term care insurance program with a 25 percent
rate hike, where premium increases were marketed as unlikely,
is a much tougher sell. No one wants to be burned again.
NARFE is put in the position of wanting to encourage our
members to plan for their future, while having great difficulty
recommending a product whose premiums are not necessarily
predictable or affordable.
To start, we must restore confidence in our program.
For instance, it is our understanding that fewer insurance
carriers competed for the FLTCIP contract this year. Many of us
are concerned that the downturn in the industry and further
consolidation could make matters worse in 2016 when the
contract is re-bid. Consolidation means there is less
competitive pressure on carriers to offer the best possible
product. For that reason, now may be the time for Congress to
consider whether the FLTCIP should self-insure.
If the committee finds that OPM and Long Term Care Partners
could have mitigated the premium increase by acting sooner,
then more oversight is needed.
With regard to the broader industry, we commend you,
Chairman Kohl, for introducing Senate 1177. Your legislation
would enhance consumer protections, including more stringent
regulatory authority to require plans, including the FLTCIP, to
price their product appropriately. We commend you for your
interest in restoring the Federal Long Term Care Insurance
Program's stability.
Thank you for inviting us to testify.
[The prepared statement of Ms. Baptiste follows:]
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The Chairman. Thank you very much.
Ms. Kelley.
STATEMENT OF COLLEEN KELLEY, PRESIDENT, NATIONAL TREASURY
EMPLOYEES UNION, WASHINGTON, DC
Ms. Kelley. Thank you very much, Chairmen Kohl and Akaka
and committee members for this hearing.
Federal employees and retirees face the same issues as
others in the workforce. They want an opportunity to make
financially sound decisions and planning for their later years
in life. Many have witnessed the challenges facing aging
parents and grandparents and the enormous emotional and
financial drain that can occur, and they want to be prepared.
As Senator Kohl has noted, NTEU supported the creation of
the Federal Long Term Care Insurance Program and we worked with
Congress on a bipartisan basis and with our friends in the
Federal retiree community to help enact it. Those who purchased
policies, many in the baby boomer generation who witnessed the
economic challenges of the previous generation, made smart
decisions to plan ahead for their long-term care needs, and
they signed up. As we know, those who paid more for policies
with the Automatic Compound Inflation protection option were
told that their premiums would not increase.
I am submitting, along with my testimony, four different
pieces of literature from 2002 that mischaracterized OPM's
program. Two of these brochures have headers on them that say,
``Act Smart'' and ``Be Smart.'' That is what these enrollees
thought they were doing. These brochures describe the two
different inflation protection options, the Future Purchase
Option and the ACI. These brochures make clear there will be no
corresponding increase in the premium of ACI, and it says no in
capital letters in both of these brochures.
Of course, you have the graphs added it to, which people
relied on, and these materials all came from OPM and its
partners, John Hancock and Met Life Insurance Companies.
NTEU was as surprised as all of you when 7 years later OPM
announced a future premium hike of 25 percent for those very
people who bought ACI. It is not an exaggeration to say that
Federal employees were stunned. After all, these employees
intentionally chose the ACI option because it prefunded future
benefit increases in a sensible and a forward-looking way.
While it was more expensive, it was worth it because it would
protect against inflation. ACI was considered the wise choice
by many, including savvy financial planners. Enrollees, as we
have heard, spent tens of thousands of dollars on it, and now
they are all 7 years older and they do not want to lose that
money.
It should come as no surprise that many NTEU members feel
misled and mistreated by their Government. I urge your
committees to find a way to correct these wrongs, and NTEU
pledges to work with you on that.
Now, in a matter of weeks, OPM will mail personal packets
of information presenting options for enrollees. I understand
the choices that the enrollees will have when they receive
those packages. But OPM's website says that the Special
Decision Period is now open, October 1st through December 14th.
But the packages have not even been mailed yet. I believe
enrollees need more time to study their options. NTEU supports
extending the early decision period beyond December 14th for
current enrollees. This would give enrollees additional time to
study and to absorb their various options.
OPM should also examine the current relationship between
claims and assumptions that were used in the program to
determine premiums. In its December 2006 report, GAO reported
that OPM and its long-term partners experienced a less-than-
expected number of claims. GAO recommended twice that OPM
analyze the claims experience and assumptions affecting
premiums. I am not aware if that analysis has been done by OPM,
and NTEU would like to know that. OPM needs to reexamine this
in terms of future premium projections.
NTEU does support additional consumer protections and
transparency and better marketing standards, and we do support
your bill, Chairman Kohl, S. 1177, the Confidence in Long-Term
Care Insurance Act, to ensure that plans like OPM's will
provide consumers with a better understanding of their policy's
coverage and cost.
Finally, if I leave the committees with one message today,
it is this: OPM can never let this happen again. The Federal
Long Term Care Insurance Program needs to remain viable and it
should be a model in this new field of long-term care as it was
originally envisioned.
The Government's long-term care insurance program has
experienced a very rocky beginning. Hundreds of thousands of
Federal families deserve better treatment. OPM and its partner,
John Hancock, must get it right this time and never let a
premium fiasco like this occur again.
I would be glad to answer any questions you have.
Thank you.
[The prepared statement of Ms. Kelley follows:]
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The Chairman. Thank you very much, Ms. Kelley.
Mr. Joy.
STATEMENT OF CHESTER JOY, INDIVIDUAL FEDERAL LONG-TERM CARE
POLICYHOLDER, WASHINGTON, DC
Mr. Joy. Good afternoon, Chairmen Kohl and Akaka and
Ranking Members Corker and Voinovich and other distinguished
committee members. I thank you for inviting me here today to
discuss the OPM Federal Long Term Care Insurance Program.
I will summarize my statement submitted for the record.
In 2002, before retiring from GAO, I, together with my
wife, purchased Automatic Compound Inflation, or the ACI,
policies under this program. We have paid over $60,000 in
premiums since then, much more than we would have otherwise,
because we believed this policy was special. We were told
premiums would be locked in at a flat rate, while benefits
increased at 5 percent. Every other policyholder we have talked
to understood and believed the same thing. Probably the only
exception is at the end of the table here.
Here is why we believed this. On the application form, you
checked the box indicating your choice between this policy and
the Future Purchase Option one that did not do that. Above the
box, it said, ``If you have any questions regarding Inflation
Protection, please refer to your Inflation Protection Options
Brochure in your kit.'' That is this one here, and that is
shown up there. So that is the last thing you saw.
That is the text of it right up there, and as you can see,
it says if you buy the ACI Option, you will pay now more but
lock in a flat rate. Three lines down it does have the ``no
increase'' language.
OPM now contends--and Senator Wyden, Senator LeMieux, you
pointed out about small print. Senator LeMieux, the point is
this. We did not miss the small print because what you have not
heard today is this. We have another document that we were
given that you are supposed to be given, and it is called an
outline of coverage. In that document, the very language that
OPM is citing is contained. But it is only referred to with
respect to the Future Purchase Option, the other option, not
this option. That is very crucial to understand. It was
probably a mistake on the part of the insurance companies, but
that does not matter. It was not connected to this.
Now, let me put this in a bit larger perspective that is
even more troublesome. We are not only shocked to learn that
this happened because we are going to get a renege on this, but
we only found out now that this was a 7-year contract. That
document shows a 30-year timeline, and the language below
refers to a 30-year timeline. We had no idea there was going to
be a renegotiation.
So what this means is we are placed in a terrible
situation. We either pay a higher premium now and possibly
every new contract, which the Director of OPM said will happen
on the Kojo Nnamdi NPR interview program--it will happen every
time--or we accept the lesser amount and just hope that
coverage does not erode every time. Or we go out in the private
market. Being 7 years older, that means a higher rate. Maybe
some people will not be able to get it at all. Of course, all
the premiums that we paid would be gone.
This is a very crucial decision for a lot of us, and it is
going to affect our loved ones too. The problem is that 5\1/2\
months after OPM made this agreement, we still have not heard
exactly what our options are going to be. We are not going to
get those letters until about the end of this month/beginning
of the next month. That is going to give us 6 weeks. Every
single financial expert in this area has told us you cannot go
through at our age underwriting and comparing. How can we
compare if we do not have something yet to compare to? So the
result is we are trapped, and that is wrong. So I heartily
support the notion of extending the time, as Ms. Kelley said.
Finally, OPM has repeatedly said that this program complied
with the National Association of Insurance Commissioners'
guidelines for long-term care insurance. Every place you read
it. But in fact, they provided us with their companion guide to
the shoppers guide, the NAIC guidelines. What they left out in
their companion guide is the fact that there is a warning in
there in shopping guide by NAIC that says words like ``flat
rate,'' words like ``no increase'' and ``level'' cannot be
used. So this did not comply. It further states that many
States have outlawed that kind of language. State insurance
commissioners have, but OPM allowed it.
In summary, Chairman Kohl, Chairman Akaka, all ACI
policyholders we have spoken to agree we would not have bought
this policy, we would not have spent these tens of thousands of
dollars if we had known that OPM's promise of pay more now but
lock in a flat rate was not true. But now that we have, we are
kind of stuck in a tough place.
What is particularly galling to us and me personally is as
current and former Federal employees, what tipped the balance
in our decision about this was OPM was behind it. That is what
tipped it. We could trust that brand. I think that is important
going forward to think about as you deal with this.
