Long-Term Care Insurance: Federal Program Compared Favorably with
Other Products, and Analysis of Claims Trend Could Inform Future 
Decisions (31-MAR-06, GAO-06-401).				 
                                                                 
The Long-Term Care Security Act required the federal government  
to offer long-term care insurance to its employees, their	 
families, and others. The act also required GAO to conduct a	 
study of the competitiveness of the Federal Long Term Care	 
Insurance Program, which began in 2002, compared with individual 
and group products generally available in the private market. GAO
compared the federal program's benefits, premiums, enrollment	 
rates, and enrollee characteristics with other products over a	 
3-year period. GAO also compared the federal program's early	 
claims experience with initial expectations.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-401 					        
    ACCNO:   A50557						        
  TITLE:     Long-Term Care Insurance: Federal Program Compared       
Favorably with Other Products, and Analysis of Claims Trend Could
Inform Future Decisions 					 
     DATE:   03/31/2006 
  SUBJECT:   Comparative analysis				 
	     Competition					 
	     Federal employees					 
	     Insurance premiums 				 
	     Long-term care					 
	     Long-term care insurance				 
	     Private sector					 
	     Projections					 
	     Federal Long-Term Care Insurance Program		 

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GAO-06-401

     

     * Results in Brief
     * Background
          * Long-term Care
          * Long-term Care Insurance
          * Long-term Care Insurance Marketplace
          * Federal Long Term Care Insurance Program
     * Federal Long Term Care Insurance Program Offered Benefits Co
          * Federal Program Benefits Were Similar to Those in Individual
          * Premiums for Three Federal Benefit Packages Were Usually Low
          * Federal Program Expects to Spend Higher Proportion of Premiu
     * Federal Program Participation Was Comparable to Other Group
          * Federal Program Participation Rate Was Comparable to Partici
          * Federal Program Enrollees Were Younger Than Enrollees in Ind
     * Early Claims Experience in Federal Long Term Care Insurance
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments
     * Data Request
          * Benefits
          * Premiums
          * Enrollment and Enrollee Characteristics
          * Claims Experience
     * Long-term Care Insurance Interviews
     * Prepackaged Benefit Plans in the Federal Long Term Care Insu
     * Customized Benefits in the Federal Program
     * Other Benefits in the Federal Program
     * Enrollment in Federal Program Benefits
     * GAO Contact
     * Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to Congressional Committees

United States Government Accountability Office

GAO

March 2006

LONG-TERM CARE INSURANCE

Federal Program Compared Favorably with Other Products, and Analysis of
Claims Trend Could Inform Future Decisions

GAO-06-401

Contents

Letter 1

Results in Brief 4
Background 6
Federal Long Term Care Insurance Program Offered Benefits Comparable to
Other Products, Usually at Lower Premiums 13
Federal Program Participation Was Comparable to Other Group Products,
while Federal Enrollees Were Younger Than Enrollees in Individual Products
and Older Than Enrollees in Group Products 23
Early Claims Experience in Federal Long Term Care Insurance Program Was
Lower Than Expected, but It Is Too Soon to Determine Whether Adjustments
Are Needed 28
Conclusions 32
Recommendations for Executive Action 32
Agency Comments 33
Appendix I Scope and Methodology 36
Data Request 36
Long-term Care Insurance Interviews 39
Appendix II Federal Long Term Care Insurance Program Benefits 41
Prepackaged Benefit Plans in the Federal Long Term Care Insurance Program
41
Customized Benefits in the Federal Program 43
Other Benefits in the Federal Program 44
Enrollment in Federal Program Benefits 44
Appendix III Annual Premiums for Three Benefit Packages Offered in the
Federal Program and at Five Carriers 46
Appendix IV Comments from the Office of Personnel Management 50
Appendix V GAO Contact and Staff Acknowledgments 52

Tables

Table 1: Benefit Options in the Federal Long Term Care Insurance Program
and in Individual and Group Products Sold from July 1, 2002, through March
31, 2005 15
Table 2: Benefit Options Chosen by Federal Long Term Care Insurance
Program Enrollees and by Individual and Group Product Enrollees for New
Policies Sold from July 1, 2002, through March 31, 2005 16
Table 3: Estimated Eligible Population and Actual Enrollees in the Federal
Long Term Care Insurance Program, by Category 26
Table 4: Enrollee Characteristics of the Federal Long Term Care Insurance
Program and of Individual and Group Products, July 1, 2002, through March
31, 2005 28
Table 5: Actual Claims per Enrollee as a Percentage of Expected Claims per
Enrollee in the First 3 Years for the Federal Long Term Care Insurance
Program 29
Table 6: Prepackaged Plans in the Federal Long Term Care Insurance Program
42
Table 7: Benefit Options in the Federal Long Term Care Insurance Program
44
Table 8: Federal Long Term Care Insurance Program Enrollment in
Prepackaged Benefit Plans, Customized Benefits, and Alternative Insurance
Plan from March 25, 2002, through March 31, 2005 45
Table 9: Federal Long Term Care Insurance Program Enrollment in
Prepackaged Benefit Plans from March 25, 2002, through March 31, 2005 45
Table 10: Annual Premiums for Single People and Married Couples Who Were
Both the Same Age for the Federal Long Term Care Insurance Program and for
Five Carriers in the Individual Insurance Market for Package 1 Sold on
March 31, 2005 47
Table 11: Annual Premiums for Single People and Married Couples Who Were
Both the Same Age for the Federal Long Term Care Insurance Program and for
Five Carriers in the Individual Insurance Market for Package 2 Sold on
March 31, 2005 48
Table 12: Annual Premiums for Single People and Married Couples Who Were
Both the Same Age for the Federal Long Term Care Insurance Program and for
Five Carriers in the Individual Insurance Market for Package 3 Sold on
March 31, 2005 49

Figures

Figure 1: Average Annual Federal Premiums for Single People and for
Married Couples Who Were Both the Same Age Compared with Averages for
Individual Products, for Three Benefit Packages and Overall, Sold on March
31, 2005 19
Figure 2: Annual Premiums by Age for Single People and Married Couples Who
Were Both the Same Age for the Federal Long Term Care Insurance Program
and for Five Carriers Selling Individual Products for the Most Popular
Federal Comprehensive Benefit Package Sold on March 31, 2005 21
Figure 3: Actual Claim Payments per 10,000 Enrollees in the First 3 Years
Compared with Expected Claim Payments per 10,000 Enrollees over 35 Years
for the Federal Long Term Care Insurance Program 30
Figure 4: Actual Number of Paid Claims per 10,000 Enrollees in the First 3
Years Compared with Expected Number of Paid Claims per 10,000 Enrollees
over 35 Years for the Federal Long Term Care Insurance Program 31

Abbreviations

ADL activity of daily living CalPERS California Public Employees'
Retirement System HIPAA Health Insurance Portability and Accountability
Act NAIC National Association of Insurance Commissioners OPM Office of
Personnel Management Partners Long Term Care Partners, LLC

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States Government Accountability Office

Washington, DC 20548

March 31, 2006

Congressional Committees

In 2004, about $193 billion was spent nationwide on nursing home and other
long-term care services. Private insurance covered 7 percent of this
amount, about $14 billion, while most long-term care services were
financed by government programs, primarily Medicaid. The elderly-people 65
years old and older-consume about two-thirds of all long-term care
services. As the elderly population begins to grow with the aging of the
baby boomers, the increasing demand for long-term care services will
continue to strain federal and state resources. Some policymakers propose
that increased use of long-term care insurance, particularly by the baby
boom generation, may be a means of reducing some of the future financial
burden on public programs. In September 2000, Congress passed the
Long-Term Care Security Act. The act required that the federal government
offer long-term care insurance to its employees, their families, and
others.1 Congressional committee reports accompanying this act indicated
that a long-term care insurance program could encourage more people to
obtain long-term care insurance, serve as a model for other
employer-sponsored programs across the nation,2 and possibly shift some of
the future burden to private payment sources.3

In December 2001, at the conclusion of a competitive bidding process, the
Office of Personnel Management (OPM)-the federal agency responsible for
administering governmentwide compensation and benefit systems-contracted
with Long Term Care Partners, LLC (referred to as Partners) for 7 years to
provide long-term care insurance for active federal civilian employees,
members of the uniformed services, and Postal Service employees; federal,
military, and Postal Service retirees; qualified relatives; and certain
others. Partners is a joint venture formed by two large carriers selling
long-term care insurance products in the private market, John Hancock Life
Insurance Company and Metropolitan Life Insurance Company. The Federal
Long Term Care Insurance Program conducted limited early enrollment from
March 25, 2002, through May 15, 2002, and open enrollment from July 1,
2002, through December 31, 2002. From March 25, 2002, through March 31,
2005, 218,890 employees, retirees, relatives, and others were enrolled in
the federal program, making it the largest long-term care insurance
program in the nation.

1Pub. L. No. 106-265, 114 Stat. 762, 764 (2000).

2Senate Committee on Governmental Affairs, S. Rep. No. 106-344, at 18
(2000).

3House Committee on Government Reform, H.R. Rep. No. 106-610, at 8 (2000).

The Long-Term Care Security Act also required that we conduct a study of
the competitiveness of the federal program with individual and group
products generally available in the private insurance market.4 As agreed
to by the committees of jurisdiction, this report addresses the following
questions:

           o  How do benefits and premiums for the Federal Long Term Care
           Insurance Program compare with those of other products available
           in the long-term care insurance market?
           o  How do enrollment rates and the characteristics of enrollees in
           the Federal Long Term Care Insurance Program compare with those of
           other products available in the long-term care insurance market?
           o  How does the early claims experience of the Federal Long Term
           Care Insurance Program compare with initial expectations?

           To obtain data on benefits, premiums, enrollment, and enrollee
           characteristics, we surveyed Partners, the California Public
           Employees' Retirement System (CalPERS),5 and five of the largest
           long-term care insurance carriers.6 The five insurance carriers
           were AEGON USA,7 Bankers Life and Casualty Company, Genworth
           Financial, John Hancock Life Insurance Company, and Metropolitan
           Life Insurance Company. All five carriers sold products in the
           individual market, and two of the five carriers-John Hancock Life
           Insurance Company and Metropolitan Life Insurance Company-were
           also among the five largest carriers that sold products in the
           group market. We requested data from Partners on new policies sold
           during two time periods: (1) from March 25, 2002, through February
           7, 2003, to correspond to the federal early enrollment and open
           enrollment periods8 and (2) from March 25, 2002, though March 31,
           2005, to capture the full experience of the program's first 3
           years. We asked CalPERS and the five carriers to provide data for
           policies sold from July 1, 2002, through March 31, 2005.9 We then
           compared the benefits offered, enrollment, and enrollee
           characteristics of the federal program, CalPERS, and the five
           carriers. To compare premiums, we asked CalPERS and the carriers
           to price the benefit packages offered in the federal program. In
           addition, we obtained data from Partners on the expected and early
           claims experience of the federal program to provide an early
           indicator of financial performance. Because of the proprietary
           nature of the data provided by the five carriers, we aggregated
           data across the individual and group carriers for reporting
           purposes. While we aggregated the CalPERS data with the private
           market group data in all cases, we also separately reported
           publicly available CalPERS data in two places because its
           experience in managing benefits for large numbers of public
           employees, retirees, and their families is most comparable to the
           federal program.

           To supplement the data we collected, we interviewed officials at
           OPM, Partners, CalPERS and the organization that administers its
           program, the five carriers, and five trade associations
           representing groups such as insurers and actuaries. We also
           interviewed three experts on long-term care insurance. In
           addition, we reviewed several studies, including recent studies
           addressing (1) the long-term care insurance market, (2) buyers of
           a long-term care insurance product and those who considered buying
           coverage but decided not to buy, and (3) claims experience. We
           assessed the reliability of the data we obtained from Partners,
           CalPERS, and the five carriers and determined that the data were
           sufficiently reliable for the purposes of our study. (App. I
           provides more-detailed information on our methodology.) We
           performed our work from March 2005 through March 2006 in
           accordance with generally accepted government auditing standards.

