This is the accessible text file for GAO report number GAO-11-630 
entitled 'Long-Term Care Insurance: Carrier Interest in the Federal 
Program, Changes to Its Actuarial Assumptions, and OPM Oversight' 
which was released on August 10, 2011. 

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 Webmaster@gao.gov. 

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. 

United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

July 2011: 

Long-Term Care Insurance: 

Carrier Interest in the Federal Program, Changes to Its Actuarial 
Assumptions, and OPM Oversight: 

GAO-11-630: 

GAO Highlights: 

Highlights of GAO-11-630, a report to congressional requesters. 

Why GAO Did This Study: 

Since 2002, the federal government has offered long-term care 
insurance to its employees, retirees, and certain others through the 
Federal Long Term Care Insurance Program (FLTCIP). Enrollees pay the 
full cost of their premiums. The Office of Personnel Management (OPM) 
oversees the program. OPM has held two competitive processes to select 
contractors to insure enrollees and administer FLTCIP, although 
interest in and competition for these contracts has been limited. In 
2009, soon after OPM’s award of FLTCIP’s second 7-year contract to 
John Hancock Life Insurance Company (John Hancock), 66 percent of 
enrollees were notified that their premiums would increase up to 25 
percent in order to compensate for how the actuarial assumptions used 
to set premiums differed from the program’s experience. 

GAO was asked to review FLTCIP. In this report, GAO describes (1) 
factors affecting carriers’ interest in FLTCIP, (2) how the actuarial 
assumptions used to set FLTCIP premiums have changed since the 
program’s inception, and (3) OPM’s oversight of actuarial assumptions 
and experience and program communications. To do so, GAO interviewed 
officials from six carriers that in 2009 insured over 60 percent of 
all long-term care insurance policyholders. GAO also interviewed 
officials from OPM and John Hancock and reviewed program 
documentation, including FLTCIP contracts. 

What GAO Found: 

A variety of factors influenced carriers’ interest in FLTCIP. Carriers’
business strategies had the most significant influence on their 
interest, though in different ways. Some carriers wanted to increase 
their market share and thus were attracted to FLTCIP. In contrast, 
some carriers wanted to grow their long-term care insurance business 
at a slower pace, which detracted from their interest in FLTCIP. At 
the time of FLTCIP’s second contract, factors relating to the 
program’s history had the second-most significant influence on carriers’
interest, and generally detracted from it as a result of FLTCIP’s need 
for a premium increase and concerns about transitioning a large, 
complex program from another carrier. A variety of other factors also 
affected carriers’ interest. For example, the large number of eligible 
individuals and the lack of a requirement to guarantee coverage to 
them positively influenced carriers’ interest, while the lack of a 
list of home addresses for the eligible population—which could have 
been used to market the program—and the relatively large portion of 
eligible individuals who were disabled detracted from carriers’ 
interest. 

Since FLTCIP’s inception in 2002, John Hancock has revised the 
program’s actuarial assumptions. When setting premiums for the second 
contract period, John Hancock updated FLTCIP’s assumptions to reflect 
an expectation that a larger portion of enrollees will voluntarily 
maintain their coverage longer and will live longer than initially 
expected. The carrier also reduced the amount of claims costs the 
program expects for enrollees of any given age. Although FLTCIP 
yielded a lower-than-expected return on investment during the first 
contract period, John Hancock did not revise this assumption when 
setting premiums for the second contract period. Instead, it revised 
the investment strategy to include considerable investments in public 
equities—such as stocks—which the carrier said have a higher expected 
rate of return. Altogether, John Hancock expects that more enrollees 
will continue their coverage, reach older ages, and submit claims than 
initially assumed. As such, the carrier increased projections for the 
total amount of future FLTCIP claims. 

As part of its assessment of carriers’ proposals to insure FLTCIP 
enrollees and administer the program, OPM evaluated the actuarial 
assumptions carriers proposed for the program to ensure that the 
assumptions were reasonable and collectively supported the proposed 
premiums. Once the program’s premiums were finalized with the award of 
the contract, OPM has monitored the program’s experience by reviewing 
regular reports comparing the experience of the program to the 
actuarial assumptions used to set premiums. OPM’s oversight has also 
included a review of all program communications for accuracy and 
clarity prior to their use. 

OPM and John Hancock provided technical comments, which have been 
incorporated as appropriate. 

View [hyperlink, http://www.gao.gov/products/GAO-11-630] or key 
components. For more information, contact John E. Dicken at (202) 512-
7114 or dickenj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

A Variety of Factors Influenced Carriers' Interest in FLTCIP, Business 
Strategy Most Significantly: 

Key Changes Have Been Made to FLTCIP Benefits, Investment Strategy, 
and Profit Payment Formula since the Second Contract Was Awarded: 

FLTCIP Offered Enrollees Options to Change Their Benefits to Limit the 
Premium Increase; Nearly Half Made No Changes: 

Changes to Actuarial Assumptions Used to Set FLTCIP Premiums Resulted 
in a Projected Increase in Future Claims: 

OPM's Oversight Includes an Evaluation of FLTCIP's Actuarial 
Assumptions and a Review of Program Communications: 

Agency and Third-Party Comments: 

Appendix I: Influence of Carriers' Business Strategies on Their 
Interest in the Federal Long Term Care Insurance Program (FLTCIP): 

Appendix II: Influence of Program History on Carriers' Interest in 
FLTCIP: 

Appendix III: Influence of Program Size and Other Characteristics on 
Carriers' Interest in FLTCIP: 

Appendix IV: Selected Features of FLTCIP Benefit Plans Offered during 
the Program's First and Second Contract Periods: 

Appendix V: Changes in the Cost of Long-Term Care Services Compared 
with FLTCIP Inflation Protection Options: 

Appendix VI: Changes to FLTCIP Performance Metrics: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Profit Structure of the Federal Long Term Care Insurance 
Program (FLTCIP) under Its First and Second Contracts: 

Table 2: Distribution of Premium Changes Experienced by Federal Long 
Term Care Insurance Program (FLTCIP) Enrollees Subject to the Premium 
Increase, by Benefit Selection: 

Table 3: Summary of Premium Changes Experienced by Federal Long Term 
Care Insurance Program (FLTCIP) Enrollees Subject to the Premium 
Increase, by Benefit Selection: 

Table 4: Federal Long Term Care Insurance Program (FLTCIP) Performance 
Metrics, by Contract: 

Figures: 

Figure 1: Percentage of Nationwide Spending on Long-Term Care 
Services, by Payment Source (2009): 

Figure 2: Benefit Selections of Federal Long Term Care Insurance 
Program (FLTCIP) Enrollees Facing the Premium Increase: 

Figure 3: Percentage Change in the Cost of Nursing Home Care, 2002 
through 2010, Compared with Automatic Compound Inflation Options 
(ACIO) Available under the Federal Long Term Care Insurance Program 
(FLTCIP): 

Abbreviations: 

ACIO: automatic compound inflation option: 

FLTCIP: Federal Long Term Care Insurance Program: 

NAIC: National Association of Insurance Commissioners: 

OPM: Office of Personnel Management: 

RFP: request for proposal: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 11, 2011: 

Congressional Requesters: 

In 2009, about $253 billion was spent nationwide on long-term care 
services, including nursing home and other assisted-living services. 
[Footnote 1] Most of this care was financed by government programs, 
primarily Medicaid,[Footnote 2] and a small share of these costs--
about 6 percent--was paid for by private insurance. Elderly people--
those aged 65 and older--account for the majority of spending on long-
term care services. As the number of elderly Americans continues to 
grow, particularly with the aging of the baby boom population, the 
growing demand for long-term care services will strain federal and 
state resources. Policymakers and experts have proposed an increased 
use of long-term care insurance as a means of reducing the future 
share of long-term care services financed by public programs. 

Since 2002, the federal government has offered long-term care 
insurance to its employees, retirees, and certain others through the 
Federal Long Term Care Insurance Program (FLTCIP), in accordance with 
the Long-Term Care Security Act.[Footnote 3] FLTCIP enrollees are 
required to pay the full cost of their premiums, unlike some other 
employee benefits--such as health insurance--offered by the federal 
government. The Office of Personnel Management (OPM), the federal 
agency that administers governmentwide compensation and benefit 
programs, oversees FLTCIP and contracts with private companies to 
insure FLTCIP enrollees and administer the program.[Footnote 4] To 
date, OPM has held two competitive processes to select contractors for 
FLTCIP; however, only a few companies have submitted proposals, 
resulting in limited competition for the FLTCIP contracts. After the 
conclusion of the first competitive process in 2001, OPM selected a 
consortium of two large insurance carriers--John Hancock Life 
Insurance Company (John Hancock) and Metropolitan Life Insurance 
Company (MetLife)--to insure program enrollees for the duration of the 
program's initial 7-year contract. This consortium jointly formed Long 
Term Care Partners, LLC (Partners) to administer the program. As the 
end of the first contract period grew near, OPM conducted its second 
competitive process for FLTCIP's next 7-year contract. In April 2009, 
the agency selected John Hancock as the insurer, with Partners--which 
became a wholly owned subsidiary of John Hancock--continuing to 
administer the program.[Footnote 5] 

With 268,204 enrollees as of June 30, 2011, FLTCIP is the largest 
private long-term care insurance program in the nation. As we 
previously reported, the benefits and premiums offered under FLTCIP 
compared favorably with those of other long-term care insurance plans. 
[Footnote 6] These benefits and premiums did not change during 
FLTCIP's first 7-year contract period. However, in 2009, soon after 
OPM awarded the program's second contract, 146,415 individuals (66 
percent of enrollees at that time) were notified that their premiums 
were subject to an increase of up to 25 percent. All of these 
enrollees had selected a particular inflation protection option--the 5 
percent automatic compound inflation option (ACIO)--that was intended 
to keep enrollees' benefits commensurate with the cost of long-term 
care services by increasing their benefits each year by 5 percent 
without a routine increase in premiums. Although FLTCIP had not 
guaranteed that enrollees' premiums would remain stable, the 
announcement of a premium increase surprised some FLTCIP enrollees, 
who thought that the program's marketing materials indicated that 
selecting the ACIO would result in premiums that would remain constant 
over the life of their policies. However, FLTCIP was not unique in 
raising enrollee premiums. Long-term care insurance is a relatively 
new product, and carriers throughout the industry have struggled with 
setting premiums at a rate sufficient to cover future costs. Over the 
last decade, many carriers--including the largest in the market--have 
raised premiums to compensate for how the assumptions they used in 
setting premiums for this insurance product differed from their 
experience. 

You requested that we review FLTCIP. In this report, we describe (1) 
factors affecting insurance carriers' interest in contracting to 
insure FLTCIP enrollees and administer the program; (2) key changes 
made to FLTCIP since the second contract was awarded; (3) the benefit 
options offered to enrollees who faced a premium increase and the 
options they selected; (4) how actuarial assumptions used to set 
premiums for FLTCIP have changed since the program's inception; and 
(5) OPM's oversight of FLTCIP's actuarial assumptions and experience, 
and its communications with current and prospective enrollees. 

To describe information on the factors that affected insurance 
carriers' interest in FLTCIP, we interviewed officials from six of the 
nation's largest long-term care insurance carriers--Genworth 
Financial, John Hancock, MetLife, Prudential Financial Inc., 
Transamerica Life Insurance Company, and Unum.[Footnote 7] In 2009, 
these six carriers insured 61 percent of all long-term care insurance 
policyholders and 79 percent of those who purchased coverage through 
employers or other sponsors in the group market. In addition, these 
carriers varied with respect to their interest in FLTCIP; some 
submitted proposals to insure FLTCIP enrollees and administer the 
program, while others had not. We asked officials from these carriers 
to identify the factors that influenced the carriers' interest in 
FLTCIP at the time of the program's first and second contracts. 
Specifically, we asked these officials how factors related to 
carriers' business strategies and capabilities, FLTCIP's history, and 
other aspects of the program--such as statutory requirements--affected 
their interest in the program. We also asked these officials to 
explain how and to what extent such factors influenced carriers' 
interest. 

To describe the key changes that have been made to FLTCIP since the 
second contract was awarded, we interviewed officials from OPM and 
John Hancock about the changes made to the program and reviewed 
program documentation, including FLTCIP contracts. We considered 
changes to be key changes if officials from both OPM and John Hancock 
identified them as significant and if they directly affected current 
or future enrollees. 

To describe the benefit options that were offered to enrollees facing 
a premium increase, we interviewed OPM and John Hancock officials and 
reviewed program documentation. We also assessed the extent to which 
the benefit options were similar to those offered by other long-term 
care insurance carriers. To do so, we interviewed officials from the 
six insurance carriers noted above to obtain information on the 
benefit options they have typically offered to enrollees facing a 
premium increase. To describe the benefit options that FLTCIP 
enrollees selected and the impact of those selections on enrollees' 
premiums, we analyzed John Hancock data. These data summarized the 
benefits selected by FLTCIP enrollees facing the premium increase and 
the amount by which their premiums changed as a result of those 
selections. We discussed the data with knowledgeable officials from 
John Hancock and reviewed all data for reasonableness and consistency; 
we determined that the data were sufficiently reliable for our 
purposes. 

To describe how the actuarial assumptions used to set premiums for 
FLTCIP have changed since the program's inception, we interviewed OPM 
and John Hancock officials and reviewed program documentation, 
including FLTCIP contracts. We compared the actuarial assumptions used 
to set premiums for the first contract period to those used to set 
premiums for the second contract period. We also examined the extent 
to which the assumptions had changed since premiums for the second 
contract period were set. In addition, we assessed how changes in 
FLTCIP assumptions compare to those used in setting premiums for other 
long-term care insurance plans. To do so, we interviewed officials 
from the six insurance carriers in our analysis about the actuarial 
assumptions they use, and how their assumptions have changed since 
FLTCIP began in 2002. We also interviewed insurance regulators from 
three states--California, Florida, and New York--about the actuarial 
assumptions used in setting premiums for long-term care insurance 
plans offered in their states. In 2009, these were the top three 
states in terms of the amount of long-term care insurance premiums 
earned; they were collectively responsible for overseeing 20 percent 
of all long-term care insurance policies. 

