I’m concerned about the future for the Federal Long-Term Care Insurance Program, or “FLTCIP”. While it’s true that I’m concerned about the future for all long-term care insurance, I’m particularly concerned about the FLTCIP. The Program has a smaller pool of participants than the pool for a large retail carrier like John Hancock. A smaller pool of participants means greater risk. In addition, the FLTCIP’s participant pool was assembled using an initial open season, which means that people were allowed into the pool without the usually rigorous screening – or underwriting – applied to retail applicants. Lower standards of admittance usually lead to something called adverse selection, which then leads to greater-than-average risk for the pool. Both of these factors – limited group size and relaxed screening of applicants – lead to greater risk. Greater risk, in turn, leads to higher premiums.

The result is a pool of insurance that should be riskier than the corresponding pool for the broader retail market. This is troubling since the broader retail market has been having more than its fair share of problems. The history of long-term care insurance in general, and specifically for the FLTCIP, has not been good, and there is no sign that it is improving. The latest round of premium increases recently announced for the FLTCIP, while shocking to many, are entirely consistent with those already imposed upon retail policy holders. It would be hard to argue against the opinion that the FLTCIP is in a downward spiral. If it is, then this fact is essential to informing the decisions you make about your participation in the Program.

In deciding how to proceed in the face of increasing rates, ignore the premiums you have already paid. These are “sunk costs” and using them as an excuse for continuing to pay may lead you to throw good money after bad. Think only about where you are now, and where you will go from here. Also, you’ll need to decide what is more important, you or the FLTCIP. By acting to protect your own interests, you may be contributing to the demise of the Program. What’s good for you may not be what’s good for the FLTCIP, and vice versa.

If you have a family or medical history gives you a higher-than-average risk of needing significant amounts of long-term care during your lifetime, you should be very reluctant to give up existing insurance. If your risk is high enough, the premiums may still be a bargain for you, even at higher levels.

If you are in average health for your age and find the premiums difficult to pay, or would find them difficult to pay at twice their new level, then you should consider dropping your existing coverage. Remember that no long-term care insurance does not mean no long-term care. There are other ways to pay for, or obtain, long-term care, should you need it. If you don’t have long-term care insurance now, you should consider waiting to consider buying it until we see how things settle out. This might take 10 years, or more, but with premiums in the thousands of dollars per year for decent coverage, it’s important to be careful.

The FLTCIP needs many young, healthy participants paying premiums to keep the insurance pool viable. On the other hand, fewer older, unhealthy participants is better for the Program. This can lead to “pricing” people into the Program when they are young and then pricing them out of it as they age. I’m not accusing the OPM of this, but it is a risk that should be recognized and considered as you make your decisions. Paying premiums for many years when you are not likely to file a claim is a waste of money if you are going to be forced to drop the coverage when you are most likely to need it.

Like medical care, long-term care is not a good candidate for insurance. A good candidate for insurance has two basic characteristics: 1. A high cost, and 2. A low probability. Long-term care certainly meets the high cost requirement, but it fails the low probability test. It’s too likely to be needed to be a good candidate for insurance. I consider the development of long-term care insurance a profit-making endeavor for insurance companies, which was successful, but which has now run its course for them. Lots of companies got in, made their money, and have gotten out. The FLTCIP is an admirable effort by your employer to offer you a safer alternative to the profit-driven retail market. Unfortunately, this effort may ultimately fail.

Written by Mike Miles
For the Federal Times
Publication August 8, 2016