I am not saying that OPM and the insurers were acting in
bad faith, but by the same token, OPM and the insurers cannot
in good faith contend that the documents you have seen today--
and I want to emphasize one of those documents, which I
included, and that is that one, that Outline of Coverage
document, which I referred to in my prepared statement, that
that document says that that provision they are citing relates
to the ACI option because clearly, when you read it, it only
refers to the other. You are only referred to that phrase when
you get to the FPO section. So the documents clearly show they
did promise no increase, and I do not think they can, in good
faith, contend otherwise.
The proposed fix of offering us the same amount for lesser
coverage is not really equitable. What is the fairness or
accountability in that?
My prepared statement does describe some remedies that I
consider acceptable, including one very closely related,
Chairman Kohl, to your proposed legislation which if we had
passed in 2002, none of us would be spending this afternoon
like this.
Ladies and gentlemen, that concludes my statement.
[The prepared statement of Mr. Joy follows:]
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The Chairman. Thank you, Mr. Joy.
Ms. Senkewicz.
STATEMENT OF MARY BETH SENKEWICZ, DEPUTY COMMISSIONER, FLORIDA
OFFICE OF INSURANCE REGULATION, TALLAHASSEE, FL
Ms. Senkewicz. Thank you, Chairman Kohl, Chairman Akaka,
Ranking Member Corker. Good afternoon, everyone. Thank you for
inviting me here.
In addition to my position in Florida, I also serve on
behalf of Commissioner Kevin McCarty as Chair of the NAIC's
Senior Issues Task Force, and it is on the NAIC's behalf that I
testify today, an organization comprised of insurance
regulators from the 50 States, the District of Columbia, and
five U.S. territories.
Before I begin, I would like to thank the Senate Special
Committee on Aging for its continued focus on improving the
long-term care insurance market. The NAIC appreciated the
opportunity to work with Chairman Kohl on S. 1177, the
Confidence in Long-Term Care Insurance Act of 2009. If enacted,
this bill would improve the long-term care insurance
marketplace.
As we all know, our Nation faces an increasing challenge of
how to pay for long-term care services. Medical inflation is
rising faster than incomes. Some individuals can afford to put
money aside, but many rely on Medicaid, which puts considerable
pressure on State and Federal budgets.
A healthy long-term care market will help alleviate that
pressure. Currently, private long-term care insurance provides
approximately 10 percent of the total long-term care services
in the country, but it is increasing. In the past decade, the
market has grown from covering less than 3 million lives to
covering more than 7 million lives, with premiums increasing to
over $100 billion.
However, let us be frank. Long-term care insurance has
proved a challenging product to regulate because of the length
of the tail. You are purchasing a product that you do not
expect to access benefits for over 30 years. The history of the
product has shown us this. Long-term care policies, unlike the
original policies which generally only provided nursing home
care, now incorporate a myriad of care alternatives, including
nursing home, home health care, respite care, hospice care, and
services provided in assisted living facilities, adult day care
centers, and other community facilities. In addition, we have
observed the emergence of group policies, most notably the
Federal Long Term Care Insurance Program.
State regulators did notice during the 1990's many
companies were under-pricing long-term care policies due to
faulty assumptions. This resulted in Florida and many States
with significant rate increases for the companies to pay
unanticipated claims in order for them to retain their
solvency. One result, policyholders had to lapse.
At this time, the NAIC--we studied it. We developed and
adopted rate stabilization standards in August 2000 which
revised the NAIC long-term care model regulation. These
standards, adopted by Florida in 2003, provide incentives for
the company to price its products adequately at the front end
so that no rate increases will be necessary and require company
assurances that the rates are sufficient to pay anticipated
costs under moderately adverse experience during the life of
the policyholder.
In addition, the new standards require specific disclosure
to the consumer about the potential for rate increases which
must be signed and acknowledged by the consumer. Let me repeat
that. A specific disclosure is contained in appendix B of our
model regulation which is called the ``long-term care insurance
personal worksheet.'' Right up near the front in bold print is
the company's right to increase premiums. On the second page,
there is a little box that you have to check that says we also
require that they provide a 10-year rate history, and there is
a little box that you have to check and sign that says I
understand that this premium--the price for this product may go
up in the future.
A second appendix, appendix F, also discusses what happens
if there is a contingent benefit upon lapse when there are rate
increases. This one is specifically signed. The other is
informational.
If the company does file for a rate increase under these
standards, the company is penalized and a persistent practice
could result in a company's suspension from the market.
In Florida, we have been even more aggressive in adopting
regulations to protect seniors. In addition to the NAIC models,
we require rate pooling across similar benefits and we impose
limits on the relationship between the new business and renewal
rates, which helps reduce death spirals because requiring this
pooling and requiring that the rates be capped by the new
business rate, you are preventing people from being in that
death spiral when a block is closed.
We believe the adoption of S. 1177 would be an important
tool, as it would update Federal consumer protection standards
and institute a formal process for incorporating new NAIC-
adopted protections in tax-qualified and partnership plans.
In conclusion, we have worked hard over the years to keep
up with our regulatory oversight of this product, as it has
changed rapidly and often during the last 20 years. We look
forward to continuing our partnership with Congress to achieve
the goal of continuing to protect consumers.
Thank you, Mr. Chairman.
[The prepared statement of Ms. Senkewicz follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Senkewicz.
Ms. Harrison.
STATEMENT OF MARIANNE HARRISON, PRESIDENT, LONG TERM CARE, JOHN
HANCOCK FINANCIAL SERVICES, INC., BOSTON, MA
Ms. Harrison. Good afternoon, Chairman Kohl, Chairman
Akaka, and members of the committees. I am Marianne Harrison,
President and General Manager of the Long Term Care Business
Unit at John Hancock. I welcome the opportunity to appear
before you today to discuss the Federal Long Term Care
Insurance Program.
We believe long-term care insurance is a critically
important product that can help mitigate the impact of
potentially devastating costs on the financial well-being of
American families facing a long-term care situation. We have
always actively supported consumer protection legislation and
regulations at the State and national level, and we commend the
initiatives proposed by Chairman Kohl in S. 1177, the
Confidence in Long Term Care Insurance Act of 2009. This bill
would help to further strengthen the consumer protections
afforded to purchasers of long-term care insurance.
My testimony today will address the issue of premiums
charged under the Federal program and describe our
communications campaign to help enrollees evaluate their
options and facilitate an informed decisionmaking process. I
would like to add that we regret any misunderstandings that may
have arisen as a result of the rate increase. We are hopeful
that this hearing will help to dispel that confusion.
At the outset, I would like to highlight three critically
important points. First, everyone can avoid the rate increase
without a reduction in his or her current benefit levels.
Second, no one who purchased at the issue age of 70 or above
will experience a rate increase, and third, everyone will have
time and support to evaluate his or her options.
In the world of long-term care insurance, the Federal
program has a unique funding mechanism that allows for complete
and total transparency. All of the premiums collected for the
Federal program go into a separate fund called the Experience
Fund and cannot be used to cover unrelated liabilities of the
insurer or for any purposes other than the Federal program. All
premiums must go into the Experience Fund and all debits such
as program claims, expenses, and fees are paid out of the
Experience Fund.
As the program developed, we saw that some of the original
pricing assumptions were inconsistent with actual experience.
In particular, enrollee mortality and lapse rates have been
significantly lower than expected. This has been the case even
though a lower lapse rate had been assumed in pricing but not
generally used throughout the industry at the time.
Also, investment experience has been worse than expected,
the consequence of the low interest rate environment that
evolved shortly after the program began in 2002.
While it is still early in the program, it is evident that
in order for the program to have enough money to cover the
claims that are now expected to be incurred in the future, it
is necessary to revise some of the premiums. For those
enrollees who will experience a rate change, the average
monthly increase is approximately $29 per month. All of the
people impacted by the increase purchased a 5 percent annual
inflation adjustment.
Out of concern that some of these enrollees might find this
increase in premium unmanageable, we developed an option that
allows an individual to avoid an increase in premium altogether
by changing from a 5 percent annual benefit increase to a 4
percent annual benefit increase. This alternative allows
enrollees to retain the core value of their current benefits
including, for example, types of services, levels of
reimbursement for services, waiting periods, and care
coordination while still avoiding the rate increase. Again,
making this change would not decrease current benefit levels.
We believe that a 4 percent annual benefit increase
provides meaningful protection from increases in the cost of
long-term care services over time.
We also believe much of the confusion has arisen because
people assume that because premiums do not increase due to
inflation under the Compound Inflation provision, that there
was an implied guarantee that premiums would not increase for
the program overall.
We have worked closely with OPM to develop a comprehensive
communication strategy for current enrollees to provide clear
and explicit descriptions of their choices and options.
We have also developed a process to provide enrollees with
sufficient time to help them evaluate their options and
choices. Open season for Federal employees to make decisions on
all their health benefits is 30 days. Enrollees in the Federal
Long Term Care Insurance Program will have at least 5 weeks to
decide how they want to proceed. In addition, we will ensure
that extenuating circumstances are considered and that every
affected enrollee has an opportunity within a reasonable
timeframe to avoid the rate increase.
John Hancock believes that private insurance will play an
increasingly important role as a source of funding for long-
term care needs in the coming years and that the reasons for
which the Federal program was established are more valid than
ever. Our commitment to protecting the interest of our current
and future policyholders is unequivocal.
