Yves here. Please welcome Lawrence Grossman, who has provided a second post on the CalPERS long-term care policy train wreck. Grossman, a financial analyst, describes the extreme underfunding of this zombie program in his earlier piece: CalPERS’ Long-Term Care Program Bleeds Policyholders Dry via 10X Higher Premiums, Gross Mismanagement, Bad Faith Dealing. The rate increases that CalPERS is putting through, a 900% increase over the rates charged at the outset, are wildly disproportionate to the level of any other significant long-term care program. In other words, even by the standards of an industry that is in deep financial trouble, CalPERS’ rate increases are such an outlier that it is hard to explain them solely as a result of the original underpricing. It is not unreasonable to suspect that mismanagement also contributed to this sorry outcome.
Grossman continues his analysis by describing how the settlement of a class action suit conveniently ignored a key fact: that CalPERS flagrantly violated the legislation that allowed the giant fund to offer long-term care policies. Grossman cites the work of former California Deputy Attorney General and Court of Appeal Attorney, Linda J. Vogel, who argues that CalPERS has ignored the clear-cut statutory requirement that it offer long-term care policies from third party providers, and not only try making its own sausage in house. Grossman describes why this violation of the long-term care program’s governing law led to its failure and the damage to its policy-holders.
We discussed this sorry situation in 2019 in CalPERS’ Long-Term Care Policy Train Wreck – Is Bankruptcy the End Game?. The opening of that post:
It doesn’t look like there will be a happy ending for the over 100,000 CalPERS long-term care policy holders who are represented in the class action lawsuit, Wedding v. CalPERS. That doesn’t mean there’s a good outcome for CalPERS either. However, things should work out for the plaintiffs’ attorneys.
The bone of contention is that CalPERS approved an eye-popping 85% increase in premiums in 2013, hitting only the policies with the most generous payment features. The plaintiffs contend that these increases weren’t permissible and are seeking substantial damages.
The case has been grinding through the California courts since 2013. Judge William Highberger, in his decision from a June 10 trial, explicitly called on the legislature and state government to bail out the long-term care scheme.
We said then that the only winners in this case were likely to be the attorneys representing the plaintiffs. Sadly is how it appears to be playing out.
By Lawrence Grossman, CalPERS Long-Term Care policy holder and Certified Financial Planner, Accredited Investment Fiduciary, Registered Investment Adviser, and MBA. This post represents solely his personal views
The ongoing CalPERS long-term care insurance program crisis continues to unravel. It is also revealing overarching behavior which is both unethical and contrary to law.
CalPERS announced insurance premium increases of 52%-90% that become effective very shortly, at the same time that CalPERS has agreed to a class action lawsuit settlement over its last 85% rate increase. (In my next article I will discuss why I suspect the settlement is another con job by CalPERS.) But here I first must address a shocking revelation previously unreported about CalPERS long-term care insurance program (LTC) which needs to be recognized before moving on to the issues of the proposed settlement.
There is new and truly disturbing information about the CalPERS long-term care insurance program from a recent review of the enabling legislation prepared by a former California Deputy Attorney General and Court of Appeal Attorney, Linda J. Vogel.
According to Vogel’s analysis, the CalPERS long-term care insurance program since inception in 1991 has operated contrary to law.
It then follows that if CalPERS had followed the law, there most likely would be no CalPERS long-term care insurance crisis and no class action lawsuit. That said, there is no evidence that either the class-action plaintiff lawyers or the judge on the case are aware of this issue. Here are the details.
The 1991 legislation enacting the Public Employees’ Long Term Care Insurance Act (the Act) stated that the CalPERS “board shall contract with carriers offering long-term care insurance plans and enter into health care service contracts covering long-term care . . .the board shall award contracts to carriers who are qualified to provide long-term care benefits, and may develop and administer self-funded long-term care insurance plans. The board may offer one or more long-term care insurance plans or health care service plan contracts covering long-term care and may offer service or indemnity-type plans.” (former Gov. Code § 21411, subd. (a), underlining added for emphasis.) Government Code defines “carrier” as a “private insurance company holding a valid outstanding certificate of authority from the Insurance Commissioner . . .” (Gov. Code, § 22764.)