           Benefits offered during the first 3 years of the Federal Long Term
           Care Insurance Program and premiums associated with these benefits
           generally compared favorably with those offered by other long-term
           care insurance products sold during the same period. Compared to
           individual and group products, the federal program offered similar
           benefits-long-term care services provided in facilities and in the
           home with coverage for specified dollar amounts and periods to
           begin after a predetermined waiting period. However, the federal
           program offered fewer options within these benefits, especially
           compared with individual products. Most federal program enrollees
           and enrollees in individual and group products chose benefits in
           similar ranges. Annual premiums in the federal program averaged
           across the three most commonly purchased federal benefit packages
           were 46 percent lower for single people and 19 percent lower for
           married couples who were both the same age than the premiums for
           similar individual products. Although the premium estimates
           reported for individual products included discounts for married
           couples, they did not include discounts for enrollees who were
           considered to be in good health. Annual premiums for each of the
           three different federal benefit packages were always lower for
           single enrollees compared with premiums for the individual
           products we reviewed, while premiums were lower in the federal
           program for married couples who were both the same age in most,
           but not all, cases. In contrast, annual federal premiums averaged
           across the three benefit packages were 3 percent higher than those
           at CalPERS, the one group product for which we had premium data.

           Five percent of eligible active federal civilian employees
           enrolled in the federal program, which is similar to the
           enrollment rates of other groups. Yet overall enrollment was 36
           percent lower than the initial expectations established by
           Partners, in part because active military members and Postal
           Service employees enrolled in low numbers. During the 3-year
           period covered by our study, the average age of enrollees in the
           federal program at the time of enrollment was 56 years old, which
           is younger than the average age of 60 for individual products we
           reviewed and older than the average age of 52 for group products
           we reviewed. As was true for the individual and group products,
           more women than men purchased coverage in the federal program
           during the 3-year period.

           The early claims experience of the Federal Long Term Care
           Insurance Program was below the expectations established by
           Partners. The federal program paid 39 percent of what it expected
           to pay for claims per enrollee during the first 3 years of the
           program. The number of paid claims per enrollee was also below
           expected levels. While there was a discrepancy between the actual
           and expected claims experience during these early years, it is not
           known whether the discrepancy indicates the future trend or is a
           brief departure from the expected claims experience over the long
           term. In general, the expected claims experience in the first
           years of a long-term care insurance program is very low relative
           to the longer term because the majority of claims are unlikely to
           be submitted for many years. Furthermore, the claims experience is
           only one of many factors affecting premiums. While about half of
           the total claims payment amount was spent on facility care during
           the first 3 years, this type of care represented less than a
           quarter of the total number of claims. The most common medical
           conditions prompting claims in the early years of a policy for the
           federal program were cancer, stroke, and injuries and poisoning.
           Across the individual and group products we reviewed, the most
           common medical conditions prompting claims were also cancer,
           stroke, and injuries, as well as cognitive problems,
           musculoskeletal disorders, cardiac disease, and arthritis.

           We recommend that the Director of OPM take the following two
           actions. First, the Director should analyze the reasons for the
           lower-than-expected early claims experience and, as appropriate,
           use the results of this analysis to modify assumptions about the
           expected claims experience. Second, the Director should analyze
           the projections for the amount of premiums to be collected to pay
           for claims, including an analysis of the assumptions made for the
           projections that are related to future claims experience and other
           factors affecting premiums. OPM should report both analyses to
           Congress prior to the next contract negotiations.

           In its written comments on a draft of this report, OPM generally
           agreed with the report's findings. In response to our
           recommendations, OPM indicated that it intends to provide updated
           information on claims experience and premium setting in its
           written recommendation to Congress before entering into a new
           contract for administration of the Federal Long Term Care
           Insurance Program, in accordance with the Long-Term Care Security
           Act. OPM stated that it believes an additional report on the
           issues of claims experience and projections for the amount of
           premiums to be collected is not needed. OPM also indicated in its
           comments that the expectations about enrollment and claims
           experience were established by Partners prior to the start of the
           federal program, rather than established by the marketplace, and
           we revised the report accordingly.

           Long-term care services assist people who need help in performing
           activities of daily living (ADLs), such as eating, bathing, and
           dressing.10 As some of these services can be expensive, especially
           services provided in a nursing home, long-term care insurance
           helps people pay for the cost of care. However, relatively few
           people have obtained long-term care insurance through products
           sold in the individual and group markets. To help federal
           employees, retirees, and others obtain coverage, the federal
           government began offering the opportunity to apply for long-term
           care insurance in 2002 through an employer-sponsored group program
           in which enrollees pay the entire cost of their premium.

           Long-term care refers to a range of support services provided to
           people who, because of illness or disability, generally are unable
           to perform ADLs for an extended period. Long-term care services
           include medical, social, and personal services. Care may be
           provided in various settings, including facilities such as nursing
           homes or assisted living facilities, a person's own home, or the
           community. Both paid and unpaid caregivers may provide long-term
           care services. As a person ages, his or her ability to perform
           basic physical functions typically declines, increasing the
           likelihood that he or she will need long-term care services.

           People can purchase long-term care insurance directly from
           carriers that sell products in the individual market or can enroll
           in products offered by employer-sponsored and other groups.11
           Long-term care insurance policies sold in the individual and group
           markets cover costs associated with long-term care. For a
           specified premium amount that is designed-but not guaranteed-to
           remain level over time, the carrier agrees to provide covered
           benefits under an insurance contract. First sold in the 1970s,
           long-term care insurance has evolved from initially offering
           coverage for nursing home care only to offering comprehensive
           coverage. Comprehensive coverage pays for care provided in
           facilities such as nursing homes and other settings such as a
           person's home. Insurance is generally purchased for defined daily
           benefit amounts and benefit periods, with elimination, or waiting,
           periods. For example, long-term care insurance might provide
           coverage at $100 per day for care provided in a nursing home or in
           other settings for 3 years after a waiting period of 90 days.
           Because long-term care insurance claims might not be filed for
           many years after the product is purchased, the insured can
           purchase protection against inflation, which can increase the
           daily benefit amount covered. In addition, long-term care
           insurance products can (1) cover home care at varying percentages
           of the daily benefit amount; (2) offer people a range of other
           types of options, such as policies that return a portion of the
           premium payments if the person dies; and (3) include selected
           benefits, such as international coverage or care-coordination
           services that, among other things, provide information about
           long-term care services to the enrollee and monitor the receipt of
           services.

           Many factors affect long-term care insurance premiums. Carriers
           charge higher premiums for richer benefits; for example, higher
           daily benefit amounts, longer benefit periods, and higher levels
           of inflation protection will increase the cost. Premiums are based
           on the age of the applicant, with premiums increasing more rapidly
           as age increases. Premiums are also based on the health status of
           the applicant. Most carriers selling coverage in the individual
           market assign applicants to one of three general rating categories
           based on health status when underwriting the coverage-preferred,
           standard, or substandard-with associated discounts and
           surcharges.12 In addition, carriers in the individual market
           usually offer discounts to married couples when both spouses
           purchase coverage. Products sold in the group market may be sold
           on a guaranteed issue basis during an open enrollment period, with
           no or limited underwriting for employees actively at work who
           enroll through an employer-sponsored program, and the products
           generally do not provide discounts for spouses. Carriers cannot
           increase a particular person's premiums but can increase premiums
           for a group of people who bought the same type of policy when the
           carrier can demonstrate that anticipated costs will exceed premium
           revenue. Carrier pricing assumptions, including projected interest
           rates, morbidity or illness rates, and lapse rates-the number of
           people expected to drop their policies over time-all affect
           premium rates and rate setting.

           Carriers estimate the total amount of premiums to be collected for
           long-term care insurance policies sold as well as projected claims
           and administrative costs for these policies using an anticipated
           lifetime loss ratio. This ratio describes what portion of total
           premiums is expected to be paid for claims for the reimbursement
           of the costs of long-term care over the life of a set of
           policies.13 The portion of premiums not spent on claims is used to
           pay for administrative costs, such as marketing, agent
           commissions, claims handling, overhead, and taxes, and for
           profits. In the past, National Association of Insurance
           Commissioners (NAIC) model regulations for long-term care
           insurance stated that carriers should spend a minimum of 60
           percent of collected premiums on claims.14 However, in model
           regulations released in August 2000, NAIC recommended that
           carriers price their products high enough initially to prevent the
           need for future rate increases rather than target a minimum
           percentage to be spent on claims. So far, according to NAIC, a
           majority of states have adopted long-term care insurance
           regulations based on the 2000 NAIC model, while some states still
           require minimum loss ratios. Many large carriers set premium rates
           on a national rather than regional basis. Carriers also price to
           cover a profit margin and administrative costs as well as to meet
           minimum loss ratios.

           Few claims are expected to be submitted during the early years of
           a long-term care insurance policy. As a result of underwriting, it
           is unlikely that many people could meet the eligibility
           requirements to buy the policy yet submit a claim within 3 years.
           Industry experts suggested that the effects of underwriting begin
           to decline and the rate of claim submissions starts to increase
           after about 3 to 7 years. The rate of increase in claim
           submissions depends on the average age of the enrollees, with most
           long-term care insurance claims submitted when people reach their
           mid-70s to mid-80s. Industry experts also noted that the rate of
           claim submissions in the federal program is expected to peak 25
           years or more after the program began. Because the average age of
           enrollees in the individual market is higher than the average age
           of enrollees in the federal program, the rate of claim submissions
           is likely to peak earlier in the individual market, after 15 to 25
           years. The rate of claim submissions is likely to peak after 30 to
           40 years in the group market because of the younger average age of
           its enrollees.

           The Health Insurance Portability and Accountability Act of 1996
           (HIPAA) specified conditions under which long-term care insurance
           benefits and premiums would receive favorable federal income tax
           treatment and provided specific protections to people who
           purchased tax-qualified plans.15 Long-term care insurance plans
           must meet certain requirements contained in HIPAA to be considered
           tax-qualified.16 For example, according to HIPAA, a plan must
           begin coverage when a person is certified to need substantial
           assistance with at least two of the six ADLs and a disability is
           expected to last 90 or more days, or to need regular supervision
           because of a severe cognitive impairment. In addition, federally
           tax-qualified plans must comply with the NAIC long-term care
           insurance model act and regulations in effect as of January 1993,
           as incorporated into HIPAA.17 These provide certain consumer
           protections, such as preventing a carrier from (1) not renewing a
           long-term care insurance policy because of age or deteriorating
           health and (2) increasing the premium of an existing policy
           because of a person's age or claims filed. Another consumer
           protection was that carriers had to offer inflation protection as
           specified in the NAIC model regulations.

           Each state establishes its own long-term care insurance laws and
           regulations that cover areas such as benefits, premium setting,
           and consumer protections.18 As a result, product requirements in
           the individual and group markets can vary among the states.
           According to NAIC, 41 states based their long-term care insurance
           regulations on the NAIC model, 7 based their regulations partially
           on the model, and 3 did not follow the model.

           The number of long-term care insurance policies sold has been
           small-about 9 million as of 2002, the most recent year for which
           data were available.19 About 80 percent of these policies were
           sold through the individual insurance market and the remaining 20
           percent were sold through the group market. In March 2005, 13
           percent of full-time workers in private industry had access to
           employer-sponsored long-term care insurance benefits; within
           private industry, 21 percent of workers in large establishments
           with 100 or more workers had access to this benefit.20

           People purchase policies from carriers in the individual market,
           usually through agents or brokers, and choose their own benefits
           from among a range of options the carriers offer. Groups-for
           example, employers, associations, or unions-purchase policies from
           carriers in the group market. Groups usually design the benefits,
           and enrollees are often given some benefit options from which to
           choose, for example, differing daily benefit amounts and benefit
           periods. However, benefit choices offered in employer-sponsored
           group products tend to be more limited than those that are
           available in the individual insurance market. Some groups offer
           benefit packages in which the benefit options are predetermined.
           In contrast to health insurance, where employers often contribute
           a share of the premium costs, enrollees in group long-term care
           insurance coverage usually pay the entire premium.

