    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

     FEDERAL LONG	TERM CARE INSURANCE PROGRAM: EXAMINING PREMIUM INCREASES

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                             GOVERNMENT OPERATIONS

                                     OF THE

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM
                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               NOVEMBER 30, 2016

                                   __________

                               Serial No. 114-126

                                   __________

    Printed for the use of the Committee on Oversight and Government Reform

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             Available via the World Wide Web: http://www.fdsys.gov
                          http://www.house.gov/reform
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                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                         JASON CHAFFETZ, Utah, Chairman
    JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland,
    MICHAEL R. TURNER, Ohio                  Ranking Minority Member
    JOHN J. DUNCAN, Jr., Tennessee       CAROLYN B. MALONEY, New York
    JIM JORDAN, Ohio                     ELEANOR HOLMES NORTON, District of
    TIM WALBERG, Michigan                    Columbia
    JUSTIN AMASH, Michigan               WM. LACY CLAY, Missouri
    PAUL A. GOSAR, Arizona               STEPHEN F. LYNCH, Massachusetts
    SCOTT DesJARLAIS, Tennessee          JIM COOPER, Tennessee
    TREY GOWDY, South Carolina           GERALD E. CONNOLLY, Virginia
    BLAKE FARENTHOLD, Texas              TAMMY DUCKWORTH, Illinois
    CYNTHIA M. LUMMIS, Wyoming           ROBIN L. KELLY, Illinois
    THOMAS MASSIE, Kentucky              BRENDA L. LAWRENCE, Michigan
    MARK MEADOWS, North Carolina         TED LIEU, California
    RON DeSANTIS, Florida                BONNIE WATSON COLEMAN, New Jersey
    MICK MULVANEY, South Carolina        STACEY E. PLASKETT, Virgin Islands
    KEN BUCK, Colorado                   MARK DeSAULNIER, California
    MARK WALKER, North Carolina          BRENDAN F. BOYLE, Pennsylvania
    ROD BLUM, Iowa                       PETER WELCH, Vermont
    JODY B. HICE, Georgia                MICHELLE LUJAN GRISHAM, New Mexico
    STEVE RUSSELL, Oklahoma
    EARL L. ``BUDDY'' CARTER, Georgia
    GLENN GROTHMAN, Wisconsin
    WILL HURD, Texas
    GARY J. PALMER, Alabama

                       Jennifer Hemingway, Staff Director
                     David Rapallo, Minority Staff Director
                     Kevin Ortiz, Professional Staff Member
                               Willie Marx, Clerk

                                     ------

                     Subcommittee on Government Operations

                     MARK MEADOWS, North Carolina, Chairman
    JIM JORDAN, Ohio                     GERALD E. CONNOLLY, Virginia,
    TIM WALBERG, Michigan, Vice Chair        Ranking Minority Member
    TREY GOWDY, South Carolina           CAROLYN B. MALONEY, New York
    THOMAS MASSIE, Kentucky              ELEANOR HOLMES NORTON, District of
    MICK MULVANEY, South Carolina            Columbia
    KEN BUCK, Colorado                   WM. LACY CLAY, Missouri
    EARL L. ``BUDDY'' CARTER, Georgia    STACEY E. PLASKETT, Virgin Islands
    GLENN GROTHMAN, Wisconsin            STEPHEN F. LYNCH, Massachusetts

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on November 30, 2016................................     1

                                   WITNESSES

    Mr. Michael Doughty, President General Manager, John Hancock
      Insurance
        Oral Statement...............................................     5
        Written Statement............................................     7
    Mr. John O'Brien, Senior Advisor for Health Policy, U.S. Office
      of Personnel Management
        Oral Statement...............................................    18
        Written Statement............................................    20
    Mr. Laurel Kastrup, Chair of the Health Financial Reporting and
      Solvency Committee, American Academy of Actuaries
        Oral Statement...............................................    25
        Written Statement............................................    27
    Mr. Richard G. Thissen, National President, National Archive and
      Retired Federal Employees Association
        Oral Statement...............................................    35
        Written Statement............................................    37
    Marc A. Cohen, Ph.D, Clinical Professor of Gerontology,
      University of Massachusetts Boston
        Oral Statement...............................................    49
        Written Statement............................................    51

                                    APPENDIX

    Statement for the record from Anthony M. Reardon, National
      Treasury Employees Union. submitted by Mr. Connolly............    74
    Statement by Senator-Elect Chris Van Hollen, submitted by Mr.
      Meadows........................................................    77

