Premiums

Select a question below:

  • How are Federal Long Term Care Insurance Program (FLTCIP) premiums established?
  • The goal in establishing the premium rates is to calculate rates that will be sufficient to pay claims plus expenses, now and over the future lifetime of enrollees. Calculating premiums requires using a series of assumptions that quantify the risk that certain things will happen in the FLTCIP over the course of time.

    The key risk assumptions relate to claims (how many people will qualify for benefits and begin submitting claims, when, and for how long?), investment results (how much money will be earned by investing the premiums?), lapse results (how many people will voluntarily drop their coverage over the course of time?), and mortality (how many people will die while enrolled?). These risks vary for enrollees depending on their ages when they enroll, and the risks change as people age while enrolled. Different plan designs require different risk assumptions as well (for example, there are different risk assumptions made for a 3 year benefit period and an unlimited benefit period). There are also expense assumptions—how much it will cost to administer the FLTCIP and pay fees to the insurer(s).

    The FLTCIP contract requires that the pricing calculations adhere to the National Association of Insurance Commissioners guidelines. This means that, at the time premiums are determined for new enrollees, the insurer must certify that the premiums are expected to be sufficient (expected not to increase) under “moderately adverse” conditions. While the term “moderately adverse” is not defined in the guidelines, it means that a small deviation in experience from original assumptions should not result in a rate increase. It does not guarantee that rates will not need to be increased. John Hancock’s pricing assumptions for the FLTCIP are fully disclosed to OPM, and provisions for handling FLTCIP expenses and for determining the insurance carrier’s fees were established during the competitive procurement process.
  • What happens to the money?
  • All of the premiums collected for the FLTCIP go into an account that is held by the insurer just for the FLTCIP. The insurer cannot use this account for anything except the FLTCIP. This account is called an Experience Fund. The only sources of money for the Experience Fund are the premiums that are collected from participants and the fund’s investment earnings. Money in the Experience Fund can only be used to pay claims and cover expenses and fees for the FLTCIP. The assumptions for projecting future experience and the value of the Experience Fund are monitored by OPM and the insurance carrier to evaluate whether the fund, along with future premiums and investment income, is adequate to pay expected claims, expenses, and fees over the course of time. If the fund has enough money to cover the FLTCIP’s expected needs, no corrective action is needed. If the fund is not adequate, analysis is done to determine which plan designs and age groups may need rate adjustments.

    By the same token, if the fund has more money than might reasonably be needed to cover the FLTCIP’s expected obligations, premiums can be reduced or benefits can be improved for the participants without raising premium rates. The key thing to remember is that all premium collected goes into the Experience Fund, and the Experience Fund can only be used to cover the FLTCIP’s needs and obligations and for the benefit of the FLTCIP participants. If the FLTCIP changes insurer(s), the fund moves to the new insurer(s).
  • Has the Federal Long Term Care Insurance Program (FLTCIP) ever had a premium increase?
  • Yes. Premiums increased for some enrollees in 2010, and affected enrollees had choices to avoid the increase.

    Effective March 1, 2010, premiums increased for FLTCIP 1.0 enrollees with the Automatic Compound Inflation Option whose age at purchase was 69 or younger and who chose to keep the same coverage they had.

    The amount of the increase depended on the person's age when the ACIO insurance was purchased:

    Percentage of premium increase depending on age at purchase

    This premium increase did not affect FLTCIP 1.0 enrollees with the Future Purchase Option (FPO).
  • Why did the FLTCIP need a rate increase?
  • Some of the key assumptions that were used in developing premium rates in the first contract period that were intended to be conservative and were consistent with industry practices at the time turned out to be inaccurate for the FLTCIP. In particular, enrollee persistency has been higher than expected. This means that more people than expected are keeping their coverage (rather than voluntarily canceling it) and people are living longer than expected when the initial rates were set. Investment experience has been worse than expected. Even if overall trends improve, experience is unlikely to match the underlying assumptions used in the original pricing. Based on revised assumptions (which were derived from an analysis of actual experience), in order to assure that there will be enough money in the Experience Fund to cover the claims and costs that are now expected to be incurred over the course of time, it was necessary to adjust the premium rates for certain plan designs and age groups.

    The FLTCIP is not unique in seeing the need to raise premium rates. As industry experience emerges, and is compared to original good-faith pricing assumptions, many long term care insurers have seen a need to raise premiums, both for new business and for some or all of their existing insureds.
  • How do I know that the 2010 rate increase was really necessary?
  • As part of the competitive procurement process for the second contract term, OPM hired an independent actuarial consultant to review the offers received. The actuarial consultant determined that a rate increase was necessary.

    Late in the first contract period, analysis of the Experience Fund indicated a future projected shortfall of monies available to pay claims. The result of this analysis was confirmed by actuaries from the insurers at that time and OPM, as well as a third-party actuarial firm. As a result, the competitive procurement process for the second contract period included this analysis and considered all recommendations about ensuring the future stability of the FLTCIP. OPM awarded the contract for the second 7-year period to John Hancock. That contract included a premium increase.
  • Why did some premium rates go up but not others?
  • The changes to many long term pricing assumptions have a larger impact on plans with automatic inflation increases and on younger issue ages because there is a greater degree of prefunding for these groups. Changes in assumptions about annual investment returns, mortality rates, and enrollee lapses have the greatest effect when applied over a long period of time.
  • Is a premium increase expected when the current contract ends in 2016?
  • Premiums do not automatically change in 2016 when the contract term ends. There are no plans today to change the premiums again, either during this contract term or in 2016. However, premium rates are not guaranteed. They may change in the future if necessary to ensure that sufficient funds will be available to pay benefits to enrollees in the future.
  • What guarantees are there that this won't happen again?
  • The revised premium rates are intended to adequately position the Experience Fund to cover all future claims and expenses for FLTCIP enrollees. While we cannot guarantee that the premium rates will always remain the same, we do know that a rate increase is a serious event for all stakeholders: plan enrollees, OPM, and the insurance carrier(s). A future rate increase would only be implemented if deemed necessary to assure the adequacy of the Experience Fund.
  • Are enrollees in FLTCIP 1.0 more likely to be in the "group of enrollees whose premium is determined to be inadequate" and therefore more likely to be subject to a future rate increase?
  • We do not expect enrollees in FLTCIP 1.0 to be more or less likely than enrollees in FLTCIP 2.0 to be in a group whose premium may be determined to be inadequate in the future. The differences between the premium rates for FLTCIP 1.0 and the premium rates for FLTCIP 2.0 are based on plan design differences. There is one Experience Fund that receives all premium and investment income from both FLTCIP 1.0 and FLTCIP 2.0, and from which all claims, fees, and expenses are paid for both plans.
  • Could enrollees in the group that was subject to the premium increase have been "grandfathered" so that they were not subject to the premium increase?
  • That was not possible under the law, which requires that enrollee premiums reasonably and equitably reflect the cost of the benefits. If enrollees in this group were exempted from the premium increase, new enrollees' premiums would have to be artificially raised to make up the projected funding shortfall. Their premiums then would not reflect the cost of their benefits. Additionally, the law does not provide for a government contribution to pay part or all of the premiums.