CalPERS has disgracefully extended and intensified the financial abuse of the participants in its long-term care insurance scheme, one that violates its enabling legislation and was never properly disclosed as being neither policed by any insurance regulator nor backed by CalPERS, via a cynical and self-serving setlement process.
If you have been victimized by CalPERS, as in are a CalPERS long-term care policyholder, I strongly urge you to first go to the end of this post, where fellow victim and financial analyst Lawerence Grossman has provided contact information for state officials to hector about CalPERS’ misconduct. Then read this post in light of composing a missive to send to them.
Even though the entire long-term care insurance industry is in a world of hurt, CalPERS’ plans are in uniquely terrible shape due to CalPERS having designed its program while high on magical thinking.
Recall that when the long-term care insurance industry was getting off the ground, insurers had no basis for pricing the policies. They made unduly optimistic assumptions, particularly about the lapse rate. While some individuals wind up dropping coverage for life insurance policies before they die, which means more money to pay claims for those who pay faithfully, pretty much no one who got a long-term care policy dropped it. This was as true for CalPERS as it was for the rest of the industry.
On top of that, the existence of these policies helped support the growth of retirement homes, as well as at-home “home health aide” services. The effect of these was to help increase the lifespans of the elderly who otherwise would not be able to care for themselves on their own. What was a positive outcome for these individuals and society was even more destructive to the economics of these insurance schemes.
So the CalPERS long-term care insurance plans will clearly and undeniably will never be able to pay out the stipulated benefits while complying with the original terms, which included an inflation protection option that most sensibly chose. As former board member, JJ Jelincic, explained:
The product was mispriced from day one. Providing long dated, unlimited inflation adjusted benefits meant that the program was offering undefined and unlimited coverage. There was no way to reasonably price the policy.
What makes this ugly situation worse is the way CalPERS has abused these policy holders. First some key background, from a 2019 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.
Needless to say, this is a highly unusual step for a judge to take in a contract dispute. At a minimum, it signals an expectation that CalPERS will lose and lose big.
But CalPERS losing would be of no benefit to the policyholders as a whole (there could be some reallocation among them). It’s highly unlikely that the state will throw money at CalPERS. Unlike CalPERS’ pensions, the state has no obligation. The long-term care insurance plan was set up to be self-funded. So in a worst-case scenario, and “worst-case” looks all too likely, the relevant plans will be insolvent.
Let’s stop a minute. Policy-holders sued in 2013 and the case was limping along in court as of 2019. That strongly suggests that CalPERS was simply trying to drag this out as long as possible, with the eye of postponing embarrassment and criticism. When faced with a difficult problem, kicking the can down the road is alway the preferred option in government-land.
But the effect of dragging this out was to continue to exploit and drain already abused long-term care policy holders. Policy-holders kept paying out of misunderstanding or naive hope that either the judge could claw money out of the pension system (impossible) or that as the judge suggested, the state would ride in and rescue them. Again, merely suggesting that a state rescue could happen would lead policyholders to continue paying into what amounted to a Ponzi scheme. 1
In 2020, the court determined a second time that CalPERS could not raise premiums on its inflation-protected policies. In the summer of 2021, CalPERS and the attorneys for the policy-holders reached a tentative settlement. However, CalPERS was yet again engaging in financial chicanery to keep the policy-holders throwing money at a losing proposition.
The tentative settlement afforded CalPERS with two termination triggers, which CalPERS long-term care policy holder and certified financial planner painstakingly explained in a 2021 post which we titled CalPERS Devises “Heads I Win, Tails You Lose” Gamble for Long-Term Care Policyholders in Settlement. Grossman presented decision matrixes which helped given an idea of what the stakes were. He noted:
Policyholders choosing to stay with CalPERS are gambling that they can afford to pay the premiums in the future, which likely will continue to increase dramatically. Policyholders wishing to terminate, because of CalPERS record of raising rates outrageously and most likely contrary to law, are gambling for or against the Settlement going through.
In light of the critical importance of the Settlement going through or not, policyholders ought to have reasonable information to base their decisions (aka bets). But information available from the Court, the plaintiff’s attorneys and CalPERS, does not provide any objective reason to believe that the Settlement will in fact go through. Therefore, the Settlement options forced on policyholders constitute a legally imposed gamble shrouded in ignorance. I believe that policyholders are not properly equipped to make such financially complex gambles and that it is unfair that they are compelled to do so.
What is clear is that the Settlement is a win-win proposition for CalPERS, but not for policyholders.
What is also clear is that the Settlement has the look and feel of a “con job”, an exercise of deception by CalPERS to again better the financial position of CalPERS at the expense of policyholders.
Grossman’s take has been proven correct now that CalPERS terminated the settlement.