The current version of that language, now at Government Code section 21661, subdivisions (b) and (c), eliminates the second clause of former section 21411, and simply says that “[t]he board shall contract with carriers offering long-term care insurance plans.” (Gov. Code. § 21661, subd. (b).). Language allowing the board to offer its own plan, at its discretion, in addition to contracts with carriers remains the same: “The board shall award contracts to carriers who are qualified to provide long-term care benefits, and may develop and administer self-funded long-term care insurance plans. The board may offer one or more long-term care insurance plans” (Gov. Code § 21661, subd. (c), underlining added for emphasis.)
The threshold fact about CalPERS’ LTC program, according to Vogel, is that CalPERS has never done what the Act required and still requires it to do, which is to contract with long-term care insurers for group long-term care insurance, something the federal LTC program for federal employees and service members does with great success relative to CalPERS’ program.
Notwithstanding the clarity of the law, CalPERS never awarded a contract to any carrier qualified to provide long-term care benefits. CalPERS proceeded with only the self-funded option.
While it is unclear how this was decided, and more about that below, it is apparent that the carrier option would have presented competition to the self-funded option and in that way protected policyholders from abusive rate increases from the self-funded plan. But it seems that CalPERS quietly buried the competitor that was required by law.
For example, premiums on CalPERS policies issued decades ago have increased 400% – 900%. Yet the policy contracts stated that the premiums were “designed” and/or “guaranteed” not to increase. Now CalPERS is raising premiums another 90% on top of past increases. Though CalPERS tries to explain these increases as normal for the industry and legal, those assertions are not accurate and are part of a cover-up.
During the same past two decades the Federal Long-Term Care Insurance Program, which is not self-funded but utilizes a competitive bidding process to select and subcontract to John Hancock Insurance, reports rate increases of no more than 157%. Moreover, commercial carrier insurers in California such as Mutual of Omaha, Transamerica, and Thrivent report increases no greater than 59%. As well, two Court rulings have declared that significant parts of past CalPERS rate increases violate policy contracts.
CalPERS’ failure to provide the mandated insurance carrier option means that the entire program has been run on a no-bid basis. The result has been a predictable fiasco.
Vogel has personal experience with the kinds of errors CalPERS makes on a statewide basis. Some years ago, she demonstrated that CalPERS’s attorneys were misinterpreting a Revenue Code section to deny members the opportunity to buy service credit (“air time”) to which they were entitled. Her legal analysis resulted in CalPERS acknowledging its error and changing its eligibility criteria statewide.
In light of the “shall” and “may” statutory language as well as Legislative Counsel’s Digests that summarized the Act as requiring the Board to contract with carriers offering long-term care insurance plans for eligible employees, Vogel wrote in June an e-mail memorandum of law to CalPERS General Counsel Matthew Jacobs, pointing out the consistent “shall” and “may” statutory language, citing the legal authority that interprets “shall” as mandatory and “may” as discretionary, and requesting CalPERS’ legal authority for not contracting on behalf of enrollees with long-term care insurance carriers.
A few days later she received an email from Senior CalPERS Attorney David vander Griff, on behalf of Jacobs, that stated in toto: “We would like to thank you for your concern, but this is how the LTC Program has always operated, and there are no present plans to change it.”
More recently, Vogel submitted Public Records Act requests for all documents concerning implementation of the statutory requirement for CalPERS to contract with insurance carriers. CalPERS repeatedly responded that it does not have “any responsive documents concerning contracts with long-term care insurance carriers”, including documents reflecting CalPERS’ assessment of the Act’s requirement to contract with carriers. According to Vogel, it defies belief that CalPERS never considered offering insurance through carriers as called for by the legislation. But officially, there are no staff analyses or reports, no committee minutes of discussions, no nothing. A very private burial indeed.
In sum, it appears that for over three decades CalPERS has acted contrary to law and is now stonewalling any explanation of why. Board members refuse to explain their behavior, even when directly and publicly asked, and CalPERS staff says no information is available.
Board members that lack the character to properly explain their actions are unacceptable. CalPERS members voting now for Board Member-at-Large candidates should keep that in mind. But stonewalling is not new to CalPERS, which is the largest pension fund in the nation. In my next article, I’ll explain how stonewalling is the reason why the class action lawsuit settlement is suspect.
CalPERS’ failure to implement the law regarding the carrier option is the primary reason why hundreds of thousands of policyholders have effectively been extorted over the past decades. If CalPERS had followed the law and acted like the federal government in subcontracting the program, then most likely there would be no CalPERS long-term care insurance crisis. So, this legal issue is not just old trivia, but is dramatically damaging some 120,000 policyholders today, 80,000 of which are part of the class action lawsuit settlement.
