A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Appendix Pc: Presentation Entitled "Actuarial Research Corporation's Long Term Care Insurance Model"

10/14/2011

Actuarial Research Corporation’s Long Term Care Insurance Model

June 22, 2011

Caveats

  • No one can foresee how this program will operate, therefore premiums cannot be guaranteed to be adequate.
    • Unknowns include level of participation, level of antiselection, and the effectiveness of procedures to determine earnings, “actively at work,” and qualifications for benefits, and the effect of providing advocacy services
  • Level premiums cannot be determined for benefits linked to an index (CPI), because future benefits are unknown at the time that premiums are calculated.
  • Adequacy of premium cannot be guaranteed when premium levels are unknown such as would be the case if premiums bounce up and down with income.

Actuarial Basis For Premium Formula

  • For each issue age, projections of benefits, expenses, and premium income are made until age 100 (presumed to be the end of life for all individuals in the cohort).
  • The Premium for each issue age is set so that the present value of benefits and expenses is equal to the present value of premium income.

Assumptions

  • Premiums are calculated such that there is no subsidy across years of issue or age at issue, as is typical of social insurance.
  • Premiums are based on a set of assumptions:
    • Interest Rates
    • Mortality Rates
    • Lapse Rates
    • Expense Levels
    • Utilization Rates

Source for Assumptions

  • All assumptions may be modified b the user.
  • Interest rates and mortality rates are taken from the 2011 OASDI Trustees Reports.
  • Lapse Rates are assumed to be 0.75% per year.
  • Premium load for expenses is assumed to be 3%.
  • Utilization comes from survey data with several adjustments.

Mortality Assumptions

  • 2011 Trustees Report
  • Mortality rates decline by roughly 0.8% per year
  • Compared to 1994 GAM:
    • Male GAM rates are about 99% of TR rates in 2011
    • Male TR rates go below 1994 GAM in 2012
    • Female GAM rates are about 83% of TR rates in 2011
    • Female TR rates go below 1994 GAM in 2033

Utilization Assumptions: Data Sources for Nursing Home Rates

  • For NH prevalence rates, incidence rates, average length of stay, and continuance table: 1985 National Nursing Home Surveys (NNHS), trended to 2004 NNHS (generally about 20% to 40% reduction depending on age and sex).

Utilization Assumptions: Data Sources for Home Care Rates

  • For HC ages 65+, incidence rates, average length of episode, and continuance table: 1982-1989 National Long-Term Care Surveys (NLTCS) as analyzed by Eric Stallard and Bob Yee, trended to 2004 by change in prevalence rates from the 1989 to 2004 NLTCSs (generally about 20% to 50% increase depending on age and sex).
  • For HC ages <65, home care prevalence rates from the 2009 National Health Interview Survey (NHIS). Average length of episode is extrapolated from the over 65 (increased by 1% for each age, which is from about 3 1/2 years at age 65 to about 5 3/4 years at age 18). Continuance table is from the over 65. Incidence rates are derived from the formula:
    • PR = IR * ALOS, which is equivalent to IR = PR / ALOS
Utilization Assumptions: Comparison of ARC Model Incidence Rates to SOA Data for 2+ ADLs
  Age   ARC Model
  (before adjustments)*  
SOA 2004
  Intercompany Data  
  Ratio  
45 .155% .13% 1.2
55 .235% .14% 1.7
67 2.20% .47% 4.7
77 7.54% 2.81% 2.7
87 21.90% 9.62% 2.3
* Excluded adjustments are for selection, antiselection, trend, and ADL creep. Incidence rates are the sum of NH + HC incidence rates average of male and female.

Utilization Assumptions: Adjustments

  • Utilization data are tabulated by age, gender, and ADL.
  • Utilization of the under 65 are also tabulated by income level and definition of cognitive impairment.
  • We assume that 25% of those with one ADL less than the requirement will receive benefits.
  • We calculate the number of new beneficiaries in the first year of benefit payments (2017) by using prevalence rates rather than incidence rates.

