Long-Term Care Insurance: State Oversight of Rate Setting and	 
Claims Settlement Practices (24-JUL-08, GAO-08-1016T).		 
                                                                 
As the baby boom generation ages, the demand for long-term care  
services is likely to grow and could strain state and federal	 
resources. The increased use of long-term care insurance (LTCI)  
may be a way of reducing the share of long-term care paid by	 
state and federal governments. Oversight of LTCI is primarily the
responsibility of states, but over the past 12 years, there have 
been federal efforts to increase the use of LTCI while also	 
ensuring that consumers purchasing LTCI are adequately protected.
Despite this oversight, concerns have been raised about both	 
premium increases and denials of claims that may leave consumers 
without LTCI coverage when they begin needing care. This	 
statement focuses on oversight of the LTCI industry's (1) rate	 
setting practices and (2) claims settlement practices. This	 
statement is based on findings from GAO's June 2008 report	 
entitled Long-Term Care Insurance: Oversight of Rate Setting and 
Claims Settlement Practices (GAO-08-712). For that report, GAO	 
reviewed information from the National Association of Insurance  
Commissioners (NAIC) on all states' rate setting standards. GAO  
also completed 10 state case studies on oversight of rate setting
and claims settlement practices, which included structured	 
reviews of state laws and regulations, interviews with state	 
regulators, and reviews of state complaint information. GAO also 
reviewed national data on rate increases implemented by 	 
companies.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-1016T					        
    ACCNO:   A83045						        
  TITLE:     Long-Term Care Insurance: State Oversight of Rate Setting
and Claims Settlement Practices 				 
     DATE:   07/24/2008 
  SUBJECT:   Baby boomers					 
	     Best practices					 
	     Claims processing					 
	     Claims settlement					 
	     Consumer education 				 
	     Consumer protection				 
	     Elderly persons					 
	     Federal regulations				 
	     Federal/state relations				 
	     Insurance						 
	     Insurance claims					 
	     Insurance cost control				 
	     Insurance premiums 				 
	     Long-term care					 
	     Long-term care insurance				 
	     Policy evaluation					 
	     Prices and pricing 				 
	     Program evaluation 				 
	     Rates						 
	     Risk management					 
	     Standards						 
	     Standards evaluation				 
	     State governments					 
	     Strategic planning 				 
	     Policies and procedures				 

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GAO-08-1016T

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Testimony: 

Before the Subcommittee on Oversight and Investigations, Committee on 
Energy and Commerce, House of Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Thursday, July 24, 2008: 

Long-Term Care Insurance: 

State Oversight of Rate Setting and Claims Settlement Practices: 

Statement of John E. Dicken:
Director, Health Care: 

GAO-08-1016T: 

GAO Highlights: 

Highlights of GAO-08-1016T, a testimony before the Subcommittee on 
Oversight and Investigations, Committee on Energy and Commerce, House 
of Representatives. 

Why GAO Did This Study: 

As the baby boom generation ages, the demand for long-term care 
services is likely to grow and could strain state and federal 
resources. The increased use of long-term care insurance (LTCI) may be 
a way of reducing the share of long-term care paid by state and federal 
governments. Oversight of LTCI is primarily the responsibility of 
states, but over the past 12 years, there have been federal efforts to 
increase the use of LTCI while also ensuring that consumers purchasing 
LTCI are adequately protected. Despite this oversight, concerns have 
been raised about both premium increases and denials of claims that may 
leave consumers without LTCI coverage when they begin needing care. 

This statement focuses on oversight of the LTCI industryï¿½s (1) rate 
setting practices and (2) claims settlement practices. This statement 
is based on findings from GAOï¿½s June 2008 report entitled Long-Term 
Care Insurance: Oversight of Rate Setting and Claims Settlement 
Practices (GAO-08-712). For that report, GAO reviewed information from 
the National Association of Insurance Commissioners (NAIC) on all 
statesï¿½ rate setting standards. GAO also completed 10 state case 
studies on oversight of rate setting and claims settlement practices, 
which included structured reviews of state laws and regulations, 
interviews with state regulators, and reviews of state complaint 
information. GAO also reviewed national data on rate increases 
implemented by companies. 

What GAO Found: 

Many states have made efforts to improve oversight of rate setting, 
though some consumers remain more likely to experience rate increases 
than others. NAIC estimates that since 2000 more than half of states 
nationwide have adopted new rate setting standards. States that adopted 
new standards generally moved from a single standard that was intended 
to prevent premium rates from being set too high to more comprehensive 
standards intended to enhance rate stability and provide other 
protections for consumers. Although a growing number of consumers will 
be protected by the more comprehensive standards going forward, as of 
2006 many consumers had policies not protected by these standards. 
Regulators in most of the 10 states GAO reviewed said that they think 
the more comprehensive standards will be effective, but that more time 
is needed to know how well the standards will work. State regulators in 
GAOï¿½s review also use other standards or practices to oversee rate 
setting, several of which are intended to keep premium rates more 
stable. Despite state oversight efforts, some consumers remain more 
likely to experience rate increases than others. Specifically, 
consumers may face more risk of a rate increase depending on when they 
purchased their policy, from which company their policy was purchased, 
and which state is reviewing a proposed rate increase on their policy. 

Regulators in the 10 states GAO reviewed oversee claims settlement 
practices by monitoring consumer complaints and conducting examinations 
in an effort to ensure that companies are complying with standards. 
Claims settlement standards in these states largely focus on timely 
investigation and payment of claims and prompt communication with 
consumers, but the standards adopted and how states define timeliness 
vary notably across the states. Regulators told GAO that reviewing 
consumer complaints is one of the primary methods for monitoring 
companiesï¿½ compliance with state standards. In addition to monitoring 
complaints, these regulators also said that they use examinations of 
company practices to identify any violations in standards that may 
require further action. Finally, state regulators in 6 of the 10 states 
in GAOï¿½s review reported that their states are considering additional 
protections related to claims settlement. For example, regulators in 
several states said that their states were considering an independent 
review process for consumers appealing claims denials. Such an addition 
may be useful as some regulators said that they lack authority to 
resolve complaints where, for example, the company and consumer 
disagree on a factual matter, such as a consumerï¿½s eligibility for 
benefits. 

