Lessons from CalPERS LTC Insurance Crisis
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Since the 1990s, the California state pension fund (CalPERS) sold long-term care (LTC) policies to its residents. The lawsuit over claims related to those policies illustrates the dangers clients face with government-sponsored insurance programs.
The $2.7 billion CalPERS LTC insurance class action settlement, preliminarily approved in 2021, collapsed on April 22, 2022. Though little has been written about the suit, it was to be one of the largest settlements in U.S. history. Policyholders who were forced to continue paying premiums for the last year to just participate in the settlement, now find that they will get nothing for that gamble, other than the options of paying a 90% increase in their insurance premiums or walking away from their policies. This increase brings total premium increases to 900% for policies thought to have guaranteed level premiums.
This is a financial and health care crisis for 120,000 policy holders, who are overwhelmingly elderly, and their families. Many of these policyholders will soon need LTC services, and though they have paid premiums for decades, they are now being forced to terminate or reduce coverage because they can no longer afford the latest rate increase or have trust in CalPERS.
This is also a crisis for CalPERS and its three decades of presumably well-intentioned public policy that massively failed in implementation. The crisis has been shaded from view because CalPERS is an independent entity and denies any crisis exists. It effectively is not overseen by either its Board or the California State Legislature. The LTC failures have been massive and manifold – the enabling legislation, the implementation by CalPERS, the lack of oversight by the California Legislature and the Department of Insurance, and the overarching failure to properly disclose to policyholders what insurance CalPERS was selling.
The lawsuit itself, technically limited in many ways, is far from perfect in addressing all the major problems with the CalPERS program. Roughly half of all policies sold were excluded from the lawsuit, many large rate increases were not included, and highly deceptive sales practices were not addressed. While a court trial or further settlement negotiations are to come, the legal process alone is not adequate to address all the damage that CalPERS has done and continues to do with its LTC program.
This is also an object lesson for advisors who deal with public entities, by choice or perforce, while providing financial services. Like all large social entities, public entities can be extremely powerful and have bureaucratic interests that at times improperly dominate those of the entity as a whole and the public it serves. CalPERS, ironically, is an example of where neither the typical critique from the right or the left fits perfectly. Conservatives will surely look upon this fiasco as further proof of the failings of government entities providing services. Liberals will see those same failings, but they will argue that the disaster would have been avoided or greatly mitigated if CalPERS had been regulated by the Department of Insurance.
CalPERS disreputable behavior goes back to the 1990s when it sold its first LTC policies to CalPERS employees, many of whom are alive today. "Justice delayed is justice denied," is a well-known legal maxim. The wisdom of that precept is as true now as when the plaintiffs will be elderly and planning for care in their final days.
Here is how the crisis has unfolded.
Background of the CalPERS LTC insurance crisis
In 1995, the California Legislature enacted the Public Employees’ Long Term Care Act (§§21410 et seq. (Stats. 1991 c.4 (A.B. 44.)). The legislation said that the CalPERS board shall award contracts to private carriers who are qualified to provide long-term care benefits and may offer a self-funded long-term care insurance plan. This “shall” and “may” language was repeated in legislation in 1992, 1993, 1995, 1999, 2001 and remains current law. In an email to a colleague from a CalPERS senior attorney on behalf of General Counsel Matt Jacobs acknowledged that the program has been run only in the self-funded form but declined to explain why the legal requirement for a commercial carrier was ignored. This issue is not subject to the current class action lawsuit. Failure to follow the law meant policyholders were denied the opportunity through CalPERS to purchase a competitive policy from an established insurance company that was regulated by the state.
There are 120,000 policyholders today; in the past, there were an estimated 200,000 policies sold. Most policies sold had inflation adjustments to benefits; the premiums were contractually “guaranteed” not to increase and/or “designed not to increase.” Policyholders plan to hold policies for decades and thus purchase policies based on what they can afford for the long term. Yet there were draconian rate increases that forced policyholders to terminate or reduce benefits of their policies. Premiums increased in 2003 (30%), 2007 (46%), 2010 (22%), 2013 (10%), 2014 (10%), 2015 & 2016 (85%) and 2021 & 2022 (90%); though the individual increases arithmetically totalled 268%, because rate percent changes compound geometrically, the total premium increases have been 900%. During the same period, in geometric terms, LTC service costs only rose about 120% and inflation only rose 45%. Following on the 2013 rate increases, a class action lawsuit was filed in 2015. The suit, however, did not address all rate increases, insureds or other abuses.
