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Structure and Faced a Significant Marketing Challenges' which was 
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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

December 2006: 

Long-Term Care Insurance: 

Federal Program Has a Unique Profit Structure and Faced a Significant 
Marketing Challenge: 

Federal Long-Term Care Insurance Program: 

GAO-07-202: 

GAO Highlights: 

Highlights of GAO-07-202, a report to congressional committees 

Why GAO Did This Study: 

Spending on long-term care services—about $193 billion in 2004—is 
expected to rise. In 2000, Congress passed the Long-Term Care Security 
Act, requiring the federal government to offer long-term care 
insurance. To do so, the Office of Personnel Management (OPM) 
contracted with Long Term Care Partners LLC (Partners) to create the 
Federal Long Term Care Insurance Program. This is the second of two 
reports required by the act on the competitiveness of the federal 
program. GAO’s March 31, 2006, report, Long-Term Care Insurance: 
Federal Program Compared Favorably with Other Products, and Analysis of 
Claims Trend Could Inform Future Decisions (GAO-06-401), found that the 
federal program’s benefits and premiums compared favorably with other 
plans, but enrollment and claims experience—the amount and number of 
claims payments—were lower than Partners expected. 

In this report, GAO compared the federal program’s profit structure and 
marketing efforts with those of other plans and updated its analysis of 
the program’s claims experience. GAO reviewed the contract between OPM 
and Partners and interviewed OPM, Partners, and insurance carrier 
officials, as well as actuaries and industry experts. GAO also analyzed 
data on claim payments for the federal program since it began in 2002. 

What GAO Found: 

The Federal Long Term Care Insurance Program has a unique profit 
structure that is explicitly defined in the contract between OPM and 
Partners. This profit structure consists of three distinct annual 
payments to Partners: (1) a guaranteed payment of 3.5 percent of the 
year’s collected premiums, (2) a payment linked to OPM’s evaluation of 
Partners’ performance of up to 3 percent of the year’s collected 
premiums, and (3) a guaranteed payment of 0.3 percent of the average 
annual assets of the program. These payments are separate from other 
payments made to cover the program’s expenses. In contrast to the 
federal program, profits realized by carriers offering other long-term 
care insurance plans generally are not based on explicit profit 
structures, but rather on the experience of the programs they insure. 

The federal program’s marketing efforts were generally similar to those 
used for other plans sold in the group market, but faced a significant 
challenge in sending information directly to eligible individuals. The 
federal program and other plans sold in the group market used such 
marketing efforts as mailing information to the homes of eligible 
individuals and hosting employee and retiree seminars. Of these 
efforts, carrier officials GAO spoke with explained that mailing to the 
homes of eligible individuals was critical to their marketing strategy. 
The federal program faced a significant challenge in mailing 
information to the homes of those eligible for the program because it 
initially did not have the home addresses for nearly all active federal 
civilian employees. Because of this challenge, the federal program 
relied heavily on marketing efforts that were less direct and less 
personalized, such as sending information to federal employees through 
agency benefits officers. 

The federal program’s claims experience increased in the program’s 
fourth year, but remained lower than the expectations established by 
Partners in its contract with OPM. This increase was generally 
consistent with trends since the federal program began in 2002. 
Overall, the federal program has paid 44 percent of the expected amount 
of claim payments per enrollee and 41 percent of the expected number of 
claims per enrollee. As of August 2006, Partners officials had not 
determined why the claims experience was lower than Partners’ 
expectations. While it is generally expected that the number of claims 
submitted in the first few years of a long-term care insurance program 
will be a small portion of the total number of claims submitted over 
time, a program’s claims experience is one of several factors that may 
affect its long-term financial outlook. The results of this analysis 
underscore GAO’s prior recommendations that OPM analyze the claims 
experience and assumptions affecting premiums to inform forthcoming 
contract negotiations. 

In commenting on a draft of this report, OPM generally agreed with the 
report’s findings. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-202]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John E. Dicken at (202) 
512-7119 or dickenj@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Federal Program Has a Unique Profit Structure: 

Federal Program Used Marketing Efforts Generally Similar to Those Used 
for Other Plans but Faced a Significant Challenge: 

Claims Experience in the Federal Program Increased but Remained Lower 
Than Expectations: 

Concluding Observations: 

Agency Comments: 

Appendix I: Performance Measures Used for the Federal Long Term Care 
Insurance Program: 

Appendix II: Comments from the Office of Personnel Management: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Profit Structure of the Federal Long Term Care Insurance 
Program: 

Table 2: Actual Claims per Enrollee as a Percentage of Expected Claims 
per Enrollee in the First 4 Years of the Federal Long Term Care 
Insurance Program: 

Table 3: Federal Long Term Care Insurance Program's Short-Term 
Performance Measures, Assessed Annually: 

Table 4: Federal Long Term Care Insurance Program's Long-Term 
Performance Measures, Assessed Every 3 Years: 

Figure: 

Figure 1: Actual Claim Payments per 10,000 Enrollees in the First 4 
Years of the Federal Long Term Care Insurance Program Compared with 
Expected Claim Payments per 10,000 Enrollees over 35 Years: 

Abbreviations: 

NAIC: National Association of Insurance Commissioners: 
OPM: Office of Personnel Management: 

United States Government Accountability Office: 
Washington, DC 20548: 

December 29, 2006: 

Congressional Committees: 

In 2004, about $193 billion was spent nationwide on long-term care 
services, including nursing home care and other assisted-living 
services.[Footnote 1] Most of this care was financed by government 
programs, primarily by Medicaid, a joint federal-state program that 
finances health insurance for certain low-income adults and children. 
Elderly people--those aged 65 or older--consume about two-thirds of all 
long-term care services. As the elderly population continues to grow, 
particularly with the aging of the baby boom generation, the increasing 
demand for long-term care services will likely strain federal and state 
resources. Some policymakers propose that increased use of long-term 
care insurance may be a means of reducing the future financial burden 
on public programs. In 2000, Congress passed the Long-Term Care 
Security Act, requiring the federal government to offer long-term care 
insurance to its employees, their families, and others.[Footnote 2] 
Congressional committee reports accompanying the act indicated that a 
federal long-term care insurance program could encourage people to 
purchase long-term care insurance, serve as a model for other employer- 
sponsored programs across the nation,[Footnote 3] and encourage private 
payment sources to assume some of the insurance risk.[Footnote 4] 