This will be entertaining.
Attorney General Bonta will be all over this in no time!
More seriously, the Judge will not be happy when this is brought to his attention.
It’s 8 years into this law suit and CalPers has been less than attentive to the Judges’s rulings.
If the program was not legally constituted from the GitGo then the question of who is responsible to the policyholders arises.
Which will be hugely entertaining.
I expect Policy holders will still be screwed sideways because that’s how things are done, but they won’t be quiet about it..
You do know that CalPERS is saying this LTC is someone else’s fault right refusing to answer any members questions. The board President denies having any knowledge of this and refers us to the “administrators”. He has said that the board is not responsible. Well, it one way he’s right they are irresponsible.
That issue was not raised in the lawsuit and is not within then purview of the lawsuit. It remains to be addressed, most likely in the Legislature.
Linda, do you know if any of this information re malfeasance has reached the legislature or the Governor’s Office ? Outrage is great, but a cure is far better. What if anything can we do, to push this problem, to a satisfactory solution ?
Were you working on this issue when you were an AG? If so, did you report it to your supervisors ?
As a long-timerCalPERS LTC policy holder, I am disappointed in the anemic proposed settlement that does nothing to hold the CalPERS board or staff accountable, restructure the program and strengthen oversight over the board and staff. Time for CalPERS LTC participants to organize and move the state legislature, the senate committee responsible for CalPERS board and staff oversight, and state attorney general to:
1. Thoroughly investigate this debacle, then move toward creating new legislation that completely restructures the CalPERS LTC Program with (per the 1991 law) regulated, private industry and regulated insurance options for LTC participants so that its solvency does not depend on a nearly 1,000% premium increase burden (over the life of the program) for LTC participants.
2. Move the calPERS LTC Program away from the jurisdiction of the CalPERS board and staff, which have abrogated their fiduciary responsibility. It is obvious that neither board nor staff should be in the insurance business.
3. Create legislation that creates a new LTC regulatory body and which guarantees the program’s long-term solvency. Research Washington State’s new public LTC program.
4. Hold the state legislature accountable for its lack of oversight of its 1991 legislation and the CalPERS board and staff.
5. Start an advocacy group comprised of LTC participants. Is there one forming out there? There should be.
The unfortunate “settlement” places the burden on older LTC participants many of whom cannot afford the increases or new policy, a form of age discrimination. Even the “get your money back” option is unworkable. There are no guarantees of replacement policies and those will be far less than what CalPERS promised. It is likely taxable and would not pay for even half a year’s worth of long term care. Participants in their 60s, 70s and 80s who have been with the program since its early days will find comparable LTC insurance. All this is ironic since the state recently established a committee to “study long-term care” in California.
And the attorneys and settlement administrators, all of whom will be well-compensated in the millions of dollars, will be the only ones who actually benefit from this. The impression is that they want nothing more than to collect their cash and wash their hands of this anemic “deal” which still has many uncertainties.for LTC participants.
After my infusion with the wonder drug caffeine it struck me that if Ms Vogel’s reading of the law is correct EVERY long term care policy issued by CalPers is void.
Not voidable, void.
Because the issuer did not have the capacity to issue such insurance as a matter of Law.
Can any of our legal mavens chime in?
No, the policies ate not void. As I read the statute CalPERS had discretionary authority to devise its own self-managed plan in addition to contracting with insurance carriers.
Thanks to Lawrence Grossman for following this story. He must get his waders from the same place that Lambert does. Where this post says that ‘It doesn’t look like there will be a happy ending for the over 100,000 CalPERS long-term care policy holders who are represented in the class action lawsuit’, I think that it should be amended to 100,000 CalPERS long-term care policy holders are discovered to be also voters who would like a conversation with the Governor. As Newsom just won in California, he had better hope that it does not blow up on his watch though you think that there would be a pressure group formed of all these people and their families plus all the other Californian Taxpayers who will be on the hook to pay for this all when it finally blows up. So the question should be asked of Newsom – ‘Do you feel lucky, punk?’
Rev, I’ll rephrase my question.
How can an institution which as a matter of Law can not issue an insurance policy issue a valid insurance policy?
They can only do it if provided political cover by Sacramento – and it does not matter if it is Democrat or Republican. Both parties have had decades to reform CalPERS and done zip.