To describe OPM oversight of actuarial assumptions and experience and 
program communications with current and prospective enrollees, we 
interviewed officials from OPM, John Hancock, and MetLife. For 
context, we interviewed officials from the six insurance carriers to 
gather information regarding the oversight conducted by other 
employers and state regulators. 

We conducted this performance audit from September 2010 to July 2011 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Long-term care, which includes services provided to individuals in 
nursing homes, in assisted-living facilities, or in their homes, can 
be costly. Most of our nation's spending for this care is paid for by 
government programs. Private long-term care insurance can also be used 
to pay for these costs; however, only a small portion of total long- 
term care costs are paid for by such coverage. The federal government 
has taken steps to increase the use of private insurance to pay for 
long-term care costs, including creating FLTCIP. 

Long-Term Care Costs: 

Long-term care costs vary based on the types of services provided and 
the geographic area where they are rendered. For example, in 2010, the 
average annual cost for care in a nursing home exceeded $83,000 and 
the average annual cost for care in an assisted-living facility was 
nearly $40,000. In addition, the average hourly rate for a home health 
aide was $21; for example, 10 hours of such care a week would average 
about $11,000 per year.[Footnote 8] 

Most of the nation's spending on long-term care services is paid for 
by government programs. About $253 billion was spent nationwide on 
long-term care services in 2009, according to the most recently 
available data. Nearly three-quarters of this amount--$183 billion--
was paid for by government programs, primarily Medicaid, and to a 
lesser extent, Medicare and other government programs. Individuals 
paid 18 percent of the total, or $46 billion, out of pocket, and 
private insurance paid for a small portion of the total, 6 percent, or 
about $16 billion.[Footnote 9] (See figure 1.) 

Figure 1: Percentage of Nationwide Spending on Long-Term Care 
Services, by Payment Source (2009): 

[Refer to PDF for image: pie-chart] 

Government spending (72 percent): 

Medicaid[A]: 44%; 
Medicare[B]: 25%; 
Other government[C]: 3%; 

Other spending (27 percent): 
Out-of-pocket spending: 18%; 
Private insurance: 6%; 
Other[D]: 3%. 

Source: Centers for Medicare & Medicaid Services' Office of the 
Actuary estimate based on 2009 National Health Expenditures data
and other unpublished sources. 

Notes: This estimate includes spending on nursing home care, home 
health care, and hospital-based nursing and home health care, as well 
as spending through Medicaid home-and community-based waiver programs 
that provide certain low-income individuals in some states with access 
to home-and community-based long-term care services. Percentages do 
not sum to 100 because of rounding. 

[A] Medicaid is a joint federal-state program that finances health 
care for certain categories of low-income individuals. 

[B] Medicare is the federal program that finances health care for 
seniors aged 65 and older, certain disabled individuals, and 
individuals with end-stage renal disease. 

[C] Other government spending includes coverage financed by the 
Department of Veterans Affairs as well as other state and local 
programs. 

[D] Other includes private revenues, such as philanthropy. 

[End of figure] 

Long-Term Care Insurance: 

Individuals may purchase long-term care insurance policies directly 
from carriers in the individual market, or they can enroll in those 
offered by groups, such as their employers. At the end of calendar 
year 2009, 6.7 million individuals had long-term care insurance 
policies, according to data from the National Association of Insurance 
Commissioners (NAIC). Nearly 70 percent of these policies were 
purchased in the individual market, with the remaining portion 
purchased through employers or other group sponsors. 

States are generally responsible for overseeing long-term care 
insurance. Through laws and regulations, states establish standards 
governing long-term care insurance and state insurance departments 
enforce those standards. NAIC has issued model laws and regulations to 
assist states in formulating their laws and regulations for long-term 
care insurance; many states have adopted NAIC's models. State 
regulators perform a variety of oversight tasks that are intended to 
protect consumers from unfair practices, including reviewing premiums 
and marketing materials and responding to consumer complaints. 

Long-term care insurance is generally structured around a number of 
benefit options that applicants select. These include: 

* the types of services covered, such as nursing home services, care 
in home and community settings, or both; 

* the daily benefit amount, which is the maximum amount insurance will 
pay on a single day; 

* the benefit period (or duration of coverage), which can range from 1 
year to unlimited (i.e., lifetime) coverage; and: 

* the length of the elimination or waiting period, which is the length 
of time an individual has to wait before insurance will provide 
coverage toward the cost of care. 

An applicant can also select an inflation protection benefit to help 
ensure that over time, his or her daily benefit amount remains 
commensurate with the costs of care. Inflation protection benefits 
increase the enrollee's daily benefit amount at specified intervals-- 
for example, annually. Carriers typically provide multiple inflation 
protection options, including a 5 percent ACIO. Under this option, an 
enrollee's daily benefit amount is increased each year by 5 percent of 
the prior year's amount without a routine increase in premiums. For 
example, an individual who selected a daily benefit amount of $100 at 
enrollment would have accrued a $105 daily benefit amount that would 
be available to him or her at the beginning of the second year of 
coverage. At the beginning of the third year of coverage, the 
enrollee's daily benefit amount would accrue by an additional 5 
percent to $110.25. Inflation protection is important because many 
purchasers of long-term care insurance do not expect to need long-term 
care services until some time in the future; they pay premiums over a 
period of years in return for a promise of future protection. This 
benefit allows enrollees to take advantage of lower premium rates 
available to younger enrollees, while allowing their benefits to grow 
over time. 

Long-term care insurance premiums are affected by many factors. 
Carriers charge higher premiums for richer benefits; for example, 
higher daily benefit amounts, longer benefit periods, and higher 
levels of inflation protection will increase premiums. In addition, 
premium rates vary based on enrollees' age at enrollment, with older 
individuals subject to higher premiums than younger individuals who 
select the same benefits. Premiums for some policies may also be based 
on the health status of the applicant. For example, policies sold in 
the individual market are generally subject to full underwriting, 
[Footnote 10] which entails an extensive review of the applicant's 
health and may result in premiums that vary based on health status. In 
contrast, premiums for policies sold in the group market usually do 
not vary based on individuals' health status. Such policies may be 
offered, during at least some periods, on a guaranteed issue basis 
with no underwriting--meaning that coverage is guaranteed to all 
eligible individuals. For example, some carriers guarantee coverage to 
a group of eligible individuals, such as active employees, during an 
open enrollment period. 

In addition, carriers establish premiums on the basis of actuarial 
assumptions--including lapse, mortality, morbidity, and return on 
investment assumptions. 

* The lapse assumption reflects the expected portion of enrollees who 
drop their coverage each year, for example, by voluntarily canceling 
their policies. Lapse assumptions can vary based on a variety of 
factors, including the enrollees' age at enrollment and the number of 
years enrollees have had their policies. In general, it is assumed 
that the longer that enrollees keep their policies, the less likely 
they are to lapse. After enrollees have maintained their policies for 
a certain number of years--for example, after 6 or 8 years--carriers 
may assume that the lapse rate will remain constant. This rate is 
referred to as the ultimate lapse rate. Lapse rate assumptions greatly 
affect long-term care insurance premiums because when individuals 
lapse, future liabilities are immediately reduced although current 
assets are not affected. Premiums that have already been paid by those 
who lapse generally remain with the carrier and are used to subsidize 
the cost of future claims by other enrollees.[Footnote 11] 

* The mortality assumption summarizes the expected death rate of the 
enrollee population, by age. Similar to the lapse assumption, 
mortality reduces future liabilities without affecting assets. 

* The morbidity assumption reflects the amount of claims costs 
expected for enrollees, by age, and accounts for the portion of 
enrollees of each age who file a claim and the duration of those 
claims. Because carriers assume that older enrollees are more likely 
to file a claim, the expected amount of claims costs increases with 
age. 

* The return on investment assumption reflects the expected interest 
rate earned on invested assets. 

Because actuarial assumptions are projections about the future, they 
can change over time as carriers gain more experience, especially with 
relatively new products such as long-term care insurance. In addition, 
these assumptions are developed based on the professional judgment of 
carriers' actuaries; therefore, actuarial assumptions--and the 
resulting premiums--can differ across actuaries and carriers. 

A key feature of long-term care insurance is that premiums are 
designed--although not guaranteed--to remain level over time. Carriers 
calculate premium rates with a goal of ensuring that the total amount 
of premiums paid by all enrollees plus the interest earned on the 
invested assets over the lifetime of the policy are sufficient to 
cover the cost of future claims and expenses. Setting premiums at an 
adequate level to cover future costs has been a challenge for some 
carriers. Long-term care insurance is a relatively new product. In 
addition, several decades may elapse before enrollees submit claims 
and carriers obtain data on how their enrollees use their policies. As 
a result, many carriers have lacked (and may continue to lack) 
sufficient data to accurately estimate the revenue needed to cover 
costs. This has led to changes in the marketplace as many companies 
have raised premiums, left the marketplace, or consolidated to form 
larger companies.[Footnote 12] 

In response to the growing number of premium increases for long-term 
care insurance, NAIC issued revisions to its model long-term care 
insurance regulation in 2000. The new model regulation established 
more rigorous requirements that carriers must meet when setting 
initial premium rates and when requesting premium increases. For 
example, the model regulation introduced a new requirement for 
insurance carriers' actuaries to certify that premiums are adequate to 
cover anticipated costs over the life of a policy, even under 
"moderately adverse conditions," with no future premium increases 
anticipated. Moderately adverse conditions could include, for example, 
below average returns on invested assets. To fulfill this requirement, 
insurance carriers' actuaries must include a margin for error when 
setting premiums.[Footnote 13] 

FLTCIP Oversight and Administration: 

The Long-Term Care Security Act authorizes OPM to enter into 7-year 
contracts with one or more private entities to insure FLTCIP enrollees 
and administer the program. The Act requires OPM to ensure that each 
of these contracts is awarded on the basis of contractor 
qualifications, price, and reasonable competition. The Act also tasked 
OPM with overseeing FLTCIP and preempts state oversight of the 
program.[Footnote 14] As a result, OPM performs functions of both a 
sponsoring employer and a regulator for this program. 

To obtain carriers' proposals for FLTCIP, OPM issued two requests for 
proposals (RFP)--one in 2001 for the program's first contract, and 
another in 2008 for the program's second contract. The agency's RFPs 
summarized information about the program, including information about 
the population eligible to apply for coverage, as well as program 
requirements, such as covered services and benefit options that were 
to be offered. The RFP for the program's second contract included 
detailed information about the experience of the program to date--
including the number of enrolled individuals and their 
characteristics, current premiums, and the balance of funds available 
to pay for FLTCIP claims and expenses. The RFPs for both contracts 
also outlined OPM's expectations for the program. For example, OPM's 
RFP for the first contract stated that because of efficiencies in 
marketing to a large group, the agency expected that carriers would 
offer premiums that were 15 to 20 percent below those charged for 
comparable benefits in the individual market. In its RFP for the 
second contract, OPM stated that carriers should adjust premiums to 
ensure that they were adequate, but that premium increases should not 
exceed 25 percent per enrollee.[Footnote 15] In addition, in its RFPs 
for both contracts, OPM stated that it expected carriers to follow 
NAIC's 2000 model long-term care insurance regulation by including a 
margin for moderately adverse conditions when setting premiums for 
FLTCIP. In addition to providing information about the program, OPM's 
RFPs required carriers to submit detailed proposals for plan premiums 
and benefits as well as for the administration of FLTCIP. 

The FLTCIP contract includes the winning carrier's responses to OPM's 
RFP and outlines all key aspects of the program. Once the contract is 
signed, any changes made to the program during the contract term--such 
as changes to enrollee premiums--must be agreed upon by OPM and the 
carrier. The contract outlines the roles and responsibilities of all 
parties and the type and frequency of reporting. It also includes 
information about the benefits offered; the actuarial assumptions used 
to set premiums; the premiums charged; and how payments for the 
program's expenses, as well as payments that are designated as 
profits, are determined. Unlike other contracts between employers and 
insurance carriers, the FLTCIP contract includes provisions for the 
management of program assets--that is, the funds collected as premiums 
and used to pay claims. By statute, such funds must remain separate 
from the carrier's other businesses.[Footnote 16] 

At the end of FLTCIP's 7-year contract, OPM can again conduct a 
competitive process to obtain proposals for insuring FLTCIP during its 
third contract term. If a new carrier is selected, the current carrier 
must transfer all FLTCIP enrollees and assets, including any positive 
or negative returns related to the experience of the program, to the 
next carrier. If OPM does not contract with another carrier, the 
current carrier would retain its responsibility for insuring all 
current enrollees and would continue to work with OPM to administer 
the program. Premium rates would remain at their then current levels 
unless OPM and the carrier agree on different rates, or the carrier 
submits new premium rates it believes are warranted to attain funding 
sufficiency, at least one year prior to the rates' effective date. 
FLTCIP assets would remain available to pay for these enrollees' 
claims and expenses. 

