There is good news and bad news in the Federal Long Term Care Insurance Program’s new contract with John Hancock that will guarantee the program for the next seven years.

Good news for current and future participants is that the benefits provided will be enhanced. Of greatest benefit, in my opinion, is that the cap on the home health care benefit will be raised.

Bad news is that premiums will be going up for many participants. While the Office of Personnel Management has not released details, it has been said that many existing participants will see increases, likely effective in January, of as much as 25 percent.

This brings home some important facts about group insurance coverage. There are important differences between group insurance and individual insurance policies that you should be aware of when shopping for insurance. As a participant in the Federal Long Term Care Insurance Program, you are subject to changes in your premium and benefits that are negotiated by OPM and the insurance company. As a participant, you do not have a contract directly with the insurance company. Basically, the only guarantee is that if you pay your premiums on time, you will be eligible for whatever benefits happen to be in force if and when you file a claim that is approved.

In the case of the federal program, both the benefits and the premiums are changing. You can either accept the new benefits and their cost, or you can reduce your benefits and your premium. Either way, you’ll be giving up something that you didn’t expect to give up when you bought into the program.

In the individual insurance market, you have a contract directly with the insurance company. The only changes allowed are clearly spelled out in that contract. Typically, that means that the benefits cannot be changed without your consent. In most cases, the insurer may raise the premium only if it can convince your state’s regulators that an increase is needed. More importantly, insurers in the individual market have the option of doing something to control prices that the federal program seems to have foregone. John Hancock, for example, has generally chosen to rework the premiums and benefits on new policies to improve the performance of its business, rather than simply raise rates for existing policyholders.

In my practice as a retirement planner, I have frequently recommended that my clients go to the Federal Long Term Care Insurance Program for coverage. This recommendation was based on the program’s current value proposition and OPM’s promise to control that value proposition going forward. To participants who had the reasonable expectation that their premiums would be pretty much level for life, it
is unsettling to hear OPM boast of its success in holding premiums flat for seven years and then promise to try to keep them flat for at least another seven years. Those premiums were, and are, supposed to be level for life if the insurer has done its job properly – factoring in conservative expectations for claims and other costs, including inflation.

I suspect that the problem with the premiums stems from the problem that plagues many group insurance programs. When the federal program offered relaxed underwriting standards during its initial enrollment period, it accepted risk for which it did not specifically charge. Since it doesn’t charge premiums that reflect the risk associated with each participant, accepting more high-risk participants than it expected
when the premiums were set will lead to higher-than-expected claims costs and increases in premiums for everyone, down the road. The practice of offering relaxed underwriting standards without charging premiums based on risk typically leads to higher costs for all but the unhealthiest participants.

Whatever the reason, the announced federal program changes mean that, once the details have been nailed down, existing participants will be prudent to go back into the individual market to compare their options. Unfortunately, this is exactly what many participants had hoped to avoid when enrolling in the federal program. But I’m sure there are plenty of hungry insurance agents out there who won’t mind helping.

Written by Mike Miles
For the Federal Times
Publication May 25, 2009