Federal Long-Term Care Insurance Program Proposal & Policy Implications

Federal Long-Term Care Insurance Program Proposal & Policy Implications

The Federal Long-Term Care Insurance Program (FLTCIP) provides long term care insurance to help pay for costs of care from simple ailments to complex syndromes. The Federal Long-Term Care Insurance Program reflects the long and careful efforts of the U.S. Office of Personnel Management and two insurance leaders – John Hancock and MetLife – to provide affordable group premiums and comprehensive benefits.

Recently, the U.S. Office of Personnel Management has signed a contract with John Hancock Life and Health Insurance Company to provide insurance for the Federal Long Term Care Insurance Program’s second 7-year contract term.

Part of the proposed federal health plan being discussed today by the U.S. Senate includes proposed long term care protection. The proposed Community Living Assistance Services and Supports Act (CLASS Act) would provide coverage paid by individuals who would have the ability to opt out.

The Federal Long Term Care Insurance Proposal is a great deal for current baby boomers but will burden the next generation of seniors with higher taxes. According to the document, the plan’s proponents believe a $65-per-month tax for individuals would be sufficient to provide a $50 average monthly benefit. However, the study reveals that the sound monthly premium level would be closer to $110 a month or over $1,300 a year per-individual.

The CLASS Act proposes a voluntary federal program that is sustainable and actuarially sound over a 75-year horizon. Based on the current assumptions, the independent actuaries project the new government fund will be insolvent by 2027 to pay for long-term care claims.

Anyone born after 1962 will realize the increase of taxes required to sustain this will be imposed when they realize the funds will run out.

The debate of health care reform continues.

The full 13 page letter to the U.S. Senate Committee on Health, Education, Labor and Pensions from P.J. Eric Stallard (Chairperson, Federal Long-Term Care Task Force of the American Academy of Actuaries) and Steven Schoonveld (Chairperson, Long-Term Care Insurance Section Council of the Society of Actuaries) can be found here in this PDF.

Actuarial Issues and Policy Implications of a Federal Long-Term Care Insurance Program

Here is the Executive Summary:

Our actuarial analysis indicates that the proposed structure and funding approaches in the CLASS Act, as introduced on June 9th, will not only be unsustainable within the foreseeable future, but are unlikely to cover more than a very small proportion of the intended population. In the absence of an actuarially sound requirement, we project that the Fund will be insolvent as early as 2021, or within 11 years. The opt-out and guaranteed issue provisions of the plan pose a significant and likely risk that, in a relatively short time period, the program will either need increased premiums and/or significant reductions.

The version of the bill reported on July 15th includes an amendment requiring an actuarially sound program over a 75-year period. We commend this change in the legislation, with the caveat that the requirement may not be possible to achieve unless the issues explored in this letter are addressed. There is considerable risk of adverse selection, which could necessitate future increases in premiums or reductions in benefits to maintain a sustainable program. As these changes are introduced there is a significant potential for increased adverse selection, necessitating further changes, which may make the program unsustainable. The premium estimates suggested below are optimistic as they assume only a modest level of adverse selection.

Our principal analysis is performed assuming an average daily cash benefit of $75 increasing annually with the Consumer Price Index (CPI). We have also provided an analysis using the minimum average daily benefit of $50 called for in the legislation, increasing annually with CPI. Furthermore, we have reviewed two potential premium structures, an entry-age level premium and an annual increasing premium approach.

We estimate that the actuarially sound average monthly premium level would be $160 using an entry-age level premium approach and assuming an average daily benefit of $75. Under an annual increasing premium approach, the average monthly premium would be $125 per month increasing annually with CPI. Based on the originally proposed $65 average monthly level premium, the fund would be insolvent by 2021. Under the increasing premium approach the fund would be insolvent by 2022.

Using a $50 initial minimum average benefit, we estimate that an actuarially sound average monthly premium level would be $110 under the entry-age level premium approach and $86 using the annual increasing premium approach. Based on the originally proposed $65 average monthly level premium, the fund would be insolvent by 2027. Under the increasing premium approach the fund would be insolvent by 2032.

Each of these premium estimates is significantly in excess of the $65 monthly average initially proposed in the CLASS Act. These estimates were based on a series of scenarios, using actuarial assumptions, which we will detail later in our comments.

A voluntary federal LTC program can be developed so that the program is sustainable and minimizes the impact of adverse selection. Such a program would require the use of a stronger actively-at-work definition, an underwriting approach for the coverage of non-working spouses, stronger participant opt-out/ opt-in restrictions, consistent eligibility definitions for benefits and potential program design changes that would result in more affordable premiums. These considerations, along with a strong marketing and education effort, could enable the development of an actuarially sound voluntary federal program that encourages broad participation and a sufficient spread of risks.