In December 2001, at the conclusion of a competitive bidding process, 
the Office of Personnel Management (OPM)--the federal agency 
responsible for administering governmentwide compensation and benefit 
systems--entered into a 7-year contract with Long Term Care Partners 
LLC (referred to as Partners) that allows certain eligible individuals 
affiliated with the federal government to apply for long-term care 
insurance. Individuals eligible for the Federal Long Term Care 
Insurance Program include federal and Postal Service employees and 
retirees; active and retired members of the uniformed services; 
qualified relatives of these individuals, such as spouses of employees 
and retirees; and certain others. Partners is a joint venture formed by 
two large insurance carriers that sell long-term care insurance 
products in the private market--John Hancock Life Insurance Company and 
Metropolitan Life Insurance Company. The contract between OPM and 
Partners outlines the roles and responsibilities of all parties with 
respect to the program, including how payments for program expenses and 
profits are determined. Partners began marketing the Federal Long Term 
Care Insurance Program in February 2002, and the program began 
accepting enrollment applications on March 25, 2002. As of September 
30, 2006, the federal program had 214,034 current enrollees, making it 
the largest private long-term care insurance program in the 
nation.[Footnote 5] 

This report is the second of two reports required by the Long-Term Care 
Security Act on the competitiveness of the federal program compared 
with group and individual plans generally available in the private 
insurance market.[Footnote 6] Our first report found that the program 
compared favorably with other group and individual plans we reviewed in 
terms of benefits offered and premiums. However, in its first 3 years, 
from April 1, 2002, through March 31, 2005, the federal program's 
enrollment and claims experience--that is, the number of paid claims 
and the amount paid for those claims--were lower than the expectations 
established by Partners.[Footnote 7] We recommended that the Director 
of OPM analyze the reasons for the lower-than-expected claims 
experience and, as appropriate, use the results to modify assumptions 
about the expected claims experience. We also recommended that the 
Director of OPM analyze the projections for the amount of premiums 
collected to pay for claims. In response to these recommendations, OPM 
indicated that it intended to provide updated information on claims 
experience and premium setting in its written recommendation to 
Congress before entering into a new contract for the administration of 
the Federal Long Term Care Insurance Program. Partners' current 
contract with OPM ends December 31, 2008. 

In this report, as discussed with the committees of jurisdiction, we 
examined the following questions regarding other aspects of 
competitiveness: 

1. How does the profit structure of the Federal Long Term Care 
Insurance Program as defined by the contract compare with that of other 
long-term care insurance plans? 

2. How do the marketing efforts for the Federal Long Term Care 
Insurance Program compare with those for other long-term care insurance 
plans? 

3. How does the Federal Long Term Care Insurance Program's claims 
experience, updated to reflect the program's fourth year, compare with 
initial expectations? 

To obtain information on the profit structure of the Federal Long Term 
Care Insurance Program, we interviewed officials at OPM and Partners 
and reviewed relevant documents, including the contract between OPM and 
Partners. We limited our review to the payments that were defined in 
this contract as profits. To obtain comparable information on any 
profit structures used in the private sector, we interviewed officials 
from four of the nation's largest long-term care insurance carriers-- 
Bankers Life and Casualty Company, Genworth Financial, John Hancock 
Life Insurance Company, and Metropolitan Life Insurance 
Company.[Footnote 8],[Footnote 9] All four insurance carriers sold 
products in the individual market, and two of the four--John Hancock 
Life Insurance Company and Metropolitan Life Insurance Company--were 
also among the five largest carriers that sold products in the group 
market. We also interviewed benefits officials from four states-- 
California, New Jersey, North Carolina, and Texas--that offered long- 
term care insurance to state employees and certain other 
groups,[Footnote 10] and we interviewed industry experts and actuaries 
regarding the profit structures used in the industry. 

To obtain information on marketing efforts for the Federal Long Term 
Care Insurance Program, we interviewed officials from OPM and Partners 
and reviewed marketing plans for the federal program. To obtain 
comparable information on the marketing efforts used in the private 
sector, we interviewed actuaries, industry experts, officials from the 
four insurance carriers, and benefits officials from the four states. 

To describe how the federal program's claims experience, updated to 
reflect the program's fourth year, compared with initial expectations 
as established by Partners in its contract with OPM, we analyzed data 
from Partners on the number of enrollees, the number of paid claims, 
and the amount of claim payments made for the federal program from 
April 1, 2005, through March 31, 2006. We also included data presented 
in our previous report regarding the claims experience of the federal 
program in its first 3 years, from April 1, 2002, through March 31, 
2005. We compared the anticipated claims experience for the federal 
program as established by Partners in its contract with OPM prior to 
the program's start of enrollment, with the actual number of claims 
paid and the amount of claims payments during the federal program's 
first 4 years--from April 1, 2002, through March 31, 2006. We also 
interviewed Partners officials about the federal program's claims 
experience. 

We reviewed all data for reasonableness and consistency and determined 
that the data were sufficiently reliable for our purposes. We performed 
our work in accordance with generally accepted government auditing 
standards from May 2006 through December 2006. 

Results in Brief: 

The federal program has a unique profit structure that is explicitly 
defined in the contract between OPM and Partners. This profit structure 
consists of three distinct annual payments to Partners that are 
separate from payments made to cover the program's expenses. Two of the 
three profit payments are based on a percentage of the premiums 
collected during the year, and one is based on the average annual 
assets of the federal program. One premium-based payment and the asset- 
based payment are guaranteed. The other premium-based payment is not 
guaranteed, but rather is linked to OPM's evaluation of Partners' 
performance, including OPM's annual evaluation in 21 measures across 4 
categories: administrative expense savings, customer service, 
enrollment experience, and responsiveness to OPM. In contrast to the 
federal program, profits realized by carriers offering other long-term 
care insurance plans generally are not based on an explicit profit 
structure. Instead, carriers may realize profits according to the 
experience of the programs they insure. 

The federal program used marketing efforts that were generally similar 
to those for other plans sold in the group market, but faced a 
significant challenge in sending information directly to eligible 
individuals. The federal program and other plans sold in the group 
market used marketing efforts such as mailing information to the homes 
of eligible individuals, sending e-mails to eligible employees at work, 
posting information on a Web site, and hosting employee and retiree 
seminars. Of these efforts, carrier officials we spoke with explained 
that direct mail is a critical marketing strategy for long-term care 
insurance. The federal program faced a significant challenge in mailing 
information to the homes of those individuals eligible for the program 
because it initially did not have the home addresses of nearly all 
active federal civilian employees. Because of this challenge, the 
federal program relied on marketing efforts that were less direct and 
less personalized, such as sending information to federal employees 
through agency benefits officers and working with affinity groups whose 
membership consists of eligible individuals. 