     FEDERAL LONG-TERM CARE INSURANCE PROGRAM: EXAMINING PREMIUM INCREASES

                                  ----------

                          Wednesday, November 30, 2016

                      House of Representatives,
                 Subcommittee on Government Operations,
                  Committee on Oversight and Government Reform,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 2:06 p.m., in
    Room 2154, Rayburn House Office Building, Hon. Mark Meadows
    [chairman of the subcommittee] presiding.
        Present: Representatives Meadows, Jordan, Walberg, Buck,
    Grothman, Connolly, and Lynch.
        Also present: Representatives Comstock, Beyer, and Delaney.
        Mr. Meadows. The subcommittee on Government Operations will
    come to order. Without objection, the chair is authorized to
    declare a recess at any time. The gentleman from Virginia is on
    his way. And so we're going to go ahead and try to get this
    started in the interest of your time and some pressing
    schedules that are here.
        I'd like to start off by acknowledging just the incredible
    work of the staff, both in majority and minority, on their
    preparation for this particular hearing. It's an issue that,
    obviously, has great impact, but it's also one that was not on
    my bucket list. And so it's been interesting to be able to come
    up to speed on that and be aware of it.
        And as you know, the Federal Long Term Care Insurance
    Program helps Federal employees prepare for the future
    healthcare needs by enrolling in long-term care insurance
    coverage. Federal employees can help reduce the financial
    burden of acquiring care as they grow older. And these burdens,
    obviously, can be very costly.
        According to the Department of Health and Human Services,
    Americans turning 65 today will spend an average of $138,000 in
    long-term care services. By purchasing insurance now, the
    Federal employees can start paying for those services that they
    will need well into the future.
        Alarmingly, the cost for this insurance continues to rise,
    and on July 18, the Office of Personnel Management, better
    known as OPM, after signing a new contract with John Hancock
    Insurance to administer the program, announced that the premium
    rates for most enrollees will drastically increase. Premiums
    have increased an average of $111, representing an 83 percent
    increase for nearly all of the 274,000 program enrollees.
        For 102,000 of these enrollees, the rate increase was
    between 100 and 126 percent, translating to about $200 per
    month extra that people must pay to maintain the coverage.
    These most recent premium increases come after rates have
    already increased in 2009 by nearly 25 percent. And for many
    enrollees, including some 7,500 North Carolinians who are part
    of this program, this cost increase has been a financial
    difficulty. Unfortunately, these rates--the rate increases are
    not limited just to the Federal program.
        Premiums have increased for nearly all long-term care
    insurance programs in the private sector as well, as my mother
    has very eloquently illuminated to me. And so a large reason
    behind these premium increases have to do with the nature of
    long-term care insurance. Insurance carriers must project a
    host of variables, including mortality rates, voluntary lapses,
    interest rates, morbidity rates and the like.
        The values of these variables are constantly changing, and
    when projected several years into the future, it makes for the
    actuarial assumptions to be difficult, if not off in a number
    of cases. This necessitates premium increases at times in order
    for the insurance carriers to guarantee it can cover the
    expected benefits. Fortunately, insurance carriers have begun
    to acquire actual claim data in order to make more informed
    assumptions.
        The hearing today will provide this committee the
    opportunity to delve into the variables that actually must be
    taken into account when setting these premium rates. This
    hearing will also allow the committee to look at factors
    affecting the lack of competition for Federal programs
    contracts. I'm concerned only that one carrier has bid on this
    contract, you know, both the second and third contracts.
    Encouraging healthy competition for Federal long-term care
    insurance programs contracts is an important aspect.
        And so I look forward to hearing all of your testimony that
    we will receive today. And I recognize the gentleman from
    Virginia, my good friend, the ranking member, Mr. Connolly, for
    his opening statements.
        Mr. Connolly. Thank you, Mr. Chairman. And thank you for
    the honorable way in which you have responded to my request to
    have this hearing. I really appreciate it, and you've kept your
    word in helping make sure we had a hearing on this very
    important topic. I also ask unanimous consent to enter a
    statement into the record from Anthony Reardon, the national
    president of the National Treasury Employees Union.
        Mr. Meadows. Without objection.
        Mr. Connolly. I thank the chair. The Federal Long Term Care
    Insurance Program, also known as FLTCIP, was created in 2002 to
    provide affordable long-term care insurance to Federal workers
    and their families. The program has been administered by John
    Hancock Life & Health Insurance Company and overseen by the
    Office of Personnel Management. Although the Federal Government
    provides benefits to Federal employees, it is paid for by
    Federal employees with no government contribution.
        This past July, OPM announced rate increases in the program
    that affected nearly all of the 274,000 FLTCIP enrollees. Like
    many of my constituents, I was shocked to learn that the
    increases averaged 83 percent, equivalent to an additional $111
    per month beyond the current premium that enrollees were
    paying, and nearly 40 percent of enrollees were actually
    subject to 126 percent.
        OPM has an obligation, it seems to me, to the Federal
    employees enrolled in the program to provide a service that's
    affordable. OPM's management and John Hancock's administration
    of the contract has left many FLTCIP enrollees scrambling to
    find ways to find affordable alternatives or to pay for the
    increasing costs of long-term care through other methods, and
    that raises serious concerns. Many of my constituents are
    worried about how they will afford to pay increased premiums.
    Many are retirees on fixed income and a huge increase, which
    they did not expect and did not plan for, is putting them in a
    financially untenable position.
        Although Hancock provided enrollees with a few personalized
    rate options, the choices are less than satisfying to most of
    my constituents. If enrollees choose to keep their existing
    long-term care coverage, they somehow have to find a way to get
    the additional money to pay for it. If they cannot afford to
    pay the increased premium, then they have to reduce their
    coverage to lower the cost or give it up entirely. Those are
    not particularly desirable options.
        It's important to note that this was not the first rate
    increase since FLTCIP's inception. In 2009, after Hancock was
    awarded the FLTCIP second contract, 66 percent of enrollees
    were notified their premiums would increase by up to 25
    percent. Prompted by the alarming increases in FLTCIP premiums
    in October 2009, the Senate Permanent Select Committee on Aging
    held a hearing to examine FLTCIP and long-term care insurance
    in general. Witnesses from OPM and Hancock at that time agree
    that the misleading language used in marketing materials led
    enrollees to believe they would not suffer any, much less,
    egregious increases in premiums. The series of dramatic rate
    increases over the last two contract terms are propelling
    FLTCIP premium prices out of reach for the average middle-class
    Federal employee.
        When FLTCIP was established by the Long-Term Care Security
    Act, it was intended to be an affordable way for individuals to
    protect against the risk of losing all of their retirement
    savings because of a long-term illness. It was meant to provide
    a safety net for Federal employees in old age. During an April
    1999 Oversight subcommittee hearing, then representative Joe
    Scarborough, now a television host, the lead sponsor of the
    bill, a Republican, stated that he hoped to make long-term
    care, quote, ``affordable and available to all Federal
    employees.''
        Maybe we should have subpoenaed him, Mr. Chairman.
        Today, we have a product that has become unaffordable for
    most Federal workers. It's clearly deviated from the intent of
    the Act. However, Federal workers are not alone here. Industry
    experts are saying that all middle-class Americans are
    struggling with the same problem. Rate increases and benefit
    reductions are happening in the private sector too when it
    comes to long-term care. And nearly all private sector
    companies have abandoned unlimited long-term care coverage,
    leaving no long-term care insurance option for those who want
    to guard against the risk of catastrophic long-term care costs.
        I'm concerned about the future of this important kind of
    insurance, as I know you are, Mr. Chairman. Long-term care
    insurance was designed to close gaps in coverage. Long-term
    care costs are not covered by Medicare or health insurance, and
    Medicaid only covers such costs for low-income individuals.
    With over 70 percent of people age 65 and older needing some
    long-term care during their lives and costs of semiprivate
    nursing homes averaging well above $100,000 annually, the
    necessity of this insurance seems clear.
        John Hancock, one of the few remaining and largest long-
    term care providers in the United States serving 1.2 million
    enrollees, has recently announced it will be pulling out of the
    private sector long-term care market, as I understand it. As
    options for long-term care dwindle, many individuals rely on
    their families to provide care. However, family caregivers are
    becoming scarcer as baby boomers will outnumber caregivers 4 to
    1 by 2030. In 2030, this baby boomer will be over 70.
        This hearing not only provides an opportunity to look at
    ways to ensure that FLTCIP lives up to its original promise,
    but also understand the reasons for the rate increases so we
    can try to work together to find solutions to address the
    failing market. This problem affects hundreds of thousands of
    Federal employees and retirees and millions of middle-class
    Americans. The market has not solved this problem on its own.
    And today's hearing cannot be the last on the topic.
        Historically, Republicans and Democrats have agreed that
    when the market is unable to solve a problem, the government
    has an appropriate role to play in finding solutions that work
    for American families. I feel strongly that this market failure
    and the exposure of many Americans to catastrophic costs
    deserves our attention. We've got to safeguard about
    affordability and stability of long-term care premium rates for
    middle-class Federal workers and, indeed, for all Americans.
        I thank all of the witnesses for being here. And, again,
    thank you, Mr. Chairman, for delivering on your promise.
        Mr. Meadows. I thank the gentleman for his eloquent words.
    I also would note that we will hold the record open for 5
    legislative days for any member that would like to submit a
    written statement.
        The chair notes the presence of the gentlewoman from
    Virginia, Mrs. Comstock is here. It is my understanding that
    the gentleman from Virginia, Mr. Beyer, and the gentleman from
    Maryland, Mr. Delaney, may indeed come as well.
        We appreciate, Mrs. Comstock, your interest in this topic.
        Mr. Connolly. Mr. Chairman?
        Mr. Meadows. Yes.
        Mr. Connolly. I would ask unanimous consent that all of
    those named be given the privilege of participating as if they
    were a member.
        Mr. Meadows. Without objection, so ordered.
        I will also ask unanimous consent to enter into the record
    a statement from the representative from Maryland, Chris Van
    Hollen, on this particular subject.
        Without objection, so ordered.
        Mr. Meadows. We'll now recognize our panel of witnesses.
    I'm pleased to welcome Mr. Michael Doughty, president and
    general manager of John Hancock Insurance. Welcome. Mr. John
    O'Brien, senior adviser for health policy at the U.S. Office of
    Personnel Management. Welcome, Mr. O'Brien. Ms. Laurel Kastrup,
    chair of the Health Financial Reporting Insolvency Committee at
    the American Academy of Actuaries. Thank you for being here.
    Mr. Richard Thissen, national president of the National Active
    and Retired Federal Employees Association. Welcome. And Mr.
    Marc Cohen, clinical professor of gerontology at the University
    of Massachusetts Boston. Welcome to you all. And pursuant to
    committee rules, all witnesses will be sworn in before they
    testify. So if you would please rise and raise your right hand.
        Do you solemnly swear or affirm that the testimony you're
    about to give will be the truth, the whole truth, and nothing
    but the truth?
        Let the record reflect the witnesses answered in the
    affirmative.
        You may take your seat. In order to allow time for
    discussion, we would ask that you would limit your oral
    testimony to 5 minutes. Your entire written statement, however,
    will be made part of the record.
        And so I'd like to go ahead and recognize you, Mr. Doughty,
    for 5 minutes.

                           WITNESS STATEMENTS

                      STATEMENT OF MICHAEL DOUGHTY

        Mr. Doughty. Thank you, Chairman Meadows, Ranking Member
    Connolly, and members of the subcommittee. I'm Mike Doughty,
    president and general manager of John Hancock Insurance. I
    oversee John Hancock Insurance products, including the Federal
    long-term care program.
        I appreciate the opportunity to be here today to discuss
    the Federal Long Term Care Insurance Program and the contract
    that OPM awarded to John Hancock Life & Health Insurance
    Company in April 2016. John Hancock has been involved with the
    program since its inception, and we remain committed to
    providing a strong and financially sound long-term care
    insurance product for Federal employees.
        We recognize enrollees' legitimate concerns about the
    premium increase and the very real impact that it will have on
    people's lives. I appreciate the opportunity to address that
    increase, the reasons that it was necessary, and the steps that
    John Hancock has taken, in coordination with OPM, to provide
    enrollees with alternative options designed to mitigate the
    financial burden of the rate increase.
        Congress created the Federal Long Term Care Insurance
    Program 16 years ago. Under the authorizing legislation, OPM
    conducts a competitive bidding process and awards a 7-year
    contract to a company to provide long-term care insurance.
    Regardless of the company that received the contract, the
    legislation has a unique feature that requires all funds,
    premiums, and investment returns, to be maintained separately
    in a fund called the Experience Fund. The Experience Fund is
    used exclusively for the program's assets and liabilities, and
    it transfers to a new carrier if OPM awards the contract to
    another provider.
        Also, the Experience Fund receives no taxpayer money. All
    benefits are paid by the enrollees' premiums and the fund's
    investment returns. For these reasons, it is critically
    important that the premiums and the projected investment
    returns of the Experience Fund match the projected claims that
    enrollees will make many decades into the future. The entire
    industry has learned that making predictions about claims in
    the far-distant future is very challenging. But it was these
    projections that made the recent premium increase necessary.
        In 2013, John Hancock observed trends in our non-Federal
    long-term care insurance policies that we determined could
    affect the Federal program. So we began an assessment of the
    Federal program. The review of the Federal program, which was
    completed in May 2014, showed that the Experience Fund would
    experience a deficit in the future. We found that new claims
    were increasing, particularly at older ages, claims were
    lasting longer than expected, and policies with higher daily
    benefits had higher than expected claims. We continued to
    evaluate the data.
        Overall, the data revealed changes in mortality rates,
    people are living longer than previously expected; morbidity
    rates, more people are requiring long-term care and for longer
    periods of time; and investment changes. We have been in a
    sustained period of low interest rates.
        On page 7 of my written testimony, there is a chart that
    captures the effects of these changes. The Experience Fund was
    projected to enter a deficit between 2035 and 2040 without a
    premium change. With the premium change, the Fund is projected
    to maintain funding sufficient to cover all enrollees'
    projected future claims.
        Both John Hancock and OPM have a contractual obligation to
    adjust the premiums to make sure that the Experience Fund is
    able to meet the needs of enrollees for many decades into the
    future. And that's what we did. Importantly, these projections
    were reviewed by John Hancock's experts, by OPM, by John
    Hancock's independent actuarial firm, and by OPM's independent
    actuarial firm.
        Next, recognizing the significance of the premium change,
    John Hancock worked closely with OPM on the implementation.
        First, we created a program to communicate with enrollees
    about the premium increase, including a Web site, webinars,
    videos, FAQs and a professionally staffed call center.
        Second, we created several alternative options which were
    designed to permit enrollees to adjust their coverage in light
    of the premium increase.
        Finally, Mr. Chairman, I want to note that John Hancock
    agreed, in our new contract with OPM, to reduce the charges
    that we receive under the contract so that John Hancock will
    not have an increased profit from this rate increase.
        Thank you for the opportunity to be here today. I look
    forward to discussing possible ways to strengthen the Federal
    Long Term Care Insurance Program, and I would welcome the
    opportunity to answer your questions.
        [Prepared statement of Mr. Doughty follows:]

      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Walberg. [Presiding.] I thank the gentleman.
        And I recognize Mr. O'Brien for your 5 minutes of
    testimony.

