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Why long-term care premiums are rising

By: Greg Carlstrom

Richard Alter, a retired Army Audit Agency supervisor, thought he was getting a good deal seven years ago: He signed up for long-term care insurance that claimed it would hold his premiums steady while increasing benefits by 5 percent each year.

Now he’s learned that his premiums will jump by nearly 25 percent later this year — from $2,200 annually to more than $2,700.

“I feel stuck. I lose the benefits if I go to another insurance carrier,” Alter said. “But now I’m going to get a bill that’s 25 percent larger.”

Thousands of active and retired federal employees, military members and their qualified relatives find themselves in a similar situation. More than 150,000 of them chose a higher-cost option that was supposed to hold their premiums steady under the Federal Long Term Care Insurance Program; now they’re accusing the Office of Personnel Management, which announced the premium hikes last month, of a bait-and-switch.

They have some legitimate grievances. The insurance providers — then John Hancock and MetLife — used statistical models to calculate premiums for policyholders, and those models often were incorrect, according to interviews with OPM officials and insurance agents. The models made overly optimistic assumptions about how many feds would cancel their policies, thus paying premiums but not collecting benefits. And they underestimated how many would live long enough to claim long-term care benefits.

Those mistakes will cost federal employees in the form of higher premiums and, for some, tough new underwriting — a review of their medical history that could leave them ineligible for certain coverage.

Bad assumptions

Perhaps the insurers’ most basic miscalculation was the mortality rate of federal enrollees. People are living longer than the insurance companies expected — a good development, of course, but a costly one.

“That translates into … people living to the point where they need long-term care,” said Greg Kissel, an actuary at OPM who works on the long-term care program, which covers formal and informal care at home, adult day care, assisted living facility care, hospice care and nursing home care. “You’re making an assumption over what’s going to happen over decades. And some of those assumptions have changed.”

Kissel said even small changes in the mortality rate could have a “leveraging effect” on the program; an extra year of claims from a single policyholder can require tens of thousands of dollars in additional benefits.

Another miscalculation: More young feds signed up for policies than the companies expected. OPM couldn’t provide specific numbers, but there’s a similar trend nationwide.

In the 1990s, the average policyholder was about 70 years old, according to agents at John Hancock; today that average is closer to 50.

That means insurers have to invest their money for a longer time — and it’s hard to guess what will happen to interest rates decades in the future. The uncertainty means higher premiums for younger enrollees.

“[Before], you only had to worry about 15 or 20 years, and you were pretty sure what you could get on your return,” said an insurance agent at John Hancock who has worked on the federal program. “But you can’t really get instruments that lock in your rates for [35 or 40] years.”

The models also made bad assumptions about something called the “lapse rate” — the percentage of people who cancel their policies each year.

Those people are free money for the insurance program, because it never has to pay benefits on their policies. So a higher lapse rate means lower premiums.

But the lapse rate was lower than expected, according to OPM. Officials couldn’t provide an exact figure. But analysts in the private sector say the nationwide lapse rate — which, for decades, was assumed to be 3 percent to 5 percent — is actually less than 1 percent. Experts say that’s because people are living longer, and because long-term care is getting more expensive.

“People know they’re going to need the insurance,” said the John Hancock agent. These problems aren’t unique to the federal program, which John Hancock will administer for the next seven years. CalPERS, which covers state employees in California and is one of the largest public-sector insurance programs, has announced two rate increases since 2002, both of them larger than OPM’s increase.

And some of the nation’s largest insurers — Genworth Financial, John Hancock and MetLife — have all announced rate increases for their individual policies over the last three years.

“There’s nothing special about the federal program that isn’t happening elsewhere,” said an actuary at John Hancock who worked on the program.

Bad underwriting?

But several experts say the federal program had one unique problem: poor underwriting. Long-term care insurers normally conduct extensive underwriting to screen applicants, according to insurance agents. It often includes a detailed questionnaire and a telephone interview about an applicant’s medical history; some insurers also require copies of medical records.

OPM decided to waive many of those requirements to boost participation when it launched the program in 2002. Federal employees were allowed to register after “abbreviated” underwriting, which didn’t require the same level of information. “In certain situations, people were approved for the federal product that did not get approval for individual [private] plans,” said another John Hancock insurance agent who has worked on the program. The agent asked not to be named because he was not authorized to speak to the media.

Alter, the retired Army auditor, signed up during that open enrollment period. He said the requirements were minimal: no medical records, no interview, no doctor’s exam. Experts say that kind of lax underwriting could leave an insurance program with too many risky policyholders.

“Unless they had health problems, they could go to John Hancock and buy an [individual policy] that was more attractive,” said Mike Miles, a Washington-area financial planner who writes a regular column for Federal Times. “Where they weren’t eligible … they’d go to the federal program.”

OPM rejects that claim, though. Kissel said the insurers were concerned, in 2002, that open enrollment might lead to thousands of risky policies. But he said those fears turned out to be baseless.

“We have not seen any indication that there was any bad selection due to our abbreviated underwriting process,” Kissel said. “We did not have an adverse experience.”

Kissel said the insurance program was not paying out more benefits than expected, which would suggest the underwriting process eliminated the riskiest applicants; even the abbreviated process would deny coverage to feds with debilitating diseases. OPM still offers an abbreviated underwriting option, but only for newly hired federal employees and military members, or the newly married spouses of feds.

Hard choices for enrollees

Current enrollees face some hard choices about what to do with their policies. They can avoid higher premiums by reducing their benefits — or they can accept the increase, which would also give them the option of better benefits, such as higher home health care reimbursement and larger payments for family members and other unlicensed caregivers.

Enrollees who choose to reduce their benefits won’t have to undergo new underwriting. Enrollees who increase their benefits, though, may need new underwriting, according to Laura Lawrence, OPM’s long-term care insurance program manager.

Most of the nearly dozen federal employees contacted by Federal Times said they would keep their policies in spite of the increase. But many of them expressed frustration with OPM; several called the change a “bait-and-switch.” Lawrence acknowledged that OPM advertised the steady premiums as one of the perks of the program. But she said the contract always allowed for higher premiums in certain circumstances.

“I understand what they’re saying,” Lawrence said. “We didn’t ever guarantee that the premiums would never increase. But we didn’t emphasize the fact that rates could ever increase.”

And OPM says that — with the statistical problems fixed — it hopes this will be a one-time increase.

“There is no plan to change rates at any point in the future — within the next seven years or thereafter,” Kissel said. “There’s always the possibility that rates could change in the future. But we have no plans to do that.” Miles said the federal program is still generally competitive with the private sector. But he advises employees to shop around because they might be able to find better deals for individual policies.

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