Retired California government workers will get tens of thousands of dollars if they give up their long-term care insurance.
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CalPERS is preparing to pay out roughly $800 million to settle claims that it misled retirees when it began offering long-term care insurance in the late 1990s and pledged it wouldn’t substantially raise rates on certain plans.
The nation’s largest public pension fund in the 1990s and early 2000s sold long-term care insurance with so-called inflation-protection that members believed would shield them from dramatic spikes in premiums. CalPERS nonetheless hiked long-term care insurance rates by 85% in 2012 and continued to raise fees in subsequent years, straining household budgets for retirees on fixed incomes.
The settlement, tentatively approved by a Los Angeles Superior Court judge earlier this month, would resolve a lawsuit that centers on that steep 2012 fee increase. The settlement cannot take effect until plaintiffs in the class-action lawsuit review it and have an opportunity to submit comments to the court on it in a process that’s expected to take place between April and early June, according to court records.
The California Public Employees’ Retirement System pays for long-term care out of a specific fund that is separate from the $443 billion portfolio that supports pensions for its 2 million members. The long-term care fund had about $4.9 billion as of June and about 105,000 active policies, according to CalPERS.
The agreement is the second court-approved settlement in the case. It is significantly less expensive for CalPERS than the first one.
The previous agreement would have cost CalPERS as much as $2.7 billion and required retirees to drop their long-term care plans in exchange for payments of as much as $50,000 apiece.
Thousands of retirees chose security over cash and rejected that agreement because they wanted to retain to long-term care insurance, according to attorneys representing the plaintiffs.
Under the new agreement, retirees who want to cancel their long-term care insurance will receive 80% of the premiums they paid into CalPERS’ long-term care fund. That could amount to tens of thousands of dollars for retirees. The settlement does not cap how much money a policyholder can receive.
Members of the class who want to keep their long-term care insurance will receive $1,000 and a commitment from CalPERS that their rates will not increase until November 2024.
About 79,000 households stand to benefit from the settlement, including relatives of deceased policyholders, said Stuart Talley, an attorney for the plaintiffs. In total, about $740 million will go to the plaintiffs, while another $80 million will go to lawyers and administrative fees.
He said the new agreement strikes “a sort of balance” between policyholders who want to drop their plans because of the fee increases and others who want assurances that CalPERS’ long-term care fund is able to pay benefits.
“Really what they’re getting is a program that is financially viable and solvent and will be there in the future for them,” he said.
The average age in the class is 76 and 14,846 members of the lawsuit have died since the litigation began, according to the settlement order. Attorneys estimate another 9,000 could die before seeing any benefit from the lawsuit if the case proceeds to trial and takes more than two years to resolve.
“There are so many people who want out of this program. Even though this isn’t the greatest settlement in the world, I think it’s best to move forward,” Talley said.
Insurers misjudged long-term care market
CalPERS began offering long-term care insurance in an era when the public pension fund was flush and confident it could earn 8% returns on investments. It marketed long-term care plans with inflation protection, giving members the impression they could “lock in” cheap insurance without risk of significant rate hikes.
Rates increased incrementally before the 85% jump in 2012, which was brought on by lower-than-expected investment earnings and higher-than-projected expenses. The increase led many CalPERS members to opt for lesser coverage to limit their costs, according to court records.
CalPERS was not the only provider to misjudge the market when it began offering those plans. AARP in a 2018 report noted that more than 100 carriers sold those policies in the 1990s, a number that shrank to about 15.
In fact, last year’s settlement agreement called for CalPERS and the plaintiffs’ attorneys to seek a replacement plan for members who wanted long-term care insurance from another provider. Their brokers approached more than 90 insurers and could not find a company to take on the new customers, according to settlement documents.
“It’s a toxic product for insurers, and CalPERS in 1995 decided to jump in with both feet,” Talley said.
If the case had gone to trial, CalPERS was expected to argue that it raised rates in 2012 because of change in its expected investment earnings and that members who reduced their benefits because of the 85% increase did not suffer financial harm, according to a summary of the settlement that will be mailed to policyholders in April.
CalPERS has not sold new long-term care policies since 2020, citing uncertainty in the market. It also recently adopted two big rate increases, a 52% hike in November 2021 and a 25% jump in November 2022.
What CalPERS plans cost
Today the average monthly premium for a CalPERS long-term care policy is $280.41, according to CalPERS. Talley’s clients bought policies in the 1990s for as little as $60 a month; he said it’s common for them to pay upwards of $400 a month today.
CalPERS declined an interview request about the settlement, but provided written information about the status of the long-term care fund.
Matt Jacobs, CalPERS’ general counsel, at a court hearing earlier this month said the long-term care fund would remain solvent after the settlement, according to a transcript.
“The new settlement reflects the parties’ work to provide policyholders who are counting on their policies to provide critical care with a choice to keep their policies,” he said in a press release about the agreement. “We believe this new settlement resolves what are very complex issues in a fair and equitable manner.”
At the hearing, Superior Court Judge William Highberger characterized the settlement as “not the happiest of outcomes, because it’s a compromise.”
“One of the consequences of the settlement is the hideously inaccurate actuarial data which some of the original pie-in-the-sky marketing materials were based on will all go in the rear view mirror and be gone and released,” he said, “Everybody going forward is going to have a clear-eyed view. This plan is going to run on a basis that is economically solvent without regard to what was said 20-plus years ago when it was first offered.”
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