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.