           A recent downturn in the long-term care insurance industry has led
           to more conservative assumptions when setting premiums and
           consolidation among carriers. The long-term care insurance
           industry experienced 18 percent annual growth in the number of
           policies sold from 1987 through 2002, but the industry has
           experienced a downturn in more-recent years. Beginning in 2003,
           many carriers in the individual market raised premiums, left the
           marketplace, or consolidated to form larger companies. This
           activity occurred in response to several factors including high
           administrative expenses relative to premiums; lower-than-expected
           lapse rates, which increased the number of people likely to submit
           claims; low interest rates, which reduced the expected return on
           investments; and new government regulations limiting direct
           marketing by telephone. Many carriers revised the assumptions used
           in setting their premium rates, taking a more conservative
           approach that led to higher premiums, while state regulators
           increased their oversight of the industry. Currently, several
           large carriers dominate the coverage sold in the individual and
           group markets as a result of mergers and acquisitions, and sales
           in the group market are growing faster than in the individual
           market.

           The federal government began offering group long-term care
           insurance benefits in 2002 for federal employees, retirees, and
           certain other people. When the Federal Long Term Care Insurance
           Program began, eligible people could apply for benefits during two
           specified time periods: (1) an early enrollment period for benefit
           options that were somewhat limited21 that ran from March 25, 2002,
           through May 15, 2002, intended for people who were well-informed
           about long-term care insurance and were eager to enroll in the
           federal program and (2) an open enrollment period for all benefit
           options that ran from July 1, 2002, through December 31, 2002.
           Active and retired federal and Postal Service employees, active
           and retired members of the uniformed services, qualified
           relatives, and certain others are eligible to apply for federal
           long-term care insurance benefits.22 Following the open enrollment
           period, eligible people could apply at any time.

           The federal program determines eligibility for long-term care
           insurance through underwriting. During the early and open
           enrollment periods, the program used an abbreviated underwriting
           application to determine eligibility for active employees and
           active members of the uniformed services and their spouses who
           applied. All other applicants, including retirees and qualified
           relatives, used the full underwriting application, which was
           similar to underwriting in the individual insurance market. Since
           the conclusion of the open enrollment period, newly hired federal
           and Postal Service employees and newly active members of the
           uniformed services who apply for long-term care insurance within
           60 days of employment can do so using an abbreviated application,
           as can their spouses.23 All other applicants must use the full
           underwriting application.

           The federal program offers four prepackaged plan designs, each
           with a 90-day elimination period, a choice of two types of
           inflation protection-either automatic compound inflation
           protection or the future purchase option24-and the following
           benefit options:

           o  Package 1-$100 daily benefit amount for comprehensive coverage
           and 3-year benefit period,
           o  Package 2-$150 daily benefit amount for comprehensive coverage
           and 5-year benefit period,
           o  Package 3-$150 daily benefit amount for comprehensive coverage
           and an unlimited benefit period, and
           o  Package 4-$100 daily benefit amount for facilities-only
           coverage and 3-year benefit period.

           If not choosing a prepackaged plan, an enrollee in the federal
           program also has several options for customizing benefits. The
           federal program was designed to comply with the NAIC model
           regulations and HIPAA tax-qualification standards, which specify
           that certain benefit options be offered. (App. II provides more
           information on federal long-term care insurance benefits and
           enrollment in these benefits.)

           The federal program provides reimbursement for costs of care when
           an enrollee is unable to perform at least two ADLs for an expected
           period of at least 90 days or needs substantial supervision
           because of a severe cognitive impairment. Reimbursement is based
           on the benefits chosen by the enrollee. The federal government
           does not contribute to the cost of coverage, so an enrollee pays
           the entire premium for the benefits chosen.

           OPM, rather than the states, regulates the federal program, and
           Partners administers the program in accordance with the
           requirements of the contract between OPM and Partners. The
           contract-which was signed on December 18, 2001, and extends for a
           period of 7 years-defines key administrative requirements
           including who controls program assets and how profits are
           determined. The contract requires that the parent companies of
           Partners-John Hancock Life Insurance Company and Metropolitan Life
           Insurance Company-must hold federal program assets in accounts
           separate from all their other businesses. At the end of the
           contract period, OPM may decide to enter into a new contract with
           Partners. However, if OPM selects a different contractor at that
           time, the financial assets of the federal program would be
           transferred to the new contractor. The contract also specifies how
           Partners earn a profit each year. The profit formula consists of
           two parts: (1) some of the profit is capped at 6.5 percent of
           premiums collected in a year-nearly half of this type of profit is
           subject to performance criteria while the rest is guaranteed-and
           (2) some of the profit is based on the performance of the total
           assets of the federal program being managed by Partners to pay
           future claims-this type of profit consists of 0.3 percent of the
           total assets, called a "risk charge." Partners must pay federal
           taxes on their total profit, but may charge other taxes to the
           federal program. Partners also collects investment-management fees
           that are less than 0.2 percent of total assets. No profit is
           allowed if the premiums are not sufficient to cover claims and
           expenses. While OPM expects premium rates to remain level over an
           enrollee's lifetime, Partners may raise or lower premiums for
           groups of enrollees during the contract period with OPM's
           agreement. Additionally, premium rates may be changed at the time
           of a new contract.

           The federal program offered benefits that were similar to those of
           other long-term care insurance products we reviewed and usually
           offered lower premiums for comparable benefits in individual
           products. While federal program enrollees could choose from many
           options to customize their benefits, a broader range of options
           was available in the other products we reviewed, especially in the
           individual products. However, despite the broader range of options
           available in the other products, most enrollees in the federal
           program and in individual and group products chose similar daily
           benefit amounts, elimination periods, and benefit periods. A
           greater percentage of federal enrollees chose automatic compound
           inflation protection compared with enrollees in other products.
           Overall, annual premiums in the federal program averaged across
           three benefit plan designs were lower for both single people and
           married couples who were both the same age compared with similar
           individual products sold on March 31, 2005.25 Moreover, of total
           premiums projected to be collected over the life of the coverage
           sold during the study period, the federal program expected to pay
           a higher percentage in claim payments and a lower percentage in
           administrative costs compared with individual and group products.

           Long-term care insurance benefit options were similar in the
           federal program and in individual and group products we reviewed.
           While the federal program offered over 500 possible benefit option
           combinations in addition to the four prepackaged benefit plans,
           other products, especially individual products, offered more
           possible benefit combinations and more extensive customization in
           daily benefit amounts and in elimination and benefit periods.26
           Benefits offered in the federal program and in the individual and
           group products we reviewed were covered by consumer protections
           required for HIPAA tax-qualified plans. These consumer protections
           included, among other provisions, that enrollees be offered an
           option to protect their benefits against inflation. However, some
           individual and group product enrollees were also offered the
           opportunity to purchase policies that did not meet requirements
           for HIPAA tax-qualified plans. In addition, according to officials
           at OPM and Partners, the federal program offered several unique
           benefits, including payment to family members providing informal
           care, international coverage, and a process allowing third-party
           review of denied claims. Table 1 summarizes the benefit options in
           the federal program and in the individual and group products we
           reviewed.

           Table 1: Benefit Options in the Federal Long Term Care Insurance
           Program and in Individual and Group Products Sold from July 1,
           2002, through March 31, 2005

           Source: GAO analysis of data provided by Partners, five carriers
           selling individual products, CalPERS, and two carriers selling
           group products.

           aSome federal enrollees, members of the uniformed services, and
           their spouses who could apply for the federal program using an
           abbreviated application, but who were denied regular coverage,
           were offered coverage in the Alternative Insurance Plan. This Plan
           covered nursing homes only, had a 180-day elimination period,
           provided coverage for 2 years, and started with a weekly benefit
           amount of $200.

           bOne carrier reported selling individual products with
           home-care-only coverage.

           cOne carrier reported that one policy was sold with a daily
           benefit amount of $822.

           dWith automatic compound inflation protection, benefit amounts
           increase by a stated percentage of the previous year's amount with
           generally no change in premiums. For example, a $100 daily benefit
           amount with automatic compound inflation protection of 5 percent
           will go up by $5 to $105 at the beginning of the second year. At
           the beginning of the third year, benefits will go up by 5 percent
           of $105 or by $5.25 to $110.25. Simple inflation protection
           increases benefits by the same amount each year with generally no
           change in premiums. For example, a $100 daily benefit amount with
           simple inflation protection of 5 percent will go up by $5 each
           year. The future purchase option offers the ability to increase
           benefits at predetermined time intervals for an additional cost.
           Other inflation-protection options include a deferred inflation
           option, where the enrollee can increase benefits at a later date
           chosen by the enrollee.

           Most enrollees in the federal program chose comprehensive coverage
           and daily benefit amounts, elimination periods, and benefit
           periods similar to those chosen by enrollees in individual and
           group products. Most enrollees in all products chose to have the
           cost of long-term care services reimbursed at a rate in the range
           of $100 to $199 per day and chose an elimination period of 90 days
           or greater27 and a benefit period from 3 to 5 years. With regard
           to inflation protection, over two-thirds of federal program
           enrollees chose automatic compound inflation protection, a higher
           proportion than for enrollees in individual and group products.
           Federal enrollees who did not choose automatic compound inflation
           protection received the future purchase option as a default.
           Several experts and industry officials said the federal government
           was a leader in the group market by encouraging enrollees to
           choose more comprehensive inflation-protection benefits. Table 2
           summarizes the benefit options chosen by enrollees in the federal
           program and in individual and group products.

           Table 2: Benefit Options Chosen by Federal Long Term Care
           Insurance Program Enrollees and by Individual and Group Product
           Enrollees for New Policies Sold from July 1, 2002, through March
           31, 2005

           Source: GAO analysis of data provided by Partners, five carriers
           selling individual products, CalPERS, and two carriers selling
           group products.

           Notes: Individual entries may not add to 100 percent because of
           rounding.

           n.a. = not applicable.

           aFederal program enrollees include those who chose a prepackaged
           plan, designed their own customized plan, or chose the Alternative
           Insurance Plan from March 25, 2002, through March 31, 2005.

           bDaily benefit amounts for individual products were from four of
           the five carriers. At the fifth carrier, 80 percent of the
           enrollees chose daily benefit amounts that were greater than $75
           and less than or equal to $175.

           cWith automatic compound inflation protection, benefit amounts
           increase by a stated percentage of the previous year's amount with
           generally no change in premiums. For example, a $100 daily benefit
           amount with automatic compound inflation protection of 5 percent
           will go up by $5, to $105, at the beginning of the second year. At
           the beginning of the third year, benefits will go up by 5 percent
           of $105, or by $5.25, to $110.25. Simple inflation protection
           increases benefits by the same amount each year with generally no
           change in premiums. For example, a $100 daily benefit amount with
           simple inflation protection of 5 percent will go up by $5 each
           year. The future purchase option offers the ability to increase
           benefits at predetermined time intervals for an additional cost.
           Other inflation-protection options include a deferred inflation
           option, where the enrollee can increase benefits at a later date
           chosen by the enrollee.

           dOne carrier reported a deferred inflation option, where the
           enrollee can increase benefits at a later date chosen by the
           enrollee.

           eOne carrier reported optional inflation protection, which is
           similar to a future purchase option. Under optional inflation
           protection, an enrollee is offered the chance to increase benefits
           at predetermined time intervals whether or not the enrollee has
           submitted a claim for benefits, while the future purchase option
           is offered by this carrier only if the enrollee has not submitted
           a claim.

           Federal Long Term Care Insurance Program annual premiums were
           usually lower than annual premiums for individual products for
           three benefit packages with similar benefit options sold on March
           31, 2005.28 Overall, the average premium in the federal program
           for the three benefit packages for single people was 46 percent
           lower than average premiums for individual products we reviewed,
           while premiums for married couples who were both the same age were
           19 percent lower. However, the premium estimates reported for
           individual products do not include discounts for good-health
           status, which several carrier officials said were about 10 percent
           to 15 percent and apply to about one-third of all enrollees.29
           Figure 1 compares average annual premiums for three benefit
           packages and overall for the federal program with average annual
           premiums for the individual products we reviewed at five carriers.

4Pub. L. No. 106-265, S: 9006, 114 Stat. 768. The act also requires us to
conduct a second, subsequent study of the Federal Long Term Care Insurance
Program.

5CalPERS manages pension, health, and other benefits for more than 1.4
million California public employees, retirees, and their families and for
more than 2,500 public employers. CalPERS began offering a long-term care
insurance program in 1995. After the federal program, CalPERS is the next
largest group offering long-term care insurance. In contrast to the
federal program and most group products, the CalPERS group product is
self-funded rather than purchased from an insurer.