Thank you for the opportunity to speak to you today to
offer this testimony. I will be happy to answer any questions
you may have at this time.
[The prepared statement of Ms. Harrison follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Harrison.
We will now turn to the panel for questions. Senator Akaka?
Chairman Akaka. Thank you very much, Mr. Chairman.
Mr. Green, how long have you been with OPM?
Mr. Green. I have been with OPM 37 years, sir.
Chairman Akaka. How long have you been in this Deputy
Associate Director position?
Mr. Green. Since 2005.
Chairman Akaka. As early as the status report for fiscal
year 2004, the provider told you that the program had a deficit
that had grown from the prior year. This trend continued.
My question to you is, why is Congress just learning of
these serious problems this year?
Mr. Green. Well, sir, first of all, OPM did inform Congress
in 2007 that rates may have to be increased with the new
contract term.
But more broadly, the answer is that we dealt with
assumptions that were believed to be valid at the beginning of
the contract term. The actual experience was worse than
anticipated. We did not know, and our contractor did not know,
whether this was a temporary or long-term condition. Changing
the rates while they were still fluctuating and uncertain would
have been a disservice to all concerned, especially our
enrollees.
So it was not until we determined that, not only was the
experience worse than anticipated, but it was likely to stay
that way, that we decided a rate increase was needed even if
experience turned for the better. In late 2007 and on into the
later years, as the contract was coming to an end, we decided
it was appropriate at that time to come up with a new benefits
structure going forward and to deal with the rate issue for
current enrollees.
Chairman Akaka. Ms. Harrison, as was discussed already,
John Hancock was awarded the next 7-year contract for this
program. You testified that changes in certain assumptions were
needed.
My question to you is, what changes in investments,
assumptions, and program benefits are you making to ensure that
additional premium increases of this kind will not be
necessary?
Ms. Harrison. When we initially priced the product, we were
using our best estimate of assumptions at that particular time.
As we saw the experience coming out over the years, there were
two things that we primarily noted. Termination rates which
were based on population's mortality and lapse rates had
deteriorated, as had the investment experience.
When we priced for the second contract, we ensured that we
used what we have learned from the past 7 years, that we used
expectations in terms of where we think those assumptions will
be in the long term. At this point, we have priced, assuming
that we will not have another rate increase, but if assumptions
change, there is a possibility that there may be one in the
future. However, we have priced right now assuming the current
premiums are correct.
Chairman Akaka. Thank you.
Mr. Green, according to GAO, State programs faced with a
large premium increase have varied in how they handle the
situation. Some States have raised premiums by a smaller amount
over a few years to make it easier for the enrollees to handle,
while others have imposed the full increase at one time, as OPM
has done here.
Please discuss why OPM decided to impose a large, one-time
increase rather than phasing smaller increases over several
years?
Mr. Green. Yes, sir. The primary reason for that is that we
were not sure 2 or 3 years ago, and our partners were not sure
2 or 3 years ago, that a rate increase was needed at all. We
did not have enough experience over the short term of this
contract in order to be certain that the adverse conditions we
were seeing would continue. It was the recommendation of the
contractor, which OPM accepted, not to increase rates at all at
that time. It was only in the past year or so that it was
determined that conditions were such that, even if they
improved, rates would have to go up.
Chairman Akaka. Mr. Joy, you said in your testimony that
you were not aware that your premiums could rise when you
signed up for the program and chose the Automatic Compound
Inflation Option. After taking a look at the documents that you
were given when you signed up, I think that conclusion was
quite reasonable.
I would like you to talk about what this premium increase
or lowering the benefit inflation rate would mean for you and
for other policyholders faced with that same choice.
Mr. Joy. Many persons chose this policy knowing that it
would be a stretch, but they thought over time it would go
away. It is sort of like, well, your mortgage in effect keeps
going down. The problem is that we feel like we're getting our
mortgage refinanced at a higher level by the company here, and
in point of fact, instead of living with that stretch of that
high mortgage for a while, it is going to now be forever and
maybe get beyond control. At a certain point, especially given
that this is going to happen--according to, again, OPM Director
Berry on September 9th on National Public Radio--said this is
going to happen every time.
So I cannot take 25 percent increases every 7 years, not at
the rate I have paid. On the other hand, lowering the benefit--
well, if that is just the mirror image, the left-right image.
If I am going to pay the same amount that I am stretched for
now, but I am going to get less and less and less over time,
then why am I paying it? What is going to happen is a lot of
people are going to lapse and that is going to do everybody a
lot of good because then those benefits will never have to be
paid out, but the premiums will have been paid in.
So that is why there is an equity issue here that has to be
addressed, and I would emphasize again we are not talking about
a difference between the large print and the small print. The
Outline of Coverage document does not say that that particular
paragraph they are citing as the reason applies to the ACI one.
It is only referred to within the FPO one. So I had no reason
to think otherwise, and that is why I am stretched. That is why
I made the decision to be stretched like this.
Chairman Akaka. Thank you very much, Mr. Chairman.
The Chairman. Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Ms. Harrison, I have to tell you that I thought that your
testimony here today is as misleading as these marketing
materials. Twice you said that you would allow enrollees to
avoid an increase in premium by switching from the 5 percent
annual benefit increase to a 4 percent increase, and twice you
said this change would not decrease current benefit levels.
Well, of course, the key word there is ``current.'' For about
one year, there is no change, but after that there becomes a
huge change.
Let me give you an example. If an individual enrolls in
this program at age 40--and after all, we are trying to
encourage people to plan--and then pays into this program for
40 years, which is about the time that you would expect someone
to need long-term care at age 80, then rather than receiving
$1,056 as the daily benefit that they would have received under
the 5 percent compound formula, instead that individual is
going to receive a daily benefit of only $720. That is almost a
third lower.
So when you twice say today that you can switch, you can
switch, it is not going to affect your current benefits, it is
not going to affect your core plan design, your core benefits,
your coverage services, I think that is extraordinarily
misleading because, in fact, very quickly there is a
considerable delta that opens up as a result of going from 5 to
4 percent. That may sound like it is minor, but because of the
way compound interest works, that is not minor at all.
I am discouraged to hear you give those blithe assurances
today when, in fact, a third decrease to Mr. Joy is going to
make the difference between whether he can afford the nursing
home if, God forbid, you end up in one, or whether his family
members or the Medicaid program are going to have to pay for
his costs.
So I feel, listening to your testimony today, that your
company has not learned anything. You are still misleading
people. I would ask you to respond to that. Do you not think
that is a big difference?
Ms. Harrison. My response is, in terms of what 5 percent
compound inflation is trying to do, is that is trying to
maintain your benefits over time. If you have a $100 daily
benefit today, it wants to make sure that in the future when it
is time to pay the claim, that you have still that core benefit
of $100. So it really is trying to--the idea of 5 percent
compound is that it is increasing your benefit to reflect what
inflation is doing and what the cost of care services is doing.
The 5 percent compound was introduced several years ago as
an indication of what inflation would look like. Whether it is
5 percent, 4 percent, 3 percent, no one really knows what the
right number is, but I would say that the cost of care over the
last several years has been trending anywhere from 1.5 to 4
percent.
So we think that 4 percent is a fair inflation rate to
apply to this, and some people may even argue that at 5 percent
you are actually overpaying for what it is that you are trying
to maintain core benefit.
Senator Collins. I can tell you that if you told seniors or
if you told Federal employees today, as you did, that you can
change from 5 to 4 percent, it will protect your core benefit,
there will be, quote, no change in current benefit levels, they
would think, well, wow, that is a good deal. If you told them,
however, that if they went from 5 to 4 percent, 40 years from
now, that the difference is they are going to be getting a
third less, that is a totally different impression.
Let me, before my time expires, go to the brochure
materials that Mr. Joy and everyone relied upon who chose this
plan. As he has pointed out, it even says that there will be
no, with capital letters, no corresponding increase in your
premium. Do you think that this is a fair representation of the
product?
Ms. Harrison. I think in our attempt to try and distinguish
between the two inflation options, which were the Future
Purchase Option and the 5 percent Compound, that the text was
trying to get at is that with the Future Purchase Option that
your premiums are going up as you utilize the FPO in the
future, whereas with 5 percent Compound, as that inflation
option increases, your premiums would not increase. I do think
that it caused a lot of confusion, and I do regret that. I
think there are other places where it is clear. That was
probably not one of them.
What we have done going forward in the second contract term
is to ensure that all the language is very clear so that people
understand that distinction.
Senator Collins. Ms. Senkewicz, my time is expired. Let me
ask you the same question. Do you think that this document is
misleading to consumers?
Ms. Senkewicz. Ma'am, Mr. Chairman, I think that it is
pretty evident that a consumer could be misled. I do not think
that--just looking at that side by side and overall in the
documents that I have seen, it is not set out as clearly as we
do in our model and the separate disclosure that you have to
read and sign. It says, you know, this product could have an
increase in rates. I mean, we were very concerned about that.
We worked very hard on that particular disclosure to make sure
that it was crystal clear.
Senator Collins. But that is nowhere on this document.
Ms. Senkewicz. I do not see the little check box in any of
the materials that were provided to me by the staff.
Senator Collins. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Collins.
Senator LeMieux.
Senator LeMieux. Thank you, Mr. Chairman.