The federal program's claims experience--the amount of claim payments 
per enrollee and the number of paid claims per enrollee--increased in 
the program's fourth year, but remained lower than Partners' 
expectations as established in its contract with OPM. This increase was 
generally consistent with trends since the federal program began in 
2002. Overall, the federal program has paid 44 percent of the expected 
amount of claim payments per enrollee and 41 percent of the expected 
number of claims per enrollee. As of August 2006, Partners officials 
had not determined why the claims experience was lower than its 
expectations. It is generally expected that the number of claims 
submitted in the first few years of a long-term care insurance program 
will be a small portion of the total number of claims submitted over 
time. However, claims experience is one of several factors that may 
affect the long-term financial outlook of a long-term care insurance 
program. The results of this analysis underscore our prior 
recommendations that OPM analyze the claims experience and assumptions 
affecting premiums to inform forthcoming contract negotiations for the 
administration of the federal program. These negotiations may occur 
prior to December 31, 2008, the end of Partners' current contract. 

In commenting on a draft of this report, OPM generally agreed with our 
findings. Regarding the program's profit structure, OPM stated that now 
that it has more operating experience with the program, it plans to 
reexamine the profit structure as it renegotiates or rebids the 
contract for the administration of the program. In its comments, 
Partners highlighted certain distinct aspects of the federal program's 
profit structure that we noted in our draft report, including that 
Partners does not own federal program assets and that a profit payment 
is contingent on Partners meeting specific performance standards that 
Partners characterized as exceptionally high for the insurance industry 
in general. 

Background: 

Long-term care, which may include care provided in nursing homes, 
assisted-living facilities, or a person's home, can be expensive. In 
2005, the average cost of a year in a nursing home was more than 
$70,000,[Footnote 11] and in 1999, according to the most recent data 
available, the average length of stay was between 2 and 3 
years.[Footnote 12] Long-term care insurance helps individuals pay for 
costs associated with long-term care services. Yet relatively few 
individuals have obtained coverage. As of 2002, about 9 million people 
nationwide had obtained long-term care insurance.[Footnote 13] To help 
federal employees, retirees, and others obtain coverage, the federal 
government began offering long-term care insurance in 2002. 

Long-Term Care Insurance: 

Long-term care insurance helps pay for the costs associated with long- 
term care services. People can purchase long-term care insurance 
directly from carriers that sell products in the individual market, or 
they can enroll in plans offered by employers or other groups. For a 
specified premium that is designed--but not guaranteed--to remain level 
over time, the carrier agrees to provide covered benefits under an 
insurance contract. 

Long-term care insurance premiums are affected by many factors, 
including the benefits offered and the age and health status of the 
applicant. Carriers review the health status of the applicant during 
the underwriting process.[Footnote 14] Carrier assumptions about 
interest rates, mortality rates, morbidity rates,[Footnote 15] and 
lapse rates--the number of people expected to drop their policies over 
time--also affect premium rates. Carriers set premium rates to cover 
the anticipated cost of enrollee benefits (which means paying approved 
claims),[Footnote 16] administrative costs (which includes marketing 
costs, claims handling, overhead, and taxes), and profits. 

Few claims are expected to be submitted during the early years of an 
enrollee's long-term care insurance policy. As a result of 
underwriting, it is unlikely that many people could meet the 
eligibility requirements to buy a policy yet submit an approved claim 
within 3 years. Industry experts suggest that the rate of claim 
submissions begins to increase after about 3 to 7 years. 

Claims experience is one of many factors--such as interest rates and 
lapse rates--that affect the long-term financial outlook of a long-term 
care program. While having a lower-than-expected claims experience is a 
positive financial indicator, if the claims experience is significantly 
lower than expected over the long term, then it is possible that the 
premiums are too high. On the other hand, in accordance with the 
National Association of Insurance Commissioners (NAIC) premium-setting 
guidelines, it may be appropriate to project the claims experience 
assuming moderately adverse results to protect against the need to 
raise premiums.[Footnote 17] 

Insurance carriers' long-term care insurance profits--defined as the 
excess of revenues over expenses--are affected by many factors, 
including the amount of risk the insurance carrier assumes. In general, 
the more risk a carrier assumes, the greater the carrier's expected 
profits. Over time, carriers' ability to meet or exceed their initial 
projections regarding interest rates, mortality rates, morbidity rates, 
and lapse rates, as well as their ability to contain costs, ultimately 
affects their profits. Carriers are also subject to state requirements, 
which may affect their ability to realize profits. 

Long-Term Care Insurance Marketplace: 

Long-term care insurance is sold in two primary markets--the individual 
and group markets. Of the nearly 9 million policies sold as of 2002, 
the most recent year for which data were available, about 80 percent 
were sold through the individual market, and the remaining 20 percent 
were sold through the group market.[Footnote 18] Sales in the group 
market are growing faster than sales in the individual market.[Footnote 
19] In March 2006, 13 percent of full-time employees in private 
industry had access to employer-sponsored long-term care insurance 
benefits; 20 percent of employees of establishments with 100 or more 
employees had access to this benefit.[Footnote 20] 

The individual market includes plans sold by insurance carriers to 
individuals, usually through agents or brokers. Individuals may choose 
benefits from a range of options offered by the carriers, including the 
duration and amount of daily benefit payments. Those who purchase 
coverage through the individual market typically pay the full premium. 
The carrier generally owns program assets and bears the risk of 
insuring enrollees for the terms of enrollees' policies. 

The group market includes long-term care insurance plans offered to 
individuals through employers and other groups, such as professional 
associations. In this market, the groups usually design the benefits, 
and enrollees are often given some benefit options from which to 
choose, including the duration and amount of daily benefit payments. 
However, benefit options offered in the group market tend to be fewer 
than those offered in the individual market. Individuals who purchase 
long-term care insurance in the group market typically pay the full 
premium, similar to those who purchase coverage in the individual 
market.[Footnote 21] 

Employers and other groups typically contract with insurance carriers 
to provide long-term care insurance to qualified individuals.[Footnote 
22] These contracts may be time-limited, lasting, for example, 3 to 5 
years. Under these contracts, carriers are usually required to bear the 
risk of insuring enrollees for the terms of enrollees' policies; the 
term of enrollees' policies may be independent from, and therefore 
longer than, the length of an employer's contract with a carrier. These 
carriers also generally own all program assets. As a result, if a 
carrier's contract with an employer was not renewed, the carrier would 
usually be required by its contract to continue insuring those 
individuals for whom it issued policies. 