FLTCIP Eligibility and Benefits: 

The Long-Term Care Security Act also defined key aspects of FLTCIP 
eligibility. For example, the statute requires that all federal and 
Postal Service employees and retirees, active and retired members of 
the uniformed services, their qualified relatives, and certain others 
be eligible to apply for FLTCIP coverage.[Footnote 17] Almost 19 
million people were estimated to be eligible to apply for coverage as 
of October 15, 2001. While the Act specifies who is eligible to apply 
for FLTCIP coverage, it does not require that coverage be guaranteed 
to all eligible individuals. Eligibility for coverage has been subject 
to underwriting, though the level of underwriting used by the program 
varies. During FLTCIP open enrollment periods, an abbreviated 
underwriting application has been used for active federal employees 
and their spouses or same-sex domestic partners and active members of 
the uniformed services and their spouses.[Footnote 18] A more lengthy 
underwriting application, similar to underwriting in the individual 
insurance market, is generally used for these applicants if they apply 
for coverage during other times and for all other applicants, 
including retirees and qualified relatives, regardless of when they 
apply.[Footnote 19] 

Similar to other long-term care insurance plans, FLTCIP enrollees are 
able to select from a range of benefits, as outlined in OPM's contract 
with the carrier. FLTCIP offers applicants the ability to choose, for 
example, their daily benefit amount and benefit period. The program 
also offers inflation protection benefits, including a 5 percent ACIO, 
which has been offered since the program's inception. Once an enrollee 
becomes eligible for benefits, FLTCIP provides reimbursement for 
covered services up to the enrollee's accrued daily benefit amount 
based on the benefit options selected.[Footnote 20] For example, 
FLTCIP pays for 100 percent of enrollees' nursing home costs, up to 
their accrued daily benefit amount. 

FLTCIP premiums vary greatly depending on the benefits selected as 
well as individuals' ages at enrollment. For example, a plan with a 
$150 daily benefit amount, 3-year benefit period, and 5 percent ACIO 
would cost $87 per month for coverage for an individual who enrolled 
at age 40, but would cost $238 per month for an individual who 
enrolled at age 65. 

As part of FLTCIP's second contract, OPM and John Hancock agreed to a 
premium increase of up to 25 percent for current enrollees who had 
selected the program's 5 percent ACIO benefit and were less than 70 
years old at the time of their enrollment. As of October 2009, two- 
thirds of all FLTCIP enrollees--146,415 individuals--had 5 percent 
ACIO coverage and were subject to the premium increase.[Footnote 21] 
OPM and John Hancock officials have stated that the premium increase 
was warranted because of projections for future program underfunding, 
which occurred primarily as a result of lower-than-expected lapse and 
mortality rates, as well as lower-than-expected returns on investments. 

A Variety of Factors Influenced Carriers' Interest in FLTCIP, Business 
Strategy Most Significantly: 

A variety of factors have influenced carriers' interest in contracting 
to insure FLTCIP enrollees and administer the program, according to 
officials from the carriers we interviewed. Carriers' business 
strategies had the most significant effect on their interest in the 
program at the time of both contracts, but their strategies affected 
their interest in different ways. Factors relating to FLTCIP's history 
generally detracted from carriers' interest in the program at the time 
of its second contract, and a variety of other factors--including the 
size and characteristics of the program--have also influenced 
carriers' interest in the program since its inception. 

Business Strategy Most Significantly Influenced Carriers' Interest in 
FLTCIP, but in Different Ways: 

Carriers' business strategies had the most significant influence on 
their interest in FLTCIP at the time OPM solicited proposals for the 
first and second contracts, according to officials we interviewed. 
However, carriers differed as to whether their business strategy had a 
positive or negative effect on their interest in FLTCIP. Officials 
from three of the six carriers we interviewed said that their 
carrier's business strategy positively influenced their interest in 
FLTCIP at the time OPM solicited proposals for each contract. In 
contrast, officials from three of the carriers we interviewed 
indicated that their carrier's business strategy detracted from their 
interest in FLTCIP.[Footnote 22] 

Officials from the carriers who indicated that business strategy had a 
positive influence on their interest noted that their companies were 
interested in growing their long-term care insurance business and 
believed FLTCIP would provide them with an opportunity to do so. They 
also stated that insuring FLTCIP would lend them credibility, assist 
them in gaining name recognition in the marketplace, and further their 
goals of expanding sales of their other (nonfederal) long-term care 
insurance policies. In contrast, officials from the carriers who 
indicated that their business strategy detracted from their interest 
in FLTCIP said that they wanted to grow their long-term care insurance 
business at a slower pace or focus on other segments of the market, 
such as the individual market. Officials from three carriers noted 
that FLTCIP had the potential to be so large that the carrier may not 
have been able to insure enrollees or administer the program 
independently, and some carriers also noted concerns about partnering 
with other insurance carriers to do so. Finally, two carriers told us 
that they had less interest in selling long-term care insurance 
overall at the time of the second contract. Officials from these 
carriers told us that they were uncertain about the risks associated 
with long-term care insurance because of industrywide challenges in 
setting actuarial assumptions that lead to adequate premium rates. As 
of January 2011, three of the six carriers whose officials we 
interviewed had suspended sales of some or all of their long-term care 
insurance policies.[Footnote 23] (See appendix I for more information 
about how factors related to carriers' business strategies and 
capabilities influenced their interest in FLTCIP.) 

FLTCIP History Generally Detracted from Carriers' Interest in the 
Second Contract: 

Factors related to FLTCIP's history generally detracted from carriers' 
interest in the program at the time of OPM's solicitation for the 
second contract and had the second most significant influence on 
carriers' interest in FLTCIP at that time. When asked about how 
FLTCIP's history affected the carrier's interest at the time of the 
second contract, officials from four of the carriers noted that as a 
result of the program's history--including the premiums charged for 
the benefits offered during the first contract period and the 
actuarial experience of the program--a premium increase was warranted. 
These officials raised concerns about having to implement a premium 
increase for FLTCIP. Specifically, officials from three of the 
carriers, none of which were involved in the program's first contract, 
raised concerns that implementing a premium increase as the program's 
new carrier would result in negative implications for the carrier's 
reputation. Additionally, officials from two carriers told us that 
OPM's 25 percent cap on premium increases was a concern because they 
estimated that a larger premium increase was warranted. 

Four carriers also cited concerns about transitioning the program from 
other carriers. Specifically, officials from some of these carriers 
stated that transitions are difficult for the smallest programs, and 
the large size and complexity of FLTCIP would add to other challenges 
related to transitioning the program. In addition, officials from two 
carriers explained that their concerns over transitioning FLTCIP were 
linked to taking on the risk of insuring a population that the carrier 
had no involvement in underwriting. (See appendix II for more 
information about how FLTCIP's history influenced carriers' interest 
in the program.) 

Other Factors, Including the Size and Characteristics of FLTCIP's 
Eligible Population, Also Influenced Carriers' Interest: 

Other factors, such as the large size and characteristics of FLTCIP's 
eligible population, also influenced carriers' interest in the program 
at the time of both the first and second contracts. The large size of 
the eligible population had a positive influence on carriers' interest 
in FLTCIP, but the lack of a list of home addresses for the eligible 
population and the voluntary nature of the program had a negative 
influence. Officials from four of the six carriers we interviewed 
noted that the large number of people eligible for FLTCIP positively 
influenced their interest in the program. These officials explained 
that a large eligible population increases the likelihood for a larger 
number of enrollees and provides a greater potential for enrolling 
healthy individuals who represent a lower risk of submitting claims. 
However, as OPM noted in its RFPs for both contracts, the agency does 
not have a list of home addresses of active federal employees for the 
carrier to use in marketing FLTCIP. All of the carriers we interviewed 
noted that not having this information significantly detracted from 
their interest in the program.[Footnote 24] These officials explained 
that marketing directly to eligible individuals at their homes is 
critical for ensuring that a large number of individuals--including a 
high proportion of healthy individuals--apply for coverage. As such, 
not having this list resulted in concerns that FLTCIP would attract a 
disproportionate share of individuals who knew they needed coverage, 
which would result in a higher risk for the program. Likewise, 
officials from three carriers we interviewed also noted that offering 
FLTCIP as a voluntary benefit with no government contribution to 
premiums detracted from their interest in the program because carriers 
had concerns that the program's enrollment would not be as large as it 
could have been. In addition, officials noted that this aspect of the 
program would likely attract a disproportionate share of individuals 
who expected to incur long-term care costs and would likely submit 
claims earlier than was typically expected. These officials explained 
that if all active federal employees were automatically enrolled in 
FLTCIP, or if the government paid for a portion of all active federal 
employees' premiums, FLTCIP would benefit from a larger number of 
enrollees as well as a larger portion of healthy enrollees who would 
have a lower risk of submitting claims. 

Similarly, characteristics of the eligible population negatively 
affected carriers' interest in FLTCIP, but this was at least somewhat 
offset by the fact that eligible individuals are not guaranteed 
coverage. Officials from all of the carriers we interviewed cited 
concerns about the relatively high portion of active federal employees 
who were disabled and eligible to apply for FLTCIP coverage. In its 
RFP for the first contract, OPM notified insurance carriers that the 
federal government employs a large percentage of persons with self- 
reported disabilities.[Footnote 25] Specifically, OPM reported that 
approximately 7 percent of active federal employees self-identified as 
disabled, noting that this estimate did not include active postal or 
military employees. Insurance carrier officials told us that the 
relatively large portion of disabled individuals increased the risk to 
FLTCIP because disabled individuals were more likely to seek coverage 
and submit claims sooner than nondisabled individuals. Officials from 
five of the six carriers we interviewed said that the fact that FLTCIP 
has not guaranteed coverage for all eligible individuals--and is not 
required to do so--had a large positive influence on the carriers' 
interest at the time of the first and second contracts. These 
officials explained that the ability to conduct at least some 
underwriting for applicants would enable them to better manage the 
risks of the program, especially given the relatively large portion of 
disabled employees. Officials from several carriers also said that if 
FLTCIP guaranteed coverage to all eligible individuals at any point in 
time, carrier interest in FLTCIP would likely diminish and officials 
from two carriers we interviewed noted that they would not have 
considered submitting a proposal for FLTCIP if the program were 
required to offer coverage on a guaranteed issue basis. 

Five of the six carriers we interviewed stated that having FLTCIP 
subject to OPM oversight rather than states' oversight influenced 
their interest in the program, but the carriers varied with regard to 
how this affected their interest. Officials from three of these 
carriers said that OPM's role was unusual, because the agency would be 
acting as both the employer sponsor and insurance regulator. Officials 
also raised related questions and concerns about OPM's ability to 
adequately oversee such a complicated insurance product as well as the 
potential for FLTCIP to be subject to political pressure. In addition, 
officials from three of the carriers we interviewed expressed concerns 
regarding the potential for having a difference of opinion with OPM 
during the contract period regarding key elements of the program, such 
as the need for a premium increase. However, officials from four of 
the carriers we spoke with noted that OPM oversight positively 
influenced their interest in FLTCIP, in part because it had the 
potential to produce a single, large, uniform program as a result of a 
more streamlined oversight process than what would otherwise be 
available through state oversight. Appendix III provides more 
information about how a variety of factors influenced carriers' 
interest in FLTCIP. 

Key Changes Have Been Made to FLTCIP Benefits, Investment Strategy, 
and Profit Payment Formula since the Second Contract Was Awarded: 

Since the second contract was awarded, three key changes have been 
made to FLTCIP, in addition to the implementation of a premium 
increase for certain enrollees. These key changes were the 
introduction of new benefits for current and new enrollees, 
modifications to the program's investment strategy, and revisions to 
the formula used to calculate the carrier's profit payment. 

Regarding the program's benefit changes, FLTCIP introduced a new 
benefit plan and a new inflation protection option for enrollees. 

* The new benefit plan--referred to as FLTCIP 2.0--was made available 
to all program enrollees.[Footnote 26] In comparison to the FLTCIP 1.0 
plan that was previously offered, the FLTCIP 2.0 plan provides 
enhanced coverage. It offers additional benefit options, for example, 
by expanding the range of daily benefit amounts and benefit periods 
available to enrollees. The FLTCIP 2.0 plan also covers a greater 
portion of the cost of care for some long-term care services. For 
instance, the FLTCIP 2.0 plan covers 100 percent of the cost of home 
care and adult day care, up to the enrollee's accrued daily benefit 
amount. This represents an increase over the FLTCIP 1.0 plan, which 
covered these costs up to 75 percent of the enrollee's accrued daily 
benefit amount for those who selected comprehensive coverage.[Footnote 
27] In addition, the FLTCIP 2.0 plan provided coverage for a broader 
range of services than the FLTCIP 1.0 plan. Specifically, the FLTCIP 
2.0 plan expanded the services covered under its stay-at-home benefit. 
This benefit pays for costs that enable enrollees to receive long-term 
care services in the home, including those incurred for home 
modifications and caregiver training. (See appendix IV for a 
comparison of selected benefits available under the FLTCIP 1.0 and 
FLTCIP 2.0 plans.) John Hancock officials told us that they proposed 
changes to FLTCIP's benefits to make the program's benefits comparable 
to those offered by other long-term care insurance plans available in 
the market. They further noted that these changes were intended to 
ensure that FLTCIP remains competitive with other long-term care 
insurance plans. 

* FLTCIP also introduced a new inflation protection option for 
enrollees--a 4 percent ACIO. This option was made available to 
enrollees in addition to the other inflation protection options that 
FLTCIP has offered since its inception, such as the 5 percent ACIO. 
Compared with a 5 percent ACIO, a 4 percent option results in reduced 
protection against increases in the cost of long-term care services. 
[Footnote 28] However, a 4 percent ACIO allows enrollees to obtain a 
package of benefits at a cost that is lower than that available with a 
5 percent ACIO. John Hancock officials told us that they offered a 4 
percent ACIO to provide enrollees with an additional inflation 
protection option, and they were comfortable that this option provides 
enrollees with adequate protection against inflation based on 
historical increases in the cost of long-term care services. (See 
appendix V for an analysis of how the 4 and 5 percent ACIOs compare to 
changes in the cost of long-term care services since 2002.) 