Mr. Green, this document that we are talking about that is
up there on the board next to you--who was responsible for
creating this document?
Mr. Green. The Long Term Care Partners created it. OPM
approved it.
Senator LeMieux. OK. The Long Term Care Partners--that is
separate from John Hancock?
Mr. Green. It is a subsidiary of John Hancock.
Senator LeMieux. Are they here today?
Mr. Green. Yes. Well, represented by----
Senator LeMieux. Ms. Harrison?
Mr. Green. Ms. Harrison.
Senator LeMieux. OK. Let me just change if I can.
Ms. Harrison, Long Term Care Partners, a subsidiary of John
Hancock, came up with this document?
Ms. Harrison. That is correct.
Senator LeMieux. When did you realize that the information
that was contained in this document was no longer accurate? You
meaning John Hancock or Long Term Care Partners.
Ms. Harrison. I think it has become very clear that with
the rate increase, that there was a lot of confusion over the
document.
Senator LeMieux. When did you understand that there was
going to have to be a 25 percent increase or any increase?
Ms. Harrison. The first time that we proposed a rate
increase would have been in the spring of 2007.
Senator LeMieux. How long has this document been in use?
Ms. Harrison. Since the beginning of the program.
Senator LeMieux. Is still being used?
Ms. Harrison. No, it is not.
Senator LeMieux. When did that stop?
Ms. Harrison. When we realized that a rate increase was
necessary, we stopped actually pushing the program to
enrollees. We were not actively using those documents.
Senator LeMieux. So as soon as you found out in 2007 that
there was going to have to be an increase, you did not use this
document anymore?
Ms. Harrison. I would have to check on the exact date.
Senator LeMieux. For the folks that relied upon this
inaccurate document, when did they find out that this document
was no longer good and that they were going to have to pay
more?
Ms. Harrison. I would assume it was when the rate increase
came up.
Senator LeMieux. That is just 2009.
Ms. Harrison. Right.
Senator LeMieux. So for two years, people who have been
paying into this--$60,000 Mr. Joy says over time--they did not
know that this information that they relied upon was incorrect,
and still, they made their payments.
Ms. Harrison. I should clarify that in May 2008, all new
enrollees got a one-pager that also talked about the
possibility that premiums may go up in the future, and it was
also posted on the fedbizops as well.
Senator LeMieux. Mr. Green, when did you find out from the
John Hancock company or their subsidiary that this information
was incorrect?
Mr. Green. First, let me correct for the record that this
particular document was taken off the market in January 2005.
It has not been in use since then.
Senator LeMieux. OK. Can you answer my question?
Mr. Green. Would you repeat it please, sir?
Senator LeMieux. When did you find out that this
information was inaccurate?
Mr. Green. Before January 2005, in the sense that we did
not know that a rate increase would be necessary. We did know
as was said earlier, that it does do a good job of explaining
in plain language the difference between a Future Purchase
Option and an Automatic Compound Inflation Option. It does not
do an adequate job of explaining the overall potential for a
rate increase, and that was one of the reasons I believe it was
taken off the----
Senator LeMieux. So 2005 you stopped using this document
because you are worried that it is not accurate, that it is
not----
Mr. Green. It was too simplistic.
Senator LeMieux. It says here that you are not going to get
a rate increase.
Mr. Green. Yes.
Senator LeMieux. You figure out in 2005 that is not true
anymore?
Mr. Green. Among other reasons. I do not know all the
reasons it was taken off.
Senator LeMieux. So you stopped using. Right?
Mr. Green. We stopped using it.
Senator LeMieux. So then you sent a letter, of course,
right after you found this out to all of the Federal employees
who had paid for this telling them that this information was
inaccurate and a rate increase was coming.
Mr. Green. No.
Senator LeMieux. You did not do that.
Mr. Green. Because we did not know at that point that a
rate increase was coming.
Senator LeMieux. So for years, Federal employees, more than
100,000 who chose to do the right thing to get the fixed
product, the fixed payment, keep paying in even though you know
and John Hancock knows that this information is no longer
accurate.
Mr. Green. We started using correct information, and we did
not know at that time that a rate increase would be necessary.
Senator LeMieux. But people like Mr. Joy are still paying
in and they do not know that the situation has changed and that
the thing they relied upon is not true. Right?
Mr. Green. I am not saying it was not true, but it was not
complete. It was not accurate. It was not up to our standards.
Senator LeMieux. Your benefit increases year after year
without causing an increase in your premium. That was no longer
true. Was it? Because they were going to get a rate increase.
Mr. Green. We did not know they were going to get a rate
increase.
Senator LeMieux. When did you know that?
Mr. Green. As I said, we knew a rate increase would be
necessary, or we assumed a rate increase would be necessary
late in 2007.
Senator LeMieux. Now, I only have a few seconds left, but I
want to go back to this point that I talked about in my opening
statement. Mr. Chairman, if these Federal employees are given
this document that says they are not going to get a rate
increase, why should this mistake fall upon them? Why should
they have to pay for it?
I applaud the comments of my colleague from Illinois. Why
should John Hancock and the Federal Government not have to make
up this difference? You know, frankly, heads should roll over
this. This is a huge mistake, and we have got 6,000 people in
Florida, Federal retirees, who did the right thing and paid
into this, who are going to get a 25 percent increase. Why
should they pay the burden of the people--for the mistake that
others made? It does not make any sense to me. There should not
be any increase in premiums. There should not be any decrease
in benefits. If there is going to have to be a change, they
should be refunded what they paid in, the difference between
this plan and the other variable plan. They should get the
difference back. It is not fair to them.
But I appreciate, Mr. Chairman, you having this meeting
today on this very important topic.
The Chairman. Thank you, Mr. LeMieux.
Now we turn to Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. Let me say again,
Mr. Chairman, I think that this highlights the need for your
legislation.
I just have a couple of points, having listened to some of
my colleagues ask questions.
Mr. Green, I am not clear what is actually going to change
at OPM as a result of Chairman Kohl's hearing. What we have
heard is that you have got older people who feel they were the
victims of a bait and switch process. It really amounts to them
like a confidence game.
So could you just outline, since we have been at it for 90
minutes or so, what specifically is going to change at OPM to
give consumers a sense of confidence that things will be
different?
Mr. Green. Yes, sir. Thank you.
First, we have worked very hard to improve the educational
materials that will be part of the outreach effort for all
enrollees, including the new enrollees we hope will join the
program in the second contract year.
Senator Wyden. So on that point, improve the educational
materials, are you saying that on your watch we will not have
another situation where there is a big gap between the
promotional materials and what the legalese says? I mean, that
is what I would call a change in the educational materials.
Mr. Green. Yes, sir.
Senator Wyden. Can you assure us that that will not happen
again? There will no longer be a gap between the ads and what
the fine print----
Mr. Green. That is our absolute intention and that is what
we are going to accomplish.
Senator Wyden. Go ahead.
Mr. Green. Let me give you some examples. All of these
materials are currently outlined, by the way, on the
www.ltcfeds.com website, and they are available on request from
Long Term Care Partners.
The new materials disclose that the insurance company
reserves the right to increase premiums. The new materials
disclose that the premiums are not guaranteed. The new
materials disclose this information in many places, including
on the pages that talk about the ACI and the FPO options. The
first page of the new application discloses that premiums are
not guaranteed. The agreement and acknowledgement section of
these applications, which I think we have heard about, and
which requires the applicant's signature, discloses that
premiums are not guaranteed. The new benefits booklet, the
contractual statement of benefits, discloses that premiums are
not guaranteed on its very first page in addition to disclosing
it within the booklet.
In addition, all the new graphs that describe how the ACI
option works now clearly state that premiums are not
guaranteed. Likewise, the new graphs that describe how the FPO
option works also state that premiums are not guaranteed.
Senator Wyden. So we are not going to see any more of what
we are listening to today, gaps between promotional materials
and contracts. You have changed the educational materials. Any
other steps that the agency is going to take to protect
consumers? Any other marketing changes? Anything else that you
can outline today to protect consumers?
Mr. Green. We are going to do anything we can and
everything we can. One of the things Director Berry asked me to
share with you today is his willingness and OPM's willingness
to work with both the subcommittee and the committee on ways of
improving the program, looking at new ideas, better ways of
managing the program based on our experience, based on the
growth of the experience in the long-term care industry, and
working with John Hancock and Long Term Care Partners and all
the members on this committee and on this panel. We are open to
making improvements in the program.
Senator Wyden. In your mind, would the program be better
off if the consumer had more choices and there was more
competition in this sector of health care? Mr. Joy is nodding
his head, and I might want to give him a crack at it. But I
think one of the things we have learned in health reform is
some of the biggest problems take place in health care where
you have monopolies and where you have sole source contracts.
So do you think more competition, more choice needs to be
brought to this area?
Mr. Green. I think that that should be looked into. There
are differences, though. One of the strenghts of the Federal
Employees Health Benefits Program is the amount of choice
Federal employees have. If they are not happy with their
particular health plan for either the premium increase or for
any other reason, such as customer service, they can switch
health plans and stay within the program without penalty,
without worrying about prior conditions or any of that.
Senator Wyden. Well----
Mr. Green. The difference there, though, sir--excuse me--is
that there are 4 million enrollees in the FEHB program. Right
now, there are 225,000 enrollees in the long-term care program.