6We selected the five carriers on the basis of the total number of
policies and annualized premiums in effect in the individual market as of
December 31, 2004.

7AEGON USA left the long-term care insurance market on March 31, 2005.

8The open enrollment period closed on December 31, 2002, but applications
submitted and received by February 7, 2003, were processed as part of the
open enrollment period.

9We asked the carriers to provide data for the period beginning July 1,
2002, which is the beginning of a financial quarter and the beginning of
the federal open enrollment period, rather than March 25, 2002, the
beginning of the federal early enrollment period. Because few federal
program enrollees-about 4 percent of the program's total enrollment as of
March 31, 2005-had coverage that became effective during the early
enrollment period, we reduced the reporting burden for the carriers by
requesting data for the period beginning July 1, 2002.

                                Results in Brief

                                   Background

Long-term Care

Long-term Care Insurance

10People may need help in performing ADLs such as eating, bathing,
dressing, using the toilet, getting in and out of bed, and getting around
the house. Also, people may need help in performing instrumental ADLs such
as preparing meals, shopping for groceries, and getting around outside.

11Throughout this report we use the term "enrollees" to refer to people
who enroll in the Federal Long Term Care Insurance Program, who purchase
individual products, or who enroll in group products.

12Underwriting is the process of reviewing medical and health-related
questions furnished in an application to determine if the applicant
presents an acceptable level of risk and is insurable. Some insurers
require medical record reviews and interviews with nurses as well.

13For the purposes of this report, a claim refers to the series of
payments made to reimburse the provider or the policyholder for the costs
of an episode of care.

14State insurance regulators established NAIC to help promote effective
insurance regulation, to encourage uniformity in approaches to regulation,
and to help coordinate states' activities. Among other activities, NAIC
develops model laws and regulations to assist states in formulating their
policies to regulate insurance.

15Pub. L. No. 104-191, S:S: 321-327, 110 Stat. 1936, 2054-2067.

16Long-term care insurance premiums for HIPAA tax-qualified plans can be
itemized as deductions from income along with other medical expenses,
which is similar to how premiums for accident and health insurance are
handled.

17HIPAA requirements will be met if an insurance contract complies with
state law in a state that has adopted the NAIC model regulations or a more
stringent version of the model.

18Throughout this report, we include the District of Columbia in our
references to the states.

Long-term Care Insurance Marketplace

19America's Health Insurance Plans, Research Findings, Long-Term Care
Insurance in 2002 (Washington, D.C.: June 2004).

20U.S. Department of Labor, Bureau of Labor Statistics, National
Compensation Survey: Employee Benefits in Private Industry in the United
States, March 2005 (Washington, D.C.: August 2005).

Federal Long Term Care Insurance Program

21During the early enrollment period, enrollees had more limited choices
in some of the benefit options such as the benefit period and type of
coverage; for example, they could select only comprehensive coverage.

22Qualified relatives include current spouses of employees and retirees;
adult children at least 18 years old-including natural, adopted, and
stepchildren, but not foster children-of living employees and retirees;
and parents, parents-in-law, and stepparents of living employees, but not
of retirees. Selected military reservists, employees and retirees of the
Tennessee Valley Authority, District of Columbia government employees and
retirees first employed before October 1, 1987, and employees and retirees
of the District of Columbia Courts are also eligible to apply.

23Newly married spouses of eligible employees and certain federal or
Postal Service employees returning from a nonpay status and their spouses
can also use an abbreviated application.

24With automatic compound inflation protection, benefit amounts increase
by a stated percentage of the previous year's amount with generally no
change in premiums. The future purchase option offers the ability to
increase benefits at predetermined time intervals for an additional cost.

 Federal Long Term Care Insurance Program Offered Benefits Comparable to Other
                      Products, Usually at Lower Premiums

Federal Program Benefits Were Similar to Those in Individual and Group Products

25The federal program offers four prepackaged plan designs. One package is
a facilities-only design, while the remaining three packages provide
comprehensive coverage, including long-term care services provided in the
home. We report data on premiums for the three comprehensive packages
because two carriers selling individual products did not offer
facilities-only benefits on March 31, 2005.

26Partners officials told us that group products typically offer fewer
options than individual products because the group products are sold
without the assistance of an agent.

Benefit                                                                    
options       Federal programa   Individual products    Group products
Coverage type Comprehensive or   Comprehensive,         Comprehensive or   
                 Facilities-only    Facilities-only, or    Facilities-only    
                                    Home-care-onlyb        
Daily benefit $50 to $300        $18 to $500c           $35 to $465        
amounts                                                 
Elimination   30 days or 90 days 0 days to 730 days     20 days to 180     
periods                                                 days               
Benefit       3 years, 5 years,  1 year to lifetime     1 year to lifetime 
periods       or lifetime                               
Inflation     Automatic compound Automatic compound,    Automatic          
protectiond   or Future purchase Simple, Future         compound, Future   
                 option             purchase option,       purchase option,   
                                    Other, or None         Other, or None     

                                   Percentage choosing benefit option
                                                    Average for   Average for
                             Federal program individual product group product
                                  enrolleesa          enrollees     enrollees
Coverage type                                                     
Comprehensive                                    89            91       91 
Facilities-only                                  11             3        9 
Other                                            <1             6     n.a. 
Daily benefit amountb                                             
Less than $100                                    3            11       12 
$100 to $149                                     49            53       44 
$150 to $199                                     42            25       18 
$200 and greater                                  5            11       26 
Elimination period                                                
Less than 30 days                              n.a.             8       <1 
30 days to 89 days                               12            21       30 
90 days and greater                              88            71       70 
Benefit period                                                    
Less than 3 years                                <1            14        6 
3 years                                          49            23       13 
Greater than 3 years to                                                    
5 years                                          31            27       54
Greater than 5 years to                                                    
20 years                                       n.a.            10        4
Lifetime                                         20            26       23 
Inflation protectionc                                             
Automatic compound                               68            55       18 
Simple                                         n.a.            22     n.a. 
Future purchase option                           32             7       32 
None                                           n.a.            16        7 
Other                                            <1            1d      42e 

27All four federal prepackaged plans included 90-day elimination periods.
Federal enrollees who designed their own customized benefits could choose
either a 30- or 90-day elimination period. Elimination periods can be
based either on the number of days from the beginning of the episode of
illness-calendar days-or on the number of days from when services are
first received-service days. The elimination periods for the federal
program are based on service days.

Premiums for Three Federal Benefit Packages Were Usually Lower Than Those for
Comparable Benefits in Other Products

28We included premiums for the three comprehensive benefit packages
available in the federal program. Premiums included compound inflation
protection.

29The premiums for married couples include spousal discounts of 30 or 40
percent.

Figure 1: Average Annual Federal Premiums for Single People and for
Married Couples Who Were Both the Same Age Compared with Averages for
Individual Products, for Three Benefit Packages and Overall, Sold on March
31, 2005

Notes: We analyzed annual premiums for the three federal benefit packages
with comprehensive coverage available in the federal program. The three
benefit packages were Package 1-$100 daily benefit amount and 3-year
benefit period, Package 2-$150 daily benefit amount and 5-year benefit
period, and Package 3-$150 daily benefit amount and an unlimited benefit
period.

Each package had a 90-day elimination period and included the automatic
compound inflation-protection option.

For the five carriers selling individual products that we reviewed, single
premiums represented a 40-, 50-, 60-, and 70-year-old person underwritten
into the standard rating category, the category where carriers place most
enrollees after they assess the risk. Premiums for married couples
represented situations where both were the same age-40, 50, 60, and 70
years old-and both were written into the standard rating category.
Premiums for couples at the five carriers reflected either a 30-percent or
a 40-percent discount per couple. The federal program did not provide
discounts for spouses; therefore, for the federal program we doubled the
premiums charged for single people. For each benefit package, we averaged
premiums for single people and averaged the premiums for married couples
who were both the same age across the four age categories. We assumed
there was no discount for good health.

All benefits chosen by an enrollee affect the pricing of the package to
some degree. Carriers provided premiums for the major benefit options most
similar to the federal packages that had the largest effect on
premiums-daily benefit amounts, benefit periods, elimination periods, and
inflation protection.

The pattern of lower premiums in the federal program compared with those
in the individual products remained consistent in different age groups as
well as for single people and married couples. Figure 2 shows the range in
annual premiums in the individual products we reviewed relative to annual
federal premiums for single people and married couples who were both the
same age, by age group, for the most popular federal comprehensive benefit
package. Appendix III provides more information on annual federal and
individual product premiums for the benefit packages we reviewed.

Figure 2: Annual Premiums by Age for Single People and Married Couples Who
Were Both the Same Age for the Federal Long Term Care Insurance Program
and for Five Carriers Selling Individual Products for the Most Popular
Federal Comprehensive Benefit Package Sold on March 31, 2005

Notes: Premiums shown are for the federal program's Comprehensive 100
benefit package (Package 1), the most popular federal benefit package
purchased through March 31, 2005. Package 1 included a $100 daily benefit
amount, 3-year benefit period, 90-day elimination period, and the
automatic compound inflation-protection option. One carrier reported
premiums for a 100-day elimination period rather than for a 90-day period.

For the five carriers selling individual products we reviewed, premiums
were for the standard rating category. The federal program did not use
rating categories. Premiums for married couples who were both the same age
at the five carriers reflected either a 30-percent or a 40-percent
discount. The federal program did not provide discounts for spouses;
therefore, we doubled the premiums the federal program charged for single
people. We assumed there was no discount for good health.

All benefits chosen by an enrollee affect the pricing of the package to
some degree. Carriers provided premiums for the major benefit options most
similar to the federal program that had the largest effect on
premiums-daily benefit amounts, benefit periods, elimination periods, and
inflation protection.

When compared with premiums offered by CalPERS, the only group product for
which we had premium information, average federal premiums were higher for
two of the three packages.30 Overall, the average annual federal premium
for single people and for married couples who were both the same age for
the three benefit packages combined was 3 percent higher than the average
annual premium for CalPERS.

Federal Program Expects to Spend Higher Proportion of Premium on Claims and
Lower Proportion on Administrative Costs Than Individual and Group Products

As measured by the anticipated lifetime loss ratio,31 the federal program
expects to spend a higher proportion of collected premium on claims and a
lower proportion of collected premium on administrative costs than
individual and group products. The Federal Long Term Care Insurance
Program had a higher anticipated lifetime loss ratio than the average
anticipated lifetime loss ratios for the individual and group products we
reviewed32-75 percent for the federal program, compared with 59 percent
for individual products and 68 percent for group products.33 The federal
program expected to pay out in claim payments three-quarters of the $3.1
billion in premiums it projected would be collected over the life of the
policies for all policies sold from March 25, 2002, through March 31,
2005. The federal program expected to spend the remaining amount of
collected premiums-25 percent-on administrative costs, including
marketing, underwriting, claims handling, overhead, and taxes, and on
profits. For individual products sold during July 1, 2002, through March
31, 2005, individual market carriers estimated that an average of 41
percent of total premiums collected would cover administrative costs and
profits. Unlike the federal program, these administrative costs included
agent commissions, which averaged 17 percent of premiums collected for the
individual products we reviewed, or about half of their administrative
costs. For group products, carriers estimated that an average of 32
percent of total premiums collected for coverage sold during this time
period would cover administrative costs and profits.

30We did not request premium information for comparable benefit packages
for group products other than CalPERS, because of the variation that
exists across the groups insured by each carrier. In contrast to the
federal program and most group products, the CalPERS group product is
self-funded rather than purchased from an insurer, which CalPERS claims
may lower its costs to provide benefits compared with other insurers.

31The anticipated lifetime loss ratio describes what portion of the
premium is expected to pay for claims over the life of a set of policies.
This ratio is calculated as the present value of the total expected claim
payments compared with the present value of the total expected premiums
over the life of a set of policies.

32Four of the five respondents in the individual market provided loss
ratio data; three of these respondents provided additional detail about
administrative costs. Two of the three respondents in the group market
provided loss ratio data.