In commenting on a draft of GAOï¿½s report issued on June 30, 2008, NAIC 
compiled comments from its member states. Member states said that the 
report was accurate but seemed to critique certain aspects of state 
regulation, including differences among states, and make an argument 
for certain reforms. The draft reported differences in statesï¿½ 
oversight without making any conclusions or recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1016T. For more 
information, contact John Dicken at (202) 512-7114 or [email protected]. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you examine oversight of long-term 
care insurance (LTCI). About $193 billion was spent nationwide on long- 
term care services in 2004. Most of this care was financed by 
government programs, primarily Medicaid, and a small share of these 
costs--less than 10 percent--was paid by private insurance. Elderly 
people--those aged 65 or older--consume about two-thirds of all long- 
term care services used in the United States. As the number of elderly 
Americans continues to grow, particularly with the aging of the baby 
boom generation, the increasing demand for long-term care services will 
likely strain state and federal resources. Some policymakers have 
suggested that increased use of LTCI may be a means of reducing the 
future share of long-term care services financed by public programs. 

Oversight of the LTCI industry is primarily the responsibility of 
states,[Footnote 1] though federal efforts over the past 12 years have 
aimed to increase the use of LTCI and ensure that consumers who 
purchase policies are adequately protected. Members of Congress, state 
regulators, and other interested parties have raised concerns that 
despite existing state and federal consumer protection standards, 
increases in LTCI premiums or denials of benefit claims may leave some 
consumers without LTCI coverage as they begin needing long-term care, 
which could have fiscal implications for Medicaid. My remarks today are 
based on our June 2008 report on the oversight of rate setting and 
claims settlement practices in the long-term care insurance industry, 
Long-Term Care Insurance: Oversight of Rate Setting and Claims 
Settlement Practices.[Footnote 2] In that report, we examined (1) 
oversight of rate setting practices in the LTCI industry and (2) 
oversight of claims settlement practices in the LTCI industry.[Footnote 
3] 

To conduct the work for our June 2008 report, we reviewed information 
provided by the National Association of Insurance Commissioners (NAIC) 
and interviewed NAIC officials. We also completed case studies for a 
judgmental sample of 10 states--which we refer to as the states in our 
review.[Footnote 4] Our case studies included a structured review of 
state laws and regulations, interviews with regulators from the 
selected states' insurance departments, and a review of information on 
LTCI consumer complaints from the 6 states that were able to provide 
this information. In addition, we were able to determine rate setting 
standards in place in all 50 states and the District of Columbia by 
supplementing information from our case studies with information 
provided by NAIC and our own review of relevant state laws and 
regulations. We also reviewed national data collected from companies 
and published by the California Department of Insurance on rate 
increases proposed and approved in any state from 1990 through 2006. To 
identify federal requirements that affect oversight of rate setting and 
claims settlement practices, we reviewed federal laws, regulations, and 
guidance, and interviewed officials from the Internal Revenue Service 
(IRS), the Centers for Medicare & Medicaid Services (CMS), and the 
Office of Personnel Management (OPM). Finally, we interviewed officials 
from a judgemental sample of six companies selling LTCI--that together 
represented 40 percent of the market in 2006--regarding oversight of 
rate setting practices and reviewed company documents describing claims 
settlement practices. We performed our work in accordance with 
generally accepted government auditing standards from September 2007 
through June 2008. A detailed explanation of our scope and methodology 
is included in the report. 

In summary, we found that many states have made efforts to improve 
oversight of rate setting practices in the LTCI industry, though some 
consumers remain more likely to experience rate increases than others. 
NAIC estimates that by 2006 more than half of all states had adopted 
new rate setting standards that were based on amendments to its LTCI 
model regulation in 2000. States that adopted new standards generally 
moved from a single standard that was intended to prevent rates from 
being set too high to more comprehensive standards intended to enhance 
rate stability and provide other protections for consumers. Although a 
growing number of consumers will be protected by the more comprehensive 
standards going forward, as of 2006 many consumers had policies not 
protected by these standards, either because they live in states that 
have not adopted the new standards or because they bought policies 
issued prior to implementation of these standards. While regulators in 
most of the 10 states we reviewed told us that they think the more 
comprehensive standards will be effective, they recognized that more 
time is needed to know how well the standards will work in stabilizing 
premium rates. Regulators in the states in our review also use other 
standards or practices to oversee rate setting, several of which are 
intended to help improve rate stability. Despite state oversight 
efforts, some consumers remain more likely to experience rate increases 
than others. Specifically, consumers may face more risk of a rate 
increase depending on when they purchased their policy, from which 
company their policy was purchased, and which state is reviewing a 
proposed rate increase on their policy. 

Regulators in the 10 states in our review oversee claims settlement 
practices by monitoring consumer complaints and conducting examinations 
of company practices in an effort to ensure that companies are 
complying with standards. Claims settlement standards in these states 
primarily focus on timely investigation and payment of claims, as well 
as prompt communication with consumers about claims. However, the 
standards adopted and how states define timeliness vary notably across 
the states. This variation may leave consumers in some states less 
protected than others. Regulators from all 10 states told us that 
reviewing consumer complaints is one of the primary methods for 
monitoring companies' compliance with state standards. In addition to 
monitoring complaints, regulators from all of the states we reviewed 
said that they use market conduct examinations to determine whether 
companies are complying with claims settlement standards. These 
examinations can result in enforcement actions if the regulators 
identify violations of the standards. State regulators in 6 of the 10 
states in our review reported that their states are considering 
additional protections related to claims settlement. For example, 
regulators in several states said that their states were considering an 
independent review process for consumers appealing claims denials. Such 
an addition may be useful as some regulators said that they lack 
authority to resolve complaints where, for example, the company and 
consumer disagree on a factual matter, such as a consumer's eligibility 
for benefits. 