Of course, we have many more people who could sign up for the
program. It is true. But you would need a large enough pool to
smooth the experience throughout that large pool so that no one
paid too much because they were in a pool that had higher
claims than another pool.
Senator Wyden. I understand that, and obviously, big pools
is a key component of health reform. But OPM went with John
Hancock as the sole long-term care policy for the Federal Long
Term Care Program. Prior to that, there was Met Life and John
Hancock. So look at what we got under this arrangement. So I
gather you are willing to look at the idea of increasing more
choices as one opportunity to protect consumers.
Mr. Green. As one opportunity, yes, sir.
Senator Wyden. I hope you will.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Wyden.
Senator Kirk.
Senator Kirk. Thank you, Mr. Chairman.
Mr. Green, I was going to ask in testimony that has been
offered here was a suggestion that OPM would make available to
GAO and perhaps to the Congress the methodology or the
assumptions on experiences and claims by which you arrived at
premiums. Has that been done? Has that been proffered to either
the GAO or the Congress?
Mr. Green. I cannot say of my personal knowledge that it
has. It is my understanding that it has been provided to staff
both of this subcommittee and the committee. If that has not
been done, we certainly would be willing to do that
immediately.
Senator Kirk. The reason I ask, one of the things I hope,
in addition to the chairman's legislation, there will be some
lessons learned from this experience. It seems to me that one
of them is transparency in terms of the methodologies and how
the quantification of different things were arrived at. So
those particularly in your agency who have that
responsibility--it can be shared so that consumers and Members
of the Congress who represent them will have a full
understanding of that.
Mr. Green. Senator, I assure you lessons have been learned.
Senator Kirk. On that point, one of the things that is of
concern--in your testimony you indicated in response to the
Senator from Florida that this particular marketing document
was pulled or changed in 2005?
Mr. Green. Yes, sir.
Senator Kirk. I think I heard you say that one of the
things that was clear was, indeed, that premiums may have to be
increased. Therefore, this document would not stand the light
of day going forward to the present day. Is that right?
Mr. Green. That is correct.
Senator Kirk. Did you folks feel that the policyholders at
that point, when you knew that there might be or would be an
increase in premiums--do you feel responsible to put them on
notice that this might be coming up?
Mr. Green. We felt that responsibility keenly, sir. What is
more, though, we felt a responsibility to make sure we had a
contract in place, going forward, and that there were choices
available to enrollees that we felt were reasonable, legitimate
alternatives instead of merely accepting a rate increase. If
that is what they choose to do, that is what they choose to do.
But we wanted to provide other options as well. So we felt it
was important to have it all laid out and ready so there would
not be continued uncertainty.
Senator Kirk. Going back to your comment about you felt
that it would be irresponsible not to increase the premiums,
let me ask you about the sense of responsibility that OPM has
or now feels toward the policyholders who, in effect, were
blind-sided, if you will--I am being kind about this--about
what they thought they were buying at a higher cost and what
they were protecting and now having the rug pulled out from
under them. What I am suggesting perhaps, along the lines that
have suggested before, is do you feel a responsibility that
these folks should be, if not grandfathered into the further
elongation of an incumbent contract or the next term of the
contract or somehow compensated for the monies that have been
expended for the guarantees that they are now not going to
receive?
Mr. Green. First of all, let me say again I am one of those
that are experiencing that sticker shock. I did not expect it
either. I knew that it was possible, but I certainly did not
expect it. No one did. So I understand from a personal point of
view, as well as from a professional point of view, that
sticker shock, that concern.
However, under current law, all of the costs of the
program, both claims and expenses, are to come from premiums in
the program. So by law, there is no other source for funding
claims than the premiums received from enrollees in the
program, which are deposited in the Experience Fund.
Senator Kirk. But I am trying to get at not so much the
sticker shock. Everybody, when the price goes up--they do not
like it, but they were paying in on a certain premise that was
published and marketed to them. So I mean, in another world,
you would call it, if not deliberate, it became a deceptive
document on which folks relied. So I am wondering whether there
is some way to continue the guarantee on which they did rely
for some period of time, which would allow them a much longer
special decision period so they can plan their lives for the
future, or whether we can somehow make them whole for the
monies that are out of pocket and for which they will not get
the guarantees that they thought they were getting.
Mr. Green. Again, sir, OPM does not have the authority
under current law to do that. But, of course, we will work with
you and with the committee to take appropriate actions for the
future.
Senator Kirk. Yes. I would hope we could at least visit the
possibility of some sort of recompense for these folks who have
been basically wronged by this incident.
I am pretty clear that with the chairman's legislation,
along with hopefully more vigilant oversight by OPM, that
things will get better in the future. But I really have a
nagging concern about the folks who have been wrongly treated
under this particular plan, and I hope we can find a way to
alleviate that.
Mr. Green. I appreciate that, sir.
The Chairman. Thank you very much, Senator Kirk.
Senator Kirk. Thank you, sir.
The Chairman. Senator Burris.
Senator Burris. Thank you, Mr. Chairman. I would just like
to continue Senator Kirk's line of questioning to Mr. Green and
to Ms. Harrison.
You said, Mr. Green, that there is no provision in the law
to try to do a grandfathering process. I do not see in a
rightful judgment how anyone, especially Mr. Joy and all your
union members and yourself, who signed up for this program
believing that your premiums would not increase and your
premiums have increased proportionately at a rate of 25
percent, or if you do not want to do that, they are going to
reduce, as Senator Collins just said, how your payout benefits
are going to be 40 years from now. I was just wondering whether
or not OPM and John Hancock cannot get together and come up
with some type of recommendation for this Congress to do
grandfathering for those--well, I guess there are 100,000 and
some odd. In Illinois, we got 3,710 employees who are members
of this system.
I know what is going to happen when they hear what my
position is going to be on this--those Federal employees who
put their money into this system and now they are going to get
hit. Or just take Mr. Joy who is sitting right here. He said he
is going to pay $29 a month. What is that? Another $300 a year,
if that is what his coverage is?
Ms. Harrison, Mr. Green, you all ought to get together.
Mr. Chairman, I would like to see your legislation amended
that would allow those employees not to have to bear one
additional premium payment because of the erroneous information
that they were given in this brochure. It borders on almost
misleading. We will give you credit for someone saying that
this was unintentional.
But now, Ms. Harrison, I am trying to find out what is the
difference now between the first plan and the second plan if
the premiums are going to go up. That is where you sold the ACI
plan. No increases in premiums. So you only got one plan now.
Is that correct?
Ms. Harrison. No. We still have two plans.
Senator Burris. So what is the difference between the
future plan and the other plan? The premium is going to go up
in both of them. There is no fixed payment with no increases.
Ms. Harrison. There is no fixed payment with no increases.
That is correct that both the 5 percent compound and the FPO--
if the circumstances are different than what our expectations
are--and as I say, we have priced it so that we have the best
assumptions today, that there is no guarantee that rates would
not go up.
Senator Burris. So what is the difference between the
plans?
Ms. Harrison. One is compounding at a rate of 5 percent in
terms of the benefits. So it is trying to keep up with
inflation.
Senator Burris. So you just got one plan. You got a
different compounding rate. You do not have two plans. You
promoted this as two plans.
Ms. Harrison. There are two inflation options. So when you
see everywhere in the documentation--there is usually a header
that talks about inflation----
Senator Burris. So you got one plan with two inflation
options. You do not have two plans.
Ms. Harrison. We have two inflation options. That is
correct.
Senator Burris. So that is the same plan with an inflation
option. The other plan said that we would not increase
premiums. You do not have that anymore, do you? Do you have
that anymore?
Ms. Harrison. When you say the other plan----
Senator Burris. Do you have that anymore?
Ms. Harrison. I just want to understand the question, sir.
Senator Burris. Do you have any more plans that say you
will not increase your premiums?
Ms. Harrison. We do not have any plans where the premiums
are guaranteed.
Senator Burris. That plan is out. The ACI no longer exists.
Ms. Harrison. It does actually.
Senator Burris. Under you all's interpretation, but it is
just a modification of what the rates will be.
Ms. Harrison. Well, again, I really regret that some of the
documentation was confusing. In some spots it was clear that
rates could go up----
Senator Burris. Ms. Harrison, that is more than confusing.
I know you regret it. I know you probably were not there when
this was done, but this is unconscionable to do this to Federal
employees who have given their life in service to the public.
Now they are trying to plan for their long-term care, and
because of OPM and you and the other insurance policy, you all
put out information to them that is erroneous and they got to
bear that burden. I am hoping that that does not happen.
I am going to ask my staff to talk to the chairman to see
if we cannot come up with some amendments where you will pay
and I do not whether or not the other taxpayers are going to
bear this burden or how OPM is going to get any more because
they only get it from the taxpayers. I am just wondering
whether John Hancock is going to take it out of some their
profits because since the insurance company has been making all
this money anyway. We can stop this onslaught of our Federal
workers to pay this amount of money. It is unconscionable. It
is unacceptable. I am not going to sit here and listen to you
all say we made a mistake and who is going to bear the brunt of
this mistake? Mr. Joy, Mr. Green. They are going to bear this
mistake?
Please respond, Ms. Harrison.
Ms. Harrison. The program is set up very uniquely versus a
lot of other group plans. The program was set up specifically
so that it was walled off, shall I say, from all of our other
business. They wanted to have transparency within the program
where all the premiums went in and all expenses came out. That
is what has happened.