Several large carriers dominated the long-term care insurance coverage 
sold in the individual and group markets, as of December 31, 2005. 
While the long-term care insurance industry experienced 18 percent 
annual growth in the number of policies sold from 1987 through 
2002,[Footnote 23] the industry has experienced a downturn in more 
recent years, according to industry experts. Specifically, carriers 
faced several challenges, including higher-than-expected administrative 
expenses relative to premiums; lower-than-expected lapse rates, which 
increased the number of people likely to submit claims; low interest 
rates, which reduced the actual return on investments below what had 
been assumed; and new state regulations that limited direct marketing 
by telephone. As a result, beginning in 2003, for example, many 
carriers in the individual market raised premiums, left the 
marketplace, or consolidated to form larger companies. In addition, 
many carriers have revised the assumptions used in setting premiums, 
taking a more conservative approach that has led to higher premiums, 
while state regulators have increased their oversight of the industry. 

Federal Long Term Care Insurance Program: 

The federal government began offering a group long-term care insurance 
program in 2002 whereby certain eligible individuals affiliated with 
more than 125 federal agencies may apply for coverage. Individuals 
eligible for the Federal Long Term Care Insurance Program include 
federal and Postal Service employees and retirees; active and retired 
members of the uniformed services; qualified relatives of these 
individuals; and certain others.[Footnote 24] Almost 19 million people 
were estimated to be eligible for coverage as of October 15, 2001. With 
more than 214,000 current enrollees as of September 2006, the federal 
program is the largest employer-sponsored group program in the nation. 
When the Federal Long Term Care Insurance Program began, eligible 
individuals could apply for enrollment during two specified periods: an 
early enrollment period held from March 25, 2002, through May 15, 2002, 
and an open enrollment period held from July 1, 2002, through December 
31, 2002.[Footnote 25] Following the open enrollment period, eligible 
individuals could apply for coverage at any time.[Footnote 26] As is 
typical for other plans sold in the group market, enrollees pay the 
entire cost of their premium. As we noted in our March 2006 report, the 
federal program offered benefits similar to those of other long term- 
care insurance products, usually at lower premiums for comparable 
benefits, and the federal program's early enrollment and claims were 
lower than initially expected.[Footnote 27] 

OPM oversees the federal program, and Partners administers the program 
in accordance with the requirements of a 7-year contract between OPM 
and Partners. The contract, signed December 18, 2001, defines key 
administrative requirements, including OPM's oversight of the program 
and how payments for the federal program's expenses, as well as 
payments that are earmarked as profits, are determined. Unlike other 
contracts between employers and carriers, the federal program's 
contract includes requirements for the management of federal program 
assets--that is, the funds collected as premiums and used to pay 
claims--because the federal program does not give Partners ownership of 
federal program assets. 

By statute, OPM's contract with Partners is for 7 years and is not 
automatically renewable.[Footnote 28] At the end of the 7-year term, 
OPM can either renegotiate the contract with Partners, or allow the 
contract to terminate and select a new carrier. If a new carrier is 
selected, Partners must transfer all federal program enrollees and 
assets, including any positive or negative returns related to the 
experience of the program, to the federal program's next carrier. 
However, if OPM does not contract with another carrier, Partners would 
continue insuring the individuals who enrolled in the federal program 
through Partners. In this case, the federal program's assets would 
remain available to Partners to pay for claims and expenses. 

Federal Program Has a Unique Profit Structure: 

The federal program has a unique profit structure that is explicitly 
defined in the contract between OPM and Partners. This profit structure 
consists of three distinct annual payments to Partners to compensate 
Partners for the risks it assumes under the program's 7-year 
contract.[Footnote 29] Of these payments, two are based on a percentage 
of the premiums collected during the year and one is based on the 
average annual assets of the federal program. (See table 1.) These 
three payments are allowed only if premiums are sufficient to cover the 
federal program's current claims and expenses. In contrast to the 
federal program, profits realized by carriers offering other long-term 
care insurance plans generally are not based on explicit profit 
structures. Instead, under the terms of their contracts, carriers 
assume the risk of insuring enrollees for the terms of enrollees' 
policies and own program assets--and are thus able to realize profits 
or losses according to the experience of the programs they insure. 

Table 1: Profit Structure of the Federal Long Term Care Insurance 
Program: 

Payment type: Premium-based payments: Guaranteed; 
Payment amount: 3.5 percent of the premiums collected during the year. 

Payment type: Premium-based payments: Performance-based; 
Payment amount: Up to 3.0 percent of the premiums collected during the 
year--the actual amount is determined by OPM based on its assessment of 
Partners' performance. 

Payment type: Asset-based payment: Guaranteed; 
Payment amount: 0.3 percent of the average annual assets of the federal 
program. 

Source: GAO analysis of OPM's contract with Partners. 

Note: These three payments are allowed only if premiums are sufficient 
to cover the federal program's current claims and expenses. 

[End of table] 

The federal program guarantees one annual premium-based payment to 
Partners. This payment equals 3.5 percent of the premiums collected in 
a year. For other long-term care insurance plans offered in the group 
and individual markets, carriers' profits were generally not 
guaranteed, according to carrier officials and industry experts. 
Similar to the federal program, one source of carriers' revenue is 
enrollee premiums, which include an amount for anticipated profits. 
However, carriers may realize profits or losses according to the 
experience of the programs they insure, subject to applicable state 
regulations.[Footnote 30] 

The federal program links the second annual premium-based payment to 
OPM's evaluation of Partners' performance. This payment can equal up to 
3 percent of the premiums collected in a year. Under an agreement which 
amended the contract between OPM and Partners and became effective 
beginning fiscal year 2006, OPM evaluates Partners' performance each 
year on 21 short-term performance measures across 4 categories: 
administrative expense savings, customer service, enrollment 
experience, and responsiveness to OPM.[Footnote 31] Each performance 
measure has a corresponding payment equivalent to a percentage of the 
total performance-based payment of 3 percent of premiums. If Partners' 
performance does not meet stated expectations in a measure, the payment 
corresponding to that measure is placed into a retained profit account. 
In addition, every 3 years, OPM evaluates Partners' performance in two 
long-term performance measures: return on investment and claims 
experience. If Partners meets expectations in one measure and funds are 
present in the retained profit account, one-half of the amount present 
in the retained profit account is paid to Partners. If Partners meets 
expectations in both measures and funds are present in the retained 
profit account, the total amount present in the retained profit account 
is paid to Partners. As of September 2006, Partners has been awarded 
the full performance-based payment each year since the federal program 
began. Appendix I provides a complete list of the performance measures 
used for the federal program. 

Unlike the federal program, most other sponsors of plans offered in the 
group market usually did not link carrier profits to performance 
evaluations, according to carrier officials and industry experts. 
Carrier officials estimated that about 10 percent to 20 percent of 
employers required their long-term care insurance carrier to relinquish 
a certain percentage (for example, 2 percent to 4 percent) of premiums 
if their performance did not meet agreed-upon expectations.[Footnote 
32] However, employers may require carriers to guarantee a certain 
level of performance in their contracts to ensure that enrollees are 
provided with standard levels of service, according to state 
officials.[Footnote 33] These performance measures and guarantees may 
include those related to the timeliness of underwriting decisions and 
call center performance. The federal program used all of the 
performance measures that industry experts and carrier officials cited 
as those commonly used throughout in the group market, in addition to 
other measures such as administrative expense savings and claims 
experience. 