Even worse, Margaret Brown says that the board was informed last November that the settlement math didn’t work, which was a misleading way of saying that the CalPERS plan to bleed policyholders for one more year of payment was succeeding. Rather than acting to protect the insureds and demand that CalPERS terminate the settlement immediately, the board went along and allowed CalPERS to bleed policyholders further by throwing good money after bad. In a new post first published at the CSU-ERPA website and we are reposting below, Grossman provides more detail and a recap of the sordid background.
As JJ Jelincic added:
I’m deeply troubled that CalPERS knew for months that the conditions of the settlement were not going to be met. Yet if offered no guidance to help policy holders make rational informed choices about the options they faced. In fact, two business days before staff informed the Board that it would be walking away from the settlement the staff refused to tell CalPERS stakeholders even when a decision was going to be made.
Additional evidence of CalPERS’ bad faith comes in its choice of law firm. At trial, it had six attorneys from Durie Tangri and one from Drinker Biddle & Reath. Durie Tangri is a software intellectual property firm. It represented CalPERS incompetently against JJ Jelincic’s Public Records Act suit, both via sending JJ Jelincic an overheated letters which made a damaging admission, and via making public nearly all of the closed session transcript that was one of two bones of contention in that suit. Exposing the content of the discussion made clear that CalPERS had flagrantly violated the Bagley-Keene Open Meeting Act by discussing numerous topic that by law could be debated only in a properly-noticed public session. It also made it almost impossible for the judge to rule in favor of CalPERS had he been predisposed to do so (judges in California are generally very deferential to state agencies).
Now admittedly, Durie Tangri does have a class action defense practice. But if you look at the cases they highlight at their website, they are all intellectual property related! Earth to base, tech intellectual property and insurance are not the same! And the fact that Durie Tangri as a software intellectual property firm gets hired for software intellectual property suits suggests that having domain expertise matters.
Several CalPERS insiders believe that the only reason for general counsel Matt Jacobs to be repeatedly throwing legal business to a firm ill suited to handle it is that Jacobs is positioning himself to join Durie Tangri in case his position at CalPERS becomes untenable via having curried a lot of big-ticket favors with them.
By Lawrence Grossman, CalPERS Long-Term Care policy holder and Certified Financial Planner, Accredited Investment Fiduciary, Registered Investment Adviser, and MBA. Originally published at the California State University Emeritus & Retired Faculty & Staff Association website. This post represents solely his personal views
The following commentary about CalPERS withdrawing from the proposed settlement of the Long-Term Care class action suit was written by a frequent contributor to our website – Lawrence Grossman, who is a Certified Financial Planner (TM) and CalPERS LTC policyholder. The opinions expressed in the commentary are his. So far, CSU-ERFSA has not taken a position on the recent developments in the long-running CalPERS LTC class action suit.
CalPERS LTC Insurance Crisis Briefing
The $2.7 billion CalPERS long-term care (LTC) insurance class action settlement, preliminarily approved in 2021, collapsed on April 22, 2022. Policyholders who were forced to continue paying premiums for the last year in order to just participate in the settlement, now find that they will get nothing for that gamble, other than the options of paying the new 90% premium increase, significantly reducing their benefits, or walking away from their policies. This is a financial and health care crisis for 120,000 current policy holders, who are overwhelmingly elderly, and their families. Many of these policyholders will soon need long-term care 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.
The lawsuit itself, technically limited in many ways, is far from perfect in terms of addressing all the major problems with the CalPERS program. Roughly half of all policies sold were excluded, 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, it is clear that the legal process alone is not adequate to address all the damage that CalPERS has done and continues to do with its long-term care program.
After seven years of CalPERS unjustly and fruitlessly fighting its elderly policyholders in court, it is critical now for our government officials and candidates for office – at CalPERS, in the Assembly and Senate, and the Governor – to step forward with honesty and vision to work to ensure that the problems with CalPERS LTC are fixed equitably. Equally, it is time for the press to fulfill its role in good governance and seriously investigate this crisis. There will be elections in 2022 for CalPERS board seats in addition to the regular balloting for the Assembly and Senate. Below are questions that need to be answered and related background material.
Questions for officials, candidates and journalists about the CalPERS Long Term Care Insurance Crisis
Will you investigate why CalPERS
• raised premiums enormously on policies where premiums were contractually guaranteed not to increase?
• raised premiums over 900%, far higher than any other insurance program or what regulators would permit, while asserting that the CalPERS program was well managed?
• misled, to this day, policyholders to mistakenly believe CalPERS as a whole was financially responsible for the LTC program?
• failed to disclose the major policy risk caused by the fact that the CalPERS LTC program is not a typical insurance entity with rates and policy features regulated by the California State Department of Insurance?
• failed to disclose the major policy risk caused by the fact that the CalPERS LTC program does not qualify for assistance from the California Life and Health Insurance Guarantee Association or the California Insurance Guarantee Association, which come into play to help policyholders in financial mismanagement cases like CalPERS?
