fegli.net blog Archive for the ‘News’ Category

Why long-term care premiums are rising

Thursday, June 11th, 2009

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.

Time to reconsider long-term-care plan

Thursday, June 11th, 2009

By Mike Causey

Looking for the perfect gift for your spouse, kids, siblings and parents? Get yourself a good long-term-care insurance policy. And pray – for yourself and your loved ones – that you never need it.Most of us buy life insurance because we reluctantly concede that someday it will pay off.Most of us buy health insurance hoping we won’t need it but knowing that eventually we will use it. But most of us buy travel insurance, fire insurance, auto insurance, long-term disability and long-term care (LTC) insurance hoping it will never pay off.Airplane crashes typically have a bad outcome. Losing a house and your belongings to a fire is not what something you hope for. And being unable to work – and draw a paycheck – or being unable to bathe, feed or dress yourself is not something anybody looks forward to.Although the federal government is a model employer in many ways, its health insurance program doesn’t cover what LTC insurance does. Nor does Medicare. You must be nearly broke before you can go on Medicaid, and it does not pay for the kind of assisted-living coverage most people would want for themselves or a loved one.LTC is on a lot of people’s minds these days, because the program offered to active and retired civil servants (and in some cases, their parents) is about to change. Premiums did not go up during the just-expired seven-year contract. But they are going up in January for many people. The increases will range from 5 percent to 25 percent, depending on age and the options people choose.The new benefits will be outlined shortly by the Office of Personnel Management. So will premiums.Arthur Stein, a certified financial planner who specializes in investments and insurance, says most people need LTC coverage. He recommends that they get a policy from a top-rated firm and that the policy have an automatic 5 percent inflation add-on each year.Mr. Stein says that many federal and postal workers can get a better deal – that is, equal benefits with lower premiums – by going outside the government program. This is especially true if they are younger and healthy enough to pass what are often more stringent underwriting requirements in a non-group private plan.While full details of the new federal LTC offering (backed by insurer John Hancock) are yet to come, Mr. Stein summarized your options this way:* Remain in your current benefit structure subject to rate increases that may apply.* Keep your premiums at about the same as what you pay now by making changes to your current benefits.* Or take advantage of a one-time opportunity to switch to the new benefit options without underwriting.That last point is important, especially if you are not in good health or are older and likely to need LTC sooner rather than later.Some of the known changes in the new, seven-year contract include:* A new two-year benefit (individuals can now buy them for three years, five years, or lifetime coverage).* A higher daily benefit available in $50 increments, from $100 to $450 per day.* Payment for informal care to family members (who did not normally live with the insured person at the time of the claim.) In that instance, informal care could be paid for up to 500 days.Triple playBills that would make it easier for federal employees to retire, telework and return to government after retirement are on the Senate fast track, cleared by the committee that controls civil service legislation last week.One proposal would require federal agencies to open up more teleworking opportunities for employees. A little more than 100,000 of the about 1.5 million nonpostal federal workers telecommute on a regular basis.Sponsor Sen. Daniel K. Akaka, Hawaii Democrat, says having more people telecommute is critical to the government’s plan to keep key services up and running during emergencies ranging from swine flu to a terrorist attack.A second bill would change retirement computation rules so that workers under the old Civil Service Retirement System could switch to part time at the end of their careers without taking a pension hit. Most of the government’s workers are under the newer Federal Employees Retirement System. But the majority of people who are within 10 years of retirement are under the old program.Finally, the Senate Homeland Security and Governmental Affairs Committee has given the green light to a bill that would remove a major barrier preventing some retired federal workers from returning to government. At present, in many instances, retirees must take a lower salary than called for by their civil-service grade. That salary is offset by the amount of the employee’s federal annuity.The bill would give retired feds the same break as private-sector retirees who can be hired by the government and allowed to keep both their private pension and their full federal salary.

Long-term care premiums to jump up to 25%

Thursday, June 11th, 2009

As many as 155,000 civilian and military employees and retirees enrolled in the federal long-term care insurance program can expect their premiums to increase by as much as 25 percent later this year or early next year.

The increases will affect most of those who are enrolled in the program’s “automatic compound inflation protection” option. Under this option, enrollees’ benefit payments increase 5 percent annually, but premiums do not regularly increase. Under the new policy, however, a range of premium increases will go into effect, depending on the age at which an enrollee first signed up for coverage. Enrollees who first purchased coverage at age 65 or younger face a premium increase of 25 percent. Those who purchased coverage between the ages of 65 and 70 face smaller increases. Those who purchased at age 70 or older face no increase.

There will be no premium increase for 69,000 employees and retirees who enrolled in the “future purchase” option, in which benefits and premiums increase every two years. The size of the increase varies based on the enrollee’s age.
The Office of Personnel Management, which oversees the benefit, said the increase is needed to cover the program’s costs.

“The announced premium increase is necessary due to changes to certain key components underlying pricing, particularly the expected return on program investments and … the number of people expected to keep the coverage until they claim benefits,” OPM said in a statement to Federal Times.
Some are worried and disappointed by the premium increase.
“So much for OPM’s ability to keep a premium down,” said Mike Miles, a Washington-area financial planner who writes the Federal Times Money Matters column. “The idea was supposed to be that [the government’s] buying power and leverage would allow [it] to force insurance carriers to keep the premiums low and level.”

One federal employee, who enrolled in the long-term care program when it started seven years ago and asked that her name not be used, said she might leave in the face of a 25 percent increase. “The whole idea of buying in early is to keep your premiums at lower rate,” she said. “But if they raise them every seven years, what’s the advantage?” But she worries that because she’s now 56 and falls in a higher age bracket, she may not find a better deal elsewhere.
“I would have hoped OPM would have done a better job,” she said. The National Active and Retired Federal Employees Association plans to meet with OPM this week to discuss the hike. “There’s a lot of questions we have,” said assistant legislative director Dan Adcock. The hike is included as part of a new seven-year contract that OPM awarded to John Hancock Life and Health Insurance Co. to administer the long-term care benefit. OPM started the long-term care program in 2002. Until now, the benefit was managed by a partnership between John Hancock and MetLife. Under the new contract, which OPM announced May 1, MetLife will play no role. OPM would not comment on why it did not choose MetLife. MetLife issued a statement that said it thought it submitted a strong proposal when it bid on the contract.

The new contract also includes new options in benefits:

  • Higher home health care reimbursement. The program currently reimburses 75 percent of the daily benefit amount for care provided by a nurse, therapist, informal caregiver, health aide or other authorized provider at home, but the new contract will reimburse 100 percent of the daily benefit amount.
  • Higher caps on benefits that can be paid out in a single day. Enrollees can now choose daily benefit caps of $50 to $300, but the new limits will range from $100 to $450.
  • Higher caps on payments for family members, friends and other unlicensed caregivers who provide informal care. The program currently covers up to 365 days of informal care in an enrollee’s lifetime, but the new contract will provide up to 500 days of coverage.
  • A new option for a two-year benefit period. The benefit period is the length of time that the policy can be expected to pay benefits. The program already lets employees choose options of either three years, five years or a lifetime.

Enrollees will have time before rates increase to decide whether to stay with the current benefit structure at a potentially higher premium, cut their benefits to keep their premiums at current rates, or switch to the new benefit structure and its higher premiums without underwriting. The Federal Long Term Care Insurance Program is optional for federal civilian employees and retirees, military members and retirees, and qualified relatives. The insurance covers care at home, adult day care, assisted living facilities, hospices and nursing homes.