Another key change made to FLTCIP was the modification of the 
program's investment strategy. John Hancock proposed a new, less 
conservative investment strategy in its response to OPM's RFP for 
FLTCIP's second contract, which later became part of the terms of the 
carrier's contract with OPM. According to John Hancock officials, the 
revised strategy has a higher expected rate of return than the former 
strategy. During the first contract period, FLTCIP invested 100 
percent of its assets in short-duration fixed-income bonds. FLTCIP's 
new investment strategy involves investing a portion of the program's 
assets in fixed-income bonds of a longer duration, while investing 
another portion in public equities. Specifically, all of the assets 
corresponding to the program's short-term liabilities--those expected 
to be incurred within the next 20 years--would be invested in fixed-
income bonds. However, most of the assets corresponding to the 
program's long-term liabilities--those expected to be incurred in more 
than 20 years--would be invested in public equities, which have the 
potential to earn a higher rate of return than fixed-income bonds. 
[Footnote 29] John Hancock proposed modifications to the investment 
strategy to enable FLTCIP to earn a potentially higher rate of return 
on its investments over time without subjecting short-term investments 
to possible fluctuations in investment returns. According to John 
Hancock officials, the new strategy would also better align the 
duration of the program's investments with the program's liabilities. 
John Hancock officials told us that they hoped these changes would 
enable FLTCIP to maintain more stable premiums over time. 

The third key change made to FLTCIP since the second contract was 
awarded was a revision to the formula used to calculate the insurance 
carrier's profit payment.[Footnote 30] While the structure of the 
formula remained the same, the portion of premiums and assets used in 
calculating the profit payment was reduced. Both FLTCIP contracts have 
explicitly defined a profit payment that is to be paid to the 
program's carrier each year of the program's 7-year contract period. 
For both contract periods, this profit payment has consisted of three 
distinct payments; two of these are based on a percentage of the 
premiums collected during the fiscal year, and one is based on the 
average annual assets of the program. One of the premium-based 
payments is subject to OPM's evaluation of the carrier's performance, 
while the other premium-based payment is guaranteed to the carrier. 
With the second contract, FLTCIP reduced the maximum portion of 
premium-based profit payments from 6.5 percent of premiums collected 
in each fiscal year to 4.0 percent of premiums collected in each 
fiscal year. To do so, the program decreased both the portion of 
premium-based payments that were guaranteed and those that were 
subject to OPM's evaluation of John Hancock's performance. In 
addition, FLTCIP also reduced the portion of average annual assets 
used to calculate the profit payment, from 0.3 percent to 0.15 
percent. (See table 1.) John Hancock officials told us that they 
proposed modifications to the profit payment formula in order to 
provide greater premium stability for enrollees over time. They also 
stated that had they not reduced the profit payment formula, FLTCIP 
would have needed to implement a greater increase in enrollee 
premiums. While the portion of premiums and assets used in calculating 
the profit payment decreased with the second contract, John Hancock's 
profit payments will likely grow during the contract period because 
the number of enrollees paying premiums and the value of the program's 
assets is also expected to increase over time. 

Table 1: Profit Structure of the Federal Long Term Care Insurance 
Program (FLTCIP) under Its First and Second Contracts: 

Premium-based payments: 

Payment type: Guaranteed; 
First contract: 3.5 percent of the premiums collected during the 
fiscal year; 
Second contract: 2.0 percent of the premiums collected during the 
fiscal year. 

Payment type: Performance-based; 
First contract: Up to 3.0 percent of the premiums collected during the 
fiscal year--the actual amount is determined by OPM based on its 
assessment of the contractor's performance; 
Second contract: Up to 2.0 percent of the premiums collected during 
the fiscal year--the actual amount is determined by OPM based on its 
assessment of the contractor's performance. 

Payment type: Maximum total premium-based payments; 
First contract: Up to 6.5 percent of premiums collected during the 
fiscal year; 
Second contract: Up to 4.0 percent of premiums collected during the 
fiscal year. 

Asset-based payments: 

Payment type: Guaranteed; 
First contract: 0.3 percent of FLTCIP's average annual assets; 
Second contract: 0.15 percent of FLTCIP's average annual assets. 

Source: GAO analysis of OPM's first and second contracts for FLTCIP. 

[End of table] 

In addition to the three key changes noted above, several other 
changes were made to FLTCIP since the second contract was awarded. For 
instance, FLTCIP eligibility was expanded in 2010 to provide coverage 
for same-sex domestic partners of active and retired federal and 
Postal Service employees.[Footnote 31] In addition, the performance 
metrics that OPM uses to evaluate the carrier--and on which a certain 
percentage of profit payment depends--were updated. Changes to these 
metrics included adding a requirement that FLTCIP customer service 
representatives become certified long-term care insurance specialists 
within 9 months of employment and reducing the amount of time 
available to make benefits determinations and to pay claims, from 10 
business days to 5 business days. (See appendix VI for additional 
information about the changes made to the performance metrics.) 

FLTCIP Offered Enrollees Options to Change Their Benefits to Limit the 
Premium Increase; Nearly Half Made No Changes: 

In order to limit their premium increase, FLTCIP offered enrollees 
options to change their benefits, including reducing their inflation 
protection benefits. Nearly half of enrollees facing the premium 
increase made no changes to their benefits and, as such, elected to 
pay a higher premium. 

Options Offered to Enrollees Included Reducing Their Inflation 
Protection Benefits: 

FLTCIP offered enrollees options to change their benefits--including 
reducing their inflation protection benefits--in order to avoid, or 
limit the amount of, their premium increase. Specifically, in October 
2009, FLTCIP sent personalized letters to enrollees facing the premium 
increase to inform them of the increase, to offer them options to 
adjust their benefits, and to illustrate how these options would 
affect their premiums. The enrollees who faced a premium increase--all 
of whom had the FLTCIP 1.0 plan with 5 percent ACIO--were offered the 
option to reduce their ACIO to 4 percent while maintaining their 
accrued benefits. This option would result in a premium that was 
similar to--within a few dollars of--enrollees' existing monthly 
premiums, so long as enrollees made no additional changes to their 
benefits.[Footnote 32] In addition to the option to reduce their 
inflation protection benefit, enrollees were offered the option to 
switch their benefits package to the new FLTCIP 2.0 plan without 
additional underwriting, although such a change could lead to an 
increase in their premiums.[Footnote 33] In addition, FLTCIP enrollees 
were reminded of their ability to make other changes to their benefits 
at any time--for example, by modifying their daily benefit amount--
although those who wanted to increase their benefits in ways other 
than switching to the FLTCIP 2.0 plan had to undergo underwriting. 

John Hancock officials stated that they offered enrollees the option 
to reduce their inflation protection coverage because this enabled 
them to maintain relatively stable premiums while affecting future--
but not current--benefits. Reducing inflation protection affects the 
rate at which future benefits grow over time. As such, FLTCIP 
enrollees who decreased their ACIO protection to 4 percent retained 
their accrued daily benefit amount; that amount would then increase at 
the reduced ACIO rate. In contrast, other reductions in coverage--such 
as decreasing the daily benefit amount or increasing the waiting 
period--result in an immediate reduction in benefits. 

Similar to FLTCIP, officials from other carriers we interviewed told 
us that they have typically offered enrollees multiple options to 
reduce their benefits at the time of a premium increase. These options 
have included reducing their daily benefit amount or benefit period or 
reducing inflation protection coverage. In addition to these options, 
officials from several carriers told us that they have offered a 
nonforfeiture benefit to enrollees facing a premium increase. This 
benefit allows enrollees who lapse to maintain long-term care 
insurance coverage equal to the total amount of premiums paid to date; 
the coverage will be provided in the future once the individual 
becomes eligible for benefits. In contrast, FLTCIP did not provide a 
similar nonforfeiture benefit to enrollees facing the premium 
increase.[Footnote 34] 

Forty-Six Percent of Enrollees Facing a Premium Increase Made No 
Changes to Their Benefits: 

The most popular option among FLTCIP enrollees facing the premium 
increase was to make no changes to their benefits. Specifically, 46 
percent of the 146,415 enrollees facing the premium increase, or 
67,511 individuals, kept the FLTCIP 1.0 plan with 5 percent ACIO. 
[Footnote 35] These enrollees elected to pay the premium increase. 
Many enrollees chose to reduce their inflation protection benefits to 
a 4 percent ACIO, while either switching to the FLTCIP 2.0 plan (26 
percent) or retaining the FLTCIP 1.0 plan (20 percent). In addition, 
1.6 percent of enrollees facing the premium increase, or 2,344 
individuals, lapsed their coverage and as such are no longer enrolled 
in FLTCIP.[Footnote 36] (See figure 2.) 

Figure 2: Benefit Selections of Federal Long Term Care Insurance 
Program (FLTCIP) Enrollees Facing the Premium Increase: 

[Refer to PDF for image: pie-chart] 

No change (FLTCIP 1.0 plan with 5% ACIO): 46.1%; 
FLTCIP 2.0 plan with 4% ACIO: 25.7%; 
FLTCIP 1.0 plan with 4% ACIO: 20.0%; 
FLTCIP 2.0 plan with 5% ACIO: 5.6%; 
Lapse: 1.6%; 
Other benefit changes[A]: 0.5%; 
No selection[B]: 0.4%. 

Source: GAO analysis of John Hancock data. 

Notes: This figure reflects the benefits selections of the 146,415 
enrollees facing the premium increase. The FLTCIP 1.0 plan was offered 
to enrollees during the program's first contract period, and the 
FLTCIP 2.0 plan was offered to enrollees during the second contract 
period. ACIO stands for automatic compound inflation option. 
Percentages do not sum to 100 because of rounding. 

[A] Other benefit changes include, for example, changing a daily 
benefit amount. 

[B] No selection includes enrollees who died or became claimants prior 
to the effective date of the premium increase. 

[End of figure] 

Of the 144,071 enrollees who did not lapse their FLTCIP coverage after 
the premium increase was announced, 76 percent (109,114 individuals) 
experienced a premium increase and 23 percent (32,787 individuals) 
experienced a premium reduction as a result of their benefit 
selections. Premiums did not change for the remaining enrollees. The 
extent to which enrollees' premiums changed varied considerably based 
on their benefit selections.[Footnote 37] For example, over 90 percent 
of those who retained their 5 percent ACIO had a premium increase of 
20 percent or more. In contrast, most enrollees who selected a 4 
percent ACIO experienced a premium change of 5 percent or less. (See 
table 2.) 

Table 2: Distribution of Premium Changes Experienced by Federal Long 
Term Care Insurance Program (FLTCIP) Enrollees Subject to the Premium 
Increase, by Benefit Selection: 

Premium change: Decrease more than 5%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 18; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0; 
Other benefits changes[B] (n=779): 42; 
All enrollees[C] (n=144,071): 5. 

Premium change: Decrease 0.1% to 5%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 59; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 21; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0; 
Other benefits changes[B] (n=779): 2; 
All enrollees[C] (n=144,071): 18. 

Premium change: No change; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 5; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 0; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0; 
Other benefits changes[B] (n=779): 0; 
All enrollees[C] (n=144,071): 2. 

Premium change: Increase up to 5%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 35; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 32; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0; 
Other benefits changes[B] (n=779): 4; 
All enrollees[C] (n=144,071): 17. 

Premium change: Increase 5.1% to 10%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 20; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 0; 
Other benefits changes[B] (n=779): 4; 
All enrollees[C] (n=144,071): 6. 

Premium change: Increase 10.1% to 15%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 5; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 1; 
Other benefits changes[B] (n=779): 2; 
All enrollees[C] (n=144,071): 2. 

Premium change: Increase 15.1% to 20%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 0; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 4; 
Other benefits changes[B] (n=779): 3; 
All enrollees[C] (n=144,071): 1. 

Premium change: Increase 20.1% to 25%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 91; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 2; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 4; 
Other benefits changes[B] (n=779): 1; 
All enrollees[C] (n=144,071): 43. 

Premium change: Increase more than 25%; 
Enrollee benefit selections (percent): 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 0; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 2; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 91; 
Other benefits changes[B] (n=779): 42; 
All enrollees[C] (n=144,071): 6. 

Source: GAO analysis of John Hancock data. 

Notes: The FLTCIP 1.0 plan was offered to enrollees during the 
program's first contract period, and the FLTCIP 2.0 plan was offered 
to enrollees during the second contract period. ACIO stands for 
automatic compound inflation option. Enrollees' premium changes varied 
greatly depending on their age at enrollment and the benefits they had 
prior to the premium increase, as well as those they selected as a 
result of the increase. OPM's 25 percent cap on premium increases did 
not apply to enrollees who made any modifications to their benefits--
including changing their inflation protection coverage or benefit 
plan. This table does not include 2,344 individuals who were subject 
to the premium increase but subsequently lapsed their coverage. Some 
percentages do not sum to 100 because of rounding. 

[A] If an enrollee's decision to keep the FLTCIP 1.0 plan and switch 
to the 4 percent ACIO resulted in a premium decrease, John Hancock 
increased the enrollee's daily benefit amount so that the monthly 
premium remained within 2 dollars of the original premium. 

[B] Other benefit changes include, for example, changing a daily 
benefit amount. 

[C] "All enrollees" includes 533 individuals who made no selection 
because they died or became claimants prior to the effective date of 
the premium increase. 

