Get ready to brace yourself for the resurgence of federal long-term care insurance options.

Federal employees have been unable to secure long-term care insurance for the past few months. This hiatus was due to the Office of Personnel Management suspending the program while awaiting new plans and price structures from the carrier. It is anticipated that these options will come with a hefty price tag.

To shed light on what we can anticipate, John Hatton, the Vice President of Policy at NARFE (National Active and Retired Federal Employees Association), spoke with Tom Temin on Federal Drive.

Tom Temin: John, let’s delve into the impending premium hikes for federal long-term care insurance. The entire industry seems a bit uncertain at the moment, not just in the federal sector but across the board. Are premiums expected to continue rising? Where do they stand now, and what has been happening? Is the concept of long-term care insurance viable in the long run?

John Hatton: That’s an excellent question. To begin, the federal long-term care insurance program has been operating on seven-year master contracts between OPM and the insurer John Hancock. These contracts allow for premium increases every seven years. When enrollees initially signed up for the program, they were led to believe that their premiums would remain stable. However, these premiums can increase on a class basis to ensure the fund’s solvency. This contractual fine print has led to significant premium increases that would have been challenging for anyone to predict. The most recent contract renewal began in May, and enrollees will soon receive letters notifying them of premium increases, starting this week in September. They will then have 60 days to decide whether to accept these increases or opt for reduced coverage, possibly receiving coverage equivalent to the amount of premiums they’ve paid. Unfortunately, we don’t yet know the total amount of the increase, as OPM has not disclosed that information. In the last premium increase, rates surged as high as 126% with an average increase of 83%. Therefore, I anticipate another substantial premium hike that will be difficult for many to accept.

Tom Temin: So, 83% was the average increase last time?

John Hatton: Yes, that’s correct. Unfortunately, this time, we don’t have specific numbers, which could indicate that the increase may be even more significant. It’s a concerning situation, and we’ll have to rely on anecdotal reports from our members to gauge the range of premium increases. As you rightly pointed out, this trend is not unique to federal long-term care plans. Similar issues have surfaced in other long-term care insurance options, whether in the group or private sector. One key difference with the federal program is that it takes into account the insurer’s investment returns (or lack thereof) when setting premiums and still maintains a guaranteed profit structure. In contrast, private sector plans may bear potential losses to a greater extent than the federal program, where the insurer appears insulated from such losses. It’s increasingly challenging for enrollees to accept premium hikes while holding guaranteed renewable contracts. Examining the justification for these continued profits alongside steep premium increases is something that needs attention.

Tom Temin: It seems the dynamic here is different from insuring houses against fire or flood, where only a small percentage of homes are typically affected. With long-term care insurance, a larger portion of the population is approaching the age where they might need such coverage. Therefore, instead of having a premium-to-payout ratio of, say, a million to one or a hundred thousand to one, it might be more like ten to one.

John Hatton: You’re absolutely right. Long-term care insurance is more akin to an investment and bears similarities to whole life insurance. In whole life insurance, you eventually collect the benefits, whereas with long-term care insurance, the payout percentage is around 50%. It’s not an exact match, but it does offer an element of asset protection for heirs, especially when it’s highly likely that individuals will need long-term care in their later years. Many enrollees initially purchased this coverage, diligently saving for it, only to find that the premiums are now unaffordable or that the coverage no longer meets their needs. Some individuals may already be over-insured and could consider reducing their coverage or maintaining their premiums while accepting lower coverage. Nevertheless, they are left in a difficult situation.

Tom Temin: Moreover, the coverage benefits offered by these plans are diminishing. They used to provide coverage for as long as needed, but now there are maximum limits, like 36 months or 24 months. Insurance companies appear to anticipate that people won’t need care for extended periods.

John Hatton: That’s true; the coverage landscape is changing. Some coverage options are being suspended or phased out. However, individuals will likely have the choice of accepting reduced coverage. While this option may allow them to keep higher coverage levels, they will likely face substantially increased premiums. Consequently, people will be forced to choose between paying exorbitant premiums for the same coverage no longer offered to new enrollees or accepting reduced coverage.

Tom Temin: It seems that individuals will need to perform a financial calculation. If they’ve been paying premiums for 20 years that equal the cost of 24 months of long-term care, they could be at a disadvantage.

John Hatton: Absolutely. Many individuals have invested in their coverage, and there may be value in maintaining it. Finding the best way to retain coverage or a portion of it, along with other long-term care planning strategies, is crucial. It might be necessary to reassess whether total coverage is needed or if it can be combined with other financial assets, such as annuities or savings, to ensure a secure retirement.

Tom Temin: We’ll have to wait and see what the premium numbers look like when they are revealed. Perhaps OPM hasn’t disclosed them because they anticipate a significant impact.

John Hatton: That’s a possibility, but I wouldn’t want to speculate on their intentions.

Tom Temin: Speaking of OPM, there’s a lot of uncertainty surrounding the government’s operation between September 30th and October 1st this year. There’s a chance that this could affect retirement services, which OPM is already struggling to maintain.

John Hatton: Indeed, the outcome of these negotiations will have implications for retirement services. The question is whether there will be flat funding, an increase, or a decrease. The House bill proposes a funding decrease for OPM, reverting to 2022 levels. On the other hand, the Senate bill suggests increasing funding by $35 million. Furthermore, the Senate bill specifies that these funds should be allocated towards improving retirement services, modernizing IT infrastructure, and ensuring the successful implementation of the Postal Service Health Benefits program. These priorities align with our own, particularly the need to modernize OPM’s systems for retirement services. We’re at a point where modernization is long overdue.

Tom Temin: It’s not as if they haven’t had a budget for modernization in the past.

John Hatton: That’s true. There was a time when OPM awarded a multimillion-dollar contract for system modernization, but it ultimately failed. This failure led to backlogs, as staff levels were reduced in anticipation of the modernization in the early 2010s. To address the backlogs, staff levels were increased, and overtime was implemented. Progress has been incremental since then, with a pilot of an online retirement application set to launch by the end of this year. If successful, this could be rolled out government-wide