The federal program's third payment is guaranteed and is based on the 
average annual assets of the program. This annual payment--0.3 percent 
of the average annual assets of the federal program--is defined in the 
contract between OPM and Partners as a profit payment. The federal 
program developed this payment to recognize that insurers in general 
are required to hold risk-based capital. Risk-based capital is the 
capital that an insurance carrier is required to hold in reserve, 
separate from any other funds used to back insurance liabilities or 
other lines of business, to protect the carrier from 
insolvency.[Footnote 34] OPM does not require Partners to use the third 
payment to fund risk-based capital and both OPM and Partners consider 
this payment another form of profit for administering the program. 
Similar to the federal program, carriers use enrollee premium funds to 
fund risk-based capital requirements, according to OPM officials. 
However, risk-based capital may be considered an expense to carriers. 

Federal Program Used Marketing Efforts Generally Similar to Those Used 
for Other Plans but Faced a Significant Challenge: 

The federal program used marketing efforts that were generally similar 
to those used for other plans sold in the group market.[Footnote 35] 
For example, the types of marketing efforts used for the federal 
program and other plans offered in the group market, according to our 
review of federal program documents and the carrier and state officials 
we spoke with, included: 

* mailing information directly to the homes of eligible individuals, 

* sending e-mails to eligible employees at work, 

* posting information on a Web site, 

* hosting employee and retiree seminars, and: 

* working with affinity groups whose membership consists of eligible 
individuals. 

Of these efforts, carrier officials we spoke with told us that direct 
mail, which may include a personalized letter, is a critical marketing 
effort for long-term care insurance plans. One carrier official also 
explained that direct mail was so critical to the carrier's marketing 
strategy that it generally would not work with employers who neither 
provide the home addresses of employees nor assist in mailing materials 
to employees. 

The federal program faced a significant challenge in sending 
information directly to eligible individuals, particularly through 
direct mail. Specifically, the federal program was initially unable to 
mail information directly to the homes of about 60 percent of the 
program's core group of eligible individuals that Partners deemed most 
likely to enroll in the federal program--including nearly all active 
federal civilian employees--because neither OPM nor Partners had the 
home addresses of these individuals. OPM officials told us that a 
centralized database of this information does not exist. According to 
OPM officials, OPM did not request federal employees' home address 
information from other federal agencies because they felt it would be 
too burdensome to comply with certain Privacy Act requirements[Footnote 
36] and gather accurate information from each of the agencies in a 
timely manner. Despite this challenge, the federal program initially 
mailed information directly to the homes of those for whom it had 
addresses, which included about 40 percent of the program's core group 
of eligible individuals, as well as other non-core groups such as 
retired military personnel and annuitants under the Civil Service 
Retirement System and the Federal Employees Retirement System, 
according to our analysis of Partners' data.[Footnote 37] As of October 
2006, Partners officials noted that direct mail efforts were still 
limited because of the federal program's inability to mail information 
directly to the homes of most active federal civilian 
employees.[Footnote 38] Before signing its contract with OPM, Partners 
was aware of the federal program's limitations regarding direct mail. 

As a result of the federal program's limited ability to send direct 
mail to many eligible individuals, the federal program relied heavily 
on marketing efforts that were less direct and less personalized, 
including sending information to federal employees through agency 
benefits officers and working with affinity groups. Because neither OPM 
nor Partners has direct access to federal employees through e-mail, 
Partners has worked with more than 150 agency benefits officers to 
distribute program information to federal employees through e-mail, 
internal office mail, or other means.[Footnote 39] For example, 
Partners relies on agency benefits officers to send e-mails about the 
federal program.[Footnote 40] While Partners officials may be notified 
by agency benefits officers when they send program information, 
Partners is unable to determine whether all eligible federal employees 
receive this information. In addition, Partners has worked with several 
affinity groups, such as Federally Employed Women and the National 
Active and Retired Federal Employees Association, to educate their 
members about the need for long-term care insurance and to advertise in 
publications and at sponsored events. Through these efforts, Partners 
has gained direct access to the groups' members. 

Claims Experience in the Federal Program Increased but Remained Lower 
Than Expectations: 

In the federal program's fourth year, claims experience--the amount of 
claim payments per enrollee and the number of paid claims per enrollee-
-increased from that of the program's third year, but remained lower 
than Partners' expectations as established in its contract with OPM. 
This increase was generally consistent with trends since the federal 
program began in 2002. As we reported in March 2006, claims experience 
in the federal program's first 3 years was lower than the initial 
expectations set by Partners.[Footnote 41] Our analysis of Partners' 
data showed that claims experience also remained lower than expected 
for the federal program's fourth year. As of March 31, 2006, the end of 
the federal program's fourth year, the federal program had cumulatively 
paid 44 percent of the expected amount of claim payments per enrollee 
and 41 percent of the expected number of claims per enrollee, across 
the 4 years, as shown in table 2. Figure 1 shows the amount of claims 
payments per 10,000 enrollees. As of August 2006, Partners had not 
determined why the claims experience was lower than Partners' 
expectations. Claims experience is one of many factors--such as 
interest rates and lapse rates--that affect the long-term financial 
outlook of a long-term care insurance program. While it is generally 
expected that the number of claims submitted in the first few years of 
a long-term care insurance program will be a small portion of the total 
number of claims submitted over time, the rate of claim submissions 
usually begins to increase after about 3 to 7 years, according to 
industry experts. 

Table 2: Actual Claims per Enrollee as a Percentage of Expected Claims 
per Enrollee in the First 4 Years of the Federal Long Term Care 
Insurance Program: 

Claims experience: Amount of claim payments per enrollee as a 
percentage of expected claims per enrollee; 
Year 1: 40%; 
Year 2: 39%; 
Year 3: 40%; 
Year 4: 50%; 
Cumulative: 44%. 

Claims experience: Number of paid claims per enrollee as a percentage 
of expected claims per enrollee; 
Year 1: 4%; 
Year 2: 37%; 
Year 3: 48%; 
Year 4: 56%; 
Cumulative: 41%. 

Source: GAO analysis of data provided by Partners. 

Notes: Partners established expectations for enrollment and claims in 
its contract with OPM. We reviewed claims data for the first 4 years of 
the federal program, April 1, 2002, through March 31, 2006. 