After years of litigation, in a decision issued July 2020, for the second time in two years a Judge of the Superior Court of California wrote in support of plaintiffs’ claims that CalPERS could not, as it had repeatedly, raise premiums on this group of LTC insurance policies with inflation-adjusted benefits. The court decision of 2020 most notably quoted Sandra Smoley, then Secretary of the California Health and Welfare Agency and the State's "honorary chairwoman" for the marketing of this new product to state employees. Smoley testified that her understanding was that rates would not increase, and that understanding was integral to how policies were marketed.
While CalPERS argued in court that its behavior raising premiums has been legal, CalPERS also asserted publicly that there is nothing problematic with the program, other than challenges that all LTC providers have faced. But while the same economic challenges have been faced by all other LTC providers, there is no evidence that any other insurer in the nation has responded with premium increases like CalPERS. For example, the Federal Long Term Care Insurance Program has raised rates as much as 150% during the same multi-decade period; it used a private insurance company. CalPERS LTC has been able to hide its financial mismanagement and substantive insolvency only by raising rates far beyond what private insurers would be permitted by regulators. If CalPERS’ LTC insurance self-funded program were a commercial company, by now the courts and the Department of Insurance would have declared it bankrupt and placed it into receivership.
CalPERS also has asserted in court that the CalPERS Long-Term Care program is entirely distinct from CalPERS as a whole and that neither CalPERS nor the State of California have any responsibility for its solvency. They refer to the “LTC Fund” as the only responsible entity. That assertion was a shock to policyholders who believed that they purchased policies from CalPERS, not an undisclosed CalPERS subsidiary entity that never had the financial or management resources to be engaged in LTC insurance. Policyholders bought from CalPERS because they thought they could trust CalPERS and that it was secure. The LTC contracts sold by CalPERS never mentioned the LTC Fund. To this day, CalPERS does not properly disclose this vital information to policyholders.
Moreover, the CalPERS self-funded LTC program is not an insurance entity regulated by the California State Department of Insurance, the agency charged with protecting citizens by overseeing insurance company behavior and approving insurance premium increases. CalPERS, not being a regulated insurance entity, also does not qualify for assistance from the California Life and Health Insurance Guarantee Association or the California Insurance Guarantee Association, entities that help policyholders when their insurance carriers face dire financial conditions. And unlike what is required by law of regulated insurers, CalPERS failed to offer all policyholders the “nonforfeiture benefit” that permitted the conversion of a policy, after being in force for 10 years, to a paid-up policy equal to all the premiums paid or the cost of three months of care, whichever is greater; today that could be worth tens of thousands of dollars to policyholders.
CalPERS has never properly disclosed all of these financial vulnerabilities to policy applicants and holders – disclosures that would have alerted policy holders that they were taking on much greater risk with CalPERS LTC than with private carriers. If all these financial risks had been disclosed, and if CalPERS had offered a commercial policy as required by law, CalPERS self-funded program would have had few if any takers. This raises the question of whether CalPERS’ behavior amounts to fraud on a massive scale.
In the summer of 2021, CalPERS and the class action lawyers arrived at a settlement that the court preliminarily approved. The settlement would have provided $2.7 billion in payments to policyholders, being a full refund of premiums previously paid, in conjunction with the termination of their policies. It would have been one of the largest settlements in U.S. history. The preliminary settlement included a one-sided gamble – it required policyholders to hold policies for another year, with rates up 52% (being the first part of the 90% rate increase), until the settlement was finalized in June 2022. But the settlement also included for CalPERS the option to walk away from the deal under certain conditions, and CalPERS exercised its walk-away option on April 22, 2022.
Policyholders now are faced, once again, with the choice of paying the recent 90% rate increase or terminating coverage without any compensation. Many of these policyholders will soon need LTC services. Even though they have paid premiums for decades, they are now being forced to terminate or reduce coverage because they can no longer afford the latest rate increase and/or have trust in CalPERS.
The next step in the legal process is a trial. At another Superior Court hearing held May 9, 2022 in Los Angeles, attorneys for CalPERS and the plaintiffs acknowledged that the settlement had failed and the judge announced that the trial could begin as soon as late in 2022 or early in 2023. Attorneys for the plaintiffs say that the trial could take years longer.
Lawrence Grossman, CFP®, AIF(TM), MBA, MA, is an advisor with Archvest Wealth Advisors, Inc., based in Benicia, CA.