Utilization Assumptions: Selection and Antiselection

  • Selection: Provisions that result in participants being healthier than average (average is based on survey data for the whole population).
    • The 3-year work requirement
    • NHIS data shows that ADL level of those that work ($1+ per year $1) have significantly lower utilization than the total population
  • Antiselection: Those in need of services are the most likely to participate in an unsubsidized / voluntary program.

Utilization Assumptions: Selection

  • Selection Factor: incidence rates in the last year of required work = 60% of ultimate
    • Work is required for 3 out of the 5-year vesting period
  • Selection wears off over 10-year period

Utilization Assumptions: Antiselection -- Two Methods

  • Antiselectino Factor (AF) -- We model two different methods (and other methods are possible):
    • Formula based on a comparison of participation rates and prevalence rates
    • Estimate of additional 1st-year claims
  • Additional First Year Claims

Formula Method of Antiselection

  • A function of the participation rates and prevalence rates, assumed to diminish over a 20-year period.
  • Starts by first calculating a factor that represents the maximum amount of antiselection and then dampens this factor.
  • Maximum factor = 1/prevalence rate, if prevalence > participation.
  • Maximum factor = 1/(prevalence / participation), if participation > prevalence.
  • Different factor at each age and sex

Utilization Assumptions: Antiselection -- Examples

  • Example 1 -- Male age 35 2+ ADLs: participation = 0.81% & prevalence rates = 0.13%
    • AF = 1/.0081 = 124 (perfect antiselection)
    • AF = 100^0.7 = 29.2 (imperfect antiselction)
    • AF(5) = 12.8 (interpolated value at duration 5)
  • Example 2 -- Male age 55: participation = 3.43%, prevalence = 0.24%
    • AF = 1/.034 = 29.2 (perfect antiselection)
    • AF = 29.2^0.7 = 10.6 (imperfect antiselection)
    • AF(5) = 6.0 (interpolated value at duration 5)

Additional First Year Claims Method of Antiselection

  • Tabulate NHIS number of individuals that meet criteria for participation and benefit eligibility.
  • Assume that they all receive benefits in 2017 possible.
  • * All = Dementia, developmental disabilities, mental retardation, ADD, schizophrenia, bipolar.
  • ** SRD = 1st 3 in list above
  Income     All* Cognitive or  
2+ ADLs (000)
  All* Cognitive or  
3+ ADLs (000)
  SRD** Cognitive or  
2+ ADLs (000)
  SRD** Cognitive or  
3+ ADLs (000)
$0+ 2,651 2,005 1,865 1,589
$1+ 623 571 480 428
$10k+ 412 374 315 277

Policy Options That Can Be Modeled

  • Earnings requirement (parameter in law)
    • Years of work required (3)
    • Level for participation (quarter of coverage = $1,090 in 2009)
    • Level for subsidy (poverty line = $10,830 in 2009)
  • Benefit trigger (ADL requirement)
  • Dollars per day of benefit including indexing options
  • Indexing of premium
  • Waiver of premium while in claim status
    • While in nursing home
    • And / or while in home care
  • Deductible period
  • Lifetime maximum

Assumptions That Can Be Modified

  • Strength of antiselection
  • Level of utilization
  • Trend in utilization
  • Lapse
  • Interest
  • Expense load
  • Level of mortality
  • Trend in mortality

Premium Sensitivity

  • Final Set of assumptions for calculating premiums have not yet been determined.
  • Premiums are very sensitive to some assumptions.
    • Low Income Subsidy / Income requirements
    • Participation rates (1% to 4% decreases premiums by 13% to 18%)
    • Indexing of premium (20+% reduction in initial premium)
    • Interest (14% increase in premium for 4.7% interest vs 5.7% interest with no change in CPI)
    • Lapse (8% increase in premium for 0% lapse from 0.75%)
    • Trends in mortality (4.3% decrease in premium by changing annual trend from 0.75% to 0.25%) and morbidity

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