[End of table] 

On average, enrollee premiums increased 14 percent, or $16.30 per 
month. Those who maintained their FLTCIP 1.0 plan with 5 percent ACIO 
experienced an average premium increase of 24 percent, or $28.54 per 
month. In contrast, enrollees who selected FLTCIP 1.0 plan with 4 
percent ACIO experienced a small change in their premiums of about $2 
or less per month, while those who selected the FLTCIP 2.0 plan with 5 
percent ACIO experienced an average premium increase of 38 percent, or 
$40.56 per month. Table 3 summarizes the impact of enrollee benefit 
selections on their premiums. 

Table 3: Summary of Premium Changes Experienced by Federal Long Term 
Care Insurance Program (FLTCIP) Enrollees Subject to the Premium 
Increase, by Benefit Selection: 

Average change; 
Enrollee benefit selections: 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 24%; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): 0%; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): 1%; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): 38%; 
Other benefits changes[B] (n=779): 28%; 
All enrollees[C] (n=144,071): 14%. 

Average change, in dollars per month; 
Enrollee benefit selections: 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): $28.54; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): -$0.12; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): $2.14; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): $40.56; 
Other benefits changes[B] (n=779): $20.71; 
All enrollees[C] (n=144,071): $16.30. 

Range of changes; 
Enrollee benefit selections: 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): 2% to 25%; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): -6% to 2%; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): -32% to 37%; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): -1% to 46%; 
Other benefits changes[B] (n=779): -89% to 881%; 
All enrollees[C] (n=144,071): -89% to 881%. 

Range of changes, in dollars per month; 
Enrollee benefit selections: 
No change (FLTCIP 1.0 plan with 5% ACIO) (n=67,511): $2.62 to $177.90; 
FLTCIP 1.0 plan with 4% ACIO[A] (n=29,340): -$1.85 to $2.14; 
FLTCIP 2.0 plan with 4% ACIO (n=37,648): -$75.54 to $73.16; 
FLTCIP 2.0 plan with 5% ACIO (n=8,240): -$3.71 to $189.91; 
Other benefits changes[B] (n=779): -$253.41 to $691.32; 
All enrollees[C] (n=144,071): -$253.41 to $691.32. 

Source: John Hancock data. 

Notes: The FLTCIP 1.0 plan was offered to enrollees during the 
program's first contract period, and the FLTCIP 2.0 plan was offered 
to enrollees during the second contract period. ACIO stands for 
automatic compound inflation option. Enrollees' premium changes varied 
greatly depending on their age at enrollment and the benefits they had 
prior to the premium increase, as well as those they selected as a 
result of the increase. OPM's 25 percent cap on premium increases did 
not apply to enrollees who made any modifications to their benefits--
including changing their inflation protection coverage or benefit 
plan. This table does not include the 2,344 individuals who were 
subject to the premium increase and subsequently lapsed their coverage. 

[A] If an enrollee's decision to keep the FLTCIP 1.0 plan and switch 
to the 4 percent ACIO resulted in a premium decrease, John Hancock 
increased the enrollee's daily benefit amount so that the monthly 
premium remained within 2 dollars of the original premium. 

[B] Other benefit changes include, for example, changing a daily 
benefit amount. 

[C] "All enrollees" includes 533 individuals who made no selection 
because they died or became claimants prior to the effective date of 
the premium increase. 

[End of table] 

Changes to Actuarial Assumptions Used to Set FLTCIP Premiums Resulted 
in a Projected Increase in Future Claims: 

Since FLTCIP's inception in 2002, John Hancock has revised the 
actuarial assumptions used to set the program's premiums--
specifically, those made for the program's lapse, mortality, 
morbidity, and return on investment. Collectively, changes to FLTCIP's 
actuarial assumptions resulted in a projected increase in the total 
amount of future claims payments. 

Changes to FLTCIP's lapse and mortality assumptions reflect an 
expectation that a larger portion of enrollees will voluntarily 
maintain their coverage over time and will live longer than originally 
expected. Specifically, John Hancock decreased FLTCIP's lapse 
assumption for the first few years an enrollee had a policy as well as 
for later years, as reflected in the ultimate lapse rate. For example, 
between the first and second contract, the assumption for FLTCIP's 
ultimate lapse rate decreased from 2 percent of enrollees lapsing per 
year to between 0.25 and 1.25 percent per year, with variations based 
on the enrollee's age at enrollment. John Hancock also decreased 
FLTCIP's mortality assumptions, reflecting an expectation that more 
FLTCIP enrollees will reach older ages than the program originally 
expected. In addition to the changes in the lapse and mortality 
assumptions, John Hancock revised FLTCIP's morbidity assumption to 
reflect a reduction in the amount of claims costs FLTCIP expects for 
enrollees of any given age. John Hancock officials we interviewed 
explained that they revised the program's lapse, mortality, and 
morbidity assumptions to reflect FLTCIP's experience during the first 
contract period. In addition, the morbidity assumption was also 
updated to reflect the carrier's experience, and knowledge of industry 
experience, with long-term care insurance policies. 

When setting premiums for FLTCIP's second contract period, John 
Hancock used the same return on investment assumption--6.5 percent--
that it used when setting premiums for the first contract period. 
Despite FLTCIP's lower-than-expected return on investment experience 
during the first contract period, John Hancock officials told us that 
they used the same return on investment assumption because they 
revised the program's investment strategy.[Footnote 38] The new 
strategy, which invests a considerable portion of FLTCIP assets in 
public equities, has a higher expected rate of return than the 
investment strategy utilized during the first contract period, 
according to John Hancock officials. 

As a result of changes made to FLTCIP's lapse and mortality 
assumptions--and despite those made to the morbidity assumption--John 
Hancock increased projections for the total amount of FLTCIP claims 
payments.[Footnote 39] While John Hancock expects that the amount of 
claims payments made for enrollees of each age will be less than 
initially assumed, it also expects more enrollees to continue their 
coverage and reach older ages. Consequently, FLTCIP expects to pay 
claims for a greater number of enrollees than initially expected. 
Additionally, since the expected amount of claims payments increases 
with age, the total amount of future claims payments is projected to 
be greater than initially expected. Finally, while the amount of 
premiums collected each year is also projected to grow as more 
enrollees maintain their coverage, John Hancock officials told us that 
this additional income will likely be offset by the higher total costs 
associated with future claims. 

Since setting premiums for FLTCIP's second contract period, John 
Hancock has not changed the program's lapse, mortality, or morbidity 
assumptions, although it has decreased its assumptions for FLTCIP's 
return on investment. John Hancock officials stated that they reduced 
FLTCIP's return on investment assumption, from 6.5 percent (at the 
time they set premiums for the second contract period) to 6.25 percent 
(as of September 30, 2010), to reflect an overall decrease in 
investment returns earned throughout the financial industry. John 
Hancock officials noted that this change does not raise concerns about 
the adequacy of current premiums and does not itself warrant an 
additional increase in premiums because they had included margins for 
moderately adverse conditions when setting FLTCIP premiums for the 
second contract period. 

The changes made to FLTCIP actuarial assumptions since its inception 
in 2002 are generally similar to those made throughout the long-term 
care insurance industry during that time frame. For example, the 
carriers whose officials we interviewed generally decreased their 
ultimate lapse rate assumptions since 2002, and as of 2011, all of 
these carriers used ultimate lapse rate assumptions of 1.5 percent or 
less.[Footnote 40] Similar to FLTCIP, five of the six carriers also 
reduced their mortality assumptions. In addition, officials from all 
of the insurance carriers we interviewed told us that they had reduced 
their return on investment assumptions to varying degrees since 2002. 
[Footnote 41] As a result of these changes, five of the six insurance 
carriers had also increased their projections for future claims 
payments and requested premium increases for at least some of their 
policies, according to the officials we interviewed.[Footnote 42] 
Finally, officials from the three state insurance regulators we 
interviewed described similar changes to the actuarial assumptions 
used in setting premiums for policies issued in their states. 

OPM's Oversight Includes an Evaluation of FLTCIP's Actuarial 
Assumptions and a Review of Program Communications: 

OPM evaluates the actuarial assumptions proposed by carriers and 
monitors how the program's experience compared to those assumptions. 
In addition, OPM reviews all program communications for accuracy and 
clarity. 

OPM Evaluates FLTCIP's Actuarial Assumptions and Monitors Program 
Experience: 

OPM evaluates the actuarial assumptions carriers propose for FLTCIP to 
ensure that the assumptions are reasonable and collectively support 
the premiums proposed for FLTCIP plans. In its RFPs for FLTCIP's first 
and second contracts, OPM asked carriers to include in their offers, 
among other things, detailed information about the assumptions they 
used to calculate premiums. In reviewing offers for both the first and 
second contracts, OPM convened a panel of officials--including 
actuarial staff--to evaluate the actuarial assumptions carriers 
proposed. The panel reviewed the actuarial assumptions, methodology, 
and resulting premium rates for reasonableness and the likelihood they 
would achieve the goal of FLTCIP solvency and long-term premium 
stability. OPM also hired an independent actuarial firm to assist the 
agency in its evaluation. The actuarial firm used its own data to 
evaluate the reasonableness of the carriers' proposed assumptions and 
the adequacy and appropriateness of proposed premiums. In addition, as 
part of its evaluation, OPM asked additional questions of officials 
from carriers that submitted offers. OPM officials we interviewed 
stated that the purpose of these communications included gaining a 
better understanding of how the carriers developed their assumptions 
and why they considered them reasonable. OPM officials told us that 
they used the information gathered throughout their evaluation process 
to inform their decision making when awarding the FLTCIP contracts. 
OPM's award of each contract signified its acceptance of the premiums 
proposed by the winning carrier; the premiums were based on the 
actuarial assumptions outlined in the carrier's response to the RFP. 
However, OPM has acknowledged the risks involved in insuring FLTCIP 
enrollees, including the potential for future premium increases. The 
agency noted that such risks called for close government monitoring. 

Once FLTCIP's premiums are finalized with the award of the contract, 
OPM monitors how FLTCIP's experience compares with the actuarial 
assumptions that were used to set premiums. As part of both FLTCIP 
contracts, OPM required the carrier to submit regular reports about 
the program's experience. These status reports include a summary of 
FLTCIP's experience in key actuarial areas--lapse, mortality, 
morbidity, and return on investment--and a comparison of this 
experience to the program's assumptions. The reports also include the 
carrier's projections about FLTCIP's ability to pay for future claims 
and expenses. Beginning in 2004, OPM required the carrier to submit 
these reports on an annual basis, and the agency now requires these 
reports be submitted semiannually.[Footnote 43] The agency also 
required the carrier to submit quarterly reports about the experience 
of FLTCIP's invested assets, which it uses to compare the actual 
returns to the return on investment assumption. OPM officials stated 
that the agency uses the information included in these reports to 
monitor FLTCIP's overall experience and to evaluate whether any 
changes to the program are warranted. 

OPM's oversight of FLTCIP's actuarial assumptions is similar to that 
of state insurance regulators, although its oversight of the program's 
experience differs from that of states. According to insurance carrier 
officials we interviewed, carriers provide a similar amount and type 
of information to state insurance regulators about the actuarial 
assumptions used to set premiums as is provided to OPM for FLTCIP. 
However, these officials also noted that many states do not require 
carriers to provide any additional information related to the 
experience of their plans, unless the carrier is seeking to increase 
premiums for existing enrollees. Thus, states' ability to monitor the 
experience of long-term care insurance policies issued in their states 
may be more limited than OPM's ability. In addition, OPM receives more 
information about FLTCIP's actuarial assumptions and experience 
compared with other employers. Officials from the carriers we 
interviewed stated that they only provide employers with information 
on the actuarial assumptions and experience of their plans when such 
information is specifically requested, which rarely occurs. 

OPM Reviews All FLTCIP Communications for Accuracy and Clarity: 

OPM reviews all FLTCIP communications--including materials intended 
for current enrollees as well as marketing materials intended for 
prospective enrollees--for accuracy and clarity. As part of both 
FLTCIP contracts, OPM has required the carrier to submit all 
communication materials to OPM prior to their use; OPM then reviews 
and approves the materials for use. Specifically, OPM program 
officials review all communications materials for technical accuracy 
and clarity. They also review all materials to ensure that information 
provided to prospective or current enrollees is consistent across 
materials. In addition, some FLTCIP communication materials undergo a 
second review by OPM's Office of Communications. Specifically, all 
materials intended for the general public--for example, Web site 
material and advertisements--as well as for new retirees are reviewed 
by OPM communications officials. These reviews are focused on ensuring 
the clarity of materials distributed to the general public, which may 
not be familiar with FLTCIP or long-term care insurance. OPM officials 
said that their goal in reviewing communications is to ensure that 
current and prospective enrollees have accurate information so that 
they can make informed decisions regarding FLTCIP. Officials also told 
us that their process for reviewing communication materials has not 
changed since FLTCIP's inception, but indicated that the quality of 
their reviews has improved as they have gained a deeper understanding 
of how to effectively communicate with the eligible population. 

OPM has taken some actions to address concerns that communications 
about FLTCIP during the first contract period were not clear. For 
example, in response to concerns that were raised at the time of 
FLTCIP's premium increase--namely, that some enrollees with ACIO 
coverage did not think their premiums could ever increase--OPM 
required John Hancock to include more prominent disclaimers on its 
marketing materials and applications for enrollment to ensure that 
prospective enrollees understood the potential for future premium 
increases. 

Unlike OPM, state regulators and employers may not review and approve 
all long-term care insurance communication materials prior to their 
use by carriers. Not all states receive communication materials for 
review. Specifically, according to officials from several carriers we 
interviewed, more than half of states require carriers to submit at 
least some communication materials, such as marketing materials, prior 
to their use. However, not all of these states require that the 
materials be approved before they are used. Additionally, according to 
the carriers we interviewed, employers offering long-term care 
insurance generally have a limited ability to modify the communication 
materials sent to their employees. Carriers generally make a number of 
standard communication materials available from which each employer 
can select. Officials from the carriers we interviewed stated that 
some employers review these materials, but they generally do not 
suggest substantive changes to the materials since doing so would 
require the carrier to refile the materials with at least some states 
and could thus potentially delay program time frames, including 
enrollments. 