In commenting on a draft of GAO's report issued on June 30, 2008, NAIC 
compiled comments from its member states. Member states said that the 
report was accurate but seemed to critique certain aspects of state 
regulation, including differences among states, and make an argument 
for certain reforms. The draft reported differences in states' 
oversight without making any conclusions or recommendations. 

Background: 

LTCI helps pay for the costs associated with long-term care services, 
which can be expensive. However, the number of LTCI policies sold has 
been relatively small--about 9 million as of the end of 2002, the most 
recent year of data available. To receive benefits under an LTCI 
policy, the consumer must not only obtain the covered services, but 
must also meet what are commonly referred to as benefit triggers. Most 
policies provide benefits under two circumstances (1) the consumer 
cannot perform a certain number of activities of daily living (ADL)-- 
such as bathing, dressing, and eating--without assistance, or (2) the 
consumer requires supervision because of a cognitive impairment. In 
addition, benefit payments do not begin until the policyholder has met 
the benefit triggers for the length of their elimination period. 
Elimination periods establish the amount of time a policyholder must 
receive services before his or her insurance will begin making 
payments, for example, 30 or 90 days. Determining whether a consumer 
has met the benefit triggers can be complex and companies' processes 
for doing so vary. In the event that a consumer's claim for benefits is 
denied, the consumer generally can appeal to the insurance company. If 
the company upholds the denial, the consumer can file a complaint with 
the state insurance department or can seek adjudication through the 
courts. 

Many factors affect LTCI premium rates, including the benefits covered 
and the age and health status of the applicant. For example, companies 
typically charge higher premiums for comprehensive coverage as compared 
to policies without such coverage, and consumers pay higher premiums 
the higher the daily benefit amount and the shorter the elimination 
period. Similarly, premiums typically are more expensive the older the 
policyholder is at the time of purchase. Company assumptions about 
interest rates on invested assets, mortality rates, morbidity rates, 
and lapse rates--the number of people expected to drop their policies 
over time--also affect premium rates. 

A key feature of LTCI is that premium rates are designed--though not 
guaranteed--to remain level over time. While under most states' laws 
insurance companies cannot increase premiums for a single consumer 
because of individual circumstances, such as age or health, companies 
can increase premiums for entire classes of individuals, such as all 
consumers with the same policy, if new data indicate that expected 
claims payments will exceed the class's accumulated premiums and 
expected investment returns.[Footnote 5] Setting LTCI premium rates at 
an adequate level to cover future costs has been a challenge for some 
companies. Because LTCI is a relatively new product, companies lacked 
and may continue to lack sufficient data to accurately estimate the 
revenue needed to cover costs. For example, lapse rates have proven 
lower than companies anticipated in initial pricing, which increased 
the number of people likely to submit claims. As a result, many 
policies were priced too low and subsequently premiums had to be 
increased, leading some consumers to cancel coverage. 

Oversight of the LTCI industry is largely the responsibility of states. 
Through laws and regulations, states establish standards governing LTCI 
and give state insurance departments the authority to enforce those 
standards. Many states' laws and regulations reflect standards set out 
in model laws and regulations developed by NAIC. These models are 
intended to assist states in formulating their laws and policies to 
regulate insurance, but states can choose to adopt them or not. Beyond 
implementing pertinent laws and regulations, state regulators perform a 
variety of oversight tasks that are intended to protect consumers from 
unfair practices. These activities include reviewing policy rates and 
forms to ensure that they are consistent with state laws and 
regulations; conducting market conduct examinations--where an examiner 
visits a company to evaluate practices and procedures and checks those 
practices and procedures against information in the company's files; 
and responding to consumer complaints. 

Although oversight of the LTCI industry is largely the responsibility 
of states, the federal government also plays a role in the oversight of 
LTCI. For example, the Health Insurance Portability and Accountability 
Act of 1996 (HIPAA) established federal standards that specify the 
conditions under which LTCI benefits and premiums can receive favorable 
federal income tax treatment.[Footnote 6] Under HIPAA, a tax-qualified 
policy must cover individuals certified as needing substantial 
assistance with at least two of the six ADLs for at least 90 days due 
to a loss of functional capacity, having a similar level of disability, 
or requiring substantial supervision because of a severe cognitive 
impairment. Tax-qualified policies under HIPAA must also comply with 
certain provisions of the NAIC LTCI model act and regulation in effect 
as of January 1993.[Footnote 7] The Department of the Treasury, 
specifically the Internal Revenue Service (IRS), issued regulations in 
1998 implementing some of the HIPAA standards.[Footnote 8] However, 
according to IRS officials, the agency generally relies on states to 
ensure that policies marketed as tax qualified meet HIPAA requirements. 
In 2002, 90 percent of LTCI policies sold were marketed as tax 
qualified. 