33The federal program followed NAIC's 2000 revised guidelines, which
recommended that carriers price their products high enough initially to
prevent the need for future rate increases rather than target a minimum
percentage of total premiums-for example, 60 percent-to be spent on
claims.

  Federal Program Participation Was Comparable to Other Group Products, while
 Federal Enrollees Were Younger Than Enrollees in Individual Products and Older
                        Than Enrollees in Group Products

The employee participation rate in the Federal Long Term Care Insurance
Program for active federal civilian employees was 5 percent, comparable to
the industry average in the group market, but overall enrollment was lower
than the expectations established by Partners. Federal enrollees were
younger than enrollees in individual products and older than enrollees in
group products. For all products we reviewed, more women than men obtained
coverage.

Federal Program Participation Rate Was Comparable to Participation Rates of
Other Group Products but Lower Than Initially Expected

The Federal Long Term Care Insurance Program's employee participation rate
of 5 percent after the open enrollment period for active federal civilian
employees was comparable to the industry average in the group market.34
Experts suggested that typically 5 to 6 percent of a group's potentially
eligible population would enroll in a long-term care insurance product
when initially offered coverage. Participation rates tend to increase over
time, usually reaching closer to 8 percent, depending upon the average age
of the eligible population. The federal program's employee participation
rates were much lower for active military members, at 0.2 percent, and for
active Postal Service employees, at 0.9 percent. Active military members
are young and can be difficult to reach for marketing purposes, which
might explain why they were less likely to apply than active federal
workers, who tend to be older and can be reached directly through their
workplace. Active Postal Service employees are also difficult to reach
because they are located throughout the nation rather than grouped in
centralized locations, and because access to these employees for marketing
purposes has been restricted during working hours.

34In general, the participation rate is calculated as the number of
enrollees divided by the eligible population at a point in time. The most
common formula, called the employee participation rate, is the number of
enrolled employees divided by the number of active employees. The number
of people who are eligible to enroll in individual products is unknown;
therefore, an accurate participation rate for the individual market cannot
be calculated.

The federal program was the largest employer-sponsored group in the
nation, with more than 218,000 individuals enrolled for new policies sold
from March 25, 2002, through March 31, 2005. The next largest group
program was CalPERS, with more than 175,000 enrollees for policies sold
from 1995 through 2005. According to Partners, the federal program
accounted for 15 percent of the enrollees in the entire group market and 2
percent of the entire long-term care insurance market in 2002.35

Even though it was the largest group in the nation, the federal program's
enrollment was lower than expected. Partners initially estimated in 2001
that 286,066 people would enroll during the open enrollment period, but
actual enrollment was 161,048, or 44 percent lower than expected. Partners
also estimated that enrollment would reach 343,280 by the third year of
the program; total enrollment eventually rose to 218,890 enrollees for new
policies sold from March 25, 2002, through March 31, 2005, or 36 percent
lower than expected. Some of the lower-than-expected enrollment can be
explained by the low participation rates for active military members and
Postal Service employees. Additionally, according to Partners, the
terrorist attacks in the fall of 2001 resulted in slower sales of
discretionary products, such as long-term care insurance, and also
resulted in temporarily reduced access to federal employees, military
members, and Postal Service employees for marketing purposes during the
open enrollment period. A representative of Partners and an expert
knowledgeable about the federal program indicated that a pool of at least
200,000 enrollees is adequate for the federal program to achieve financial
stability, although no minimum number was ever formally established.

35For the period of March 25, 2002, through March 31, 2005, 74 percent of
the federal program's enrollees had coverage that became effective during
the early and open enrollment periods.

The federal program focused its marketing efforts on a core group of
nearly 6 million people out of an estimated eligible population of almost
19 million people, and the majority of the enrollees came from this core
group. The core group consisted of 1.8 million active federal civilian
employees, 1.4 million active military members, 0.8 million active Postal
Service employees, and 1.8 million spouses of active employees and
military members, as shown in table 3. Almost two-thirds of the 218,890
people enrolled from March 25, 2002, through March 31, 2005, came from
this core group. According to OPM officials, the federal program also
reached out to retired federal employees, retired military members, and
retired Postal Service employees.

Table 3: Estimated Eligible Population and Actual Enrollees in the Federal
Long Term Care Insurance Program, by Category

                                                           Enrollees for new
                                                          policies sold from
                                                            March 25, 2002,
                         Estimated eligible population as  through March 31,
                               of October 15, 2001               2005  
                                   Percentage of          Percentage of total
Category               Number  total eligible   Number           enrollees
Core group                                                          
Active federal                                                             
civilian employees                  1,792,000       10       90,613     41
Active military                                                            
members                             1,353,000        7        3,244      2
Active Postal Service                                                      
employees                             800,000        4        6,352      3
Spouses of active                                                          
employees and                                                       
military membersa                   1,775,000       10       35,924     16
Subtotal for core                                                          
group                               5,720,000       31      136,133     62
Noncore group                                                       
Retired employees and                                                      
military members                    4,263,000       23       48,013     22
Spouses of retired                                                         
employees and                                                       
military members and                                                
all other relativesb                8,084,000       44       23,451     11
Otherc                                500,000        3       11,293      5 
Subtotal for noncore                                                       
group                              12,847,000       69       82,757     38
Total                              18,567,000      100      218,890    100 

Source: Partners.

Note: Individual entries may not sum to totals because of rounding.

aThe estimated eligible population for the spouses category for the core
group includes only eligible spouses of active employees and military
members. The number of actual enrollees in the spouses category for the
core group includes both enrolled spouses and enrolled relatives of active
employees and military members.

bThe estimated eligible population for the spouses and relatives category
for the noncore group includes eligible spouses and eligible relatives of
retired employees and military members, as well as eligible relatives of
active employees and military members. The number of actual enrollees in
the spouses category for the noncore group includes enrolled spouses and
enrolled relatives of retired employees and military members, but not
enrolled relatives of active employees and military members.

cThe estimated eligible population for the "other" category includes
selected military reservists, but not other eligible groups for which the
population was unknown. The number of actual enrollees in the "other"
category includes selected military reservists, and also employees and
retirees of the Tennessee Valley Authority, District of Columbia
government employees and retirees first employed before October 1, 1987,
and employees and retirees of the District of Columbia courts.

The enrollees during the first 3 years of the federal program represented
about three-quarters of the applications submitted. The federal
application approval rate of 74 percent was similar to the average
approval rate of 75 percent for individual products, but lower than the
average approval rate of 84 percent for group products, which may enroll
active workers using guaranteed issue during an open enrollment period.
The most common reasons for denial of an application for the federal
program and for the group products were height and weight outside of
insurable standards, a chronic condition such as diabetes or cardiac
problems, and cognitive impairment. In addition to these reasons, the most
common reasons for denial of an application for the individual products
included cancer, stroke, and musculoskeletal problems.

Federal Program Enrollees Were Younger Than Enrollees in Individual Products and
Older Than Enrollees in Group Products, and More Women Than Men Obtained
Coverage for All Products

The average age of federal enrollees was 56 years at the time of
enrollment, compared with an average age of 60 for enrollees in individual
products and 52 for enrollees in group products, as shown in table 4. The
average age was 54 for enrollees in CalPERS. In the individual market,
carriers typically target older adults who are planning for retirement or
who have already retired. The carriers are able to market to them through
direct contact from commission-based agents. In the group market, carriers
typically target active employees, who are younger than enrollees
typically marketed to in the individual market. The carriers market to the
active employees through the employer via mailings and on-site enrollment
meetings, but may not be able to obtain contact information for retirees.
Unlike much of the group market, the federal program does have access to
retiree contact information and is able to market to retirees through
mailings to their home addresses.

More women than men enrolled in the Federal Long Term Care Insurance
Program, individual products, and group products. (See table 4.) While
more women than men enrolled in the federal program overall, slightly more
men than women enrolled among eligible active federal employees, active
military members, and active Postal Service employees. However, women in
these groups enrolled in the federal program at a higher rate than their
representation in the eligible population. Enrollees in the federal
program from these groups were 51 percent male and 49 percent female,
while the eligible population of all active federal employees, active
military members, and active Postal Service employees was 67 percent male
and 33 percent female.36

Table 4: Enrollee Characteristics of the Federal Long Term Care Insurance
Program and of Individual and Group Products, July 1, 2002, through March
31, 2005

Characteristic Federal programa Individual products Group products 
Average age            56 years            60 years       52 years 
Sex                                                 
Female                      54%                 58%            56% 
Male                        46%                 42%            44% 

Source: GAO analysis of data provided by Partners, five carriers selling
individual products, CalPERS, and two carriers selling group products.

aThe federal program includes 218,890 enrollees from March 25, 2002,
through March 31, 2005.

 Early Claims Experience in Federal Long Term Care Insurance Program Was Lower
 Than Expected, but It Is Too Soon to Determine Whether Adjustments Are Needed

The early claims experience of the Federal Long Term Care Insurance
Program was below the expectations established by Partners. During its
first 3 years, the federal program paid 39 percent of what it initially
expected to pay for claims per enrollee; the number of claims paid per
enrollee also was lower than initial expectations. It is still too early
to determine whether this trend will continue or whether adjustments to
the expected claims experience or premiums are needed. About half of the
total amount of claim payments was spent on facility care. The most common
medical conditions prompting claims in the early years of the federal
program were cancer, stroke, and injuries and poisoning. Across the
individual and group products we reviewed, the most common medical
conditions that prompted claims were also cancer, stroke and injuries, as
well as cognitive problems, musculoskeletal disorders, cardiac disease,
and arthritis.

The cumulative claims experience in the first 3 years of the Federal Long
Term Care Insurance Program was considerably lower than the expectations
established by Partners. The program paid 39 percent of the claims
expenditures expected per enrollee for long-term care services and paid 33
percent of the expected number of claims per enrollee, as shown in table
5.37 While the overall claims experience for the first 3 years was lower
than expected, the number of claims paid as a percentage of expected
claims in each consecutive year of operation was higher than the previous
year. In the first year of operation, the amount paid for claims per
enrollee was 40 percent of expected payments and the number of claims per
enrollee was 4 percent of expected claims. By the third year of operation,
the amount paid for claims per enrollee had remained level at 40 percent
of expected payments, while the number of claims per enrollee had
increased to 48 percent of expected claims.

36Eligible population data were collected as of September 30, 2002, the
most recent date for which all data were available.

Table 5: Actual Claims per Enrollee as a Percentage of Expected Claims per
Enrollee in the First 3 Years for the Federal Long Term Care Insurance
Program

Characteristic                             Year 1 Year 2 Year 3 Cumulative 
Amount of claim payments per enrollee as a                                 
percentage of expected claims per enrollee    40%    39%    40%        39%
Number of paid claims per enrollee as a                                    
percentage of expected claims per enrollee     4%    37%    48%        33%

Source: GAO analysis of data provided by Partners.

It is still too early to determine whether the early claims experience
will continue or whether adjustments to the expected claims experience or
premiums are indicated. While having lower-than-expected claims experience
is a positive financial indicator, if the claims experience is
significantly lower than expected over the longer term, then it is
possible that the premiums are too high. On the other hand, in accordance
with NAIC premium-setting guidelines, it may be appropriate to project the
claims experience assuming moderately adverse results to protect against
the need to raise premiums. As noted earlier, it is expected that the
number of claims submitted in the first years of a long-term care
insurance program will be a small percentage of the claims submitted over
time-most claims are not expected to be submitted until 25 years or more
after the program begins. Additionally, the expected claims experience is
sensitive to factors such as the level of underwriting, the total number
of enrollees, the ages of the enrollees, and the types of enrollees-for
example, active workers, retirees, or relatives. Furthermore, the claims
experience is only one of many factors-such as interest rates, lapse
rates, and mortality rates-that affect the long-term financial outlook of
the program. The financial projections for long-term care insurance are
sensitive to changes in assumptions about all these factors. Figure 3
shows the amount of paid claims per 10,000 enrollees and figure 4 shows
the number of paid claims per 10,000 enrollees during the first 3 years of
the program compared with the expected claims experience over the first 35
years of operation.

37Partners developed estimates for the claims experience based on their
estimates for enrollment before the federal program began. We used a ratio
that compares actual with expected paid claims per enrollee to account for
lower-than-expected enrollment, but data were not available for the age or
type of enrollees.

