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
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-08-1016T
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to [email protected].
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 its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
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 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.
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
GAO�s 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
companies� 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 GAO�s 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.
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, �� 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]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: [email protected]:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, [email protected]:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, [email protected]:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
*** End of document. ***