States Have Made Efforts to Improve Oversight of Rate Setting, Though 
Some Consumers Remain More Likely to Experience Rate Increases Than 
Others: 

In recent years, many states have made efforts to improve oversight of 
rate setting, though some consumers remain more likely to experience 
rate increases than others. Since 2000, NAIC estimates that more than 
half of all states have adopted new rate setting standards. States that 
adopted new standards generally moved from a single standard focused on 
ensuring that rates were not set too high to more comprehensive 
standards designed primarily to enhance rate stability and provide 
increased protections for consumers. The more comprehensive standards 
were based on changes made to NAIC's LTCI model regulation in 2000. 
While regulators in most of the 10 states we reviewed told us that they 
expect these more comprehensive standards will be successful, they 
noted that more time is needed to know how well the standards will 
work. Regulators from the states in our review also use other standards 
or practices to oversee rate setting, several of which are intended to 
keep premium rates more stable. Despite states implementing more 
comprehensive standards and using other oversight efforts intended to 
enhance rate stability, some consumers may remain more likely to 
experience rate increases than others. Specifically, consumers may face 
more risk of a rate increase depending on when they purchased their 
policy, from which company their policy was purchased, and which state 
is reviewing a proposed rate increase on their policy. 

Many States Adopted More Comprehensive Rate Setting Standards since 
2000, but It Is Too Soon to Determine the Effectiveness of the 
Standards: 

Since 2000, NAIC estimates that more than half of states nationwide 
have adopted new rate setting standards for LTCI. States that adopted 
new standards generally moved from the use of a single standard 
designed to ensure that premiums were not set too high to the use of 
more comprehensive standards designed to enhance rate stability and 
provide other protections for consumers. Prior to 2000, most states 
used a single, numerical standard when reviewing premium rates. This 
standard--called the loss ratio--was included in NAIC's LTCI model 
regulation.[Footnote 9] For all policies where initial rates were 
subject to this loss ratio standard, proposed rate increases are 
subject to the same standard. 

While the loss ratio standard was designed to ensure that premium rates 
were not set too high in relation to expected claims costs, over time 
NAIC identified two key weaknesses in the standard. First, the standard 
does not prevent premium rates from being set too low to cover the 
costs of claims over the life of the policy. Second, the standard 
provides no disincentive for companies to raise rates, and leaves room 
for companies to gain financially from premium increases. In 
identifying these two weaknesses, NAIC noted that there have been cases 
where, under the loss ratio, initial premium rates proved inadequate, 
resulting in large rate increases and significant loss of LTCI coverage 
from consumers allowing their policies to lapse. 

To address the weaknesses in the loss ratio standard as well as to 
respond to the growing number of premium increases occurring for LTCI 
policies, NAIC developed new, more comprehensive model rate setting 
standards in 2000. These more comprehensive standards were designed to 
accomplish several goals, including improving rate stability.[Footnote 
10] Among other things, the standards established more rigorous 
requirements companies must meet when setting initial LTCI rates and 
rate increases, which several state regulators told us may result in 
higher, but more stable, premium rates over the long term.[Footnote 11] 
The more comprehensive standards were also designed to inform consumers 
about the potential for rate increases and provide protections for 
consumers facing rate increases. Table 1 describes selected rate 
setting standards added to NAIC's LTCI model regulation in 2000 and the 
purpose of each standard in more detail. 

Table 1: Selected Rate Setting Standards Added to NAIC's LTCI Model 
Regulation in 2000: 

Standard: Actuarial certification for initial premium rates and rate 
increases; 
Description: When setting initial premium rates, companies are required 
to submit to state insurance departments a statement by a company 
actuary certifying that the initial rate is sufficient to cover 
anticipated costs over the life of a policy, even under "moderately 
adverse conditions," with no future rate increases anticipated. When 
notifying state insurance departments of a rate increase, companies 
must submit a similar certification. However, if it becomes clear that 
a company is consistently filing inadequate initial rates (presumably 
based on a pattern of rate increases), state insurance departments may 
prohibit or limit the company from issuing certain new policies in the 
state; 
Purpose of standard: To reduce the potential for rate increases by 
requiring a margin for error in pricing assumptions. Regulators from 
four states told us that this standard requires companies to make more 
conservative pricing assumptions, which, while increasing premium rates 
for consumers, decreases the likelihood of future rate increases. One 
company told us that with the advent of the more comprehensive 
standards, average initial premium rates went up 11 percent. 

Standard: Higher loss ratio standard for rate increases; 
Description: When notifying state insurance departments of a premium 
rate increase, companies are required to demonstrate an expected loss 
ratio of at least 58 percent for revenue associated with the original 
premium rate and 85 percent for revenue associated with the increase. 
In other words, companies are required to demonstrate that claims costs 
can be expected to equal or exceed the sum of 58 percent of the initial 
premium and 85 percent of the increase amount; 
Purpose of standard: To decrease the financial benefit of a rate 
increase.[A] Regulators from two states told us that this standard 
could act as a disincentive for companies to raise rates. 

Standard: Enhanced reporting requirements after a rate increase; 
Description: For at least 3 years after implementing a rate increase, 
companies are required to report data on premiums earned and claims 
incurred to the state insurance department. If these data show that 
actual experience does not match what companies projected in justifying 
the rate increase, state insurance departments can require companies to 
reduce this difference by, among other things, lowering premium rates; 
Purpose of standard: To increase regulatory oversight once a rate 
increase is approved. 

Standard: Disclosure of the potential for rate increases to consumers; 
Description: At the time of application, companies are required to 
include in their disclosures to consumers (1) that premium rates may 
increase in the future and (2) all rate increases implemented on the 
policy or similar policies in any state for the preceding 10 years; 
Purpose of standard: To provide consumers with adequate information 
about the potential for premium rate increases. Further, as disclosing 
rate increases to consumers could be damaging to a company from a 
marketing perspective, this particular standard may discourage 
companies from raising premium rates. 

Standard: Protections for consumers facing rate increases; 
Description: If the cumulative size of a rate increase meets a certain 
threshold that varies based on a consumer's age and if a consumer 
lapses his or her policy within 120 days of the date the increased 
premium was due, companies are required to offer the consumer the 
option to: (1) keep their original premium rate by reducing policy 
benefits or (2) stop paying premiums, but receive benefits for a 
shorter period of time than was originally covered. Also, under certain 
circumstances, the state insurance department may require companies to 
offer consumers, without underwriting, a comparable replacement policy; 
Purpose of standard: To give consumers recourse in the event that rate 
increases occur. 