Figure 3: Actual Claim Payments per 10,000 Enrollees in the First 3 Years
Compared with Expected Claim Payments per 10,000 Enrollees over 35 Years
for the Federal Long Term Care Insurance Program

Figure 4: Actual Number of Paid Claims per 10,000 Enrollees in the First 3
Years Compared with Expected Number of Paid Claims per 10,000 Enrollees
over 35 Years for the Federal Long Term Care Insurance Program

Facility care accounted for a considerable portion of the federal program
claim payments in the first 3 years. Of the total $3.6 million it paid for
claims in the 3-year period, the federal program spent 49 percent on
facility care, 3 percent on home care, 22 percent on informal caregivers,
and 27 percent on other care. While about half of the total claim payment
amount was spent on facility care, this type of care represented less than
a quarter of the total number of claims.

Generally, most early long-term care insurance claims are submitted for
conditions such as cognitive problems, cancer, arthritis, stroke, and
injuries. For the federal program, the most common medical conditions that
prompted claims during this relatively early period were cancer, stroke,
and injuries and poisoning. Across the individual and group products we
reviewed, the most common medical conditions that prompted claims were
also cancer, stroke and injuries, as well as cognitive problems,
musculoskeletal disorders, cardiac disease, and arthritis.

                                  Conclusions

The Federal Long Term Care Insurance Program generally compared favorably
with other products we studied during the first 3 years it offered
coverage. The federal program offered benefits comparable to other
products at competitive premium rates for similar benefits. Ultimately,
the premium any enrollee pays for a long-term care insurance product is
affected by several different factors, including the benefit options
purchased, the age of the enrollee at the time of purchase, applicable
discounts or surcharges, and the results of underwriting decisions. In
addition, the premium is affected by the underlying assumptions about what
will happen in the future regarding the number and dollar value of claims
filed, interest rates, mortality rates, and lapse rates. If the actual
claims experience, interest rates, mortality rates, or lapse rates vary
significantly from what was expected, then this could mean that the
premiums were too low or too high, and that premium or benefit adjustments
could be warranted. Because the federal program had been offering coverage
for only about 3 years at the time of our study, it was too early to draw
conclusions about the claims experience, especially in relation to the
premiums charged. Consistent with other long-term care insurance products,
the federal program expected most enrollees, who averaged 56 years old
when they enrolled, to submit long-term care insurance claims in their
mid-70s to mid-80s-the time when most claims are submitted. While the
early claims experience of the federal program was considerably lower than
initially projected before the program began, an assessment of the claims
submitted during the next several years and of other factors that affect
the financial performance of the program will begin to provide a clearer
picture of the longer-term implications.

                      Recommendations for Executive Action

We recommend that the Director of OPM take the following two actions.
First, the Director should analyze the reasons for the lower-than-expected
early claims experience and, as appropriate, use the results of this
analysis to modify assumptions about the expected claims experience.
Second, the Director should analyze the projections for the amount of
premiums to be collected to pay for claims, including an analysis of the
assumptions made for the projections that are related to future claims
experience and other factors affecting premiums. OPM should report both
analyses to Congress prior to the next contract negotiations.

                                Agency Comments

We provided a draft of this report to OPM, Partners, CalPERS, and five
long-term care insurance carriers.

In its written comments, OPM generally agreed with our findings and
provided comments on our recommendations. OPM stated that it intends to
consider this report when performing due diligence before making a
decision about a new contract for administration of the Federal Long Term
Care Insurance Program, in accordance with the Long-Term Care Security
Act. OPM also stated that the discussion of claims experience and premium
setting in this report provides all the information currently available,
precluding the need for a specific report on these issues at this time.
OPM commented that it would provide updated information on claims
experience and premium setting in its written recommendation to Congress
prior to making a decision about the next contract. We support OPM's
willingness to consider updated information on claims experience and
premium setting as it works with Congress in determining the next contract
for the Federal Long Term Care Insurance Program, and we agree that a
separate report will not be necessary. We believe that it is important
that actuarial assumptions about future claims experience and premium
setting reflect the experience of the program to date while still
anticipating moderately adverse assumptions regarding claims experience
and other factors in the future. In its comments, OPM also indicated that
the expectations about the federal program's enrollment and claims
experience were established by Partners prior to the start of the program,
rather than established by the marketplace. We revised the report to
reflect that the expectations about enrollment and claims were established
by Partners. (OPM's comments are reprinted in app. IV.)

In its written comments, Partners stated that the recommendation in the
draft report implied that claims experience is the determining factor in
the pricing of premiums, but that other sections of the report explain
that other factors in addition to claims experience affect pricing, such
as interest rates and lapse rates. We clarified the recommendation to
reflect that other factors in addition to claims experience affect the
pricing of premiums.

OPM, Partners, and one carrier provided technical comments, which we
incorporated as appropriate.

We are sending copies of this report to the Director of OPM and interested
congressional committees. We will also provide copies to others on
request. In addition, this report is available at no charge on the GAO Web
site at http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-7119 or [email protected] . Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this report
are listed in appendix V.

John E. Dicken Director, Health Care

List of Committees

The Honorable John Warner Chairman The Honorable Carl Levin Ranking
Minority Member Committee on Armed Services United States Senate

The Honorable George V. Voinovich Chairman The Honorable Daniel K. Akaka
Ranking Minority Member Subcommittee on Oversight of Government
Management, the Federal Workforce, and the District of Columbia Committee
on Homeland Security and Governmental Affairs United States Senate

The Honorable Duncan L. Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives

The Honorable Jon Christopher Porter Chairman The Honorable Danny K. Davis
Ranking Minority Member Subcommittee on the Federal Workforce and Agency
Organization Committee on Government Reform House of Representatives

Appendix I: S Appendix I: Scope and Methodology

To evaluate the competitiveness of the Federal Long Term Care Insurance
Program, we surveyed Long Term Care Partners, LLC (referred to as
Partners), the administrator of the federal program; the California Public
Employees' Retirement System (CalPERS), the second largest long-term care
insurance group in the nation after the federal program; and five of the
largest long-term care insurance carriers1 to obtain long-term care
insurance data. The five insurance carriers were AEGON USA,2 Bankers Life
and Casualty Company, Genworth Financial, John Hancock Life Insurance
Company, and Metropolitan Life Insurance Company. All five carriers sold
policies in the individual market, and two of the five carriers-John
Hancock Life Insurance Company and Metropolitan Life Insurance
Company-were also among the five largest carriers that sold products in
the group market. To supplement these data, we interviewed officials at
the Office of Personnel Management (OPM); Partners; the five carriers;
CalPERS and the organization that administers its program; and five trade
associations, including one representing actuaries. We also interviewed
three experts on long-term care insurance. In addition, we reviewed
studies and literature addressing long-term care insurance. We conducted
our work from March 2005 through February 2006 in accordance with
generally accepted government auditing standards.

                                  Data Request

We developed a data-collection instrument to obtain uniform long-term care
insurance data from Partners, CalPERS, and the five carriers. In
developing the instrument, we attempted to collect as much data as
possible while also considering the burden our request would place on the
respondents. Because of the proprietary nature of much of the data we
requested from the five carriers, we agreed to report the data so that
they could not be attributed to any specific carrier unless the carrier
agreed that we could release the data. To capture the full experience of
the Federal Long Term Care Insurance Program, we requested data from
Partners for the period March 25, 2002-the first day of the federal early
enrollment period-through March 31, 2005. We requested data from the
carriers and CalPERS for the period July 1, 2002, through March 31, 2005.3
To document the early enrollment and open enrollment periods for the
federal program, we also requested data from Partners for the period of
March 25, 2002, through February 7, 2003-the last day the open enrollment
period applications were processed. From each source, we requested data
for the following categories: benefits, premiums, administrative costs,
enrollment and enrollee characteristics, and claims experience.

1We selected the five carriers on the basis of the total number of
policies and annualized premiums in effect in the individual market as of
December 31, 2004.

2AEGON USA left the long-term care insurance market on March 31, 2005.

Benefits

We requested data on the number of enrollees in the individual and group
markets (including the federal program and CalPERS) who chose selected
benefit options for new long-term care insurance policies sold from July
1, 2002 (March 25, 2002, for the federal program) through March 31, 2005.
We collected data on coverage types, daily benefit amounts, elimination
periods, benefit periods, inflation-protection options, Health Insurance
Portability and Accountability Act of 1996 (HIPAA) tax-qualification
status, and optional benefits offered. The respondents determined which
policies they considered to be sold during the period. While we asked the
respondents, where possible, to report data for sold policies that became
active and for which they collected premiums, two respondents reported
benefit data for the number of new applications submitted rather than for
the new policies sold during the period. Because the federal program
offered long-term care insurance coverage in four prepackaged plans, we
asked Partners to identify the most popular benefit package chosen. (Table
6 in app. II summarizes the four prepackaged plans offered in the federal
program.)

Premiums

We asked Partners to provide annual premiums for a policy sold on March
31, 2005, for enrollees in each of the four prepackaged benefit plans
offered by the federal program, with automatic compound inflation
protection. Partners provided premium data for enrollees of four different
ages-40, 50, 60, and 70 years old-for the four benefit packages, with
automatic compound inflation protection and with a future purchase option
for inflation protection. Because the federal program provided no
discounts for spouses, we doubled the premiums that single people paid to
determine how much a married couple of the same age would pay annually for
a long-term care insurance policy through the federal program.

3We asked the carriers and CalPERS to provide data for the period
beginning July 1, 2002, which is the beginning of the federal open
enrollment period, rather than March 25, 2002, the beginning of the
federal early enrollment period. Because few federal program
enrollees-about 4 percent of the program's total enrollment as of March
31, 2005-had coverage that became effective during the early enrollment
period, we reduced the reporting burden for the carriers by requesting
data for the period beginning July 1, 2002.

To compare premiums with those in the federal program, we asked the five
carriers selling products in the individual insurance market and CalPERS
to provide annual premium data for the four federal benefit packages or
for coverage that most closely resembled each package for people for the
four ages-40, 50, 60, and 70 years old-for policies sold on March 31,
2005. Two of the five carriers selling individual products did not sell
facilities-only coverage on March 31, 2005, so we did not include the
premiums for facilities-only coverage in our analyses. Therefore, we
compared premiums for the three comprehensive benefit packages in the
federal program. Because carriers selling products in the individual
market usually place people in rating categories according to their health
and other criteria, we asked them to provide annual premiums for a single
person underwritten into the standard rating category, which is the
category most often used. Furthermore, as these carriers usually offer
discounts for married couples, we asked them to provide annual premiums
for a married couple of the same age underwritten into the standard rating
category. The premiums the carriers reported reflected their discounts for
couples, which in each case was either 30 percent or 40 percent. We also
asked respondents to identify the coverage types, daily benefit amounts,
elimination periods, benefit periods, and inflation protection for the
packages if these benefits differed from those of the federal benefit
packages. These are the benefit options that most affect premiums. We did
not ask them to identify other benefits automatically included in the
coverage or to identify the percentage of the daily benefit amount that
the package covered for benefits such as formal home care or informal home
care, if included. Other than for CalPERS-which, like the federal program,
did not use rating categories or provide discounts for spouses-we did not
request any premium data for other group products because of the variation
that exists across the groups insured by each carrier.

To compare the amount of premium spent on claims and the costs associated
with administering long-term care insurance in the federal program with
that of other products, we collected information on anticipated lifetime
loss ratios. The anticipated lifetime loss ratio represents the present
value of the total expected claim payments compared with the present value
of the total expected premiums over the life of a set of policies. This
ratio describes what portion of the premium dollar is expected to pay for
claims over a long period, with the balance going to administrative costs
and profits. We collected these data for new policies sold from July 1,
2002 (March 25, 2002, for the federal program) through March 31, 2005. Two
respondents did not provide data on loss ratios.

Enrollment and Enrollee Characteristics

We asked for enrollment information from Partners, CalPERS, and the five
carriers for new policies sold from July 1, 2002 (March 25, 2002, for the
federal program) through March 31, 2005, including the number of new
applications submitted and approved. We obtained data on selected enrollee
characteristics, including age at time of enrollment and sex.