[End of table] 

Figure 1: Actual Claim Payments per 10,000 Enrollees in the First 4 
Years of the Federal Long Term Care Insurance Program Compared with 
Expected Claim Payments per 10,000 Enrollees over 35 Years: 

[See PDF for image] 

Source: GAO analysis of data provided by Partners. 

Notes: Partners established expectations for enrollment and claims in 
its contract with OPM. We reviewed claims data for the first 4 years of 
the federal program, April 1, 2002, through March 31, 2006. 

[End of figure] 

Concluding Observations: 

Our findings from two reports together show that the Federal Long Term 
Care Insurance Program compared favorably with other plans, has a 
unique profit structure, and used marketing efforts that were generally 
similar to those of other plans, but faced a significant challenge. 
Specifically, our initial report found that the federal program offered 
benefits similar to those of other long-term care insurance products, 
usually at lower premiums for comparable benefits. In this, our second 
report, we examined other components of the federal program's 
competitiveness, including the federal program's profit structure and 
marketing efforts. We found that the federal program has a unique 
profit structure, created to compensate Partners for the risks it 
assumed for the program. The risks borne by Partners, however, are not 
as great as those assumed by carriers selling other plans because, 
unlike with other plans, the federal program's assets are owned by the 
program, not by the insurer. Because of this structure, the program 
does not link Partners' profits to the overall experience of the 
program. Rather, the program guarantees some profit payments, links 
some profit payments to OPM's evaluation of Partners' performance, and 
requires Partners to assume a potentially time-limited risk, after 
which all program assets and enrollees may be transferred to another 
carrier. Insurance carriers' profits are linked to the amount of risk 
they bear, and Partners assumes less risk for insuring the federal 
program than do carriers for insuring other long-term care insurance 
plans. Therefore, the federal program's profit payments would likely be 
lower than the profits realized by carriers selling other plans. In 
addition, while the federal program used marketing efforts that were 
generally similar to those used for other plans sold in the group 
market, the program faced a significant challenge in providing 
personalized marketing communications directly to eligible individuals 
and instead relied heavily on other marketing efforts. 

In our initial report we found that the federal program's claims 
experience--the amount and number of claims payments per enrollee--was 
lower than expected in the first 3 years of the program. While it is 
generally expected that the number of claims submitted in the first few 
years of a long-term care insurance program will be a small portion of 
the total number of claims submitted over time, a program's claims 
experience is one of several factors that may affect the long-term 
financial outlook of the program. In response to our recommendation in 
the initial report that OPM analyze the claims experience and 
assumptions affecting premiums to inform forthcoming contract 
negotiations, OPM indicated that it intended to provide updated 
information on claims experience and premium setting in its written 
recommendation to Congress before entering into the next contract for 
the administration of the Federal Long Term Care Insurance Program. 
Partners' current contract with OPM for the administration of the 
federal program ends December 31, 2008. After reviewing a fourth year 
of claims data, we note that the program's claims experience increased 
from that of the program's third year, but still remains lower than 
Partners' expectations. These results underscore the importance of our 
prior recommendations that OPM analyze the claims experience and 
assumptions as it considers its recommendations to Congress regarding a 
future contract. 

Agency Comments: 

We provided a draft of this report to OPM and Partners. In its written 
comments, OPM generally agreed with our findings. OPM's comments are 
reprinted in appendix II. 

With regard to the program's unique profit structure, OPM stated that 
now that it has more operating experience with the program, it plans to 
reexamine the profit structure as it renegotiates or rebids the 
contract for the administration of the program. OPM agreed that the 
marketing efforts for the federal program are more challenging for 
Partners than for other insurers because, among other reasons, home 
addresses for federal employees are generally not available. OPM noted 
that this will continue to be a constraint for the program in the 
future. In addition, OPM highlighted, as we noted in our draft report, 
that the ratio of actual to expected claims experience has narrowed and 
stated that it would continue to closely monitor the claims experience 
of the program. We support this effort and continue to encourage OPM to 
analyze the program's claims experience and ensure that premiums and 
actuarial assumptions about future claims reflect the experience of the 
program. 

In its comments, Partners highlighted certain distinct aspects of its 
profit structure that we noted in our draft report, including that 
Partners does not own federal program assets and that a profit payment 
is contingent on meeting specific performance standards that Partners 
characterized as exceptionally high for the insurance industry in 
general. Partners also stated that profit payments are paid only if the 
federal program's assets are sufficient to cover the risks incurred by 
the program, as our draft report noted. Regarding the marketing efforts 
used for the federal program, Partners noted that the terrorist attacks 
of 2001 and the anthrax scare, which caused heightened security at 
federal buildings, added to the marketing challenge acknowledged in the 
report. We revised the report to reflect these circumstances. Finally, 
Partners commented, and as we noted in our draft report, that in 
addition to a program's claims experience, premium rates are affected 
by a number of factors, including lapse rates and interest rates. 

OPM and Partners provided technical comments and clarifications, which 
we incorporated as appropriate. 

We are sending copies of this report to the Director of OPM and 
interested congressional committees. We will also provide copies to 
others on request. In addition, this report is 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) 512-7119 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 III. 

Signed by: 

John E. Dicken: 
Director, Health Care: 

List of Committees: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable George V. Voinovich: 
Chairman: 
The Honorable Daniel K. Akaka: 
Ranking Minority Member: 
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 Duncan L. Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable Jon C. Porter: 
Chairman: 
The Honorable Danny K. Davis: 
Ranking Minority Member: 
Subcommittee on the Federal Workforce and Agency Organization: 
Committee on Government Reform: 
House of Representatives: 

[End of section] 

Appendix I: Performance Measures Used for the Federal Long Term Care 
Insurance Program: 

The Federal Long Term Care Insurance Program makes some profit payments 
to Long Term Care Partners LLC (Partners) according to the Office of 
Personnel Management's (OPM) evaluation of Partners' performance. 
Beginning in fiscal year 2006, OPM evaluates Partners' performance each 
year on 21 short-term performance measures across 4 categories: 
administrative expense savings, customer service, enrollment 
experience, and responsiveness to OPM (see table 3). Every 3 years, OPM 
also evaluates Partners' performance in two long-term performance 
measures: claims experience and return on investment (see table 4). 

Table 3: Federal Long Term Care Insurance Program's Short-Term 
Performance Measures, Assessed Annually: 

Category: Administrative expense savings; 
Performance measure: Actual administrative expenses compared to 
budgeted amounts set by OPM and Partners. 

Category: Customer service; 
Performance measure: Billing: timeliness of posting payroll and annuity 
payments. 

Category: Customer service; 
Performance measure: Billing: timeliness of processing automatic bank 
withdrawal reversals[A]. 

Category: Customer service; 
Performance measure: Billing: timeliness of processing billing changes. 