Source: GAO analysis of NAIC's LTCI model regulation, NAIC guidance on 
the model regulation, and statements from state regulators. 

[A] Whereas under the old loss ratio standard 60 percent of the 
increased premium amount must be spent on claims and up to 40 percent 
of the increased amount could be allocated to company administrative 
expenses and profit, under the new standards the amount of the increase 
allocated to administrative expenses and profit drops to 15 percent. 

[End of table] 

Although a growing number of consumers will be protected by the more 
comprehensive standards going forward, as of 2006 many consumers had 
policies that were not protected by these standards. Following the 
revisions to NAIC's LTCI model in 2000, many states began to replace 
their loss ratio standard with more comprehensive rate setting 
standards based on NAIC's changes. NAIC estimates that by 2006 more 
than half of states nationwide had adopted the more comprehensive 
standards.[Footnote 12] However, many consumers have policies not 
protected by the more comprehensive standards, either because they live 
in states that have not adopted these standards or because they bought 
policies issued prior to implementation of these standards.[Footnote 
13] For example, as of December 2006, according to our analysis of NAIC 
and industry information, at least 30 percent of policies in force were 
issued in states that had not adopted the more comprehensive rate 
setting standards. Further, in states that have adopted the more 
comprehensive standards, many policies in force were likely to have 
been issued before states began adopting these standards in the early 
2000s.[Footnote 14] 

Regulators from most of the 10 states in our review said that they 
expect the rate setting standards added to NAIC's model regulation in 
2000 will improve rate stability and provide increased protections for 
consumers, though regulators also recognized that it is too soon to 
determine the effectiveness of the standards. Some regulators explained 
that it might be as much as a decade before they are able to assess the 
effectiveness of these standards. Regulators from 1 state explained 
that rate increases on LTCI policies sold in the 1980s did not begin 
until the late 1990s, when consumers began claiming benefits and 
companies were faced with the costs of paying their claims. Further, 
though the more comprehensive standards aim to enhance rate stability, 
LTCI is still a relatively young product, and initial rates continue to 
be based on assumptions that may eventually require revision. 

State regulators from the 10 states in our review use other standards-
-beyond those included in NAIC's LTCI model regulation--or practices to 
oversee rate setting, including several that are intended to enhance 
rate stability. Regulators from 3 of the states in our review told us 
that their state has standards intended to enhance the reliability of 
data used to justify rate increases, and regulators from 2 states told 
us that they have standards to limit the extent to which LTCI rates can 
increase. Beyond implementing rate setting standards, regulators from 
all 10 states in our review use their authority to review rates to 
reduce the size of rate increases or to phase in rate increases over 
multiple years.[Footnote 15] While state regulators work to reduce the 
effect of rate increases on consumers, regulators from 6 states 
explained that increases can be necessary to maintain companies' 
financial solvency. 

Some Consumers May Remain More Likely to Experience Rate Increases Than 
Others: 

Although some states are working to improve oversight of rate setting 
and to help ensure LTCI rate stability by adopting the more 
comprehensive standards and through other efforts, there are other 
reasons why some consumers may remain more likely to experience rate 
increases than others. In particular, consumers who purchased policies 
when there were more limited data available to inform pricing 
assumptions may continue to experience rate increases. Regulators from 
seven states in our review told us that rate increases are mainly 
affecting consumers with older policies. For example, regulators from 
one state told us that there are not as many rate increases proposed 
for policies issued after the mid-1990s. Regulators in five states 
explained that incorrect pricing assumptions on older policies are 
largely responsible for rate increases. 

Consumers' likelihood of experiencing a rate increase also may depend 
on the company from which they bought their policy. In our review of 
national data on rate increases by four judgmentally selected companies 
that together represented 36 percent of the LTCI market in 2006, we 
found variation in the extent to which they have implemented increases. 
For example, one company that has been selling LTCI for 30 years has 
increased rates on multiple policies since 1995, with many of the 
increases ranging from 30 to 50 percent. Another company that has been 
in the market since the mid-1980s has increased rates on multiple 
policies since 1991, with increases approved on one policy totaling 70 
percent. In contrast, officials from a third company that has been 
selling LTCI since 1975 told us that the company was implementing its 
first increase as of February 2008. The company reported that this 
increase, affecting a number of policies, will range from a more modest 
8 to 12 percent.[Footnote 16] Another company that also instituted only 
one rate increase explained that in cases where initial pricing 
assumptions were wrong, the company has been willing to accept lower 
profit margins rather than increase rates. While past rate increases do 
not necessarily increase the likelihood of future rate increases, they 
do provide consumers with information on a company's record in having 
stable premiums. 

Finally, consumers in some states may be more likely to experience rate 
increases than those in other states, which officials from two 
companies noted may raise equity concerns.[Footnote 17] Of the six 
companies we spoke with, officials from every company that has 
instituted a rate increase told us that there is variation in the 
extent to which states approve proposed rate increases.[Footnote 18] 
For example, officials from one company told us that when requesting 
rate increases they have seen some states deny a request and other 
states approve an 80 percent increase on the same rate request with the 
same data supporting it. While some consumers may face higher increases 
than others, company officials also told us that they provide options 
to all consumers facing a rate increase, such as the option to reduce 
their benefits to avoid all or part of a rate increase. 

