Federal employees enrolled in the Federal Long Term Care Insurance Program got hit with an extreme case of sticker shock this week, when the Office of Personnel Management said that next year's premiums would rise by an average of 83 percent.
The increase—which the National Active and Retired Federal Employees Association estimated to average an extra $111 a month—comes as enrollees are determining their level of coverage ahead of a Sept. 30 deadline for the insurance, which covers health care for beneficiaries with chronic illness, disability or need elder care.
But while the FLTCIP program has seen rates rise for new enrollees before, this year's hike will affect the more than 274,000 beneficiaries, hurt by longer life expectancies and poor performance from the plan's actuarial investment portfolio.
"Unlike health insurance, which more or less every year gets recalculated based on what expenses were the previous year, this was a long-term commitment," Walt Francis—principal author of Checkbook’s Guide, an annual report of federal health insurance costs and coverage—said. "It was supposed to be actuarially sound, that is the premiums that people have been paying were supposed to be enough to cover them.
"So this indicates a massive miscalculation in previous premiums and also maybe unaffordable for many people."
OPM said in a statement that the rate increases emerged after a new seven-year contract was awarded to FLTCIP policy holder John Hancock, who has managed the plan since its inception in 2002.
"John Hancock proposed significantly higher premiums because recent analysis of the program, using updated assumptions based on identified trends and actual claims experience, indicated that the current FLTCIP premiums would not be sufficient to meet the future, projected costs of the benefits. The new premium rates are those established as a result of this competitive process," a fact sheet for FLTCIP beneficiariessaid.
One of the reasons offered for the premium increase was that beneficiaries were living longer, but the FLTCIP is also managed by an actuary that uses investment strategies to help offset risk and future premium costs.
Enrollees can opt to purchase reduced benefits to avoid the rate hike. A 2011 Government Accountability Office reporton the FLTCIP showed that John Hancock anticipated that beneficiaries would hold their policies for longer as life expectancies increased, but noted that when the actuary had lower investment returns from 2002 to 2009, John Hancock "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."
By contrast, when John Hancock last negotiated an FLTCIP contract in 2009, the premium rates jumped approximately 25 percent for more than 146,000 beneficiaries that had enrolled in an inflation protection option.
But this year, all but approximately 10,000 beneficiaries will see their rates rise.
"The actuaries got it wrong for a couple of reasons," said John Hatton, NARFE's deputy legislative director.
"They are just seeing more claims at higher ages, which led to higher costs, and they found that the more expensive policies were being used more. The second thing was they said the investments didn’t do quite as well because a lot if it was invested in bonds, which had lower yields recently."
OPM evaluates the actuarial assumptions and approves the premium increases based on the soundness of those assumptions. Hatton said the agency’s oversight may need to be stronger to prevent such surprise rate hikes.
"Actuaries aren’t going to be right 100 percent of the time," he said, "but one of the issues that we have with [premium increases] happening now twice is the people that get penalized for the actuaries being wrong are the enrollees in the program."
OPM officials said in a statement that the new premiums reflect more current information about long-term coverage, and thus the higher rates to insure.
"The forecasting and projecting of future claims experience on long-term care insurance policies is complex and requires the insurer to make predictions about claims usage and investment returns for decades into the future using the best available information at the time," the statement said.
"In general, enrollees typically do not make claims for long-term care services for many years after the policy is sold (sometimes 20 to 30 years or later). John Hancock’s claims projections at the time of setting the premium rates in 2008 were made based on the best data available at the time. Likewise, the current claims projections, developed as a result of recent analysis, represent the best information presently available. There is now more detail about the current claims trends, particularly the age at which enrollees typically enter claims and the duration at which they use their benefits. John Hancock and Long Term Care Partners review the FLTCIP Experience Fund every six months and provide their findings to OPM. The data indicating a potential long-term funding shortfall for FLTCIP enrollees was first identified in the June 2014 status report after which time John Hancock undertook to further refine the pricing assumptions. It is new experience from data that we are now seeing that is driving the change in future claims projections and the subsequent need to increase premiums."