Claims Experience

We collected claims-related data from our study participants. For example,
we obtained the primary medical conditions that prompted the claims from
Partners, CalPERS, and the five carriers. However, because of differences
in enrollee characteristics and benefit choices across the carriers that
would affect the claims experience, we focused primarily on the early
claims experience of the federal program. We collected data on the number
of paid claims and the amount of claim payments during the 3-year study
period from Partners. We also compared the anticipated claims experience
for the federal program as projected prior to initial enrollment with the
actual number of claims submitted and the actual amount of claim payments
during the 3-year period.

                      Long-term Care Insurance Interviews

To learn about long-term care insurance and to discuss the type of data we
wanted to obtain through our data request, we interviewed officials at OPM
and Partners, a CalPERS official and an official from the organization
that administers the program, and officials at five carriers that sold
products in the individual market-two of these carriers were also among
the five largest carriers that sold products in the group market. We also
conducted follow-up interviews to clarify the data provided in response to
our data request, to verify reliability of the data received, and to
obtain additional information.

We interviewed officials at several groups and associations as well as
long-term care insurance experts. To obtain broader-based information
about long-term care insurance, we interviewed the Director of Long-Term
Care at America's Health Insurance Plans and the Senior Director of
Long-Term Care Insurance at the American Council of Life Insurers. We
interviewed actuaries and health policy staff from the American Academy of
Actuaries. To learn more about state regulation of long-term care
insurance products we contacted officials at the National Association of
Insurance Commissioners. We interviewed officials at AARP to learn about
long-term care insurance and the products offered through that
association. We also interviewed three experts on long-term care
insurance.

We also reviewed studies on long-term care insurance, including a
longitudinal study on buyers and nonbuyers of long-term care insurance.4
In addition, we reviewed a literature review5 and six policy briefs
commissioned by the Department of Health and Human Services, Office of the
Assistant Secretary for Planning and Evaluation, all dated August 2004.6

4For example, we reviewed America's Health Insurance Plans, Research
Findings, Long-Term Care Insurance in 2002 (Washington, D.C.: June 2004);
Health Insurance Association of America by LifePlans, Inc., Who Buys
Long-Term Care Insurance in 2000? A Decade of Study of Buyers and
Nonbuyers (Washington, D.C.: October 2000); and Society of Actuaries, Long
Term Care Experience Committee Intercompany Study 1984 - 2001 (Schaumburg,
Ill.: November 2004).

5Department of Health and Human Services, Office of the Assistant
Secretary for Planning and Evaluation, What We Know About Buyers and
Non-Buyers of Private Long-Term Care Insurance: A Review of Studies
(Washington, D.C.: August 2004).

6The six policy briefs were (1) A Demographic and Attitudinal Profile of
Buyers of the Federal Long-Term Care Insurance Program, (2) A Demographic
and Attitudinal Profile of Non-Buyers of the Federal Long-Term Care
Insurance Program, (3) A Demographic and Attitudinal Profile of
Non-Responders to the Federal Long-Term Care Insurance Program, (4) A
Comparison of Demographic and Attitudinal Characteristics Among Active and
Retired Buyers, Non-Buyers and Non-Responders to the Federal Long-Term
Care Insurance Program, (5) Marketing Activities: A Comparative Analysis
of Engagement and Participation Among Buyers, Non-Buyers and
Non-Responders of the Federal Long-Term Care Insurance Program, and (6)
Multivariate Analysis of Buyers and Non-Buyers of the Federal Long-Term
Care Insurance Program. Each policy brief was prepared under contract
between the Department of Health and Human Services, Office of the
Assistant Secretary for Planning and Evaluation, Office of Disability,
Aging and Long-Term Care Policy and LifePlans, Inc. (Washington, D.C.:
August 2004).

AppendiInsuranc Appendix II: Federal Long Term Care Insurance Program
Benefits

The Federal Long Term Care Insurance Program offered enrollees the option
of choosing a prepackaged benefit plan or of customizing benefits. In
addition, some applicants for federal benefits who were denied regular
coverage had another option available that offered nursing-home-only
coverage, called the Alternative Insurance Plan, while all applicants
denied coverage could purchase a Service Package, which did not provide
insurance but offered services such as access to a person who coordinated
care and to a discounted network of long-term care providers. Nearly
two-thirds of all federal enrollees during the period March 25, 2002,
through March 31, 2005, chose a prepackaged benefit plan, with the
remaining enrollees during that period customizing benefits or enrolling
in the Alternative Insurance Plan.

Prepackaged Benefit Plans in the Federal Long Term Care Insurance Program

Enrollees in the Federal Long Term Care Insurance Program could choose
from four prepackaged benefit plans. In each of the plans, several benefit
options-daily benefit amount; coverage period; elimination period; and
maximum lifetime benefit, which is a combination of the daily benefit
amount and benefit period-had been preselected into the packages along
with all covered services. After selecting one of the four packages, the
enrollee only had to choose the type of inflation protection-either
automatic compound1 or the future purchase option.2 Table 6 shows the four
prepackaged plans offered in the Federal Long Term Care Insurance Program.

1Automatic compound inflation protection increased daily benefit amounts
and the remaining amount of the maximum lifetime benefit by 5 percent each
year without increasing premiums. The increase in benefits continued even
if the enrollee had begun to receive covered long-term care services.

2The future purchase option offered the opportunity to increase the daily
benefit amount and the remaining amount of the maximum lifetime benefit
every 2 years at an extra cost. When offered the option to increase
benefits, the enrollee could not be receiving covered long-term care
services. The benefit increases would be based on increases in the
Consumer Price Index for Medical Care. Once the enrollee had declined
three offers to increase benefits, the offers would not start again unless
the enrollee specifically requested one and provided evidence of good
health. The premium for the additional coverage was based on the
enrollee's age and premium at the time the increase took effect. With each
inflation offer, the enrollee could also switch to the automatic compound
inflation-protection option without proof of good health, as long as he or
she was not eligible for benefits at that time and had not declined three
offers in the past.

Table 6: Prepackaged Plans in the Federal Long Term Care Insurance Program

                  Facilities  Comprehensivea  Comprehensivea  Comprehensivea  
                  100         100             150             150+            
Benefit                                                    
options                                                    
Daily benefit  $100        $100            $150            $150            
amount (DBA)b                                              
Benefit period 3 years     3 years         5 years         Unlimited       
Elimination    90 days     90 days         90 days         90 days         
period                                                     
Maximum        $109,500    $109,500        $273,750        Unlimited       
lifetime                                                   
benefitb                                                   
Inflation      Choice of   Choice of       Choice of       Choice of       
protection     automatic   automatic       automatic       automatic       
                  compound or compound or     compound or     compound or     
                  future      future purchase future purchase future purchase 
                  purchase    option          option          option          
                  option                                      
Covered                                                    
services                                                   
Nursing home,  100% of DBA 100% of DBA     100% of DBA     100% of DBA     
assisted                                                   
living                                                     
facility, or                                               
hospice                                                    
facility                                                   
Respite care   100% of DBA 100% of DBA     100% of DBA     100% of DBA     
in a facilityc                                             
Caregiver      100% of DBA 100% of DBA     100% of DBA     100% of DBA     
trainingd                                                  
Bed            100% of DBA 100% of DBA     100% of DBA     100% of DBA     
reservationse                                              
Formal         None        75% of DBA      75% of DBA      75% of DBA      
caregiver                                                  
services at                                                
home                                                       
Informal       None        75% of DBA      75% of DBA      75% of DBA      
caregiver                                                  
services at                                                
homef                                                      
Hospice care   None        100% of DBA     100% of DBA     100% of DBA     
at home                                                    
Adult day care None        75% of DBA      75% of DBA      75% of DBA      
center                                                     

Sources: OPM and Partners.

aA comprehensive plan covers everything a facilities-only plan covers plus
formal or informal care at home, care in adult day care centers, hospice
care at home, and respite services at home.

bDoes not reflect inflation-protection increases. Also, weekly benefit
amounts are available under comprehensive options. The weekly benefit
amount is equal to 7 times the DBA.

cBenefits limited to 30 times the DBA per calendar year. Comprehensive
options provide respite care at up to 75 percent of the DBA at home or at
an adult day care center in addition to services in a facility.

dBenefits limited to 7 times the DBA in a lifetime.

eThis benefit pays a nursing home, assisted living facility, or hospice
facility to hold a bed while an enrollee is temporarily absent so that the
enrollee may return to the facility. Benefits are limited to 30 days per
calendar year.

fBenefits for informal caregiver services are limited to those provided by
people who did not normally live in enrollee's home at the time enrollee
became eligible for benefits. Benefits for care provided by family members
are limited to 365 days in a lifetime.

The federal program included care-coordination benefits and coverage for
international benefits and had no war exclusion. Federal program care
coordinators provide, among other services, general information about
long-term care services; assess and approve need for care; develop a care
plan; and monitor and reassess services. Using these services did not
reduce an enrollee's maximum lifetime benefits. Care-coordination services
were also available to qualified relatives,3 who did not need to be
enrolled in the program, although some services could be provided at an
additional charge. Coverage for benefits received outside the United
States was available at 80 percent of the maximum amounts that would
otherwise be payable, with certain restrictions. Although the federal
program did not have a war exclusion, it included a catastrophic-coverage
limitation; that is, a catastrophic event could limit the benefit period.

The federal program did not include several benefits and services that
could be available in other products. For example, the federal program did
not offer limited pay policies, in which the long-term care insurance
policy could be paid up over a limited period of time; restoration of
benefit options, in which any of the policy's maximum benefits that has
been used could be replaced if the enrollee did not receive benefits for a
specified period of time; or any discounts for both spouses of a married
couple purchasing coverage, all of which were options available in
individual products.

                   Customized Benefits in the Federal Program

Federal program enrollees had several options for customizing benefits
instead of choosing a prepackaged benefit plan. Within certain parameters,
federal enrollees could design their own plans by mixing and matching
benefit options. In total, the federal program provided for 528 design
variations. In addition to the benefit options selected, covered services
listed in table 6 were automatically included. Table 7 shows the type and
number of benefit options available to enrollees.

3Qualified relatives include current spouses of employees and retirees;
adult children at least 18 years old-including natural, adopted, and
stepchildren, but not foster children-of living employees and retirees;
and parents, parents-in-law, and stepparents of living employees but not
of retirees.

Table 7: Benefit Options in the Federal Long Term Care Insurance Program

Benefit description                                      Number of options 
Coverage type-facilities-only or comprehensivea                          2 
Daily benefit amountsb-from $50 to $300, in $25                            
increments                                                              11
Elimination periods-30 days or 90 days                                   2 
Benefit periods-3 years, 5 years, or unlimited                           3 
Inflation protection-automatic compound inflation or                       
future purchase option                                                   2

Source: OPM and Partners.

aA comprehensive plan covers everything a facilities-only plan covers plus
formal or informal care at home, hospice care at home, respite services at
home, and care in adult day care centers.

bThe federal program also offers weekly benefit amounts with a
comprehensive plan for an additional cost.

                     Other Benefits in the Federal Program

Applicants denied regular coverage in the Federal Long Term Care Insurance
Program had other benefit options. Some federal employees, members of the
uniformed services, and their spouses who could apply for the federal
program using an abbreviated application, but who were denied regular
coverage, were offered coverage in the Alternative Insurance Plan. This
plan covered nursing homes only, had a 180-day elimination period,
provided coverage for 2 years, and started with a weekly benefit amount of
$200. In addition, all applicants for the federal program who were denied
coverage could purchase a Service Package for an annual fee. This
noninsurance option provided access to care-coordination services and
discounts.

                     Enrollment in Federal Program Benefits

Nearly two-thirds of the 218,890 people who enrolled in the federal
program from March 25, 2002, through March 31, 2005, chose one of the four
prepackaged benefits. As shown in table 8, 35 percent of the enrollees
customized their benefits within the ranges offered by the federal
program, and less than 1 percent enrolled in the Alternative Insurance
Plan.

Table 8: Federal Long Term Care Insurance Program Enrollment in
Prepackaged Benefit Plans, Customized Benefits, and Alternative Insurance
Plan from March 25, 2002, through March 31, 2005

                                                         Number Percentage 
Prepackaged benefit plans                            141,195         65 
With automatic compound inflation protection          93,870         43 
With future purchase option for inflation protection  47,325         22 
Customized benefits                                   77,164         35 
With automatic compound inflation protection          55,015         25 
With future purchase option for inflation protection  22,149         10 
Alternative Insurance Plana                              531         <1 
Total                                                218,890        100 

Source: OPM and Partners.