                       STATEMENT OF JOHN O'BRIEN

        Mr. O'Brien. Thank you, Vice Chairman Walberg, Ranking
    Member Connolly, members of the subcommittee. Thank you for the
    opportunity to testify on the Federal Long Term Care Insurance
    Program.
        OPM's mission is to recruit, retain, and honor a world-
    class Federal workforce to serve the American people. Part of
    that mission requires OPM to administer benefits, including the
    insurance product such as the Federal Long Term Care Insurance
    Program, for Federal employees, annuitants, and their families.
        At the outset, let me make clear that I share the
    committee's frustration that premiums needed to be raised by
    such a significant amount. I and my colleagues at OPM are
    painfully aware of the financial burden and hard choices those
    premium increases placed on participants. However, we cannot
    avoid our primary responsibility to those participants to
    assure that when the time comes for someone to use the benefit
    that they have paid for, the funds will be there to deliver
    those services.
        The Federal Long Term Care Insurance Program currently
    serves roughly 270,000 members whose premiums cover 100 percent
    of program's costs. All those premiums and the income those
    premiums generate is held in a single Experience Fund by John
    Hancock. While the fund is held by John Hancock, it belongs to
    the program and not the insurer. The Federal Long Term Care
    Insurance Program must assure that it can provide benefits
    decades into the future. Therefore, premiums must be based on
    long-term projection of both costs and revenues.
        We are here today because at the end of the most recent
    contract cycle, the long-term insurance program had to respond
    to two hard facts. First, estimates of long-term care costs are
    increasing. And second, projection of long-term revenues to
    support those costs are decreasing. The confluence of higher
    anticipated costs and lower anticipated returns is not unique
    to the Federal Long Term Care Insurance Program. The entire
    long-term care insurance market faces this challenge.
        Given these circumstances, increased premiums were
    necessary for the long-term viability of the Experience Fund.
    Without the increase, there would be an unacceptable risk that
    the Experience Fund would not have sufficient funds to pay for
    future claims.
        In order to test the market and ensure that the reasonable
    efforts were made to attract the most competitive proposal, OPM
    made the decision to recompete the contract. John Hancock was
    the sole bidder, and OPM awarded the contract in April 2016.
    The premium rates proposed by John Hancock were reviewed by
    OPM's staff and its actuaries. In addition, OPM contracted with
    a separate independent actuary to evaluate the proposed premium
    rates and confirm the reasonableness of the assumptions used.
        While the long-term viability of the Experience Fund made a
    substantial rate increase necessary, OPM was well aware of the
    economic hardship that the rate increase would cause
    participants. OPM's priority became to do all it could to
    ensure that enrollees had the information and opportunity to
    make informed choices about the costs and benefits of coverage
    in light of their own circumstances and needs.
        Working with John Hancock and long-term care partners, we
    conducted an enrollee decision period from July the 18 to
    September 30. Outreach efforts included three direct mailings
    to enrollees with personalized information about the rate
    increase and options that they could use to adjust their
    benefit package to reduce their premium or keep the same
    premium; a Web site, also with personalized information, as
    well as a set of informational videos that explain benefit
    options; and finally, a fully staffed call center that assured
    individuals could get their questions answered by a real
    person.
        In large part, the enrollees took advantage of this
    enrollee decision period. By the end of October, 172,000
    enrollees, or just shy of two-thirds of the entire population,
    took some action in response to the premium changes. Of those
    who took action, most chose to keep their premium constant by
    reducing their benefit package.
        While OPM remains committed to the FLTCIP program and the
    individuals it serves, we must also acknowledge that the long-
    term care insurance marketplace has changed substantially from
    2002 when the program started. At that time, over 100 insurers
    offered long-term care products. Today, only a handful of
    insurers are actively selling long-term care insurance, and
    those insurers are primarily serving individuals by individual
    policies rather than group plans.
        The challenge of matching premiums with long-term costs and
    revenues is real and ongoing. OPM staff is and will continue to
    closely monitor these trends and what it means for the long-
    term care insurance program and work to ensure that
    participants have an array of options to meet their needs.
        Thank you for the opportunity to testify today, and I am
    happy to address any questions you may have.
        [Prepared statement of Mr. O'Brien follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Walberg. I thank the gentleman.
        I recognize now Ms. Kastrup for your 5 minutes of
    testimony.

                      STATEMENT OF LAUREL KASTRUP

        Ms. Kastrup. Vice Chair Walberg, Ranking Member Connolly,
    and distinguished members of the subcommittee, thank you for
    the opportunity to testify on the issue of examining premium
    increases for long-term care insurance.
        My name is Laurel Kastrup. I am an actuary specializing in
    long-term care insurance and financing. I am representing the
    American Academy of Actuaries. The Academy is a nonpartisan
    professional association representing the actuarial profession.
    Our mission is to serve the public and the U.S. actuarial
    profession. We do this by providing independent and objective
    actuarial information, analysis, and education to help in the
    formation of sound public policy.
        I would like to start by emphasizing the importance of
    actuarial input when considering the design and evaluation of
    any potential long-term care policy approach. Actuaries are
    uniquely qualified, according to our professional standards.
    Qualified long-term care actuaries play a crucial role in the
    design of long-term care financing systems, from private long-
    term care insurance to public programs that provide long-term
    care benefits.
        Actuaries have specialized expertise in managing the risk
    of adverse selection in insurance coverage. We have the ability
    to recognize and incorporate uncertainty into cost projections
    and premiums. We also have experience in evaluating the long-
    term solvency and sustainability of public and private
    insurance programs. The Academy recently developed an issue
    brief to highlight important underlying factors affecting long-
    term care insurance premium rate increases. Without long-term
    care insurance, many more people would exhaust their savings on
    care costs and then potentially rely on public programs such as
    Medicaid for their additional care needs.
        Long-term care insurance requires a long projection period
    with assumptions extending over 50 years into the future, which
    creates a high level of uncertainty. The premium rates needed
    to ultimately be sufficient are also affected by changing
    circumstances, such as changing service providers, for example
    the growth of assisted living facilities; changes in incidents
    of Alzheimer's disease; the effects of mortality improvement in
    the population; and changes in family composition reducing
    availability of caregivers.
        Determining premium increases is a relatively
    straightforward mathematical calculation. However, determining
    projection assumptions can be difficult. Actual historical
    experience that are sufficiently credible is needed to justify
    the future assumptions used in projections. With long-term care
    insurance, it can take a long time from the purchase of a
    policy until the first time a claim is submitted. This means
    that for a relatively young group of policy forms, there is
    often little claims experience to justify premium rate
    increases based on those forms alone.
        Actuaries are required by actuarialstandards of practice to
    use alternative data sources, such as experience from the
    insurance companies older, similar policy forms or public data
    for identifying reasonable assumptions. Waiting until there is
    adequate claim information on each policy form can result in
    much larger, less affordable rate increases.
        Insurers have routinely allowed insureds to reduce coverage
    by changing benefit options in order to help offset some or all
    of the rate increase. In an effort to enable policyholders
    faced with a rate increase to retain significant coverage, some
    companies have started making available an option for
    policyholders to avoid the rate increase by reducing their
    future automatic built-in inflation increases.
        In closing, I want to mention that I understand that these
    premium rate increases can affect families. My own personal
    experience with long-term care insurance was that my grandpa
    had a policy. It had a small daily benefit. He gave up the
    inflation option to avoid rate increases. When he moved into an
    assisted living facility, his long-term care insurance policy,
    along with his income from Social Security was enough to make
    the cost affordable for him.
        Predicting future policyholder and service provider types
    and availability can be difficult. This uncertain future makes
    it important that there is a way to take corrective action. The
    more conservative assumptions used in today's pricing of
    private long-term care insurance and the improved speed at
    taking corrective action should improve future projections
    resulting in fewer and smaller rate increases.
        I, again, thank you for the opportunity to be here today
    with you and share the recent analysis by the American Academy
    of Actuaries on long-term care insurance. I would be happy to
    answer any questions.
        [Prepared statement of Ms. Kastrup follows:]

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        Mr. Walberg. Thank you, Ms. Kastrup.
        And now I recognize Mr. Thissen for your 5 minutes of
    testimony.