Our review of data on state approvals of rate increases requested by 
one LTCI company operating nationwide also indicated that consumers in 
some states may be more likely to experience rate increases.[Footnote 
19] Specifically, since 1995 one company has requested over 30 
increases, each of which affected consumers in 30 or more states. While 
the majority of states approved the full amounts requested in these 
cases, there was notable variation across states in 18 of the 20 cases 
in which the request was for an increase of over 15 percent.[Footnote 
20] For example, for one policy, the company requested a 50 percent 
increase in 46 states, including the District of Columbia. Of those 46 
states, over one quarter (14 states) either did not approve the rate 
increase request (2 states) or approved less than the 50 percent 
requested (12 states), with amounts approved ranging from 15 to 45 
percent. The remaining 32 states approved the full amount requested, 
though at least 4 of these states phased in the amount by approving 
smaller rate increases over 2 years. (See fig. 1.) 

Figure 1: Outcome of One Company's Request for a Premium Rate Increase 
in 46 States from 2003 through 2006: 

[See PDF for image] 

This figure is a stacked vertical bar graph depicting the following 
data: 

One company requested a 50% increase in 46 states. 

State: CT; 
Rate increase approved in year 1: 0; 
Rate increase approved in year 2: 0; 
Total amount approved: 0. 

State: DC; 
Rate increase approved in year 1: 0; 
Rate increase approved in year 2: 0; 
Total amount approved: 0. 

State: NJ; 
Rate increase approved in year 1: 15%; 
Rate increase approved in year 2: 0; 
Total amount approved: 15%. 

State: NY; 
Rate increase approved in year 1: 15%; 
Rate increase approved in year 2: 0; 
Total amount approved: 15%. 

State: GA; 
Rate increase approved in year 1: 14%; 
Rate increase approved in year 2: 6%; 
Total amount approved: 20%. 

State: OK; 
Rate increase approved in year 1: 15%; 
Rate increase approved in year 2: 15%; 
Total amount approved: 30%. 

State: OR; 
Rate increase approved in year 1: 30%; 
Rate increase approved in year 2: 0; 
Total amount approved: 30%. 

State: DE; 
Rate increase approved in year 1: 15%; 
Rate increase approved in year 2: 20%; 
Total amount approved: 35%. 

State: ME; 
Rate increase approved in year 1: 35%; 
Rate increase approved in year 2: 0; 
Total amount approved: 35%. 

State: MD; 
Rate increase approved in year 1: 20%; 
Rate increase approved in year 2: 15%; 
Total amount approved: 35%. 

State: TX; 
Rate increase approved in year 1: 35%; 
Rate increase approved in year 2: 0; 
Total amount approved: 35%. 

State: KS; 
Rate increase approved in year 1: 20%; 
Rate increase approved in year 2: 20%; 
Total amount approved: 40%. 

State: IA; 
Rate increase approved in year 1: 40%; 
Rate increase approved in year 2: 0; 
Total amount approved: 40%. 

State: CA; 
Rate increase approved in year 1: 25%; 
Rate increase approved in year 2: 20%; 
Total amount approved: 45%. 

State: AR; 
Rate increase approved in year 1: 25%; 
Rate increase approved in year 2: 25%; 
Total amount approved: 50%. 

State: MN; 
Rate increase approved in year 1: 30%; 
Rate increase approved in year 2: 20%; 
Total amount approved: 50%. 

State: ND; 
Rate increase approved in year 1: 30%; 
Rate increase approved in year 2: 20%; 
Total amount approved: 50%. 

State: AL; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: AK; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: AZ; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: CO; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: HI; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: ID; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: IL; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: KY; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: LA; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: MA; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: MI; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50. 

State: MO; 
Rate increase approved in year 1: 50; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: NE; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: NV; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: NH; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: NM; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: NC; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: OH; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: PA; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: RI; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: SC; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: SD; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: TN; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: UT; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: VT; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: VA; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: WA; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: WV; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

State: WI; 
Rate increase approved in year 1: 50%; 
Rate increase approved in year 2: 0; 
Total amount approved: 50%. 

Source: GAO analysis of rate increase data from the California 
Department of Insurance. 

Notes: Connecticut and the District of Columbia did not approve the 
proposed rate increase. 

[End of figure] 

Data are based on company reports to the California Department of 
Insurance. In providing technical comments on a draft of our report, 
the Massachusetts Division of Insurance reported that the division 
required the company to phase in the 50 percent increase over multiple 
years with increases not exceeding 20 percent in any one year. 

Variation in state approval of rate increase requests may have 
significant implications for consumers. In the above example, if the 
initial, annual premium for the policy was, for example, $2,000, 
consumers would see their annual premium rise by $1,000 in Colorado, a 
state that approved the full increase requested; increase by only $300 
in New York, where a 15 percent increase was approved; and stay level 
in Connecticut, where the increase was not approved.[Footnote 21] 
Although state regulators in our 10-state review told us that most rate 
increases have occurred for policies subject to the loss ratio 
standard, variation in state approval of proposed rate increases may 
continue for policies protected by the more comprehensive standards. 
States may implement the standards differently, and other oversight 
efforts, such as the extent to which states work with companies, also 
affect approval of increases. 

States in Our Review Oversee Claims Settlement Practices Using Consumer 
Complaints and Examinations, and Several States Are Considering 
Additional Protections: 

The 10 states in our review have standards established by law and 
regulations for governing claims settlement practices. The majority of 
the standards, some of which apply specifically to LTCI and others that 
apply more broadly to various insurance products, are designed to 
ensure that claims settlement practices are conducted in a timely 
manner. Specifically, the standards are designed to ensure the timely 
investigation and payment of claims and prompt communication with 
consumers about claims. In addition to these timeliness standards, 
states have established other standards, such as requirements for how 
companies are to make benefit determinations. 

