John Hancock got it wrong, and now federal employees and retirees are paying the price. A very high price.
Their cost for coverage in the Federal Long Term Care Insurance Program (FLTCIP) skyrocketed this year by an average of 83 percent, with some taking a 126 percent hit.
The reasons for the huge increases? The John Hancock Life and Health Insurance Co. made one error after another in its calculations.
The hearing was called to examine the price increases that have infuriated employees, retirees and their families who have to pay the full increase. The policies are not subsidized.
They were left with a choice of bad options, including keeping their coverage constant but at a much higher cost; continuing to pay the same premium for less coverage; fashioning a plan between those two; or abandoning their policy and losing the premiums they already paid. Another “paid-up option” allows most customers to halt payments and get limited benefits. More than 96 percent of enrollees accepted the increase or took a reduced-benefit option, according to Doughty.
“Federal employees and retirees must not face such bait-and-switch tactics again,” Richard G. Thissen, National Active and Retired Federal Employees Association (NARFE) president, told the House subcommittee on government operations. “This program, as it is currently designed, cannot be relied upon to provide premium stability or affordability.”
The increases, which took effect Nov. 1, were so large because John Hancock made a series of assumptions that were wrong.
“We found that new claims were increasing, particularly at older attained ages, claims are lasting longer than expected and that policies with higher daily benefit amounts were exhibiting disproportionately higher claims,” Doughty said. Returns on the company’s investments also were lower than expected because of lower interest rates.
There could be more bad news.
“John Hancock cannot guarantee that rates will not have to be increased in the future,” he added in his prepared testimony. Early in his statement, he emphasized that the company will not “make additional profit on the premium increase amount.”
Calling this a “market failure,” Rep. Gerald E. Connolly (Va.), the top Democrat on the subcommittee, said “we have a product that has become unaffordable for many federal workers.” Subcommittee Chairman Mark Meadows (R-N.C.) noted that the current increase follows a 25 percent hike in 2009.
“I’m worried FLTCIP will cease to exist at this rate,” National Treasury Employees Union President Tony Reardon said in a news release.
No one at the hearing explained why it was held weeks after the price hike took effect and months after the Office of Personnel Management (OPM), which oversees the program, announced the increases in July. Enrollees had until Sept. 30 to make a decision on coverage. A late November hearing meant there was no chance the session could be used to push OPM and John Hancock to find ways to lessen the severity of the hit.
“OPM has an obligation to the federal employees enrolled in this program to provide a service that is affordable,” Connolly said. “OPM’s management of this contract has left 274,000 civil servants scrambling to find coverage for the increasing costs of long-term care, and that raises some serious concerns.”
He was particularly upset with OPM for not preparing plans before the hearing to help current policyholders and to prevent similar increases in the future. He told John O’Brien, OPM’s senior adviser for health policy, to have “specific proposals” next time he appears before the panel.
“You have an obligation to the people you serve,” Connolly said.
NARFE did provide a list of policy reforms for the federal program and long-term care insurance in general. With long-term care insurance programs generally also in crisis, the organization said that Congress should explore a new public-private partnership “to better insure middle-class consumers against catastrophic risks of needing long periods of high-level care.”
Specific to the federal program, NARFE suggested, among other things, that Congress consider a government employer subsidy for long-term care insurance and a federal income tax exclusion for long-term care premiums.
“When the insurance actuaries and OPM, in its oversight role, make mistakes predicting the future costs of the program, they are not the ones who are forced to bear the financial responsibility for those mistakes,” Thissen said. “Rather, it is the enrollees who are on the hook. That is a problem in the structure of the program and ought to be fixed.”