                    STATEMENT OF RICHARD G. THISSEN

        Mr. Thissen. Good afternoon, and thank you for the
    opportunity to express NARFE's view on premium increases for
    enrollees in the Federal Long Term Care Insurance Program, or
    FLTCIP.
        NARFE was proud to have played the lead role in supporting
    legislation creating FLTCIP, but we are extremely disappointed
    in the recent premium increases. FLTCIP premiums increased by
    an astounding 83 percent on average and by as much as 126
    percent for nearly 40 percent of the enrollees. The average
    increase amounts to $111 per month. For many, the increase will
    be much larger.
        These cost increases come as a rude awakening for
    enrollees. Following the announcement in July, they were
    presented with difficult and unfair choices: Pay substantially
    higher premiums, reduce coverage significantly, or abandon what
    for some had become more than a decade-long investment in
    protecting their future. This situation should not have
    occurred and signals the need for changes in the program.
        We have heard from hundreds of NARFE members, and their
    messages have been personal and blunt. One NARFE member
    reported her premiums would rise from $275 to more than $600
    per month. She is not alone in her experience. Another member
    told me, ``I am so much older now than when I entered the
    Federal plan, the cost to switch to another plan would be
    prohibitive. All my bills are fixed. The new payment will have
    to come from the grocery budget.'' Another said, ``We have
    already paid John Hancock $56,000 in premiums. We cannot quit
    now. We have too much invested. We are outraged by this bait
    and switch scheme,'' end quote.
        For these enrollees, the reasons behind the increases come
    as little comfort, but are worth examining. The actuaries got
    it wrong. Long-term care costs are rising faster than expected
    and interest rates are expected to remain low. This may be the
    case, but the actuaries and the insurance company did not just
    get it wrong, they got it very wrong.
        We hope this hearing, at the very least, provides the
    opportunity to further investigate why the assumptions were so
    far off and how lessons learned from those mistakes may be
    applied to assumptions about the future. But our efforts should
    not end there. We need to plan for long-term care--the need to
    plan for long-term care is as much a reality today as it was
    when the program was created 16 years ago.
        Average long-term care costs are high, $3,800 per month for
    home health, $3,600 to stay in an assisted living facility,
    $7,700 for a private room in a nursing home. Sixty-nine percent
    of Americans will need some long-term care services for an
    average of 3 years. Without adequate insurance, too many will
    be bankrupt and forced to rely on Medicaid.
        Federal employees and retirees want to do the responsible
    thing for themselves and their family. This program seeks to
    address the real need to plan for these future long-term care
    costs, but the lack of price stability and affordability make
    it increasingly difficult to do so. Legislative reforms are
    needed.
        NARFE proposed a number of policy options in my written
    testimony. One of these proposals including providing enrollees
    an option to convert their plans to hybrid long-term care/life
    insurance policies, which would provide price stability.
    Another is to provide options to extend waiting periods or buy
    plans with deductibles which would improve affordability.
        NARFE also supports broader reforms to the national long-
    term care policy. The crisis faced by FLTCIP is not unique.
    Individuals in private long-term care insurance plans are
    facing significant premium increases, and neither FLTCIP nor
    any other private long-term care insurance provider is
    continuing to offer unlimited catastrophic coverage.
        Middle-class consumers seeking to insure against the worst-
    case scenarios are left with no options at all. Rather,
    Medicaid, a program intended to protect those in poverty, steps
    in as the only catastrophic option for consumers who must
    bankrupt themselves in order to qualify. Instead, NARFE
    supports a public-private partnership with a universal
    catastrophic insurance program that covers costs between the
    first 2 or 3 years of care and private insurance, such as
    FLTCIP, to cover the front end costs of care.
        It is incumbent upon this subcommittee to support real
    reforms that provide Americans with affordable, reliable
    options. Enrollees should not bear the risk when insurance
    companies and actuaries make mistakes, and they should have
    options available to plan for their future needs. NARFE looks
    forward to working with Congress to pursue them. The status quo
    is unacceptable. Thank you so much.
        [Prepared statement of Mr. Thissen follows:]

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        Mr. Walberg. Thank you for your testimony.
        And now I recognize Mr. Cohen for your 5 minutes of
    testimony.

                   STATEMENT OF MARC A. COHEN, PH.D.

        Mr. Cohen. Thank you, Vice Chair Walberg, Ranking Member
    Connolly, and members of the subcommittee. I'm Marc Cohen, the
    director of the Center for Long-Term Services and Supports at
    the McCormick Graduate School at UMass Boston, and a former
    president and current adviser to LifePlans, Inc., a long-term
    care research, consulting, and risk management company.
        I appreciate the opportunity to testify in this topic. And
    in my testimony today, I will draw upon my 25 years of research
    focused on the private insurance market. I'd like to make three
    broad points today.
        First, the rate increases that we're discussing should be
    viewed within the broader context of the long-term care
    insurance market and the challenges faced by all insurers in
    that market. These rate increases are occurring across almost
    all blocks of business as actuaries learn how the product is
    performing and make adjustments to their initial pricing
    assumptions.
        Second, the current marketplace challenges do not diminish
    the need for an insurance-based solution for middle-class
    Americans, many of whom will face catastrophic costs and
    financial impoverishment in the absence of insurance solutions.
        Finally, without public action, the private insurance
    market alone is unlikely to play a meaningful role in financing
    the Nation's long-term care needs. More specifically, an
    insurance-based public/private partnership stands the best
    chance of moving the needle on protecting middle-class
    Americans from significant costs that threaten their
    retirement.
        Let me begin by making a few key observations to frame some
    of the subsequent discussion. Today, fewer than 10 percent have
    insurance protection, industrywide sales are declining
    significantly, and many companies have exited the market. Thus,
    the market is shrinking rather than growing, and this at a time
    when more Americans are facing significant long-term care
    costs.
        There are a number of reasons why so many insurers have
    stopped offering policies. On the demand side, selling costs
    are high because consumers lack knowledge and understanding
    about long-term care risks and costs. They're confused about
    the role of public programs and there's general mistrust of
    insurers. On the supply side, insurers have faced a variety of
    unpredictable and often uncontrollable risks that are hard to
    spread. For example, given the current funding structure of
    almost all standalone policies, companies must correctly
    estimate yields on investment premiums 20 to 30 years into the
    future. An err of just a few percentage points in such an
    estimate can result in very large premium increases to assure
    adequate funding of future claims.
        Second, unfolding negative claims experience has led to
    large rate increases as insurers waited many years before
    requesting some of these rate increases. Recent research shows
    that people would prefer smaller but more frequent adjustments
    rather than large infrequent ones. The problem is that these
    premium increases have made the product too costly for a
    growing number of middle-class consumers who only have personal
    savings and safety net programs like Medicaid to rely on should
    they require significant amounts of care.
        Despite private sector challenges, variation in long-term
    care needs and expenses make risk pooling through insurance
    desirable. The underdevelopment and growing unaffordability of
    private insurance in the absence of any public insurance
    present a fundamental problem. People have no way to
    effectively plan for what is a perfectly insurable risk.
        Since current strategies have not worked well in assuring
    broad consumer appeal and ensure enthusiasm, what can be done?
    Some concrete actions include simplifying and standardizing
    products to reduce selling costs, changing the structure of
    premiums payments so that there is some level of indexing to
    address both affordability and premium stability issues.
        Also, without expanded Federal and/or State support
    designed to spur both demand and supply, however, the needle is
    unlikely to move enough to protect the majority of middle-class
    Americans. In addition to an educational campaign designed to
    reduce consumer confusion and increase knowledge and awareness,
    we need to think more broadly about shared public and private
    insurance models.
        For example, given that the private insurance market is not
    willing to provide products any longer that cover the
    catastrophic tail risk, one might consider whether and how
    States or the Federal Government might do so. Such an approach
    could provide a basis--a base that the private insurance
    industry could supplement or wrap around, and it would likely
    encourage more insurers to get back into the market, broaden
    the risk pool, and lower the cost of insurance products.
        In the interest of time, I will stop here, but would be
    happy to answer any questions that the committee might have.
    Thank you.
        [Prepared statement of Mr. Cohen follows:]