While the 10 states we reviewed all have standards governing claims 
settlement practices, the states vary in the specific standards they 
have adopted as well as in how they define timeliness. For example, 1 
state does not have a standard that requires companies to pay claims in 
a timely manner. For the 9 states that do have a standard, the 
definition of "timely" the states use varies notably--from 5 days to 45 
days, with 2 states not specifying a time frame. In addition, federal 
laws governing tax-qualified policies do not address the timely 
investigation and payment of claims or prompt communication with 
consumers about claims. The absence of certain standards and the 
variation in states' definitions of "timely" may leave consumers in 
some states less protected from, for example, delays in payment than 
consumers in other states. (See table 2 for key claims settlement 
standards adopted by the 10 states in our review and examples of the 
variation in standards.) 

Table 2: Claims Settlement Standards in Place in the 10 States in GAO's 
Review: 

Standards around timeliness: 
Timely communication with consumers about claims issues; 
Number of states: 10[A]; 
Included in NAIC LTCI models: [Empty]; 
Examples of variation in standard: State definitions of "timely" 
specified either 10 or 15 days, and 5 states did not define "timely". 

Standards around timeliness: 
Affirm or deny liability on a claim within a reasonable amount of time; 
Number of states: 10[A]; 
Included in NAIC LTCI models: [Empty]; 
Examples of variation in standard: State definitions of "reasonable" 
varied from 15 to 40 days, and 6 states did not define "reasonable". 

Standards around timeliness: 
Timely investigation by companies of a claim; 
Number of states: 9[A]; 
Included in NAIC LTCI models: [Empty]; 
Examples of variation in standard: State definitions of "timely" 
specified either 15 or 30 days, and 5 states did not define "timely". 

Standards around timeliness: 
Timely payment of a claim; 
Number of states: 9[A]; 
Included in NAIC LTCI models: [Empty]; 
Examples of variation in standard: State definitions of "timely" varied 
from 5 to 45 days, and 2 states did not define "timely". 

Standards around timeliness: 
Provide consumers with necessary claims forms and instructions within a 
certain number of days after receiving notification of a claim; 
Number of states: 9[A]; 
Included in NAIC LTCI models: [Empty]; 
Examples of variation in standard: State standards specified either 10 
or 15 days, and 1 state did not specify number of days. 

Standards around timeliness: 
Provide a written explanation of a claim denial within a reasonable 
period of time; 
Number of states: 8[A]; 
Included in NAIC LTCI models: [Check]; 
Examples of variation in standard: State definitions of "reasonable" 
varied from 40 to 60 days, and 2 states did not define "reasonable". 

Standards around timeliness: 
Provide a reasonable written explanation of delay when a claim remains 
unresolved a certain number of days after receiving proof of loss; 
Number of states: 8; 
Included in NAIC LTCI models: [Empty]; 
Examples of variation in standard: State standards varied in how much 
time can elapse before such notification is required from 15 to 45 
days. 

Other standards: 
Provide for a licensed or certified professional, such as a physician 
or social worker, to assess functional ability or cognitive impairment 
in making benefit determinations; 
Number of states: 10; 
Included in NAIC LTCI models: [Check]; 
Examples of variation in standard: No significant variation in standard 
among states. 

Other standards: 
Provide a description of the process for appealing claims in the policy 
language; 
Number of states: 9; 
Included in NAIC LTCI models: [Check]; 
Examples of variation in standard: No significant variation in standard 
among states. 

Source: GAO review of state laws and regulations conducted from 
September 2007 through May 2008 and verified by states. 

Note: The standards in this table are not intended to constitute a 
comprehensive list of all claims settlement standards affecting LTCI 
oversight. 

[A] This standard is an explicit requirement in some states, while in 
other states it is encompassed in the definition of unfair claims 
settlement practices. 

[End of table] 

The states in our review primarily use two ways to monitor companies' 
compliance with claims settlement standards. One way the states monitor 
compliance is by reviewing consumer complaints on a case-by-case basis 
and in the aggregate to identify trends in company practices.[Footnote 
22] When responding to complaints on a case-by-case basis, regulators 
in some states told us that they determine whether they can work with 
the consumer and the company to resolve the complaint or determine 
whether there has been a violation of claims settlement standards that 
requires further action. 

Regulators from four states also told us that they regularly review 
complaint data to identify trends in company practices over time or 
across companies, including practices that may violate claims 
settlement standards. Three of these states review these data as part 
of broader analyses of the LTCI market during which they also review, 
for example, financial data and information on companies' claims 
settlement practices. However, regulators in three states noted that a 
challenge in using complaint data to identify trends is the small 
number of LTCI consumer complaints that their state receives. For 
example, information on complaints provided by one state shows that the 
state received only 54 LTCI complaints in 2007, and only 20 were 
related to claims settlement issues. State regulators told us that they 
expect the number of complaints to increase in the future as more 
consumers begin claiming benefits. 

The second way that states monitor company compliance with claims 
settlement standards is by using market conduct examinations. These 
examinations may be regularly scheduled or, if regulators find patterns 
in consumer complaints about a company, they may initiate an 
examination, which generally includes a review of the company's files 
for evidence of violations of claims settlement standards. Some states 
also coordinate market conduct examinations with other states--efforts 
known as multistate examinations--during which all participating states 
examine the claims settlement practices of designated companies. If 
state regulators identify violations of claims settlement standards 
during market conduct examinations, they may take enforcement actions, 
such as imposing fines or suspending the company's license. As of March 
2008, 4 of the 10 states in our review reported taking enforcement 
actions against LTCI companies for violating claims settlement 
standards and 7 reported having ongoing examinations into companies' 
claims settlement practices.[Footnote 23] 

In addition to their efforts to monitor compliance with claims 
settlement standards, regulators from six of the states in our review 
reported that their state is considering or may consider adopting 
additional consumer protections related to claims settlement. The 
additional protection most frequently considered by the state 
regulators we interviewed is the inclusion of an independent review 
process, which would allow consumers appealing LTCI claims denials to 
have their issue reviewed by a third party independent from their 
insurance company without having to engage in legal action.[Footnote 
24] Also, a group of representatives from NAIC member states was formed 
in March 2008 to consider whether to recommend developing provisions to 
include an independent review process in the NAIC LTCI models. Such an 
addition may be useful, as regulators from three states told us that 
they lack the authority to resolve complaints involving a question of 
fact, for example, when the consumer and company disagree on a factual 
matter regarding a consumer's eligibility for benefits. Further, there 
is some evidence to suggest that due to errors or incomplete 
information companies frequently overturn LTCI denials during the 
appeals process. Specifically, data provided by four companies we 
contacted showed that the average percentage of denials overturned was 
20 percent in 2006, ranging from 7 percent in one company to 34 percent 
in another. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to 
answer any questions that you or other members of the committee may 
have. 