Agency and Third-Party Comments: 

We provided OPM with a draft of this report and provided John Hancock 
with portions of the draft report for review. OPM and John Hancock 
provided technical comments, which we incorporated as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
Director of OPM and appropriate congressional committees. The report 
also will be available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix VII. 

Signed by: 

John E. Dicken: 
Director, Health Care: 

[End of section] 

List of Requesters: 

The Honorable Joseph I. Lieberman: 
Chairman: 
The Honorable Susan M. Collins: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Herb Kohl: 
Chairman: 
The Honorable Bob Corker: 
Ranking Member: 
Special Committee on Aging: 
United States Senate: 

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

The Honorable Ron Wyden: 
United States Senate: 

[End of section] 

Appendix I: Influence of Carriers’ Business Strategies on Their 
Interest in the Federal Long Term Care Insurance Program (FLTCIP): 

Table: 

[Detract goes from 0 to -5. Attract goes from 0 to +5] 

Carriers’ business strategies, including plans related to their long-
term care insurance product line: 
First contract: 
Mean: 0; 
Range of responses: -5 to +5; 
Response of an individual carrier: -5,-4,-4, +4, +4, +5; 
Second contract: 
Mean: -1; 
Range of responses: -5 to +5; 
Response of an individual carrier: -5, -5, -4, +2, +4, +5. 

Carriers’ abilities to independently insure FLTCIP enrollees: 
First contract: 
Mean: -1; 
Range of responses: -4 to +3; 
Response of an individual carrier: -4, -4, -3, 0, 0, +3; 
Second contract: 
Mean: 0; 
Range of responses: -5 to +4; 
Response of an individual carrier: -5, -3, 0, 0, +3, +4. 

Carriers’ abilities to independently administer FLTCIP: 
First contract: 
Mean: -1; 
Range of responses: -4 to +5; 
Response of an individual carrier: -4, -4, -3, 0, 0, +5; 
Second contract: 
Mean: 0; 
Range of responses: -4 to +5; 
Response of an individual carrier: -4, -3, 0, 0, +4, +5. 

Carriers’ abilities or interests in finding a partner to insure 
enrollees or administer FLTCIP: 
First contract: 
Mean: +1; 
Range of responses: -3 to +5; 
Response of an individual carrier: -3, -2, -1, 0, +4, +5; 
Second contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4, 0, 0, 0, 0, 0. 

Carriers’ interests in obtaining name recognition in the long-term 
care insurance market: 
First contract: 
Mean: +1; 
Range of responses: -4 to +4; 
Response of an individual carrier: -4, 0, 0, +4, +4, +5; 
Second contract: 
Mean: +1; 
Range of responses: +1; 
Response of an individual carrier: 0, 0, 0, 0, +1, +4. 

Potential for FLTCIP to affect carriers’ services to other clients: 
First contract: 
Mean: -3; 
Range of responses: -5 to 0; 
Response of an individual carrier: -5, -5, -2, -1, -1, 0. 
Second contract: 
Mean: -2; 
Range of responses: -5 to 0; 
Response of an individual carrier: -5, -4, -1, -1, 0, 0. 

Carriers’ interests in establishing or maintaining contracting ties 
with the federal government: 
First contract: 
Mean: 0; 
Range of responses: -3 to +3; 
Response of an individual carrier: -3, -1, 0, 0, 0, +3; 
Second contract: 
Mean: 0; 
Range of responses: -5 to +3; 
Response of an individual carrier: -5, -1, 0, 0, +3, +3. 

Carriers’ abilities to cover program start-up costs, although such 
costs would be reimbursed by the program: 
First contract: 
Mean: 0; 
Range of responses: -2 to +2; 
Response of an individual carrier: -2, 0, 0, 0, 0, +2; 
Second contract: 
Mean: 0; 
Range of responses: -2 to 0; 
Response of an individual carrier: -2, 0, 0, 0, 0, 0. 

Carriers’ abilities to meet the requirement to be licensed in every 
state: 
First contract: 
Mean: 0; 
Range of responses: 0 to +2; 
Response of an individual carrier: 0, 0, 0, 0, 0, +2; 
Second contract: 
Mean: 0; 
Range of responses: 0 to +2; 
Response of an individual carrier: 0, 0, 0, 0, 0, +2. 

Source: GAO interviews with insurance carrier officials. 

Notes: Officials from each of the six carriers we interviewed were 
asked whether each factor affected the carrier’s interest in FLTCIP. 
If the factor influenced the carrier’s interest, then the officials
specified whether the factor had a negative or positive effect and 
rated the extent of the effect on a five-point scale, with 1 
indicating a minimal effect and 5 indicating a large effect. A score 
of -5 reflects a large negative influence on a carrier’s interest, and 
a score of +5 indicates a large positive influence on carrier’s 
interest in FLTCIP. A score of 0 indicates that the factor did not 
have an influence. 

[End of table] 

[End of section] 

Appendix II: Influence of Program History on Carriers’ Interest in 
FLTCIP: 

Table: 

[Detract goes from 0 to -5. Attract goes from 0 to +5] 

FLTCIP history: 
First contract: Not applicable; 
Second contract: 
Mean: -2; 
Range of responses: -5 to +3; 
Response of an individual carrier: -5, -4, -4, -2, 0; +3. 

Need to transition the program from another carrier: 
First contract: Not applicable; 
Second contract: 
Mean: -2; 
Range of responses: -5 to 0; 
Response of an individual carrier: -5, -4, -3, 0, 0, 0. 

Likely presence of proposals from incumbent contractors: 
First contract: Not applicable; 
Second contract: 
Mean: -1; 
Range of responses: -5 to 0; 
Response of an individual carrier: -5, -3, 0, 0, 0, 0. 

Source: GAO interviews with insurance carrier officials. 

Notes: Officials from each of the six carriers we interviewed were 
asked whether each factor affected the carrier’s interest in FLTCIP. 
If the factor influenced the carrier’s interest, then the officials
specified whether the factor had a negative or positive effect and 
rated the extent of the effect on a five-point scale, with 1 
indicating a minimal effect and 5 indicating a large effect. A score 
of -5 reflects a large negative influence on a carrier’s interest, and 
a score of +5 indicates a large positive influence on carrier’s 
interest in FLTCIP. A score of 0 indicates that the factor did not 
have an influence. 

[End of table] 

[End of section] 

Appendix III: Influence of Program Size and Other Characteristics on 
Carriers’ Interest in FLTCIP: 

Table: 

Large size of the eligible population: 
First contract: 
Mean: +2; 
Range of responses: 0 to +5; 
Response of an individual carrier: 0, 0, +1, +4, +4, +5; 
Second contract: 
Mean: +1; 
Range of responses: 0 to +5; 
Response of an individual carrier: 0, 0, 0, 0, +4, +5. 

A list of the names and addresses of all eligible individuals is 
unavailable: 
First contract: 
Mean: -4; 
Range of responses: -5 to 0; 
Response of an individual carrier: -5, -4, -4, -4, -4, -1; 
Second contract: 
Mean: -2; 
Range of responses: -5 to 0; 
Response of an individual carrier: -5, -4, -4, -2, 0, 0. 

Characteristics of the eligible population, which include a relatively 
high portion of disabled individuals: 
First contract: 
Mean: -2; 
Range of responses: -4 to +2; 
Response of an individual carrier: -4, -3, 0, 0, +2; 
Second contract: 
Mean: -1; 
Range of responses: -4 to +3; 
Response of an individual carrier: -4, -3, 0, 0, 0, +3. 

FLTCIP not required to guarantee coverage to all eligible individuals; 
all enrollees have been subject to some underwriting: 
First contract: 
Mean: +3; 
Range of responses: 0 to +5; 
Response of an individual carrier: 0, 0, +3, +3, +5, +5; 
Second contract: 
Mean: +2; 
Range of responses: 0 to +5; 
Response of an individual carrier: 0, 0, 0, +3, +5, +5. 

FLTCIP is offered as a voluntary benefit; enrollees pay the full 
amount of their premiums with no employer contribution: 
First contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4, -2, -1, 0, 0, 0; 
Second contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4, -2, 0, 0, 0, 0. 

FLTCIP is exempt from state oversight but is subject to OPM oversight: 
First contract: 
Mean: +2; 
Range of responses: -2 to +5; 
Response of an individual carrier: -2, 0, _1, +4, +4, +5; 
Second contract: 
Mean: +1; 
Range of responses: -2 to +5; 
Response of an individual carrier: -2, 0, 0, 0, +4, +5. 

OPM and the carrier must agree to all program features and any changes 
to these features: 
First contract: 
Mean: -2; 
Range of responses: -4 to +1; 
Response of an individual carrier: -4, -4, -2, -2, 0, +1; 
Second contract: 
Mean: -1; 
Range of responses: -4 to +1; 
Response of an individual carrier: -4, 0, 0, 0, 0, +1. 

OPM must approve all expenses charged to the program: 
First contract: 
Mean: -1; 
Range of responses: -2 to 0; 
Response of an individual carrier: -2, -1, 0, 0, 0, 0; 
Second contract: 
Mean: 0; 
Range of responses: -2 to 0; 
Response of an individual carrier: -2, 0, 0, 0, 0, 0. 

OPM and the carrier must agree on the timing of an open enrollment 
period: 
First contract: 
Mean: 0; 
Range of responses: 0; 
Response of an individual carrier: 0, 0, 0, 0, 0, 0; 
Second contract: 
Mean: 0; 
Range of responses: 0; 
Response of an individual carrier: 0, 0, 0, 0, 0, 0. 

The carrier must provide OPM with regular reports regarding FLTCIP: 
First contract: 
Mean: 0; 
Range of responses: 0; 
Response of an individual carrier: 0, 0, 0, 0, 0, 0; 
Second contract: 
Mean: 0; 
Range of responses: 0; 
Response of an individual carrier: 0, 0, 0, 0, 0, 0. 

Some of the carrier’s profit payment is based on a percentage of 
premiums; carrier is not rewarded based on risk: 
First contract: 
Mean: -2; 
Range of responses: -4 to +2; 
Response of an individual carrier: -4, -3, -3, -2, 0, +2; 
Second contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4, -3, -1; 0, 0, 0. 

Some of the carrier’s profit payment is subject to OPM’s evaluation of 
the carrier’s performance: 
First contract: 
Mean: -1; 
Range of responses: -2 to +1; 
Response of an individual carrier: -2, -2, -1, 0, 0, +1; 
Second contract: 
Mean: 0; 
Range of responses: -1 to +1; 
Response of an individual carrier: -1, 0, 0, 0, 0, +1. 

FLTCIP is offered under a time-limited, 7-year contract with OPM: 
First contract: 
Mean: +1; 
Range of responses: -3 to +5; 
Response of an individual carrier: -3, 0, 0, 0, +3; +5; 
Second contract: 
Mean: +1; 
Range of responses: -1 to +5; 
Response of an individual carrier: -1, 0, 0, 0, 0, +5. 

After contract term, all funding/enrollees could either transfer to 
new carrier or carrier may have to continue service: 
First contract: 
Mean: -1; 
Range of responses: -3 to 0; 
Response of an individual carrier: -3, -0, 0, 0, 0, 0; 
Second contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4; 0, 0, 0, 0, 0. 

FLTCIP contract is not automatically renewable; carriers must submit 
new bids: 
First contract: 
Mean: +1; 
Range of responses: -3 to +5; 
Response of an individual carrier: -3, 0, 0, 0, +3, +5; 
Second contract: 
Mean: +1; 
Range of responses: -2 to +5; 
Response of an individual carrier: -2, 0, 0, 0, 0, +5. 

The carrier is required to account for all program funds in a separate 
account: 
First contract: 
Mean: +1; 
Range of responses: 0 to +5; 
Response of an individual carrier: 0, 0, 0, 0, 0, +5; 
Second contract: 
Mean: +1; 
Range of responses: 0 to +5; 
Response of an individual carrier: 0, 0, 0, 0, 0, +5. 

Potential for federal audits as a result of contracting with federal 
government: 
First contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4, -1, 0, 0, 0, 0; 
Second contract: 
Mean: -1; 
Range of responses: -4 to 0; 
Response of an individual carrier: -4, -1, 0, 0, 0, 0. 

Source: GAO interviews with insurance carrier officials. 

Notes: Officials from each of the six carriers we interviewed were 
asked whether each factor affected the carrier’s interest in FLTCIP. 
If the factor influenced the carrier’s interest, then the officials
specified whether the factor had a negative or positive effect and 
rated the extent of the effect on a five-point scale, with 1 
indicating a minimal effect and 5 indicating a large effect. A score 
of -5 reflects a large negative influence on a carrier’s interest, and 
a score of +5 indicates a large positive influence on carrier’s 
interest in FLTCIP. A score of 0 indicates that the factor did not 
have an influence. 

[End of table] 

[End of section] 

Appendix IV: Selected Features of FLTCIP Benefit Plans Offered during 
the Program’s First and Second Contract Periods: 

Benefit options: 

Plan feature: Coverage type: 
FLTCIP 1.0 plan: Comprehensive or facilities-only[A]; 
FLTCIP 2.0 plan: Comprehensive. 

Plan feature: Daily benefit amount[B]; 
FLTCIP 1.0 plan: $50 to $300, in $25 increments[C]; 
FLTCIP 2.0 plan: $100 to $450, in $50 increments. 