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        Mr. Walberg. Thank you. And I thank the panel for your
    testimony.
        And now I recognize the gentleman from Wisconsin, Mr.
    Grothman, for your time of questioning.
        Mr. Grothman. Interesting testimony. I'm going to ask Ms.
    Kastrup--is that right?--a few questions. I don't know if
    you're familiar with this product as opposed to other products,
    but whenever there's insurance, I don't care whether it's
    health insurance, car insurance, whatever, you always kind of
    wonder how much of that premium is going for claims and how
    much is going for overhead and commissions and that sort of
    thing.
        Could you give me, the insurance industry in general, how
    much of, say, auto insurance, health insurance, and long-term
    insurance, how much goes for claims?
        Ms. Kastrup. I'm not an expert in all of those areas. Very
    few actuaries would cover all three of those areas. You know,
    it depends on the pricing structure. It depends on how the
    products were sold. So it would vary by carrier as well,
    whether it was sold with an agent or not. And so there's not
    really a guideline I can give on that, but I could research
    that and come back.
        Mr. Grothman. You can give me about. When you pay your auto
    insurance premium--you're an actuary, you must have some idea.
        Ms. Kastrup. I'm not a casualty actuary. I don't practice
    in car insurance.
        Mr. Grothman. Okay. Well, which type of insurance do you
    deal with?
        Ms. Kastrup. With long-term care insurance.
        Mr. Grothman. Okay. And the average long--do you have long-
    term care insurance? No, you're too young, right? Do you have
    long-term----
        Ms. Kastrup. I myself do not have a policy, no.
        Mr. Grothman. Okay. Do you know--I mean, guess, if your
    parents had a policy, how much do you think goes out average
    and how many--what percentage of the premium goes out in
    claims?
        Ms. Kastrup. Like I said, it would vary by carrier because
    it depends on how the product is sold and what costs go into
    it, whether it's a group policy or an individual policy.
    There's a lot of different factors that go into that. I don't
    know right offhand, but I could look into it and get back to
    you.
        Mr. Grothman. You must have some idea for some policies.
    Don't you? No idea at all?
        Ms. Kastrup. It would depend on your----
        Mr. Grothman. I know it depends. But, you know, they sell
    these things. I mean, is it 10 percent, is it 50 percent?
        Mr. Cohen. I can maybe add something on that.
        Mr. Grothman. Sure.
        Mr. Cohen. At least historically when these products have
    been priced, the idea was that somewhere between 60 to 70
    percent of the dollars that were collected would eventually get
    paid out in claims.
        Mr. Grothman. Okay.
        Mr. Cohen. Just to get for order of magnitude.
        Mr. Grothman. And can you compare that? Are you aware of
    any other kinds of insurance? Can you compare that to
    automobile insurance or some other insurance?
        Mr. Cohen. I don't know. I will say that, as I mentioned in
    my testimony, the selling costs associated with long-term care
    insurance are pretty high because of the lack of information,
    confusion. It's not a sort of a one and done. It's agents
    sitting across the table from people and so on. And that's, you
    know, one of the ways that we are--have to think about making
    the insurance more affordable is how to reduce some of those
    selling costs. They can represent anywhere from 15 to 25
    percent of the premium.
        Mr. Grothman. Okay. You mean for selling costs?
        Mr. Cohen. Yes.
        Mr. Grothman. Okay. And could you compare it to any other
    kind of insurance or you don't know?
        Mr. Cohen. I don't know.
        Mr. Grothman. I'll give you another question here. And--oh,
    Mr. Doughty, you must know, because doesn't John Hancock have
    other insurance other than just long-term care?
        Mr. Doughty. We do offer--the only other kind of insurance
    we offer is life insurance, which has--in terms of selling
    costs, et cetera, it's quite similar. In terms of the ongoing
    administrative costs, because you're paying out--when a client
    goes on claim, you're just paying out one death benefit, so
    that would be slightly lower than in long-term care insurance.
        Mr. Grothman. Okay. I'll give you another question. I've
    always wondered about this on long-term care insurance. With
    any insurance there's a degree of moral hazard, okay, and it's
    your behavior changes because you're insured. People have to
    make a decision, families, in life, as to whether you're going
    to allow somebody to go to a home or not. And I think sometimes
    families do extraordinary things due to the huge cost of long-
    term care.You know, they can take care of grandpa for years and
    years, because they don't want to pick out, whatever, $8,000 a
    month or something. And therefore, I've always kind of thought
    that if you have long-term care insurance, maybe people are
    quicker to send grandma to the home than they would be without
    insurance.
        Do you feel there's that degree of moral hazard when people
    buy long-term care insurance?
        Mr. Doughty. Yeah, I believe that that is absolutely a
    reality that people that don't have coverage are far more
    likely to take care of mom and dad for longer. I also think in
    the context of this broader discussion about the future of
    long-term care, and I think we're all in agreement that we need
    to do better. That one of the risks of that reliance in the
    past on families taking care of people is that families are
    becoming more spread out. There's more divided families. So I
    think in the future, it's going to continue to pose a problem
    in terms of overall support for people requiring long-term
    care.
        Mr. Grothman. Can I ask one more quick question?
        Mr. Walberg. The gentleman's time has expired. We'll have
    to move on.
        Mr. Grothman. Okay.
        Mr. Walberg. I thank the gentleman.
        I recognize the gentleman from Virginia, the ranking
    member, Mr. Connolly.
        Mr. Connolly. I thank the chair. And this conversation is
    why I requested this hearing and I'm so glad we're having it.
        But first, just, Mr. Doughty, are you from Baltimore,
    Philadelphia, or Canada?
        Mr. Doughty. I am from Canada.
        Mr. Connolly. Yes. You speak with a diphthong. O-U-T.
        Okay. So, Mr. Doughty, Hancock got out of the private
    sector provision of this kind of coverage. Is that correct?
        Mr. Doughty. Yeah. Just to be perfectly clear on that
    front, we recently decided that we were going to stop selling
    standalone retail long-term care insurance policies.
        Mr. Connolly. Right. Why?
        Mr. Doughty. Primarily because, well, we recognized a
    growing and increasing need. I think as Dr. Cohen noted, it was
    becoming increasingly difficult to actually develop enough
    critical mass in sales to make it a worthwhile business
    venture.
        Mr. Connolly. So it wasn't because people are living too
    long or getting older. It wasn't even the expense, if I'm
    hearing you correctly. It was that you just couldn't get the
    critical mass in terms of making it worthwhile as a marketable
    product?
        Mr. Doughty. Yeah. I think the two are related, though. I
    mean, we have been for a long time a player in the private
    long-term care insurance market. We continue to provide service
    in----
        Mr. Connolly. I understand. But, I mean, if 50 million
    customers knocked on your door tomorrow saying we want this
    insurance, would that change your posture in terms of providing
    it?
        Mr. Doughty. It would. And primarily because we actually
    had come up with a new product that we thought provided some
    rate stability and things like that. So, yes, it would have.
    Definitely.
        Mr. Connolly. All right. And just, what's the chicken and
    the egg thing here? Is the reason for the drop in the
    popularity of the product or the demand for the product because
    of the pricing or is it just we're just not that interested in
    long-term care?
        Mr. Doughty. I think it's both of those issues. I would say
    the primary issue because if you see sales have come down, it's
    because of the pricing.
        Mr. Connolly. Yeah.
        Mr. Doughty. I do believe that there's still a reluctance
    for younger people to think about long-term care.
        Mr. Connolly. Right. Got it.
        So, Dr. Cohen, is this a nonviable product given what's
    happening in the market?
        Mr. Cohen. I don't--I don't think it's----
        Mr. Connolly. We cannot hear you.
        Mr. Cohen. Oh, I won't touch that.
        Mr. Connolly. Okay. Go.
        Mr. Cohen. Sorry. No, I don't think that it's unviable. I
    think that there can be changes, changes in the structure of
    the product. There can be much greater education. Just to your
    last question also. When we look at the primary reason why
    people who have been approached to buy this insurance don't,
    it's a cost issue. They don't see the value proposition. And if
    you don't believe you're at risk, if you believe that public
    programs are going to cover you, then why would you lay out the
    money? There's a lot of work that needs to get done in that
    regard.
        And I also think that these types of products work best in
    the context of a broader public role. And that was one of the
    things I mentioned.
        Mr. Connolly. And real quickly to get it on the record,
    because you suggested that in your testimony, is there a
    precedent for that in terms of the Federal Government getting
    involved directly in sort of trying to fix holes in the market,
    in the insurance industry?
        Mr. Cohen. Sure. I mean, there are--the Federal Government
    has been involved in, for example, organizing risk pools for,
    you know, flood insurance.
        Mr. Connolly. There you go. Flood insurance. The Federal
    footprint is quite considerable. Right?
        Mr. Cohen. I mean, in--when there are issues that are--
    especially when it relates to insurance, if there are common
    shocks that affect the entire industry, then you can't--you
    know, you can't spread the risks adequately, no matter what you
    end up doing.
        Mr. Connolly. Right. I'm only establishing on the record,
    because I'm anticipating arguments in our next Congress on this
    subject matter that this would be an unprecedented role for the
    Federal Government. Not true. In fact, the Federal Government
    has been involved in the insurance market in various and sundry
    ways, including flood insurance especially, which may be a
    model--I'm not slavishly devoted to that model, but a model.
        Mr. Cohen. Right. On that point, I would like to say that
    it's likely--there's no magic bullet here. It's a combination
    of both demand and supply.
        Mr. Connolly. We understand.
        Mr. O'Brien, my final point. So OPM, other than weeping and
    gnashing its teeth over what's happening to your constituents,
    my constituents, Federal employees, and retirees in terms of
    cost, has OPM come up with any ideas in terms of how we can
    solve the problem or address the problem or make it easier for
    those constituents to avail themselves of this kind of coverage
    at an affordable price?
        Mr. O'Brien. Yeah. We do not have any proposals to bring
    before the committee right now. However, we are very interested
    and committed to working with anyone on ideas that might work.
    We appreciated some of the ideas that are shared in their
    testimony and we look forward to working with people to figure
    out what we can do moving forward.
        Mr. Connolly. Well, that's quite a piece of testimony.
    Thank you.
        Mr. Walberg. I thank the gentleman.
        I recognize myself for my 5 minutes of questioning.
        Ms. Kastrup, in your testimony, you indicated that there
    continues to be a high level of uncertainty in the long-term
    care market that affects premium rates. Can we ever expect
    long-term care insurance premiums to stabilize as more claims
    experience becomes available?
        Ms. Kastrup. Thank you. I think I also mentioned that it's
    a long projection period and any time you have a projection
    period, like a 50-year projection period, you're always going
    to add more uncertainty as you spread that out. I do think we
    have more stability and assumptions than we did in the initial
    years. Every new bit of experience, more bit of credibility
    gives us a better basis to project out.
        I don't think we'll ever have perfect--we don't have
    perfect in life insurance, and we've been doing that a lot
    longer than long-term care insurance.
        Mr. Walberg. But is there any reasonable guess when it
    might stabilize?
        Ms. Kastrup. Well, one of the issues that makes that hard
    is that care delivery has changed a lot from the initial
    policies. If you think about it, the initial policies were sold
    as nursing home insurance and the thought being no one wants to
    go to a nursing home. And, you know, assisted living facilities
    didn't even exist. Today, there's assisted living facilities.
    There's home care, and the policies cover these as well, even
    though they were maybe not even around when the policy was
    written. And so it would be hard to ever foresee future care
    delivery changes and know those perfectly, but we can get a lot
    better feel on things like mortality, mortality improvement,
    some of those assumptions.
        Mr. Walberg. That could change prediction, ultimately, of--
    --
        Ms. Kastrup. There's a lot of assumptions, and some of them
    we will have more certainty on and know more about. There will
    always be some things that we won't know.
        Mr. Walberg. That's comforting for me to know, having
    bought long-term care. So thank you.
        Mr. Doughty, recently, John Hancock announced that it was
    going to discontinue selling new standalone, long-term care
    policies because there's limited demand for the product. Why is
    there limited demand for the product?
        Mr. Doughty. I think the primary reason, I think it may
    have been touched on a little bit today, is one has been this
    price increase that has sort of happened and the other has been
    a general lack of understanding that people need to actually
    think about this very important event that could happen to them
    in the future. I will say on that point, however, that when
    you--you know, all of the things that we've talked about both
    in the--in terms of prices going up in the FLTCIP but also in
    standalone retail insurance, the prices are going up because
    the costs are going up.
        And so people still have to consider these products in the
    context of what alternatives do they have? They can stay in
    that kind of a program. They can try to buy something on the
    private marketplace or they can try to fund it themselves. And,
    generally speaking, insurance, although sales have gone way
    down, insurance still can for many people provide a very
    attractive alternative in that context.
        Mr. Walberg. Any other factors, specifically for your
    company, go into making the decision----
        Mr. Doughty. The decision to stop selling?
        Mr. Walberg. The decision to discontinue selling.
        Mr. Doughty. No. But that would--the primary factor and
    really the overwhelming factor was--I mean, there's questions
    about how long you tie up capital, et cetera, in this kind of a
    product. But, really, the number one factor was really just a
    pretty simple business discussion around can you sell enough of
    it to cover the infrastructure you need for your sales teams,
    for your, you know, negotiating with each State, all those
    kinds of things.
        Mr. Walberg. Did you consider what that means for
    individuals who have purchased standalone policies?
        Mr. Doughty. Yes. And thank you for asking that question
    because I want to be very clear on that point. We have not
    stopped--we continue to be in the long-term care business. We
    have 1 million customers that we continue to provide service
    to, pay claims for. We continue to be providing insurance for
    the Federal program. And we also provide long-term care
    insurance as an accelerated benefit on their life insurance
    policies, which is an increasingly popular way to--for
    consumers to get their long-term care insurance coverage.
        Mr. Walberg. Will there be substantial premium increases
    for these individuals?
        Mr. Doughty. On our--which individuals?
        Mr. Walberg. On standalone, those that have purchased it.
        Mr. Doughty. Our in force long-term care insurance has been
    experiencing really the very same trends that we have been
    discussing as part of the Federal program. Yes.
        Mr. Walberg. Okay. Well, thank you for your testimony.
        I yield back and recognize Mr. Lynch for your 5 minutes of
    questioning.
        Mr. Lynch. Thank you, Mr. Chairman, and thank you and the
    ranking member for holding this hearing.
        I want to welcome our witnesses. Thank you for the
    important input you've had and the advice. I read through your
    papers; very, very helpful.
        This is a thorny issue, and as someone who's an advocate on
    behalf of Federal employees, this was a shocker. I do
    understand that the real issues behind this, though, I've had
    some experience sitting as a trustee on pension funds where we
    assumed years ago that would always have, you know, our target
    rate was 7 or 8 percent interest on our funds and actuarially
    we could sort of stay within those guidelines and we could
    provide the fine benefit pensions to people and we could
    project that out. Now, we're in an interest rate period where
    it's half that.
        And so, Mr. Doughty, is that the core issue for you here in
    terms of--you're trying to project over a very long period of
    time. I know you're experience rating is different. You know,
    the expectations on long-term morbidity and all of that, but
    the fact that you can't--if you're putting this money in the
    market and getting return on your investment and it's so low,
    even over a long period of time, you cannot pay the benefits.
    Is that the crux of the problem?
        Mr. Doughty. That is one of the major issues with the
    problem, not the only one. I think some of the other issues
    were raised around people living longer, being on claim longer,
    all of that kind of experience. But investment expectations
    have significantly changed because of the prolonged low-
    interest rate environment, and that represents a very
    significant portion of the problem. Absolutely.
        Mr. Lynch. I notice, unlike John Hancock, a lot of other
    insurers have just gotten out of the business. They've exited.
    I think in the majority memo they said there were 100 companies
    doing this business not too long ago. And now they're down to
    12 that are doing individual policies, and maybe a similar
    amount doing group policies.
        So it's not an area where people are flocking to it. And as
    I understand it, the Federal contract that you've signed
    prevents you from getting any additional profit as a result of
    increasing the premiums. Is that correct?
        Mr. Doughty. Yes, that's correct. And--but we are quite
    happy to do that. I mean, we----
        Mr. Lynch. Well, I'm sure you weren't happy. But----
        Mr. Doughty. Well, no. But one of the reasons--one of the
    reasons you referenced, all the people that have left the
    industry, and why is that?
        Mr. Lynch. Yeah.
        Mr. Doughty. Because we've talked already about the need is
    going up.
        Mr. Lynch. Right.
        Mr. Doughty. The truth is, it's a very difficult business
    to be in. When you--John Hancock has been around for 150 years.
    We're very proud of our brand. Nobody likes to raise the price
    on customers. And I think that that's been a big challenge, so
    it's made it very difficult for people to stay in the business.
        Mr. Lynch. I understand.
        Mr. Doughty. But we negotiated not to make any additional
    fee off of the fact that we had to raise rates on these.
        Mr. Lynch. Let me thank you for that. I understand you came
    forward, your company came forward and agreed to that. I think
    that at least eliminates the possibility that, you know, that
    there's gouging going on or anything like that, since you're
    not getting any additional profit by raising the premiums. But
    it doesn't help my constituents, the Federal employees who have
    to pay these premiums. And, you know, I hear the stories of Mr.
    Thissen and it puts a human face on this.
        Let me just shift. Mr. Cohen, thank you so much. I love
    UMass Boston. They wouldn't let me in, but I jog around the
    bank along the water there. I actually did take a few courses
    there before I went to law school, so I appreciate it.
        Let me ask you. You know, Mr. Connolly raised the issue of
    flood insurance. It's intriguing. And to encourage more--there
    are some key differences here, but to encourage more insurers
    to get into this line of business, would it be helpful to have
    a government backstop like we do in the flood insurance field
    where we--you know, we actually buy our subsidy. We do provide
    a lot of assistance to families who would otherwise not be able
    to afford flood insurance.
        Mr. Cohen. Well, I mean, there are different ways to think
    about it. One is that you could imagine either the State or the
    Federal Government organizing a pool----
        Mr. Lynch. Right.
        Mr. Cohen. --among insurers where right now they have a
    premium tax that goes maybe to a guarantee fund. Maybe it goes
    to an reinsurance backstop.
        Mr. Lynch. Yeah.
        Mr. Cohen. And they all agree to a set of principles in the
    way that they operate. And if either one company, or whatever,
    has losses above that, then that's spread across the companies.
        Mr. Lynch. Okay.
        Mr. Cohen. That's one way to think about it. You know, one
    thing that I wanted to make sure that got out there, and that
    is that when you look at, for example, people who are on claim,
    you know, it is--it is true that right now, even 22 years of
    premium payments would be made up in about 5, 6 months of
    actual long-term care expenses. And so I have to say that if
    even--and even in the presence of rate increases, that means
    it's closer to 8 months.
        If you turn out to be one of the people who become disabled
    for a significant amount of time, meaning 2 to 3 years, you're
    getting a lot of benefit--a lot of benefit out of your policy.
    And I just want to make sure that that's understood here.
        Mr. Lynch. That's a good point. Thank you.
        Mr. Lynch. Mr. Chairman, I know I've exhausted my time. I
    yield back.
        Mr. Jordan. [Presiding.] I thank the gentleman for
    yielding.
        And I now recognize the gentlelady from Virginia for her 5
    minutes.
        Mrs. Comstock. Thank you, Mr. Chairman. And I thank the
    committee for holding this hearing.
        You know, when my constituents, seeing as I'm in Virginia
    and have many Federal employees also, were notified by OPM on
    July of these large premium increases, they were understandably
    concerned, and we certainly did hear a lot from them. And
    that's why I had joined folks in requesting the hearing. So I
    appreciate you all being here and taking a look at this issue.
        Walt Frances, a health economist and an expert on these
    programs, is quoted in the Washington Post as saying, quote,
    ``This never should have happened. The long-term care estimate
    should have been actuarially sound and accurate, taking into
    account far more carefully both the possibility of low interest
    rates, the low rate of return on premiums invested in bonds,
    and thirdly, the average selection by persons most likely to
    need long-term care.''
        Could Mr. Doughty and Mr. O'Brien address the industry
    assumptions that were here as well as just the general
    statement? And maybe some others would like to join also, but
    why don't we start.
        Mr. Doughty. Maybe I can start. Certainly, referencing the
    quote, which I'm not that familiar with but, you know, looking
    back, we clearly got it wrong, and there's no question about
    that. And it's creating a big issue, as you referenced, for
    your constituents.
        The question is, could you have done better? And what we do
    know is that our actuaries use the information--we talked about
    this is a relatively new product. Experience is emerging. They
    use the best--they're trained to use the best estimates that
    they can at the time, set the best assumptions that they can at
    the time. And we weren't alone in doing that. You know, we
    vetted those. We had outside actuarial firms. OPM used their
    experts to look at them and I know used outside actuarial
    firms. So it is a very challenging question.
        And specifically on the interest rate one, that is a big
    driver. You know, a small--as someone mentioned earlier, a
    relatively small change in your long-term projection around
    interest rates can have a significant impact when you're
    assuming that to--you know, you're losing that revenue year
    after year after year.
        Ms. Comstock. I think you've addressed it a little here,
    but would the premium increases shorten the contract period if
    it went from like 7 to 3 years? Would that help? Is that
    something, OPM, that you're looking at?
        Mr. O'Brien. Honestly, we do not think that shortening the
    contract----
        Mr. Connolly. Please use the mic.
        Mr. O'Brien. Sorry about that.
        Honestly, we don't think that shortening the contract
    period from 7 to 3 years--we can make adjustments during the
    contract periods if we desire to. So a shorter contract period
    does not necessarily solve any problem.
        Ms. Kastrup. I would like to jump in here and say that, you
    know, when the product was first priced, it was new. It was a
    new product. So you had to look at other things, like
    population data, because there was no insured data. And you had
    to look at other products.
        I'll give an analogy. It's that time of year. College
    football, if you think about the preseason top 10 football
    polls, it's based on last year's teams. You don't really know.
    You're trying to project this year. You know, now that we're
    all into December, you have a lot more information, and that
    top 10 has changed. It's kind of a similar situation here. So
    we have a lot better data now.
        Another thing to remember is the product was priced as a
    guaranteed renewable product, meaning that premium rates can be
    reset. If it had been priced as a product with level premiums
    that couldn't change, the initial prices would have been a lot
    higher to start with.
        Mr. Cohen. One other point on that with respect to these
    actuarial assumptions, part of the challenge that the whole
    industry has faced is the issue of waiting until you get what
    you perceive to be credible experience. And so that means that
    if you've waited 10 years and all of a sudden you're now
    certain because you have all of this credible experience,
    you've got about 10 years back to make up.
        And I think one of the ways that we could improve the
    functioning of this market is to have insurers certified on an
    annual basis based on actual--what actual assumptions are
    operating in the marketplace. For example, you see what's
    happening with interest rates. You know that. You don't have to
    wait 5 years to know that this year you're earning 1 percent or
    so on.
        And so we just completed a study and asked a question about
    that, and overwhelmingly, people would prefer--if there have to
    be rate increases, people would prefer more frequent, smaller
    increases, similar to health insurance, than, you know,
    infrequent, large, you know, one-time hits.
        Ms. Comstock. Okay.
        Mr. Thissen, did you want to--did you want to comment at
    all?
        Mr. Thissen. No.
        Ms. Comstock. Okay. I see my time is about to expire. So
    thank you.
        Mr. Jordan. I thank the gentlelady for yielding back.
        We now recognize the gentleman from Virginia, Mr. Beyer.
        Mr. Beyer. Thank you, Mr. Chairman. Thanks for allowing me
    to sit in on the hearing today.
        You know, this is something that affects many of my
    constituents. I think I have more Federal employees than
    Federal retirees than any other Member of Congress. And,
    believe me, we have heard from them. The phone rang off the
    hook.
        Mr. Connolly. Wait a minute. I'm not sure about that.
    Barbara and I might compete with that.
        Mr. Beyer. Mr. Ranking Member, thank you for requesting
    this hearing.
        For example, Rebecca Cuddy shared this story of her mother
    and her unaffordable premiums. Sharon Reynolds wrote about how
    she feels completely untrapped with the unaffordable premiums.
    Jim Real asked many effective probing questions. And I sent
    several letters to OPM requesting an explanation and a
    justification for why this is happening, what we can do to fix
    it, and at least how to plan to prevent this from ever
    happening again.
        So, Mr. O'Brien, maybe Mr. Doughty, why during the interim
    actuarial reviews didn't you know that a premium hike was
    imminent and at least make this information available to the
    current enrollees? One of the big problems they had was sticker
    shock after 7 years. Or why not even perhaps interim rate
    increases at the 4- or 6-year period?
        Mr. O'Brien. That's an excellent question, and I'd like to
    kind of go through the timeline. What we had found at the end
    of the last contract cycle, there were two sets of hard facts
    we had to deal with.
        First, when we got the funded status report in June of 2014
    was when the reevaluation of long-term cost projections by John
    Hancock indicated that the long-term care--long-term costs of
    the program were higher than we were originally projected.
        Then in April, as part of the contract when they provided
    us with bids, they had done additional revisions of their
    assumptions, including revisions to their long-term projection
    of revenue returns. So we had--as I said in my testimony, we
    had the confluence of two unfortunate factors. We had higher
    long-term projected costs and we had lower long-term projected
    returns. So those two facts meant that we had a very huge
    increase coming on.
        We then had a decision we could make. We could have made a
    decision where you could have phased in the increases over
    several years, but we knew what the magnitude of those
    increases were going to be.
        So Mr. Cohen has made the thing that people would rather
    have more frequent, smaller increases, but I would put that in
    context, given the magnitude of the bad facts that we had to
    deal with, it's different to say, yes, give me smaller
    increases rather than give me 30 percent this year and then
    follow it up with 40 percent next year. Because then you have
    the situation, long-term care that people can make the 30
    percent increase and they stretch to make their budget, but
    they can't make the 40 percent increase. So they're in a
    circumstance where we have effectively made them pay additional
    money for a benefit they will not be able to take advantage,
    because they made the choice----
        Mr. Beyer. Mr. O'Brien, I think you go right to the heart
    of this too. Because what I heard from so many people was they
    signed up in 2002 or sometime along the way with really
    expectations and guarantees that this was the premium, as long
    as the benefits--in fact, in the 2002 literature, I quote,
    ``Premiums have been set to remain constant for life unless you
    increase benefits.'' And then in the renewal in 2007, the--I
    think you said that somewhere along the way that they signed a
    form indicating premiums may only increase from among a group
    of whose premium is determined to be inadequate. And basically,
    no one saw that.
        In fact, the literature--the only thing that's different in
    the literature from 2002 to 2009 was you left out that line
    about premiums set to remain constant. Here, we're always
    guarding against binding arbitration hidden in the six-point
    type on the back of the contract.
        What did you do proactively to make sure that people knew
    in 2009 that they could really get hit the next time around?
        Mr. O'Brien. Well, I'm--we were criticized in hearings in
    2009, and we took those criticisms to heart. Exactly the points
    you're making, Congressman.
        Since 2009, the materials that are shared with enrollees
    have extensive information about the fact that premiums can
    increase. In fact, people positively attested they are aware of
    that. I'm happy to share with you in detail the information of
    how we've changed the materials and what information we now
    provide people since 2009 to clarify the possibility that their
    premiums will increase.
        If we can improve on that and make it even clearer, we are
    happy to do so, but we think we made extensive changes to the
    materials to make that clear.
        Mr. Beyer. Well, I confess if you talk to the people that
    you serve, they don't feel that way.
        Mr. Thissen, you had suggested perhaps a Federal long-term
    care insurance oversight board. Is that still a good idea?
        Mr. Thissen. Well, I think that there should be a public/
    private, you know, partnership----
        Mr. Connolly. Turn on your microphone.
        Mr. Thissen. I'm sorry.
        I think there should be a public/private partnership that
    looks at catastrophic protection; it looks at ways to encourage
    more individuals to purchase long-term care insurance, because
    the wider we can spread the risk and the wider we can spread
    the pool, it just--it helps everybody. And then I also think
    that if we can put something together like that, we possibly
    maybe even can save some money on Medicaid, because we've paid
    some of that up front.
        Mr. Beyer. Okay. Thank you.
        Mr. Chairman, thank you. I yield back.
        Mr. Jordan. I thank the gentleman.
        Now recognize for additional round, the gentlelady from
    Virginia.
        Mrs. Comstock. I just have one more question, but what
    percent of policyholders--I'm sorry if missed it--have dropped
    their policy since this increase this summer? And what percent
    cut back on their coverage in some way?
        Mr. O'Brien. Roughly 3 percent of policyholders chose to
    drop coverage so that they took the contingent nonforfeiture
    option. Of the 172,000 people who made a decision during the
    decision period, roughly a little over half, or 93,000 of
    those, took the option whereby they reduced their benefit to
    keep their premium the same.
        Mrs. Comstock. And could you--what exactly was the reduced
    benefit?
        Mr. O'Brien. There were various options in terms of how you
    could reduce the benefit to keep the premium the same, so it
    wasn't a one-size-fits all.
        Mrs. Comstock. Okay. But half of them reduced their
    benefits?
        Mr. O'Brien. Yes.
        Mrs. Comstock. Okay. Thank you.
        Mr. Jordan. I thank the lady.
        Now recognize Mr. Connolly, the ranking member.
        Mr. Connolly. I thank the chair.
        Mr. O'Brien, I ran out of time in questioning you, but if I
    understood your response to my last question to you, it was
    that OPM has given no thought to recommendations for how to
    resolve this issue, address the issue, ameliorate the issue.
    You gave consideration to, in response to Mr. Beyer's
    questions, parceling out the premium increases and decided
    against it because you didn't think it would--that would be
    particularly helpful.
        But what about--I mean, we're listening to suggestions from
    NARFE and from Professor Cohen about some creative ways we
    could go about trying to address this problem and make it
    easier for Federal employees, Federal retirees to access this
    product. I want to give you the opportunity to respond, because
    is it really your testimony on the record that OPM hasn't given
    a thought to that?
        Mr. O'Brien. I believe what I said is that we've given----
        Mr. Connolly. Please move that closer to you.
        Mr. O'Brien. I'm sorry.
        Mr. Connolly. Thank you.
        Mr. O'Brien. Okay. I believe what I'm saying is that we do
    not have a position that I can offer in terms of
    recommendations to this committee as far as what we think we
    should do to move forward in terms of addressing the problems
    in long-term care insurance. I have found this hearing very,
    very helpful. There's a number of ideas and proposals and ways
    to deal with the challenges of the program, and we are wide
    open to working with this committee and all of these
    individuals on how we can come up with solutions.
        Mr. Connolly. But, Mr. O'Brien, it's not my purpose to play
    Torquemada here, but surely you knew about this hearing, you
    knew we were planning on this hearing. This is not a new item
    in the press. It's gotten lots of coverage. You certainly have
    had feedback from Federal employees and Federal retirees. We
    certainly have, Ms. Comstock, Mr. Beyer, and myself. And yet
    you come here emptyhanded. You're open to ideas. The hearing is
    fascinating, but we have nothing in our kit bag to offer the
    people we serve. That's your testimony?
        Mr. O'Brien. My testimony is that we do not have a proposal
    that is ready for being shared with the committee at this time.
    The options and the discussion that has been offered around
    here goes in a number of different directions. We would like to
    evaluate those possibilities and come to this committee and
    this group with a proposal that we could really play out and
    we've weighed all the pros and cons, and we have not yet done
    that.
        Mr. Connolly. Any idea of the timeline when you will do
    that?
        Mr. O'Brien. We are continuing to work. I cannot give you a
    timeline at this time, sir.
        Mr. Connolly. Well, then let me say this to you: I'm the
    ranking member of the subcommittee, and I'm going to use every
    influence I've got to make sure you are summoned back to this
    subcommittee. And at that point, we will expect specific
    proposals. You owe that to the Federal employees and retirees
    who count on this product. You're not a passive observer, just
    responds to the whims of the market with, oh, my. You have an
    obligation to the people you serve. And you have an obligation
    to this Congress to come here with concrete ideas about how to
    ameliorate and resolve this issue. And we will expect that next
    time we see you, sir.
        I yield back.
        Mr. Buck. [Presiding.] The gentleman yields back.
        Does the gentleman from Wisconsin have any questions?
        Mr. Grothman. Yeah, sure. First of all, a comment. I think
    any company could bid on this product, correct?
        Mr. O'Brien. Yes.
        Mr. Grothman. How many different companies in the country
    offer long-term care insurance? Dozens?
        Mr. O'Brien. I think about a dozen has been stated at this
    meeting.
        Mr. Grothman. About a dozen. Okay. So one would think that
    if somebody could offer this plan for less, they'd be given a
    contract in the future, and we've solved the problem. I think
    there are some underlying problems here with long-term care
    insurance I go into, and my guess is--well, I'll ask one
    question and I'll go on my soapbox again.
        Have premiums for long-term care insurance gone up in
    general across the board--like if I go to my individual
    insurance agent or anything, is this an industry-wide
    phenomena?
        Mr. Doughty. Yes. I think it's safe to say that almost
    every insurance company offering long-term care has faced the
    need to raise premiums.
        Mr. Grothman. I thought so. And I think if any Congressman
    thinks you're doing a lousy job of running their company, they
    can apply to be the chief executive officer of any long-term
    care insurance company and make a boatload of money for you
    guys if they can do a better job than the free market can do.
        But back to the last question. It is--nationwide, if I just
    go to my local insurance agent, how much can I expect my
    premiums to go up, say, every year for the last 5 years, you
    think about?
        Mr. Doughty. I think it's--it varies greatly, similar to
    this program, depending on the type of product that you've
    bought. But our--you know, and I'll just speak to John Hancock
    on the private insurance, the retail insurance that we've
    offered. And generally speaking, it's gone up by, you know, the
    same factors in similar amounts over time.
        Mr. Grothman. And that's true of your 11 competitors too,
    about?
        Mr. Doughty. Fairly similar, yes.
        Mr. Grothman. I would assume John Hancock, I mean, I would
    assume you guys know something about trying to offering
    insurance at the lowest price, don't you? And if you didn't,
    wouldn't one of your competitors undercut you and put you out
    of business?
        Mr. Doughty. Yes.
        Mr. Grothman. That's kind of something that everybody who
    graduates from high school should know by now, wouldn't you
    think?
        Mr. Doughty. I mean, I would think that one of the
    realities that the industry faces is that insurance--the cost
    of insurance as they go up have been going up, the same factors
    apply to all companies and----
        Mr. Grothman. You guys have been surprised in the amount of
    claims compared to where you all thought it was going to be 10
    years ago, right? That's the underlying problem?
        Mr. Doughty. That's correct. The amount of claims and the
    investment environment that we talked about earlier.
        Mr. Grothman. Right. And as long as people maybe continue
    to live longer, be more likely to have diseases, Alzheimer's or
    whatever, that you have to put people in long-term care,
    premiums are going to have to go up, no matter how much a
    politician wants to grandstand and be critical of you, right?
        Mr. Doughty. Premiums will go up as claims go up and the
    need and costs of long-term care goes up. That's absolutely
    right.
        We should--as someone pointed out earlier, this is a
    relatively young product. And we started with very little
    experience. So as we gather additional data, we should be able
    to get better but not perfect at predicting what those costs
    would be.
        Mr. Grothman. And if I yell at you some more and ask you to
    produce your costs, is that going to make any difference at all
    as long as more and more people continue to need long-term
    care, no matter how much I yell at you, no matter how many
    times I bring you back in this room?
        Mr. Doughty. Well, in terms of the Federal program and John
    Hancock, we obviously have an obligation to make sure that
    there are sufficient prices being charged to make sure that
    those claims can get paid in the future.
        Mr. Grothman. Right. It's not going to matter. I can't yell
    at you and say, keep coming back here until you lower your
    costs as long as more people need the insurance, right? I mean,
    you need a payout, right?
        I'm sorry for the--for what you're having to put up with
    here.
        I guess that's it.
        Mr. Cohen. There are some countervailing trends, which
    advances in health care, for example----
        Mr. Grothman. Are we keeping people alive longer, too,
    right?
        Mr. Cohen. Right. It may turn out that we're keeping people
    alive longer with less disability. I mean, that's--part of the
    uncertainty here is, frankly, it can go in both directions.
        Mr. Grothman. It can, but largely, the industry is hostage
    to the number of people who need long-term care, which they
    can't control. Right?
        Mr. Cohen. Can they--I agree that they can't control the
    number who need long-term care. I don't know if they're held
    hostage to that, but----
        Mr. Grothman. Well, assuming they're not going to go
    through bankruptcy, they're hostage to it. Okay. Thanks much.
        Mr. Buck. The gentleman yields back.
        The chair recognizes the gentleman from Virginia.
        Mr. Beyer. Thank you, Mr. Chairman, very much.
        Mr. Doughty, one of the things I've been confused--I did
    sign up for long-term care insurance. And when I got the
    notices, I show that my premium was just $325 a month, went to
    $483. And I got the three different options, which seem
    perfectly fair.
        But the letters that we were getting in our office were
    from people 10 years older than I who had signed up for
    premiums at $180, $150, and $200 that went up to $1,200, that
    were up by factors of four, five, six. And I'm trying to figure
    out why was there such a difference in the increase in the
    premiums person to person? I felt like I got a relatively soft
    landing compared to the letters that I was receiving from
    constituents, who will probably have much less ability to pay
    it than I did.
        Mr. Doughty. So there definitely were differences in the
    amount of increase, depending on things like age, the type of
    benefit, et cetera. But I would be very interested in following
    up with--back to you, because the maximum increase that was
    required was 126 percent. So I think there must be some
    confusion around--you know, if people think their rates are
    going up by five or six times. And I would love to work with
    those constituents directly, if we can, to make sure that we're
    giving them adequate information to make sure we understand
    exactly what choices they're making.
        Mr. Beyer. To be clear, unaffordability was what came home
    so hard to them. The other deal too is feeling cheated that
    they put in money for year after year after year and then all
    of a sudden it becomes unaffordable, and they have a choice of
    taking a much smaller premium that wouldn't cover them or
    getting all their money back, which doesn't do them much good
    at age 75 or 82.
        Mr. O'Brien, just one--as a retailer of 40-plus years, we
    generally like to increase our labor rates like $1 at a time
    and hope people don't notice it rather than do it all at once
    and double it or 126 percent. You might take that into
    consideration going forward.
        Mr. O'Brien. Would I had that option, it would have been
    great.
        Mr. Beyer. And I know Mr. Connolly was very firm there at
    the end, and I think what came--what I heard from that is that
    we really need a commitment from you to have to do things
    differently, lest the 2016 hearing be like the 2009 hearing,
    and we're back here again in 2023 tearing our hair out again
    and asking you questions that you have a hard time answering.
        Mr. O'Brien. I would like to avoid that as well.
        Mr. Beyer. And I--on the notion of why we couldn't have
    made--I'm still not convinced that the actuarial things--you
    talked about the perfect storm, the low interest rates. Well,
    we've known that we've got low interest rates since the Great
    Recession. Or that people are living longer, we've known that
    for a long time too.
        Was it only April of this year that we suddenly realized
    how off-balance we were, how out of sync we were with the
    premiums?
        Mr. O'Brien. Again, what we had is we had, first, a
    revaluation by John Hancock in terms of their long-term cost
    projections, which we learned about in June of 2014. And that
    was when we knew that there were going to need to be rate
    increases, but those were the higher costs. Then later, as
    there were continued refinements to the assumption, including
    the revisions to the long-term investment returns, we got the
    new premium rates in April of 2015. And that's when we had the
    situation where we had 83 percent average rate increases that
    we rolled out.
        It's a fair discussion about whether or not you would have
    done that incrementally, you know, did one increase followed by
    the other increase, and which would have been the least pain?
    The decision we made, which was--and the risk we thought we ran
    once we knew that there was going to be substantial rate
    increases needed over the period to keep the Experience Fund
    solvent into the future, which is our primary responsibility,
    is that if we had done it in what were going to be large
    increments no matter what we did, increments of 20 and 30
    percent over several years, we thought we ran the risk of
    essentially having people stretch to stay in the program, and
    then a year later when they got the next increase be unable to
    do it, and they would have been paying an additional year's
    premium that they could not afford and have gotten no benefit
    from it.
        What we decided--and it's fair to say there were other
    decisions that were possible--was to do the entire increase at
    this point based on the best information we have to take the
    fund, you know, on the best information we have into the future
    and provide these opportunities for landing spots, you know, as
    opportunities to maintain the current premium, cut your benefit
    a little and pay a little bit more premium or keep the same
    premium, if that's all you could afford. That was the decision
    we made, and I still feel it was the correct one.
        Mr. Beyer. Okay, great. Thank you.
        Mr. Chair, I yield back.
        Mr. Buck. The gentleman yields back.
        Seeing no other questions, I'd like to thank our witnesses
    for taking the time to appear before us today. If there's no
    further business, without objection, this subcommittee stands
    adjourned.
        [Whereupon, at 3:34 p.m., the subcommittee was adjourned.]

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                   Material Submitted for the Hearing Record

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