Category: Customer service; 
Performance measure: Billing: timeliness of sending payroll bills to 
payroll providers. 

Category: Customer service; 
Performance measure: Call center: call abandonment rate. 

Category: Customer service; 
Performance measure: Call center: call answering speed. 

Category: Customer service; 
Performance measure: Call center: customer satisfaction with customer 
service. 

Category: Customer service; 
Performance measure: Call center: timeliness of callbacks. 

Category: Customer service; 
Performance measure: Call center: timeliness of response to written or 
e-mail inquiries. 

Category: Customer service; 
Performance measure: Claims: accuracy of claims payments. 

Category: Customer service; 
Performance measure: Claims: timeliness of claims payments. 

Category: Customer service; 
Performance measure: Care coordination: customer satisfaction with care 
coordination services. 

Category: Customer service; 
Performance measure: Care coordination: timeliness of benefit 
determinations. 

Category: Customer service; 
Performance measure: Underwriting: timeliness of initial underwriting 
decisions. 

Category: Customer service; 
Performance measure: Underwriting: timeliness of reconsideration 
decisions. 

Category: Enrollment experience; 
Performance measure: Actual enrollment compared with enrollment goals 
set by OPM and Partners. 

Category: Responsiveness to the Office of Personnel Management (OPM); 
Performance measure: General working relationship with OPM. 

Category: Responsiveness to the Office of Personnel Management (OPM); 
Performance measure: Monitoring and reporting on industry trends to 
OPM. 

Category: Responsiveness to the Office of Personnel Management (OPM); 
Performance measure: Timeliness of submitting plans that address 
deficiencies reported by OPM. 

Category: Responsiveness to the Office of Personnel Management (OPM); 
Performance measure: Timeliness of reporting significant events to 
OPM[B]. 

Source: OPM. 

[A] Individuals may allow the federal program to deduct money from 
their bank account to pay premiums through automatic bank withdrawal. 
Reversals of these withdrawals may occur as a result of insufficient 
funds. 

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

[End of table] 

Table 4: Federal Long Term Care Insurance Program's Long-Term 
Performance Measures, Assessed Every 3 Years: 

Category: Claims experience; 
Performance measure: Claims experience compared with expectations, as 
set by Partners in its contract with OPM, adjusted to reflect the 
demographic characteristics of actual enrollees. 

Category: Return on investment; 
Performance measure: Investment performance compared with contractual 
benchmark. 

Source: OPM. 

[End of table] 

[End of section] 

Appendix II: Comments from the Office of Personnel Management: 

United States Office Of Personnel Management: 
Washington, DC 20415: 

The Director: 

December 15, 2006: 

Mr. John E. Dicken: 
Director, Health Care: 
Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Dicken: 

This is in response to your request for review of the draft report 
entitled Long-Term Care Insurance: Federal Program Has a Unique Profit 
Structure and Faced a Significant Marketing Challenge (GAO-07-202). 

The report discusses the marketing efforts by Metropolitan Life and 
John Hancock, the carriers that created Long Term Care Partners LLC, 
(Partners) which administers the Federal Long Term Care Insurance 
Program (FLTCIP); the claims experience for the program; and the profit 
structure negotiated with the contractor. 

We agree with your report that the marketing effort is more challenging 
for Partners than other insurers. This begins with the fact that the 
individual market, which is the FLTCIP's true competition, employs 
insurance agents and brokers while group plans, including FLTCIP, do 
not. Compounding the situation is the fact that most employer groups 
can provide employee home addresses. Since home addresses for federal 
employees are generally not available, marketing efforts were 
constrained during and after the first Open Season. And, importantly, 
this will continue to be a constraint into the future. 

As stated in this report and the earlier GAO report, Long-Term Care 
Insurance: Federal Program Compared Favorably with Other Products and 
Analysis of Claims Trend Could Inform Future Decisions (GAO-06-401), 
claims experience is an important variable in the financial health of 
any long term care insurance program. Because FLTCIP enrollees are 
subject to initial underwriting, their claims rates are expected to 
increase over time. To date, the ratio of actual to expected claims 
experience has narrowed with each successive year of policy duration. 
We will continue to closely monitor the experience of the program to be 
as informed as possible about this aspect of the program when we move 
into the next round of contract negotiations. But it is difficult to 
predict with any certainty the future claims patterns for this maturing 
group based on the first few years of program experience. 

On the profit structure, as noted in the report, we do have a complex 
formula which was developed as we were implementing a new group 
insurance program where the costs would be borne by enrollees and where 
there were no reserves at start-up. In fact, we believe that the 
portion of the profit formula that emphasizes contractor performance 
has been an excellent motivator for Long Term Care Partners to provide 
exemplary service to our group. However, now that we have more 
operating experience with this Program, we intend to reexamine the 
formula when we either renegotiate or rebid the contract to make sure 
that it continues to serve the best interests of enrollees and the 
Government. 

We also have some technical comments for the body of the report, which 
we will send by email. If you have any questions on our reply, please 
contact John Salamone in my office (john.salamone@opm.gov or 202-606- 
1000). 

Sincerely, 

Signed by: 

Linda M. Springer: 
Director: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

John E. Dicken, (202) 512-7119 or dickenj@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Christine Brudevold, Assistant 
Director; Patricia Roy; Timothy Walker; and Rasanjali Wickrema made key 
contributions to this report. 

[End of section] 

Related GAO Products: 

Long-Term Care Insurance: Federal Program Compared Favorably with Other 
Products, and Analysis of Claims Trend Could Inform Future Decisions. 
GAO-06-401. Washington, D.C.: March 31, 2006. 

Overview of Long-Term Care Partnership Program. GAO-05-1021R. 
Washington, D.C.: September 9, 2005. 

Long-Term Care Financing: Growing Demand and Cost of Services Are 
Straining Federal and State Budgets. GAO-05-564T. Washington, D.C.: 
April 27, 2005. 

FOOTNOTES 

[1] Long-term care refers to a range of support services provided to 
people who, because of 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. Some people may also 
need help in performing instrumental activities of daily living, which 
include preparing meals, shopping for groceries, and getting around 
outside. 

[2] Pub. L. No. 106-265, 114 Stat. 762, 764 (2000). 

[3] Senate Committee on Governmental Affairs, S. Rep. No. 106-344, at 
18 (2000). 

[4] House Committee on Government Reform, H.R. Rep. No. 106-610, at 8 
(2000). 

[5] From March 25, 2002, through September 30, 2006, the federal 
program enrolled 231,664 people. This number includes past enrollees as 
well as those enrolled as of September 30, 2006. 