Yes, there seems to be a lot of confusion, and I admit that
there is confusion.
Senator Burris. What is the difference? How much money are
we talking about here that you are falling short on and that
you actuarially calculated out would be a shortfall? What are
we talking about in dollars?
Ms. Harrison. So in 2007, the deficit was $1 billion, and
we worked very hard to try and find ways to lower that. We did
it by changing investment policy. We did it by updating claims
experience.
Senator Burris. So you are saying that the money that you
collected in premiums and turned around and invested the
premium payment--you all fell $1 billion short in your
earnings.
Ms. Harrison. Because of those lapse and mortality
assumptions that we talked about earlier.
Senator Burris. Because of your--evidently there is another
question too about your sophistication in investments and what
did you all put that money in. I mean, that is what we have got
to look at too. What was the significance of your investing
this money that caused you to lose $1 billion in the
investment?
The question is, how much premium did you pay out during
this period of time? It has only been in existence 7 years, as
I understand it. I do not know what has been paid out. How much
have you all paid out under this plan?
Ms. Harrison. In total from a claims perspective, about $83
million.
Senator Burris. $83 million, and you got a $1 billion
shortfall. No further questions, Mr. Chairman. I hope, Mr.
Chairman, that my staff can work with you to see what we can do
to prevent our Federal employees--some of them are still
working with the hopes that they would have something when they
become--in a nursing home or need home care that they would be
taken care of. Still they got to pay additional monies. I think
that is totally unfair, Mr. Chairman.
The Chairman. Thank you very much, Senator Burris.
Mr. Green, we have been led to believe that you over at OPM
are thinking about extending that--what is it--December 26th
deadline?
Mr. Green. December 14th.
The Chairman. Is that right?
Mr. Green. We need a firm date so people will have a time
limit. We all need time limits to make a decision and move
forward. We know that, in most cases, people wait until the
last minute anyway. However, if a person needs more time to
make a decision, they can get in touch with Federal Long Term
Care Partners and they will be given extra time.
If they do not make a decision, especially those that are
subject to the 25 percent rate increase, if they do not contact
the Long Term Care Partners, they will be sent a letter at the
end of the year reminding them that their rate will be going up
if they do not make a change. They will be given another
opportunity at that time to make a change.
One more time, if they still take no action, but upon
receiving their check at the first of the year and see that the
premium increases have gone up and that they have less in their
check, they will have an opportunity at that time to contact
Long Term Care Partners and do something to reduce that
increase in premium.
The Chairman. Thank you.
Ms. Kelley. Mr. Chairman, if I could just with all due
respect----
The Chairman. Yes, go ahead.
Ms. Kelley. The announced open season for these impacted
144,000 Federal employees has been announced on OPM's website
that it was going start on October 1st. The last information we
can find on the website says the packets will not even been
mailed until October 26th. Even the announced period was 10
weeks, which some would argue is not enough time to make this
kind of an important life choice decision and to do all the
analysis needed. I am sure it took them more than 10 weeks to
put the materials together and to tell anybody that the
increase was coming.
So I really believe this open season, whatever they are
calling it, needs to be extended to give impacted employees the
time that they need to get those materials. Even if they mail
them October 26th from a mail house, it could take 2 weeks for
them to get to the west coast. Now they are telling employees
they have 4 weeks, maybe 6 weeks to make that kind of a
decision. It is not their fault that they are in this
situation. I just think that is really inappropriate, and I
think OPM should be adjusting that timeline and it should not
need some congressional action to do that.
The Chairman. I think you are right, and I thought--and Mr.
Green, you can clarify it. I thought I heard you say that you
are prepared to extend that deadline.
Mr. Green. We are prepared to give individuals more time,
yes, sir.
The Chairman. Are you prepared to extend the deadline?
Mr. Green. I am prepared to go back and discuss with staff
and with Long Term Care Partners the possibility extending the
deadline. December 14th is a good date because it also is the
end of open season for health and dental. It is a common date
people can understand. So there is some validity in having that
December 14th date.
But, nonetheless, we will discuss the feasibility and
appropriateness of extending that deadline. Again, listening to
people at the table here with me and you, sir, I will certainly
take that back.
The Chairman. Well, we will look forward to hearing from
you and your associates pretty promptly on that----
Mr. Green. Yes, sir. It will be very promptly.
The Chairman. When you are not mailing it out until October
26th and people do not get it until the end of the month and
then you have a deadline on December 14th----
Mr. Green. Yes, sir.
The Chairman [continuing]. That is not right. I am sure you
can understand our concern.
Mr. Green. I understand what you are saying, sir.
The Chairman. That is fixable. Some of the things that have
happened here, as we have discussed today, are not nearly as
correctable as this. This is something we could do something
about, and I think it would show at least the concern we have
over the predicament that we are in that caused the hardship to
the people, that we want to do everything we can to alleviate
it, at least in some small way, by extending that deadline.
Mr. Green. Yes, sir.
The Chairman. That is reasonable, is it not?
Mr. Green. I think it is, but I will have to take it back
and discuss it with my director and with Long Term Care
Partners. But I understand what you are saying and what you are
saying is reasonable.
Ms. Harrison. Mr. Chairman, could I make a clarifying
comment?
The Chairman. Yes, go ahead, Ms. Harrison.
Ms. Harrison. I just wanted to let you know that although
the deadline is December 14th, we have what we call a silent
grace period. The reason why we call it a silent grace period
is that although it is not announced people have more time if
they need more time. The reason we do not announce it is based
on our experience in the group business, where we have found
that people usually wait until the deadline to take action, and
so we wanted to use a deadline date that made sense, and as Mr.
Green had commented, it did coincide with the benefit program.
But there is time beyond the stated deadline during which
people can make decisions as well.
The Chairman. All right. Before I ask Senator Akaka to make
a closing statement with respect to this hearing, does anybody
want to say anything? Go ahead, Mr. Joy.
Mr. Joy. Yes, Mr. Chairman. Let me say again thank you for
convening this hearing.
The discussion here of options I think has been something
that we have all been listening to very closely, and with
respect to the extension of the time, that obviously would be
an immediate something maybe to help stop the pain. I am not
sure it is going to be a cure-all, but it will help. Everybody
on death row will always take a week's extension.
But by the same token, there are, I think, some other forms
of equitable relief that need to be considered. One of them
clearly is grandfathering. Again, I return to this because
there is a little something that is not being said here about
the emperor and his clothes. The provision that people are
relying upon was not applied, as your documents will see in
exhibit 6--or attachment 4 on page 10 of the Outline of
Coverage, it was not just that there was some fine print. The
fine print was there and it was not connected to this one. But
beyond that, that to me means that essentially if it happened
four blocks from here, it would have been called theft, but
here it is not being called theft.
In terms of fixes, it strikes me that there is a number of
them, but one of them--all of which are necessarily mutually
exclusive. One of them is, for instance, the--and I am checking
my note here. Here it is. One of them is to extend to the
policyholders who have paid more than they would have paid an
amount that essentially would forward-fund whatever other
policy they went to within the one. You could credit with the
difference between what they would have paid and what they did
pay--excuse me--what they would have paid if they had bought it
originally and what they did pay. That would be one way to do
that.
What is being proposed, as we understand, it by Hancock is
that there will be some options, but not all of them are
available. For instance, according to the testimony, if you
move to a new plan, you would go to a new cost basis. Well, why
is the new plan not available--period--entirely at the old cost
basis?
The other thing is this increase that supposedly happened
was because returns have been low. Well, I appreciate that, but
I have not heard anybody make a pledge that if returns come
back, that we are going to, in fact, have premiums lowered. It
sort of almost a heads they win, tails we lose because their
returns go down, we have to pay more. But if their returns go
up, we do not get to pay less. So that structurally is one
issue.
A third one is the Federal tax law now says that you can
deduct for the cost of long-term care, depending upon your age,
varying amounts that you pay for a qualified plan that you are
paying under. One way that might be able to be done--and this
is, I appreciate, not a tax-writing committee--would be to
simply say for any holder of this policy, that they can write
off the entire amount of the premium for a 7-year period,
essentially this period that people have been suffering. But
the point is there may be a tax fix.
Another plan--and I want to turn to 1177. All of the
features of 1177, the disclosure, et cetera, are excellent. We
would not be here now if we had that disclosure, if we had the
model, et cetera. But I do think there is maybe an argument for
at least automatically including, via some sort of legislative
measure, these existing ACI policies under the State long-term
care Medicaid partnerships, just automatically including them.
That is possibly another way for recompense.
None of these are mutually exclusive. I am really heartened
by so many Senators here in the committee wanting to do
something. The only thing I would say is this. You cannot fix
it unless you know all the facts, and there is only one way you
are going to know these facts. I guess I will special plea for
my former employer. GAO needs to be all over this on a
permanent basis. That is the only way you are going to get the
facts in order to fix it.
Having said all that, the only thing I would add is I think
Ms. Baptiste makes a good point. I am not so sure about this
patient. I think self-insure is something that also needs to be
put on the table and looked at.
Ms. Baptiste. Mr. Chairman, I would like to add NARFE's
voice to the plea that this deadline be extended and not hidden
somewhere in some fine print that you can maybe, if you call
up, get an extension. That date has to be changed so that
everybody understands it.