Note: Individual entries may not add to 100 percent because of rounding.

aFor the Alternative Insurance Plan, if coverage remains in effect for 24
months, 48 months, or 72 months, and enrollee does not become eligible for
benefits, weekly benefit amount increases to $300, $400, or $500,
respectively, without an increase in the premium.

Overall, 141,195 people enrolled in one of the four prepackaged benefit
plans. Of the enrollees who chose a prepackaged benefit plan, 12 percent
enrolled in the facilities-only package. The remainder, 88 percent,
enrolled in one of the three comprehensive packages. Most of the people
who enrolled in a comprehensive package enrolled in the Comprehensive 100
package. About two-thirds of all the enrollees choosing a prepackaged
benefit plan also chose automatic compound inflation protection. Table 9
shows federal program enrollment in the four prepackaged benefit plans.

Table 9: Federal Long Term Care Insurance Program Enrollment in
Prepackaged Benefit Plans from March 25, 2002, through March 31, 2005

                         Number who chose Number who chose                    
                       automatic compound  future purchase         
                                inflation           option   Total Percentage
Facilities 100                  10,324            6,749  17,073         12 
Comprehensive 100               41,031           18,110  59,141         42 
Comprehensive 150               25,575           12,962  38,537         27 
Comprehensive 150+              16,940            9,504  26,444         19 
Total                           93,870           47,325 141,195        100 

Source: OPM and Partners.

Appendix III: Annual Premiums for Three Benefit Packages Offered in the
Federal Program and at Five Carriers Appendix III: Annual Premiums for
Three Benefit Packages Offered in the Federal Program and at Five Carriers

Annual premiums for three comprehensive benefit packages offered in the
Federal Long Term Care Insurance Program compared favorably with premiums
at five carriers selling similar products in the individual insurance
market. Tables 10 through 12 show that federal premiums for each of the
three benefit packages were always lower than the average premium at five
carriers for single people and for married couples who were both the same
age. When considering the range of premiums available at the five carriers
selling similar individual products, federal premiums for a single person
were always lower than the premiums for individual products, while married
couples who were both the same age could find lower premiums in the
federal program in almost every case.

Table 10: Annual Premiums for Single People and Married Couples Who Were
Both the Same Age for the Federal Long Term Care Insurance Program and for
Five Carriers in the Individual Insurance Market for Package 1 Sold on
March 31, 2005

                 Federal         Average for five   Percentage Range for five 
Enrollee      program                carriersa  differenceb       carriers 
Single                                                      
person                                                      
40 years old  $520.80                $1,045.70           50     $913.68 to 
                                                                    $1,349.01 
50 years old   746.40                 1,253.02           40    1,063.14 to 
                                                                     1,580.06 
60 years old 1,118.40                 1,702.32           34    1,455.12 to 
                                                                     2,213.00 
70 years old 1,852.80                 3,143.29           41    2,723.27 to 
                                                                     3,880.77 
Married couples who were both the same age
40 years old 1,041.60                 1,382.38     25 1,152.00 to 1,888.61
50 years old 1,492.80                 1,653.03     10 1,428.00 to 2,212.08
60 years old 2,236.80                 2,248.25      1 1,920.00 to 3,098.20
70 years old 3,705.60                 4,155.52     11 3,518.00 to 5,433.07

Source: GAO analysis of data provided by Partners and five carriers
selling individual products.

Notes: Premiums shown are for the federal program's Comprehensive 100
benefit package (Package 1), the most popular federal benefit package
purchased through March 31, 2005. Package 1 included a $100 daily benefit
amount, 3-year benefit period, 90-day elimination period, and the
automatic compound inflation-protection option.

For the five carriers we reviewed, premiums were for a single person and a
married couple who were both the same age placed in the standard rating
category. The federal program did not use rating categories. Premiums for
married couples who were both the same age at the five carriers reflected
either a 30-percent or a 40-percent discount. The federal program did not
provide discounts for spouses. Therefore, we doubled the premiums charged
for single people. We assumed there was no discount for good health.

All benefits chosen by an enrollee affect the pricing of the package to
some degree. Carriers provided premiums for the major options most similar
to the federal program that had the largest effect on the premiums-daily
benefit amounts, benefit periods, elimination periods, and inflation
protection.

aOne carrier reported premiums for a 100-day elimination period rather
than for a 90-day period.

bThe percentage difference shows how much lower the annual federal program
premium is than the average annual premium at the five carriers selling
individual products.

Table 11: Annual Premiums for Single People and Married Couples Who Were
Both the Same Age for the Federal Long Term Care Insurance Program and for
Five Carriers in the Individual Insurance Market for Package 2 Sold on
March 31, 2005

                  Federal         Average for five  Percentage Range for five 
Enrollee       program                carriersa differenceb       carriers 
Single person                                               
40 years old   $950.40                $2,066.88          54   $1,855.00 to 
                                                                    $2,557.12 
50 years old  1,364.40                 2,446.50          44    2,144.61 to 
                                                                     3,000.74 
60 years old  2,044.80                 3,332.64          39    2,842.56 to 
                                                                     4,213.44 
70 years old  3,380.40                 6,178.10          45    5,352.64 to 
                                                                     7,428.87 
Married couples who were both the same age
40 years old  1,900.80                 2,735.83          31    2,225.00 to 
                                                                     3,579.97 
50 years old  2,728.80                 3,231.50          16    2,700.00 to 
                                                                     4,201.03 
60 years old  4,089.60                 4,404.34           7    3,726.00 to 
                                                                     5,898.81 
70 years old  6,760.80                 8,149.30          17    6,801.00 to 
                                                                    10,400.41 

Source: GAO analysis of data provided by Partners and five carriers
selling individual products.

Notes: Premiums shown are for the federal program's Comprehensive 150
benefit package (Package 2). Package 2 included a $150 daily benefit
amount, 5-year benefit period, 90-day elimination period, and the
automatic compound inflation-protection option.

For the five carriers we reviewed, premiums were for a single person and a
married couple who were both the same age placed in the standard rating
category. The federal program did not use rating categories. Premiums for
married couples who were both the same age at the five carriers reflected
either a 30-percent or a 40-percent discount. The federal program did not
provide discounts for spouses. Therefore, we doubled the premiums charged
for single people. We assumed there was no discount for good health.

All benefits chosen by an enrollee affect the pricing of the package to
some degree. Carriers provided premiums for the major options most similar
to the federal program that had the largest effect on the premiums-daily
benefit amounts, benefit periods, elimination periods, and inflation
protection.

aOne carrier reported premiums for a 100-day elimination period rather
than for a 90-day period.

bThe percentage difference shows how much lower the annual federal program
premium is than the average annual premium at the five carriers selling
individual products.

Table 12: Annual Premiums for Single People and Married Couples Who Were
Both the Same Age for the Federal Long Term Care Insurance Program and for
Five Carriers in the Individual Insurance Market for Package 3 Sold on
March 31, 2005

                  Federal         Average for five  Percentage Range for five 
Enrollee       program                carriersa differenceb       carriers 
Single                                                      
person                                                      
40 years old $1,310.40                $3,066.24          57   $2,755.65 to 
                                                                    $3,585.57 
50 years old  1,875.60                 3,647.26          49    3,165.00 to 
                                                                     4,186.00 
60 years old  2,779.20                 5,004.11          44    4,455.00 to 
                                                                     5,788.75 
70 years old  4,550.40                 9,093.04          50    7,740.90 to 
                                                                    10,051.12 
Married couples who were both the same age
40 years old  2,620.80                 4,051.62          35    3,546.00 to 
                                                                     5,019.80 
50 years old  3,751.20                 4,812.09          22    3,798.00 to 
                                                                     5,846.35 
60 years old  5,558.40                 6,606.20          16    5,346.00 to 
                                                                     8,104.25 
70 years old  9,100.80                11,971.86          24   10,837.26 to 
                                                                    14,071.56 

Source: GAO analysis of data provided by Partners and five carriers
selling individual products.

Notes: Premiums shown are for the federal program's Comprehensive 150+
benefit package (Package 3). Package 3 included a $150 daily benefit
amount, unlimited benefit period, 90-day elimination period, and the
automatic compound inflation-protection option.

For the five carriers we reviewed, premiums were for a single person and a
married couple who were both the same age placed in the standard rating
category. The federal program did not use rating categories. Premiums for
married couples who were both the same age at the five carriers reflected
either a 30-percent or a 40-percent discount. The federal program did not
provide discounts for spouses. Therefore, we doubled the premiums charged
for single people. We assumed there was no discount for good health.

All benefits chosen by an enrollee affect the pricing of the package to
some degree. Carriers provided premiums for the major options most similar
to the federal program that had the largest effect on the premiums-daily
benefit amounts, benefit periods, elimination periods, and inflation
protection.

aOne carrier reported premiums for a 100-day elimination period rather
than for a 90-day period.

bThe percentage difference shows how much lower the annual federal program
premium is than the average annual premium at the five carriers selling
individual products.

Appendix IV: Comments from the Office of Personnel Management Appendix IV:
Comments from the Office of Personnel Management

Appendix V: St Appendix V: GAO Contact and Staff Acknowledgments

                                  GAO Contact

John E. Dicken, (202) 512-7119 or [email protected]

                                Acknowledgments

In addition to the contact named above, Christine Brudevold, Assistant
Director; Laura Sutton Elsberg; Elizabeth T. Morrison; Michelle Murray;
and Joseph Petko made key contributions to this report.

(290447)

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www.gao.gov/cgi-bin/getrpt? GAO-06-401 .

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Highlights of GAO-06-401 , a report to congressional committees

March 2006

LONG-TERM CARE INSURANCE

Federal Program Compared Favorably with Other Products, and Analysis of
Claims Trend Could Inform Future Decisions

The Long-Term Care Security Act required the federal government to offer
long-term care insurance to its employees, their families, and others. The
act also required GAO to conduct a study of the competitiveness of the
Federal Long Term Care Insurance Program, which began in 2002, compared
with individual and group products generally available in the private
market. GAO compared the federal program's benefits, premiums, enrollment
rates, and enrollee characteristics with other products over a 3-year
period. GAO also compared the federal program's early claims experience
with initial expectations.

What GAO Recommends

GAO recommends that the Director of the Office of Personnel Management
(OPM) (1) analyze the reasons for lower-than-expected early claims
experience and, as appropriate, use the results to modify assumptions
about the expected claims experience and (2) analyze the projections for
the amount of premiums to be collected to pay for claims. OPM should
report both analyses to Congress prior to the next contract negotiations
for the administration of the federal program.

In commenting on a draft of this report, OPM generally agreed with the
report's findings and said it would provide updated information on claims
experience and premium setting to Congress.

During its first 3 years, the Federal Long Term Care Insurance Program
offered benefits similar to those of other long-term care insurance
products GAO reviewed. Most enrollees in the federal program and in
individual and group products chose similar benefit amounts, elimination
or waiting periods, and benefit periods. The federal program usually
offered lower premiums than individual products for comparable benefits.
Overall, annual premiums for the federal program averaged across three
benefit plan designs were 46 percent lower for single people and 19
percent lower for married couples who were both the same age in comparison
with similar individual products sold on March 31, 2005.

The participation rate in the Federal Long Term Care Insurance Program for
active federal civilian employees-5 percent-was comparable to the industry
average in the group market, although enrollment in the federal program
was lower than initially expected. The average age of all enrollees in the
federal program was younger than the average age of enrollees in
individual products and older than the average age of enrollees in group
products.

The Federal Long Term Care Insurance Program paid 39 percent of what it
initially projected to pay for claims per enrollee. The number of claims
paid per enrollee was also lower than initial projections. While the early
claims experience was below expectations, it is still too early to
determine whether this trend will continue or whether adjustments to the
projected claims experience or premiums are indicated, because most claims
are not expected to be submitted for many years.

Federal Long Term Care Insurance Program Actual Claim Payments in the
First 3 Years Compared with Expected Claim Payments over 35 Years
*** End of document. ***