[6] Pub. L. No. 106-265, 114 Stat. 768. The group market includes plans 
offered by employers to employees and plans offered by other groups, 
such as professional organizations. The individual market includes 
plans sold by insurance carriers to individuals, usually through agents 
or brokers. 

[7] See GAO, Long-Term Care Insurance: Federal Program Compared 
Favorably with Other Products, and Analysis of Claims Trend Could 
Inform Future Decisions, GAO-06-401 (Washington, D.C.: Mar. 31, 2006). 
See also Related GAO Products at the end of this report. 

[8] We selected the four carriers based on their total number of 
policies and total annualized premiums--the sum of enrollee premiums 
adjusted to reflect a full year of coverage--in effect in the 
individual market as of December 31, 2005. 

[9] Throughout this report, we use the term carrier officials to refer 
to officials of these four insurance carriers and not to officials of 
Partners. 

[10] In addition to offering long-term care insurance benefits to their 
employees, retirees, and other qualified relatives, such as spouses of 
employees and retirees, all four states offered benefits to other 
groups of public employees, such as public university employees. 

[11] Metropolitan Life Insurance Company, The MetLife Market Survey of 
Nursing Home & Home Care Costs (Westport, Conn.: September 2005). 

[12] U.S. Department of Health and Human Services, Centers for Disease 
Control and Prevention, National Center for Health Statistics, The 
National Nursing Home Survey: 1999 Summary (Hyattsville, Md.: June 
2002). 

[13] America's Health Insurance Plans, Research Findings, Long-Term 
Care Insurance in 2002 (Washington, D.C.: June 2004). 

[14] Underwriting is the process of reviewing an applicant's responses 
to questions, including medical and health-related questions, in an 
application for the carrier 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. 

[15] The term morbidity refers to the incidence of illness, injury, or 
disability. 

[16] For the purposes of this report, a claim refers to the series of 
payments made to reimburse the provider or the policyholder for the 
costs of an episode of care. 

[17] State insurance regulators established NAIC to help promote 
effective insurance regulation, to encourage uniformity in approaches 
to regulation, and to help coordinate states' activities. Among other 
activities, NAIC develops model laws and regulations to assist states 
in formulating their policies to regulate insurance. 

[18] America's Health Insurance Plans, Research Findings. 

[19] Jonathan Shreve and Ksenia Whittal, "Group LTC Continues Its Solid 
Advance," National Underwriter Life & Health, vol. 110, no. 37 (2006), 
p. 20. 

[20] U.S. Department of Labor, Bureau of Labor Statistics, National 
Compensation Survey: Employee Benefits in Private Industry in the 
United States, March 2006 (Washington, D.C.: August 2006). 

[21] In contrast, individuals who purchase health insurance plans in 
the group market typically do not pay the full premium because 
employers often pay a share of the premium. 

[22] Alternatively, employers may self-fund their long-term care 
insurance plans. 

[23] America's Health Insurance Plans, Research Findings. 

[24] Qualified relatives include current spouses of employees and 
retirees; 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 for coverage. 

[25] During the early enrollment period, enrollees' choices for some of 
the benefit options, such as the benefit period and type of coverage, 
were limited, whereas enrollees were able to select from all of the 
program's benefit options during the open enrollment period. During 
both of these enrollment periods, the program used an abbreviated 
underwriting application to determine eligibility for active employees 
and active members of the uniformed services and their spouses. For all 
other applicants, the program used a full underwriting application. The 
federal program's abbreviated underwriting application consists of 
fewer health-related questions than the program's full underwriting 
application. 

[26] Since the open enrollment period, the program has used an 
abbreviated underwriting application to determine eligibility for newly 
hired federal and Postal Service employees and newly active members of 
the uniformed services and their spouses who apply for coverage within 
60 days of employment. For all other applicants, the program has used a 
full underwriting application. 

[27] GAO-06-401. 

[28] Pub. L. No. 106-265, 114 Stat. 765-766. 

[29] The profit payments are intended as profits, but do not ensure 
that Partners realizes a profit because the payments are not linked to 
Partners' actual costs for the program. In addition to profit payments, 
the federal program pays Partners for the program's expenses, such as 
those for marketing, underwriting, and claims administration. 

[30] The terms of contracts under the federal program relating to 
coverage or benefits, including those pertaining to carrier profit, 
will supersede and preempt applicable state regulations. Pub. L. No. 
106-265, 114 Stat. 768, 5 U.S.C. § 9005 (2005); 5 C.F.R. § 875.107 
(2006). 

[31] From the beginning of the program through fiscal year 2005, the 
federal program subjected the same portion of profit payments to OPM's 
annual evaluation of Partners' performance and rated Partners' 
performance in 10 or 11 categories as exceeding, meeting, or not 
meeting expectations. In fiscal year 2005, OPM and Partners 
renegotiated the performance evaluation agreement at OPM's request to 
make it more challenging. The new performance evaluation agreement, 
beginning in fiscal year 2006, allowed ratings of only meeting or not 
meeting expectations in 21 measures across 4 categories. Partners 
officials told us that the new performance evaluation agreement was 
more challenging for them to meet than the prior agreement. 

[32] The carrier officials we spoke with explained that the carriers 
they represent had never had to relinquish profits as a result of a 
poor performance rating. 

[33] Employers may impose nominal fines (for example, $25 to $50 per 
violation) on carriers who do not meet performance guarantees. 

[34] Carriers determine the amount of capital to be held as risk-based 
capital based on their assessment of the risks they assume according to 
standards issued by the NAIC. 

[35] In the individual market, carrier officials we spoke with said 
that they perform limited direct marketing to potential enrollees. 
Instead, carriers rely on individual agents to identify prospective 
applicants and sell a plan, at times in a one-on-one setting. 

[36] The Privacy Act of 1974, outside a framework of specified 
exceptions, prohibits an agency from disclosing a record to any person 
or another agency, except at the request of, or with the prior consent 
of, the individual to whom that record pertains. See 5 U.S.C. § 552a 
(2000). 

[37] In total, the federal program mailed information to about 6.6 
million eligible individuals during the open enrollment period, 
according to Partners' data. These individuals represented about 35 
percent of the total estimated 18.6 million individuals eligible for 
coverage as of October 15, 2001. 

[38] Partners officials told us that they had obtained addresses for 
about 22 percent of all active federal civilian employees as of October 
2006. This percentage includes current enrollees as well as other 
eligible individuals. 

[39] Partners officials also noted that increased security measures 
taken in the fall of 2001 in response to the terrorist attacks of 
September 11, 2001, and the anthrax scare temporarily reduced access to 
federal employees for marketing purposes during the program's open 
enrollment period. 

[40] Partners is able to directly e-mail information to those who 
provided their e-mail address in response to a marketing solicitation. 

[41] GAO-06-401. 

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