With the parties involved, including what will be one pissed off Judge and a horde of abused people who thought they had valid Insurance policies and don’t this is going to be difficult to sweep under the rug.
I can easily imagine a Judge who has had eight years of his life wasted on this suit dismissing it on the grounds that there were and are no valid insurance policies.
Which could make life interesting for Matt Jacobs, Marcie Frost and the Board at CalPers because there really is such a thing as fiduciary duty.
Judges have very tender egos…
Further, if the very premise upon which the Plaintiffs have based their suit (That CalPers had the legal authority to sell LTC Insurance) disappears, what happens to the lawsuit?
And how will the Judge react to finding out that the last eight years of legal wrangling were based on the invalid assumption that these insurance policies existed, when they were sold by an entity that had no legal authority or right to sell such insurance?
This is going to be very entertaining indeed.
Thanks, for this, Yves. I’m not certain how to reconcile a “shall” with a “may” and never implement the “shall.” I’m curious though, who is/was adjusting these self insured policies? It would make sense (though there’s little sense to be had here) to engage a third party administrator. I can’t imagine they adjusted this in-house, but then nothing would surprise me. Would that have had anything to do with the egregiously soaring rates? (Mere conjecture here, but wondering.)
Where’s my popcorn?
There are yearly actuarial reports – generated in-house – that look at return on investments, use of the policies, projections for use, etc. The actuarial reports are available on the CalPERS website, although they still have not posted the one for 2020 You can get an idea from there Executive Summary what figures into a rate determination.
A wrinke is that according to a 1998 report the policies were never priced right to begin with, and CalPERS (unlike private insurers) had no other lines of insurance or reserves to draw on, so there have been continuous adjustments, especially with regard to investments, trying to get things right – and CalPERS (from my limited knowledge, but according to one of the class action attorneys) misjudged the market each time.
If you go to the CalPERS website and write “long-term care actuarial valuation report” you will get the yearly reports. They are pretty technical, but the Executive Summary is relatively straightforward. There are other reports that are available if you search on the CalPERS website for “long-term care” or “long-term care program.”
An interesting artifact that dawned on me reading the reports s that every time someone downgrades or abandons a policy, that is a net increase in CalPERS’ fund’s valuation, because of a lessened risk of future payout. There is a term “shock lapse” for when there is such a great increase at one time that people let their policies go.
Wow. Thanks Linda. I’ll take a look. That last paragraph in the second post is extremely enlightening.
SO — what are people recommending, now that the Sept 22 deadline is approaching. Many of us have to decide whether to go with the Settlement or with CalPERS. Receiving a refund of my payments — without the interest I could have earned over the past 25 years — is not an option for me. I will need long term care. Suggestions?
Helen, September 22 might not be a hard deadline. If you chose the replacement policy option on September 22, you can still back out of it after you review the replacement policy (if they find one) and choose to either stay in CalPERS or take your lump sum return of premiums. The real deadline for that is December 13. During a September 3 webcast, class attorney Michael Bidart said, you are “basically keeping all of your options open” by choosing the replacement policy option on September 22. But I am not an attorney and this is not legal advice.
State Agencies have record retention policies and after so many years the files are boxed up and sent to the State Archives which is overseen by the Secretary of State, Dr. Shirley N. Weber.
You may find the records you are searching for with the SOS.
Good luck and thank you for your important work on CalPERS’ Long-Term Care.
Wow….CalPers LTCG simply stopped paying my Mom’s claims a couple months ago and got around to notifying me by snail mail a month later….Their reason? “Line 3 of the Continued Monthly Assessment Form was incompletely filled out”. They simply decided to blow off her already accepted claim over a minor clerical error at the care home she resides in.Needless to say, this is a major problem .
Trying to get them the corrected form is another voyage through Dante…They have one, yes one, fax number for claims to cover the entire system and by their own admission the number gets so overloaded it just dumps faxed documents when the buffering system fills up.
I discovered these most enlightening articles in my process of trying to figure out who to lean on to get things rolling again but it seems there is no leverage to be had in the land of law.Could this somewhat arbitrary suspension of benefits be part of a larger scheme to find and keep what revenues they have?
I find it very disturbing that they can just stop paying an already established claim over something as trivial as one line of a form filled out wrong by and overworked floor manager at a care home and we’re left holding the bag.Should be an interesting journey .Ugh!