Plan feature: Elimination/waiting period[D]; 
FLTCIP 1.0 plan: 30 or 90 service days, with incurred expenses 
required; 
FLTCIP 2.0 plan: 90 calendar days, no incurred expenses required. 

Plan feature: Benefit period[E]; 
FLTCIP 1.0 plan: 3 years, 5 years, or unlimited: 
FLTCIP 2.0 plan: 2 years, 3 years, 5 years, or unlimited. 

Payment for covered services[F]: 

Plan feature: Nursing home and assisted-living facility; 
FLTCIP 1.0 plan: 100% of daily benefit amount; 
FLTCIP 2.0 plan: 100% of daily benefit amount. 

Plan feature: Home care and adult day care; 
FLTCIP 1.0 plan: 75% of daily benefit amount; 
FLTCIP 2.0 plan: 100% of daily benefit amount. 

Plan feature: Hospice care; 
FLTCIP 1.0 plan: 100% of daily benefit amount; 
FLTCIP 2.0 plan: 100% of daily benefit amount. 

Plan feature: Respite care; 
FLTCIP 1.0 plan: 100% of daily benefit amount, limited to 30 times the 
daily benefit amount per calendar year; 
FLTCIP 2.0 plan: 100% of daily benefit amount, limited to 30 times the 
daily benefit amount per calendar year. 

Plan feature: Informal care provided by family members; 
FLTCIP 1.0 plan: 75% of daily benefit amount, limited to 365 days in a 
lifetime; 
FLTCIP 2.0 plan: 100% of daily benefit amount, limited to 500 days in 
a lifetime. 

Plan feature: Stay-at-home benefits; 
FLTCIP 1.0 plan: Caregiver training covered at seven times the daily 
benefit amount per lifetime; 
FLTCIP 2.0 plan: Up to 30 times the daily benefit amount for a range 
of benefits, including: 
* caregiver training—payable up to seven times the daily benefit 
amount per lifetime, 
* care planning visits, 
* durable medical equipment, and, 
* home modifications. 
Benefits paid for these services do not otherwise reduce the total 
amount of benefits payable under the plan. 

Source: GAO analysis of FLTCIP program materials. 

Notes: The FLTCIP 1.0 plan was available to all individuals who 
enrolled during the program’s first contract period, beginning March 
25, 2002, and the FLTCIP 2.0 plan was available to those who enrolled 
beginning October 1, 2009—during the program’s second contract period. 
Individuals who enrolled in the FLTCIP 1.0 plan during the first 
contract period were also offered the option to switch to the FLTCIP 
2.0 plan. 

[A] Comprehensive coverage provides reimbursement for everything 
facilities-only coverage provides plus formal or informal care at 
home, care in adult day care centers, hospice care at home, and
respite services at home. Facilities-only coverage provides 
reimbursement for services such as those provided in a nursing home, 
assisted-living facility, hospice facility, and respite care facility, 
as well as caregiver training. 

[B] The daily benefit amount is the maximum amount insurance will pay 
for services on a single day. 

[C] Instead of a daily benefit amount, FLTCIP 1.0 enrollees with 
comprehensive coverage could select a weekly benefit amount equal to 
seven times the daily benefit amount. 

[D] The elimination or waiting period is the length of time an 
enrollee has to wait before insurance will provide coverage toward the 
cost of care. Elimination periods can be specified on either a service 
day (i.e., the number of days an individual must receive services 
before insurance will provide coverage toward his or her cost of care) 
or a calendar day basis. 

[E] An enrollee’s benefit period represents the length of time an 
enrollee’s insurance will pay for covered services at the maximum 
daily benefit amount. 

[F] Information about FLTCIP’s payment for covered services is 
applicable only to the comprehensive coverage option; the facilities-
only option was only available with the FLTCIP 1.0 plan. 

[End of table] 

[End of section] 

Appendix V: Changes in the Cost of Long-Term Care Services Compared 
with FLTCIP Inflation Protection Options: 

To summarize changes in the cost of long-term care services from 2002
through 2010, we analyzed consumer price index data from the Bureau of
Labor Statistics on changes in the cost of nursing home care and home
care.[Footnote 44] The nursing home care index provides information 
about changes in the cost of long-term care services provided in a 
residential setting, such as a nursing home or an assisted-living 
facility.[Footnote 45] The home care index provides information about 
changes in the cost of nonmedical long-term care services provided in 
the home, such as agency or individual assistance with bathing, food 
preparation, or toileting.[Footnote 46] Using data from these indexes, 
we compared the rate of growth in long-term care costs from 2002 (the 
year that FLTCIP began) through 2010 to the inflation protection 
offered by FLTCIP’s automatic compound inflation options (ACIO)-—5 
percent ACIO and 4 percent ACIO.[Footnote 47] 

We found that FLTCIP’s 4 percent and 5 percent ACIOs would both have
provided substantial protection against increases in long-term care 
costs from 2002 through 2010. Specifically, according to our analysis of
consumer price index data, the cost of nursing home care increased
38 percent from 2002 through 2010, which equates to an average annual
increase of 4.1 percent. In comparison, a 5 percent ACIO would have
increased an enrollees’ daily benefit amount by 48 percent during the
same time frame, while a 4 percent ACIO would have increased an
enrollees’ benefit amount by 37 percent. (See figure 3.) According to 
our analysis of consumer price index data, the cost of home care 
increased 9 percent from 2006—-the first year data became available—-
through 2010 at an average annual increase of 2.3 percent. Both the 4 
percent and 5 percent ACIO would have protected enrollees fully 
against increases in the cost of such care during that period. 
However, past increases in the cost of long-term care services may not 
reflect future trends. 

Figure 3: Percentage Change in the Cost of Nursing Home Care, 2002 
through 2010, Compared with Automatic Compound Inflation Options 
(ACIO) Available under the Federal Long Term Care Insurance Program 
(FLTCIP): 

[Refer to PDF for image: multiple line graph] 

Year: 2002; 
Nursing home care[A]: 0; 
4% ACIO: 0; 
5% ACIO: 0. 

Year: 2003; 
Nursing home care[A]: 6%; 
4% ACIO: 4%; 
5% ACIO: 5%. 

Year: 2004; 
Nursing home care[A]: 10%; 
4% ACIO: 8%; 
5% ACIO: 10%. 

Year: 2005; 
Nursing home care[A]: 13%; 
4% ACIO: 12%; 
5% ACIO: 16%. 

Year: 2006; 
Nursing home care[A]: 18%; 
4% ACIO: 17%; 
5% ACIO: 22%. 

Year: 2007; 
Nursing home care[A]: 25%; 
4% ACIO: 22%; 
5% ACIO: 28%. 

Year: 2008; 
Nursing home care[A]: 29%; 
4% ACIO: 27%; 
5% ACIO: 34%. 

Year: 2009; 
Nursing home care[A]: 34%; 
4% ACIO: 32%; 
5% ACIO: 41%. 

Year: 2010; 
Nursing home care[A]: 38%; 
4% ACIO: 37%; 
5% ACIO: 48%. 

Source: GAO analysis of consumer price index data from the Bureau of 
Labor Statistics and FLTCIP benefit options. 

Notes: FLTCIP began offering the 4 percent ACIO in 2009. 

[A] The Bureau of Labor Statistics refers to this index as “nursing 
home and adult day care services.” However, changes in the index 
reflect the cost of residential facility-based services, such as those
provided at nursing homes and assisted-living facilities, but not 
those associated with adult day care services. 

[End of figure] 

[End of section] 

Appendix VI: Changes to FLTCIP Performance Metrics: 

A portion of the profit payments made to the FLTCIP carrier is based on
the Office of Personnel Management’s (OPM) evaluation of the carrier’s
performance. The FLTCIP contract outlines both the performance
measures used and the target performance values that the carrier must
meet in order to receive all of the performance-based portion of the 
profit payments. With FLTCIP’s second contract, OPM and the FLTCIP 
carrier agreed to modify the performance metrics used to determine the 
carrier’s profit payment. These modifications included adding or 
removing performance categories, revising performance measures, and 
changing target performance values. Table 4 outlines changes made to 
FLTCIP performance metrics since the second contract was awarded. 

Table 4: Federal Long Term Care Insurance Program (FLTCIP) Performance 
Metrics, by Contract: 

Administrative expense savings: 

Performance measure: Actual administrative expenses less than budget; 
Target performance values: 
First contract: Actual administrative expenses less than 105% of 
budget; 
Second contract: Actual administrative expenses less than 100% of 
budget. 

Claims experience: 

Performance measure: Cumulative claims experience compared with 
expectations[A]; 
Target performance values: First contract: Cumulative 
claims experience is no greater than 110% of expectations; 
Second contract: Not included. 

Customer service: 

Performance measure: Billing: timeliness of posting payroll and annuity 
payments; 
Target performance values: 
First contract: 90% of payments posted within 2 business days; 
Second contract: Same. 

Performance measure: Billing: timeliness of processing automatic bank 
withdraw reversals[B]; 
Target performance values: 
First contract: 90% of reversals processed within 2 business days; 
Second contract: Same. 

Performance measure: Billing: timeliness of processing billing changes; 

Target performance values: First contract: 90% of billing changes 
processed within 3 business days; 
Target performance values: Second 
contract: Same. 

Performance measure: Billing: timeliness of sending payroll bills; 
Target performance values: 
First contract: 95% of payroll bills sent within requisite time frame; 
Second contract: Same. 

Performance measure: Call center: call abandonment rate; 
Target performance values: 
First contract: 3% or fewer calls abandoned; 
Second contract: Not included. 

Performance measure: Call center: call answering speed; 
Target performance values: 
First contract: 85% of calls answered within 20 seconds; 
Second contract: Same. 

Performance measure: Call center: customer satisfaction; 
Target performance values: 
First contract: 90% of surveyed customers rate their satisfaction 
level with customer service as satisfied or very 
satisfied; 
Second contract: Same. 

Performance measure: Call center: portion of customer service 
representatives certified as long-term care insurance specialists; 
Target performance values: 
First contract: Not included; 
Second contract: 95% of customer service representatives are certified 
as long-term care insurance specialists within 9 months of assuming 
duties. 

Performance measure: Call center: timeliness of callbacks; 
Target performance values: 
First contract: 90% of calls returned within 1 business day, and 99 
percent of calls returned within 2 business days; 
Second contract: Same. 

Performance measure: Call center: timeliness of response to written or 
e-mail inquiries; 
Target performance values: 
First contract: 90% of inquires responded to within 5 business days; 
Second contract: 90% of inquires responded to within 5 business days, 
and 99% of inquiries responded to within 10 business days. 

Performance measure: Care coordination: customer satisfaction; 
Target performance values: 
First contract: 94% of surveyed customers rate their satisfaction 
level with care coordination as satisfied or very satisfied; 
Second contract: 95% of surveyed customers rate their satisfaction 
level with care coordination as satisfied or very satisfied. 

Performance measure: Care coordination: timeliness of benefit 
determinations; 
Target performance values: 
First contract: 95% of determinations completed within 10 business 
days; 
Second contract: 95% of determinations completed within 5 business 
days, and 99% of determinations completed within 10 business days. 

Performance measure: Claims: accuracy of claims payments; 
Target performance values: 
First contract: 98% of claims are paid accurately the first time; 
Second contract: Same. 

Performance measure: Claims: timeliness of claims payments; 
Target performance values: 
First contract: 98% of claims paid within 10 business days; 
Second contract: 98% of claims paid within 5 business days. 

Performance measure: Underwriting: timeliness of initial underwriting 
decisions; 
Target performance values: 
First contract: 95% of applications underwritten within 5 business 
days, and 97% of applications underwritten within 10 business days; 
Second contract: Same. 

Performance measure: Underwriting: timeliness of reconsideration 
decisions; 
Target performance values: 
First contract: 95% of initial reconsiderations completed within 10 
business days, and 97% of initial reconsiderations completed within 15 
business days; 97% of secondary reconsiderations completed within 30 
days; 
Second contract: 95% of initial reconsiderations completed within 10 
business days, and 97% of initial reconsiderations completed within 15 
business days; 99% of secondary reconsiderations completed within 30 
business days. 

Enrollment: 

Performance measure: Actual enrollment compared with enrollment goals; 
Target performance values: 
First contract: Actual enrollment is 90% of enrollment goal; 
Second contract: Not included. 

Marketing and education effectiveness: 

Performance measure: Success in increasing positive awareness of FLTCIP 
among employees; 
Target performance values: 
First contract: Not included; 
Second contract: Conduct agreed-upon marketing and outreach 
activities, and 90% of surveyed Web users, callers, and seminar 
attendees say that their awareness of FLTCIP has increased. 

Responsiveness to OPM: 

Performance measure: Timeliness of reporting significant events to 
OPM[C]; 
Target performance values: 
First contract: Significant events reported within 10 business days; 
Second contract: Same. 

Performance measure: Timeliness of addressing deficiencies reported by 
OPM; 
Target performance values: 
First contract: Detailed plans for correcting deficiencies provided 
within 10 business days following OPM notification of deficiencies; 
Second contract: Same. 

Performance measure: General working relationship with OPM; 
Target performance values: 
First contract: No documented inattention or indifference to effective 
operations or responsiveness to OPM; 
Second contract: Same. 

Performance measure: Monitoring and reporting on industry trends to 
OPM; 
Target performance values: 
First contract: Monthly updates on industry trends and program 
recommendations provided to OPM; 
Second contract: Not included. 

Performance measure: Measures initiated by contractor to enhance 
productivity or reduce costs; 
Target performance values: First contract: Not included; 
Second contract: OPM evaluation of contractor reports and audited 
financial statements. 

Web site: 

Performance measure: Web site availability; 
Target performance values: 
First contract: Not included; 
Second contract: 99% of the time Web servers remain accessible and 
fully functional for FLTCIP customers. 

