CalPERS has marketed LTC plans to Californians since the 1990s. The policy-related lawsuit shows the pitfalls of government-sponsored insurance programs.
The $2.7 billion CalPERS LTC insurance class action settlement failed in 2022. It was one of the largest U.S. settlements, yet little is known about it. Policyholders who paid premiums for a year to participate in the settlement will get nothing for their wager other than a 90% premium increase or the choice to cancel their policies. That raises guaranteed level premiums by 900%.
120,000 elderly policyholders and their families face a financial and health care crisis. Many of them may soon require LTC care, and while they’ve paid premiums for years, they’re now forced to terminate or reduce coverage since they can’t afford the last rate increase or trust CalPERS.
CalPERS, an independent corporation, denies the situation exists. Neither its Board nor the California Legislature oversees it. The LTC failings are large and multifaceted: enabling legislation and implementation by CalPERS, lack of monitoring by the California Legislature and the Department of Insurance, and failure to adequately explain to policyholders what insurance CalPERS was offering.
The lawsuit, which is technically limited, doesn’t address all CalPERS-related problems. Half of all policies sold were excluded from the complaint, as were numerous significant rate hikes and misleading sales techniques. A court trial or more settlement discussions are coming, but the legal procedure alone won’t fix all the harm CalPERS has done to its LTC program.
That’s a lesson for financial advisers who work with public companies. Public institutions may be strong and have bureaucratic interests that sometimes overshadow those of the entity and the public it serves. Ironically, neither the traditional right-wing nor left-wing critique fits CalPERS. Conservatives will see this as proof of government service failures. Liberals would recognize the same flaws but claim that the crisis might have been averted or lessened if the Department of Insurance had regulated CalPERS.
CalPERS LTC crisis background
The 1995’s Public Employees’ Long Term Care Act requires CalPERS to award contracts to commercial carriers that can provide long-term care benefits and a self-funded plan. This “shall” and “may” phrase was repeated in 1992, 1993, 1995, 1999, and 2001. A CalPERS senior attorney for General Counsel, Matt Jacobs, confirmed that the program had been self-funded but refused to explain why a commercial carrier was overlooked. This isn’t a class action lawsuit problem. Failure to obey the law prevented CalPERS policyholders from purchasing a competitive policy from a state-regulated insurer.
Most plans sold had inflation-adjusted benefits; premiums were contractually “guaranteed” or “designed” not to increase. Policyholders buy plans depending on what they can afford long-term. Rate hikes pushed policyholders to cancel or reduce benefits. Premiums increased nine times, including 2015 & 2016 (85%) and 2021 & 2022 (90%); whereas the individual increases arithmetically totaled 268%, the cumulative premium increases have been 900%. LTC expenses climbed 120% during the same time, while inflation rose 45%. 2015 class action lawsuit followed 2013 rate hikes. The lawsuit didn’t cover all rate hikes, insureds, or abuses.
After years of litigation, a Superior Court of California judge ruled in July 2020 that CalPERS may not raise prices on LTC insurance policies with inflation-adjusted payouts.
CalPERS maintained in court that increasing premiums was legal, but it also said publicly that the program has no problems beyond what all LTC providers confront. All LTC providers face the same economic issues, but no other insurer has raised premiums like CalPERS. CalPERS LTC disguised financial incompetence and collapsed by charging premiums far higher than what commercial insurers would be allowed. If CalPERS’ self-funded LTC insurance program were a commercial corporation, courts and the Department of Insurance would have declared it insolvent and placed it in receivership.
CalPERS has also argued in court that the Long-Term Care program is separate from CalPERS and that neither CalPERS nor the state is responsible for its solvency. They simply blame the “LTC Fund.” Policyholders thought they bought policies through CalPERS, not an unlisted subsidiary that lacked the financial and administrative capacity to offer LTC insurance. The CalPERS’ LTC contracts don’t mention the LTC Fund. CalPERS still hasn’t disclosed this critical information to policyholders.
CalPERS’ self-funded LTC program is not governed by the California State Department of Insurance, which oversees insurance company activity and approves rate increases. CalPERS, not a regulated insurance organization, doesn’t qualify for support from the California Life and Health Insurance Guarantee Association or the California Insurance Guarantee Association, which protect policyholders when their insurance carriers face grave financial situations. CalPERS didn’t offer all policyholders the “nonforfeiture benefit” that allowed the conversion of a policy after ten years to a paid-up policy equal to all the premiums paid or the cost of three months of care (whichever is greater). That could be worth tens of thousands of dollars today.
CalPERS has never fully disclosed these financial vulnerabilities to insurance applicants and holders, which would have warned policyholders of the substantial risk they’re taking compared to private carriers. If CalPERS had disclosed all these financial risks and issued commercial coverage as required by law, its self-funded program would have had few takers. This makes us wonder if CalPERS is committing big fraud.
CalPERS and the class action lawyers reached a preliminary settlement in 2021. The settlement would have refunded $2.7 billion in premiums to policyholders upon cancellation, one of the largest settlements in the U.S. The preliminary settlement forced policyholders to keep insurance for another year with rates up 52% (the first portion of the 90% rate hike) until the settlement was approved in June 2022. However, CalPERS exercised its walk-away option on April 22, 2022.
Next is a trial. The judge indicated that the trial might begin in late 2022 or early 2023. Plaintiffs’ lawyers predict the process might last years.