Retirees face an extra problem this year in that they get
no COLA on their annuity, and they are now faced with these
higher costs. They have some very tough decisions to make and
it is going to be very difficult if they do not get the
information until the middle of November and it is due back by
December the 14th. So their needs to be an extension and it
needs to be in bold print somewhere. Thank you.
Ms. Kelley. Mr. Chairman, I would just make one more
comment about this. I have to tell you I find it very
disheartening that there is a silent, secret extension that
employees should know about. One hundred forty-four thousand
people should not have to guess if there is some kind of
silent, secret extension. Federal employees understand what
these deadlines are. They meet them every year for FEHB for
dental, for vision. They follow the deadlines. To say that
there can be a secret one, I just find that unacceptable.
I would love to know why the materials were not printed in
the middle of September so that they were not in the mail and
in their hands by October 1st.
So, like I said, without congressional action, I would hope
they would just do the right thing on that.
Other than that, back to the solution for all these
impacted employees. I think the grandfathering solution is one
that should be seriously looked at. NTEU would support
providing some assistance to these impacted enrollees. Perhaps
Congress could work with OPM to create a process to offset some
or all of these increases. Maybe there could be a way found to
require the insurance company to create a fund. It does not
have to be--it is not as technical as Mr. Green referred to
that claims cannot be paid anywhere other than from the Federal
Long Term Care plan. This would be a fund that the insurance
companies would contribute to so that relief could be provided
in some way, but it could require a mechanism that Congress may
have to work with OPM on doing. NTEU would welcome the
opportunity to work with you to try to put some fix in place
before this really unfair impact hits these employees.
The Chairman. Very good.
Ms. Kelley. Thank you, Mr. Chairman.
The Chairman. Senator Burris.
Senator Burris. I think it is important, the fact that $1
billion was lost in the program. So those are the investments
which are creating the shortage, and we cannot lose sight on
that. That is where the investments that you all made have
gone. They lost money.
The Chairman. Very good.
Ms. Harrison.
Ms. Harrison. Just a couple of clarifying points, if I may.
One is with respect to the Experience Fund and the comment that
Mr. Joy made that as rates go up, that the policyholders feel
the pinch and that if mortality or our lapse experience went
the other way, they would not see the benefit. As I mentioned
earlier, this fund is walled off so that if the assumptions
change favorably, the money stays in the Experience Fund. It
does not come back to the insurance company. So theoretically
either premiums could be lowered or benefits could be
increased. I just wanted to clarify that one point.
The other point I would make is that, as I said, in 2007
there was a $1 billion deficit in the fund. We worked very hard
to get that deficit down to $200 million, with some of the
actions that we took, one of them being that we reduced the
profit charge that was being paid for by the fund by about 35
percent. As I mentioned, we changed our investment policy, and
we also changed our claims assumptions. So we tried hard to
avoid a rate increase. That left the fund about $200 million
short which is why the premium rate increase became necessary.
The last just clarifying point--and I do not want to make
it sound like I am making excuses, but I just thought for the
record I should be very clear. In our actual Outline of
Coverage, which Mr. Joy was talking about, in the very first
section we do refer to see the section entitled Where Your
Premium May Change. If you go to that section, there are five
paragraphs.
The first paragraph talks about the Automatic Compound
Inflation, and it says your premium will not increase due to
inflation increases, which is true. Your premium does not go up
with the inflation. So that was true.
The second paragraph addresses the Future Purchase Option.
The third paragraph relates to both of them. It is not
specific to the inflation options.
Then the final paragraph basically says that the premiums
can go up.
So I just wanted to clarify that the fine print does have
that. I am not making excuses.
The Chairman. All right. Thank you so much. Final comment
before our closing statement. Mr. Joy.
Mr. Joy. Yes. I am glad we got to this point because this
is the one I keep repeating, Mr. Chairman. You will note, if
you turn to page 11 of my testimony, attachment 4, which
relates to exactly what she just said. There is a ``7,
relationship of cost of care to benefits'', an introductory
paragraph. Then a bold print subtitle, Automatic Compound
Inflation Option. It talks about it. Then there is a space and
then there is another bold one, Future Purchase Option, and
another space. Everything below that, there are no more spaces.
There are no more side caps. It is within that side cap of the
Future Purchase Option and only within that side cap that the
phrase, ``see the section titled when your premium may change''
is found. It is not found in the paragraph with the bold titled
one.
So the representation you have just heard from Mrs.
Harrison is 100 percent an incorrect reading of the document
you have. It is only within the FPO. She says it refers to
both, but in point of fact, it is not separated in an extra
paragraph outside of the Future Purchase Option. It is wholly
contained within the paragraph of the Future Purchase Option
and applies only to it.
Thank you, Mr. Chairman.
The Chairman. Senator Akaka.
Chairman Akaka. Thank you very much, Mr. Chairman, and for
inviting the Federal Workforce Subcommittee to join you for
this hearing today, as well as our witnesses for participating
in this hearing.
This has been a helpful discussion for me, as we review the
Federal Long Term Care Insurance Program. It is so important
that this program, which is the largest of its kind, serves as
a model for other long-term care programs. As we have heard,
much has to be done to come to be a model.
I look forward to continuing to work with OPM and also with
John Hancock to ensure that this program includes reasonable
timeframes for transparency and thoughtful responses to offered
options so the program remains stable and affordable for our
Federal employees. A decision on the time frame needs to be
made as quickly as possible and notification of your decision
must be made known to all those who are enrolled in this
program.
I want to wish you well. I would prefer that we do not have
to do things legislatively, that you do it yourselves and do it
correctly in the best interests for our Federal employees. So
let us work together to do that.
Thank you.
The Chairman. Thank you very much, Senator Akaka.
Ladies and gentlemen on the panel, you have really brought
a lot of light and thought and recommendations for action to a
very important issue, long-term care insurance. So your time
spent here has been usefully well spent. We thank you for being
here.
This hearing is concluded.
[Whereupon, at 4:35 p.m., the hearing was adjourned.]
A P P E N D I X
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Dan Green's Responses to Senator George V. Voinovich Questions
Question 1. Your testimony discusses the projected
shortfall in funding and need for a premium increase for
enrollees who selected the automatic compound inflation option.
It is my understanding OPM attributes approximately 80 percent
of the need for premium increase to enrollee persistency and 20
percent to investment loss. What factors contributed to the
projected shortfall?
Answer. Late in the first contract period, analysis of the
Experience Fund indicated a future projected shortfall of
monies available to pay claims. Some of the key assumptions
used in developing premium rates in the first contract period
turned out to be inaccurate for this Program, even though they
were intended to be conservative and were consistent with
industry practices at the time. For example, enrollee
persistency--which refers to the rate at which enrollees keep
their coverage rather than voluntarily canceling it--has been
higher than expected. In addition, people are living longer
than expected when the initial rates were set. Investment
experience has also been worse than was assumed in the original
pricing. Even if overall trends improve, experience is unlikely
to match the underlying assumptions used in the original
pricing.
Question 2. It is my understanding that lower than expected
lapse rates was common knowledge within the long-term care
industry in 2001 and 2002 when the federal program was being
crafted. With this in mind, why were OPM's lapse rate
projections off by such a wide margin? What assurances can you
provide to the Committees and enrollees about the current
projections used to set the premium rates in the current
contract?
Answer. At the Program's inception, lapse rates were
trending lower than previous industry pricing assumptions, and
the trend toward lower lapses has continued since 2001. The
Request for Proposals (RFP) for both the initial and the second
contract required that the carriers' pricing of new policies
adhere to the NAIC standard for rate adequacy. That is, the
pricing actuary must certify that premiums are, at time of
enrollment, expected to be sufficient under moderately adverse
conditions. The initial pricing and lapse rate projections were
performed by the long term care insurance carriers as part of
the competitive acquisition process. For pricing under the
second contract, John Hancock used the actual experience of the
Federal Long Term Care Insurance Program (FLTCIP) in setting
its lapse assumptions. John Hancock's inclusion of actual
FLTCIP lapse experience in its new pricing should provide
additional assurance about the assumptions underlying the new
premium rates.
Question 3. Current enrollees may avoid the premium
increase by choosing the ``landing spot'' and lowering their
daily benefit. While the difference is small in the first few
years, at year thirty, when the average enrollee will be 88
years old, the difference in the daily benefit amount grows to
approximately $160 per day. That's about a $3,200 dollar a
month difference--$731 more than the current average monthly
annuity for federal retirees.
What has OPM done through its current education campaign to
make sure enrollees have a clear understanding of the tradeoffs
associated with the ``landing spot'' and other benefit
decisions?
Answer. Every enrollee not currently eligible for or
receiving benefits (e.g., not in a nursing home) has received a
decision package outlining options for moving to the new plan
design or avoiding the premium increase (for those facing an
increase). The decision package includes background material
illustrating the difference over time between a 4 percent and a
5 percent compound benefit increase. Historical inflation
increase data are also provided. Modeling tools are available
online to allow enrollees to project the growth of their
current daily benefit under each inflation rate. The decision
packages also contain detailed comparisons of specific benefits
and the differences between the original plan, FLTCIP 1.0, and
the new plan, FLTCIP 2.0.