Performance measure: Web site satisfaction; 
Target performance values: 
First contract: Not included; 
Second contract: 90% of surveyed enrollees rate their Web site 
satisfaction level as satisfied or very satisfied. 

Return on investment: 

Performance measure: Investment performance[A]; 
Target performance values: 
First contract: Meet or exceeded the investment return benchmark; 
Second contract: Not included. 

Source: GAO analysis of FLTCIP contracts. 

Notes: Unless otherwise noted, the carrier's performance on the metric 
was to be assessed annually. For the first contract period, OPM 
evaluated the FLTCIP carrier's performance in these metrics beginning 
in fiscal year 2006. OPM used different metrics to assess the carrier's 
performance prior to fiscal year 2006. 

[A] During the first contract period, this performance metric was 
assessed every 3 years. 

[B] Individuals may allow FLTCIP to deduct money from their bank 
accounts to pay premiums through automatic bank withdrawal. Reversals 
of these withdrawals may occur as a result of insufficient funds. 

[C] Significant events are those that may be expected to have a 
material effect upon the carrier's ability to meet its contractual 
obligations to OPM. Such events may include the disposal of 25 percent 
or more of FLTCIP assets within a 6-month period, the termination of a 
contract or subcontract that may have an effect on the carrier's 
ability to meet its contractual obligations, or the discovery of fraud. 

[End of table] 

[End of section] 

Appendix VII GAO Contact and Staff Acknowledgments: 

GAO Contact: 

John E. Dicken, (202) 512-7114 or dickenj@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Michelle B. Rosenberg, 
Assistant Director; Coy J. Nesbitt; Laurie Pachter; Patricia Roy; and 
Brienne Tierney made key contributions to this report. 

[End of section] 

Footnotes: 

[1] Long-term care refers to a range of support services provided to 
people who, because of cognitive impairment, illness, or disability, 
generally are unable to perform activities of daily living for an 
extended period. Such activities include eating, bathing, dressing, 
using the toilet, getting in and out of bed, and getting around the 
house. 

[2] Medicaid is a joint federal-state program that finances health 
care for certain categories of low-income individuals. 

[3] Pub. L. No. 106-265, 114 Stat. 762 (2000). 

[4] Program administration duties include items such as marketing, 
communicating with enrollees, and paying claims. 

[5] In this report, we use “John Hancock” to refer to both John 
Hancock and its subsidiary Partners when we are referring to FLTCIP’s 
second contract period. 

[6] See GAO, Long-Term Care Insurance: Federal Program Compared 
Favorably with Other Products, and Analysis of Claims Trend Could 
Inform Future Decisions, [hyperlink, 
http://www.gao.gov/products/GAO-06-401] (Washington, D.C.: Mar. 31, 
2006). 

[7] We also contacted another insurance carrier that declined our 
request for an interview, but nonetheless provided us with some 
information regarding the factors that affected its interest in FLTCIP. 

[8] Metropolitan Life Insurance Company, Market Survey of Long-Term 
Care Costs (Westport, Conn., October 2010). 

[9] This estimate includes spending on nursing home care, home health 
care, and hospital-based nursing and home health care, as well as 
spending through Medicaid home- and community-based waiver programs 
that provide certain low-income individuals in some states with access 
to home- and community-based long-term care services. The estimate
was prepared by the Centers for Medicare & Medicaid Services’ Office 
of the Actuary based on 2009 National Health Expenditures data and 
other unpublished sources. 

[10] Underwriting is the process of reviewing an applicant’s responses 
to questions, including medical and health-related questions, to 
determine if the applicant is insurable and the premium rate is 
appropriate, given the level of risk the applicant presents for the 
insurance coverage. In some cases, underwriting also includes a review 
of the applicant’s medical records and the results of the applicant’s 
interview with a nurse. 

[11] Some plans offer a nonforfeiture benefit option, which allows 
enrollees who lapse to obtain coverage for their long-term care costs, 
up to the total amount of premiums the enrollees’ paid prior to 
lapsing. As such, premiums paid by those who lapse but who had 
nonforfeiture benefits would subsidize other enrollees’ claims to a 
smaller extent, or possibly not at all. 

[12] In 2009, the top four carriers offering long-term care insurance 
accounted for over 50 percent of all covered lives. 

[13] There is no standard definition of “moderately adverse conditions;”
 rather, the actuary must determine for each long-term care insurance 
policy the appropriate margin for error for the assumptions used to 
calculate premiums. 

[14] Pub. L. No. 106-265, §§ 9003(a), (d)(1); 9005(a); 114 Stat. 762, 
764-66, 767-8 (codified at 5 U.S.C. §§ 9003(a), (d)(1); 9005(a)). 

[15] The 25 percent cap on premium increases applied only to those who 
made no changes to their benefits. 

[16] Pub. L. No. 106-265, § 9004(e), 114 Stat. 762, 767 (codified at 5 
U.S.C. § 9004(e)). 

[17] Qualified relatives include current spouses of employees and 
retirees, as well as same-sex domestic partners of active and retired 
federal and Postal Service employees; adult children at least 18 years 
old—including natural, adopted, and stepchildren, but not foster
children—of living employees and retirees; and parents, parents-in-
law, and stepparents of living employees, but not of retirees. 
Selected military reservists; employees and retirees of the Tennessee 
Valley Authority; District of Columbia government employees and 
retirees first employed before October 1, 1987; and employees and 
retirees of the District of Columbia Courts are also eligible to apply. 

[18] FLTCIP held its first open enrollment period when the program 
first began in 2002 and held its second open enrollment from April 4, 
2011, through June 24, 2011. Same-sex domestic partners were not 
eligible to apply for FLTCIP coverage during the program’s first open 
enrollment period in 2002; they first became eligible for coverage in 
July 2010. 

[19] Newly hired federal and Postal Service employees and newly active 
members of the uniformed services who apply for FLTCIP coverage within 
60 days of their employment may do so using an abbreviated 
underwriting application, as can their spouses. 

[20] FLTCIP enrollees become eligible for benefits once a licensed 
health care practitioner certifies, and the program agrees, that the 
enrollee (1) is unable to perform at least two activities of daily 
living without substantial assistance for a period expected to last at 
least 90 days or (2) needs substantial supervision because of a severe 
cognitive impairment, such as Alzheimer’s disease. 

[21] Although FLTCIP did not guarantee that premiums would remain 
stable, some individuals who selected the 5 percent ACIO benefit—which 
increases enrollees benefits each year without a routine increase in 
premiums—believed that their premiums would never increase. At an 
October 14, 2009, joint hearing of the Senate Special Committee on
Aging and the Subcommittee on Oversight of Government Management, the 
Federal Workforce and the District of Columbia of the Senate Committee 
on Homeland Security and Governmental Affairs, members of Congress and 
others questioned the clarity of FLTCIP’s marketing of this benefit. 

[22] At the time of both of OPM’s RFPs, business strategy had a 
positive influence on three of the carriers’ interest in FLTCIP and a 
negative influence on three of the carriers’ interest. However, the 
influence on specific carriers differed for the first and second 
solicitations. Specifically, business strategy had a positive 
influence on two carriers for both solicitations and a negative 
influence on two carriers for both solicitations. For the remaining 
two carriers, business strategy affected their interests differently 
at the time of the first and second solicitations. 

[23] Specifically, in 2009, Unum halted sales of long-term care 
insurance policies in the individual market, and in 2010, John Hancock 
stopped sales of long-term care insurance policies in the group 
market. MetLife discontinued sales of all of its long-term care 
insurance policies in 2011. In addition, the carrier that we contacted 
but that declined our request for an interview discontinued sales of 
long-term care insurance policies in the individual market in 2003. 

[24] In our prior work, we noted that the lack of home addresses posed 
a significant marketing challenge for FLTCIP because the insurance 
carriers we interviewed told us that mailing information directly to 
eligible individuals’ homes is critical to market long-term care 
insurance plans. See GAO, Long-Term Care Insurance: Federal Program 
Has a Unique Profit Structure and Faced a Significant Marketing 
Challenge, [hyperlink, http://www.gao.gov/products/GAO-07-202] 
(Washington, D.C.: Dec. 29, 2006). 

[25] The federal government has taken steps to increase the 
recruitment, hiring, and retention of people with disabilities, and to 
provide these individuals with benefits. 

[26] New program enrollees were automatically enrolled in the FLTCIP 
2.0 plan, while individuals already enrolled in FLTCIP were able to 
switch to the FLTCIP 2.0 plan. 

[27] The FLTCIP 1.0 plan offered applicants the ability to select 
between comprehensive and facilities-only coverage, whereas the FLTCIP 
2.0 plan only offers comprehensive coverage. Comprehensive coverage 
provides reimbursement for everything that facilities-only coverage 
provides plus formal or informal care at home, care in adult day care
centers, hospice care at home, and respite services at home. 

[28] OPM and John Hancock have agreed to provide a method for an 
enrollee to adjust his or her daily benefit amount if they determine 
that the cumulative change in the cost of long-term care services is 
significantly higher than the enrollee’s selected ACIO rate. 
Increasing the daily benefit amount to account for a higher rate of 
inflation would result in a higher premium. 

[29] “Public equities” refers to assets invested in public companies—
for example, via the purchase of stocks. John Hancock plans to invest 
75 percent of the assets corresponding to FLTCIP’s long-term 
liabilities in public equities. However, the portion of total program
assets corresponding to FLTCIP’s long-term liabilities will change 
over time. As of the end of 2010, 42 percent of FLTCIP’s total assets—
including 58 percent of assets corresponding to long-term liabilities—
were invested in public equities. 

[30] The profit payments are intended as profits, but do not ensure 
that the carrier realizes a profit because the payments are not linked 
to the carrier’s actual costs. In addition to profit payments, FLTCIP 
pays for the program’s expenses, such as those for marketing, 
underwriting, and claims administration. For additional information on 
the unique nature of the FLTCIP profit structure, see GAO-07-202. 

[31] 5 C.F.R. § 875.213 (2011). 

[32] If an enrollee’s decision to keep the FLTCIP 1.0 plan and switch 
to the 4 percent ACIO resulted in a premium decrease, John Hancock 
increased the enrollee’s daily benefit amount so that the monthly 
premium remained within 2 dollars of the original premium. 

[33] Enrollees with certain benefit options-—those with an unlimited 
benefit period or facilities-only coverage-—could only switch to the 
FLTCIP 2.0 plan if they also reduced their inflation protection 
benefit to the 4 percent ACIO. 

[34] FLTCIP does, however, provide all enrollees with a standard 
contingent nonforfeiture benefit. To qualify for this benefit, an 
enrollee’s premium must have increased, over the lifetime of the 
policy, from 10 to 200 percent, depending on the individual’s age at 
the time he or she applied for coverage. No FLTCIP enrollees qualified 
for this benefit at the time of the premium increase. 

[35] Keeping the FLTCIP 1.0 plan with 5 percent ACIO (i.e., making no 
changes to benefits) was the default provided to enrollees facing the 
premium increase and thus required no action by the enrollees. 

[36] John Hancock officials reported that the 1.6 percent lapse rate 
was consistent with lapse rates reported by other long-term care 
insurance carriers following a premium increase. 

[37] Changes to enrollees’ premiums were also affected by individuals’ 
age at the time they applied for coverage and the benefits they had 
prior to the premium increase. In addition, OPM’s 25 percent cap on 
premium increases did not apply to enrollees who made any 
modifications to their benefits-—including changing their inflation 
protection coverage or benefit plan. 

[38] According to John Hancock officials, the return on investment 
assumption used to set premiums would have decreased had they not 
changed FLTCIP’s investment strategy. 

[39] John Hancock officials told us that the increased projections for 
the program’s claims payments were driven primarily by decreases in 
the program’s lapse and mortality rate assumptions. 

[40] As of 2011, these carriers’ ultimate lapse rate assumptions 
ranged from 0.25 to 1.5 percent. 

[41] Specifically, officials from the four carriers that provided 
detailed information on this assumption stated that the carriers’ 
return on investment assumptions decreased from between 5.75 and 7 
percent in 2002 to between 4.5 and 6 percent in 2011. 

[42] Since 2002, the carriers’ requests for premium increases ranged 
from 8 to 42 percent, according to the officials we interviewed. As of 
February 2011, some carriers’ requests for premium increases were 
pending state approval; all premium increases are subject to states’ 
approval, so the amount of increases implemented can vary by state. 

[43] OPM did not require the submission of a status report in 2008 
because the agency was in the process of requesting proposals for the 
program’s second contract. 

[44] These indexes each make up about 2 percent of the broader 
consumer price index for medical care, which provides information on 
the changes in cost of medical goods and services. 

[45] The Bureau of Labor Statistics refers to this index as “nursing 
home and adult day care services.” However, according to an agency 
official, while data are collected on consumer spending for adult day 
care services, this index does not reflect changes in the cost of care 
for these services. Rather, changes in the index only reflect the cost 
of residential facility-based services, such as those provided at 
nursing homes and assisted-living facilities. 

[46] This index, which was established by the Bureau of Labor 
Statistics in 2006, is referred to as “care of invalids and elderly at 
home,” although it reflects the costs of care provided to individuals 
of any age who are convalescing at home. 

[47] The inflation protection options are intended to help ensure that 
enrollees’ benefits remain commensurate with the costs of long-term 
care. Since its inception, FLTCIP has offered a 5 percent ACIO, which 
increases an enrollee’s daily benefit amount-—the maximum amount 
insurance will pay on a single day-—by 5 percent each year. FLTCIP
began offering a 4 percent ACIO in 2009. 

[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 Phone: 

The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site, 
[hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional 
information. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: