[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
FEDERAL LONG TERM CARE INSURANCE PROGRAM: EXAMINING PREMIUM INCREASES
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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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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
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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
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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
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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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.]
APPENDIX
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Material Submitted for the Hearing Record
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