The materials for the new FLTCIP 2.0 benefits have also
been rewritten. They are currently online at www.ltcfeds.com
and available by request from LTC Partners. The new materials,
both in hard copy and online, provide detailed information and
graphs that illustrate the difference over time between 4
percent and 5 percent compounded benefits, as well as detailed
information about other benefit decisions.
Question 4. The National Association of Insurance
Commissioners suggests that companies who increase premiums
meet a minimum loss ratio requirement of 85 percent. Does OPM's
current contract with John Hancock meet this standard? If so,
how? If not, why not?
Answer. The National Association of Insurance Commissioners
(NAIC) determined by the late 1990s that, for long term care
insurance, the loss ratio test was not effective. State
regulators reviewing policy filings for pricing adequacy were
not necessarily presented with an accurate picture and rate
increases were becoming more prevalent. To address this, the
NAIC created the requirement that company actuaries price and
certify that the pricing was done using ``moderately adverse''
assumptions. The NAIC and various actuarial bodies developed
models and tools for actuaries to use, and OPM and its
consulting actuaries employ them.
For private policies, when a company increases premiums, a
loss ratio limit may be imposed in order to prevent the
insurance company from unduly profiting from the rate increase.
However, for FLTCIP, all of the premiums collected go into an
Experience Fund that can be used only to pay claims and cover
expenses and fees for the FLTCIP. The additional premium from a
rate increase is deposited in the Experience Fund for use by
the Program. Current projections show the rate increase is
necessary to ensure the Experience Fund balance will be
adequate to pay expected claims, expenses, and fees over the
course of time. However, if at some future date the Fund has
more money than might reasonably be needed to cover the
Program's expected obligations, the surplus would be used to
benefit the FLTCIP, not the insurer, via reduced premiums or
improved benefits. Moreover, if the Program changes insurer(s),
the Fund moves to the new insurer(s).
Question 5. How did OPM use its position as one of the
largest administrators of group long-term care insurance to
keep premiums low?
Answer. Group long term care insurance has certain
advantages over individually sold policies, mostly involving
the fact that no agent compensation is paid, enrollment can be
administered more easily (e.g., payroll deduction), and the
administrative costs are spread over a larger group of
enrollees. The Program's experience rated structure is designed
to keep insurers' risk charges lower and allow participants to
benefit from financial gains the Program might experience.
Question 6. Please explain in detail OPM's decision making
process once it received the information from John Hancock on
enrollee experience. As part of your response, please provide a
timeline for such notifications and the decision-making process
OPM followed upon receipt of the information. Please also
explain how OPM determined whether or not there was a need for
a premium adjustment during the initial contract.
Answer. In February 2005, OPM received MetLife's/Hancock's
September 2004 funded status report, which showed a best
estimate of a 6 percent projected shortfall. Discussion
centered on sensitivity of the analysis to underlying
projection assumptions (e.g., claims, lapse rates, investment).
Given that this was the first indication of a projected
shortfall, that the Program was new, that the investment
horizon is long, and that the projections were quite sensitive
to assumptions, we did not believe it was prudent to take
immediate action.
In April 2006, OPM received MetLife's/Hancock's September
2005 funded status report, which showed a best estimate of a 15
percent projected shortfall. Due to the increase in the
projected shortfall, we held discussions with the carriers.
MetLife and John Hancock recommended no change to premiums,
either for current or future enrollees, but rather continued
monitoring to see if the trend persisted. Subsequent
conversations included discussions about establishing
guidelines for deciding when a rate action might be necessary
and possible pursuit of an alternative investment strategy.
In March 2007, OPM received MetLife's/Hancock's September
2006 funded status report, which showed a best estimate of a
32.5 percent projected shortfall. This report included
MetLife's and Hancock's first statement of support for a
premium adjustment. OPM then entered into discussions with
MetLife and Hancock regarding possible adjustments to premiums
and contract terms and the timing of any changes. However, the
Long-Term Care Security Act provides that premiums may not be
adjusted during the term of the contract unless mutually agreed
to by OPM and the carrier(s). MetLife and Hancock submitted no
detailed premium proposals at that time.
On June 28, 2007, OPM submitted to Congress its
recommendation for the continuance of the Program, as required
by law within 180 days of receipt of GAO's second report. The
letter mentioned the possibility that a premium increase would
be required and OPM's intention to adjust premiums as part of
the second FLTCIP contract. Consistent with the law, OPM took
no steps to re-bid or otherwise contract for coverage during
the 180 days following June 28, 2007. OPM and MetLife/Hancock
did not engage in discussions about rate adjustments during
this ``silent'' period.
On September 27, 2007, in accordance with the terms in the
first contract, MetLife and John Hancock each submitted policy
renewal proposals. These proposals set forth the terms under
which the carriers were willing to offer a group policy for the
second 7-year contract term. These proposals would have
increased premiums by as much as 65 percent for current
enrollees, while generally continuing the terms of the first
contract for a subsequent 7-year period.
Early in 2008, OPM decided to conduct a competitive
acquisition for the next FLTCIP contract. The RFP to compete
the contract for the second FLTCIP term was issued in August
2008. Given that we were near the end of the initial contract
term, and the new contract would result in new terms and
premiums, we did not believe it would be in enrollees' best
interest to increase premiums before the new contract--and new
product options--was in place.
Question. 7. What assurances can you provide the Committee
that premiums will remain affordable beyond 2016, when the
contract is scheduled for renewal?
Answer. The goal in establishing the premium rates is to
calculate rates that will be sufficient, along with the
earnings on the investment of those premiums, to pay claims
plus expenses, now and over the future lifetime of enrollees.
Calculating premiums requires using a series of assumptions
that quantify risk over the course of time. The key risk
assumptions relate to claims (how many people will file claims
and when and for how long will benefits be paid?), investment
results (how much additional funding will be realized by
investing portions of the premium?), lapse results (how many
people will voluntarily drop their coverage over the course of
time?), and mortality (how many people will die while
covered?). These risks vary for Program enrollees, depending on
their ages when they enroll, and the risks change as people age
while enrolled.
OPM requires its insurer to price its premiums for new
enrollees according to NAIC rate stability guidelines. It is
important that standard rate stability guidelines be applied
universally across the long term care industry. Because
applicants have a choice between the FLTCIP and other insurers'
products, the FLTCIP's products and premiums must remain
competitive. If FLTCIP premiums are significantly more
conservative than other insurers premiums, the Program is
likely to attract a smaller and riskier enrollment base.
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Colleen Kelley Response to Senator George Voinovich Question
Question. How has OPM worked with NTEU to ensure its
members have access to the information needed to make informed
decisions in a timely manner?
Answer. After the announcement of the new FLTCIP contract
last May, and when NTEU became aware that premium increases
were likely, we immediately contacted OPM asking for
explanations. The agency answered questions, and assembled a
briefing for NTEU and other employee representative
organizations. While we were not satisfied with the substance
of the looming premium increases, we were advised at that time
that the agency was taking steps to devise ``landing spots''
for enrollees to redesign their policies if they later decide
to do so. After the congressional hearing, the agency did
extend the Early Decision Enrollment Period in keeping with
NTEU's request. In general, OPM has been responsive when
questions were raised.
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Mary Beth Senkewicz Responses to Senator George Voinovich Questions
Question 1. Your testimony discusses the NAIC's
supplemental reequirements for consumer disclosure of the
potential for future rate increases. Do you believe OPM's prior
and current marketing materials meet these standards?
Answer. I have not seen the current marketing materials,
staff provided me with the marketing materials used when the
program was initially started. In my opinion, the prior
marketing materials do not meet the standards set forth in the
NAIC Long-Term Care Insurance Model Regulation. Section 9 is
entitled ``Required Disclosure of Rating Practices to
Consumers.'' This section requires that the insurer provide the
following information: a statement that the policy may be
subject to rate increases in the future; an explanation of
potential future premium rate revisions, and the policyholder's
options should such occur; the rate applicable to the insured
until a rate change is effected; a general explanation for
applying rate schedule adjustments; and rate increase history
of the company for the prior 10 years. The section also
requires that the applicant sign an acknowledgement at the time
of application (or at delivery of the policy if no agent is
involved) that the above disclosures have been made. Last,
insurers must give at least 45 days notice to policyholders and
certificateholders of any rate increase.
Appendix B to the model regulation is entitled ``Long Term
Care Insurance Personal Worksheet.'' Prominently displayed on
page one of this document are sections, in bold print, entitled
``The Company's Right to Increase Premiums'' and ``Rate
Increase History.'' On page three of this document, the
signature page, is a box which must be checked and the
narrative attendant to the box includes the following (also in
bold print): ``I understand that the rates for this policy may
increase in the future.''
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Appendix F to the model regulation is a form that provides
information to the applicant regarding premium rate schedules
that the insurer may use to satisfy the disclosure requirements
concerning explanation of potential rate revisions and the
insured's options should a rate increase occur in the future.
The form is entitled ``Long Term Care Insurance Potential Rate
Increase Disclosure Form.''
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Question. 2. What assusrances can the NAIC provide to
federal employees about the value of the landing spot being
marketed to current enrollees as a way to mitigate the planned
premium increase?
Answer. The NAIC cannot provide any assurances to federal
employees about the value of the landing spot. Neither the NAIC
nor any state insurance commissioner regulates these policies
and as such, have not reviewed the original policy and its
benefits or the alternative being offered to mitigate the rate
increase.
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