For future contacts regarding this statement, please contact John E. 
Dicken at (202) 512-7114 or at [email protected]. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this statement. Kristi Peterson, Assistant Director; 
Krister Friday; and Rachel Moskowitz made key contributions to this 
statement. 

[End of section] 

Footnotes: 

[1] Over time, the National Association of Insurance Commissioners 
(NAIC) has provided guidance to states on how to regulate LTCI, 
including adoption of a model LTCI act in 1986 and subsequently a model 
regulation. NAIC has updated these models periodically to address 
emerging issues in the industry. 

[2] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-712] 
(Washington, D.C.: June 30, 2008). 

[3] The term rate setting practices refers to how companies (1) 
establish initial premium rates and justify rate increases for a 
policy, (2) disclose information about rates to consumers, and (3) 
implement rate increases. The term claims settlement practices refers 
to how companies determine eligibility for LTCI benefits, communicate 
with consumers about the claims process and about specific claims 
submitted, pay or deny claims, and communicate with consumers about the 
process for appealing denials. 

[4] The 10 states were California, Florida, Illinois, Iowa, New York, 
North Dakota, Pennsylvania, Texas, Washington, and Wisconsin. Among 
other considerations, we selected states that would account for a 
substantial portion of active LTCI policies in 2006 (at least 40 
percent), would represent variation in the number of active policies, 
and would reflect variation in state oversight of the product. The 
findings from our case studies are not generalizable. 

[5] Stephanie Lewis, John Wilkin, and Mark Merlis, Regulation of 
Private Long-Term Care Insurance: Implementation Experience and Key 
Issues (Washington, D.C.: The Henry J. Kaiser Family Foundation, 2003). 

[6] Pub. L. No. 104-191, ï¿½ï¿½ 321-327, 110 Stat. 1936, 2054-2067. 

[7] Since 1993, NAIC has made several changes to its model act and 
regulation, including adding consumer protection standards related to 
rate setting. These additional protections are not required under 
HIPAA. 

[8] Under the law and regulations, a policy is tax qualified if it 
complies with a state law that is the same or more stringent than the 
analogous federal requirement. 

[9] Specifically, NAIC's pre-2000 model stated that insurance companies 
must demonstrate an expected loss ratio of at least 60 percent when 
setting premium rates, meaning that the companies could be expected to 
spend a minimum of 60 percent of the premium on paying claims. 

[10] Rate stability means that premium rates initially set for an LTCI 
policy would be sufficient to cover costs and would not require 
increases over the life of the policy. 

[11] For example, instead of a loss ratio requirement to demonstrate 
that a proposed premium is not too high, the standards require company 
actuaries to certify that a premium is adequate to cover anticipated 
costs over the life of a policy, even under "moderately adverse 
conditions," with no future rate increases anticipated. To fulfill this 
requirement, company actuaries must include a margin for error in their 
pricing assumptions. 

[12] This estimate is based on an NAIC review of state laws and 
regulations completed in 2006. 

[13] States generally adopted the more comprehensive standards on a 
going-forward basis, meaning that consumers with policies issued prior 
to implementation are still subject to the loss ratio standard. 

[14] However, data on the number of policies in force did not allow us 
to determine the precise number of consumers not protected by the more 
comprehensive rate settings standards. 

[15] While a phase-in provides consumers with short-term relief from a 
rate increase, over time it may not provide a net financial benefit for 
consumers in terms of total premiums paid. 

[16] Company officials told us that this increase will affect nearly a 
half million consumers. 

[17] Some company officials told us that initial LTCI premiums are 
largely the same across states and that differences in the initial 
pricing of LTCI primarily occur in states that mandate policies to 
include certain benefits. 

[18] Company officials noted that one reason for this variation may be 
that some states have more capacity to review rate increases than other 
states. 

[19] These data include at least one state, Louisiana where officials 
reported that, for at least part of the time period included in our 
review, the state required companies to file notice of rate increases, 
but did not have the authority to approve or deny the increases. 
Additionally, according to a report completed by the Lewin Group in 
2002, four other states did not require companies to file notice of 
rate increases at all. 

[20] For smaller increases (15 percent and below) almost all states 
approved the full amount requested. 

[21] Data on actual premium rates before and after the increase cited 
in figure 1 were not included in the rate increase data maintained by 
the California Department of Insurance. 

[22] Across five states that provided LTCI complaint data from 2001 
through 2007, 44 percent of consumer complaints were related to claims 
settlement issues in 2007. 

[23] Some states may not have taken enforcement actions related to 
claims settlement practices as a result of several factors discussed by 
state regulators, including regulators proactively identifying 
problematic practices and an insufficient number of consumer complaints 
to establish that a company's action in one or more cases represents a 
general business practice. 

[24] In discussing the possibility of adding an independent review 
process, regulators in one state mentioned that the unique nature of 
LTCI would make such a process complicated, noting that determinations 
of benefit eligibility are more complex than for other types of 
insurance, such as health insurance. 

[End of section] 

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