• has ignored its enabling legislation for decades since inception, at enormous cost to insureds, by failing to offer LTC from a commercial company, which would have been regulated, qualified for insurance guarantee assistance, and subjected the CalPERS “self-funded” program to competitive market discipline?
Will you investigate why the entities responsible for the legislation enabling CalPERS to offer LTC insurance: namely, the legislature and the executive, never supervised the implementation of the CalPERS LTC program which flagrantly disregarded the enabling legislation (passed in 1991, 1992, 1993, 1995, 1999, and 2001) to the great cost for policyholders?
Will you investigate why the $2.7 billion tentative settlement, which would have been one of the largest in US history, but which has now failed, was not publicly reviewed to determine what CalPERS has done that forced it into such a settlement?
Officials and candidates – will you work to repair the financial and emotional damage caused by CalPERS to elderly public employee policyholders and their families who believed they could trust CalPERS? What do you think an equitable resolution would be?
Background of the CalPERS Long Term Care 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 awardcontracts 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.
Email received from a CalPERS senior attorney on behalf of General Counsel Matt Jacobs acknowledges that the program has been run only in the self-funded form, but declines 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 and premiums which were contractually “guaranteed” not to increase and/or “designed not to increase”.
Policyholders plan to hold policies for decades and thus purchase policies in light of what they can afford for the long term. Yet draconian rate increases were imposed which 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 total 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, does not address all the rate increases, all those insured, 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 long-term care 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. Ms. 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 asserts publicly that there is nothing problematic with the program, other than challenges that all long-term care providers have faced. But while the same economic challenges have been faced by all other long-term care providers, there is no evidence that any other insurer in the nation has responded with premium increases like those of CalPERS. For example, the Federal Long Term Care Insurance Program has raised rates about 150% during the same multi-decade period; the federal program uses 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’ long-term care insurance self-funded program were a commercial company, it’s likely 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 from 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 their policies were 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 ten 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 failed to ever properly disclose 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, it is easy to imagine that CalPERS self-funded program would have had few, if any, takers. All 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 class action 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 US history. The preliminary settlement included a one-sided gamble – it required class-action policyholders to hold policies for another year, during which rates increased another 52% (being the first part of a scheduled 90% rate increase), until the settlement was to be 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 the 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 long-term care 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 and/or have trust in CalPERS.
There is an urgent need to address through audit or otherwise CalPERS’s behavior which has been – in my opinion – damaging, unethical, contrary to law, and incompetent.
There also is an urgent need to hold harmless, through compensation or otherwise, policyholders who have been financially and emotionally abused for decades by the callous behavior of CalPERS. Policyholders overwhelmingly are elderly and have few if any alternatives to replace the CalPERS coverage, so time is of the essence. Moreover, there is a need to examine the failure of the State of California to ensure that the program was properly managed. It is distressing that no member of the CalPERS board has spoken publicly about this, nor have any California officials commented on the LTC program’s shortcomings or the $2.7 billion settlement. It also is time for the press to fulfill its role in good governance and seriously investigate this crisis. California leaders need to be on record concerning what they will do to repair the financial and emotional damage caused by CalPERS to elderly public employee policyholders and their families who believed they could trust CalPERS.
References and resources on the internet:
CalPERS LTC Class Action Lawsuit Website – Wedding v. CalPERS – Home (calpersltcclassaction.com)
CalPERS LTC website – Long-Term Care – CalPERS
California Health Advocates – https://cahealthadvocates.org/?s=calpers&id=24538
California State University Emeritus & Retired Faculty & Staff Association – article, September 2021 – can-the-calpers-long-term-care-program-survive (csuerfsa.org)
California Retired Teachers Association Long Term Care Information | CalRTA Members
Retired Public Employees Association of California long-term-care-update (rpea.com)
Lawrence Grossman ,5/14/2021, CalPERS Long-Term Care Program Bleeds Policyholders Dry via 10X Higher Premiums, Gross Mismanagement, Bad Faith Dealing | naked capitalism
Lawrence Grossman, 9/15/2021, CalPERS’ Long-Term Care Fiasco: Private Burial to Hide Malfeasance, Failure to Implement Legislation | naked capitalism
Lawrence Grossman, 9/23/2022, CalPERS Devises “Heads I Win, Tails You Lose” Gamble for Long-Term Care Policyholders in Settlement | naked capitalism
Contact Elected Leaders
CalPERS Board Members: firstname.lastname@example.org . Write “for” and “Board Member Name” in the subject line.
California State Assembly Members: Members | Assembly Internet (ca.gov)
California State Senate Members: Senators | California State Senate
Governor Newsom: Contact | California Governor
Prepared by Lawrence Grossman, 4/26/2022, email@example.com
1 The only way to have a happy ending under this fact set would be to put in a claim sooner rather than later, as in start having the policy pay for long-term care. But you can’t do that unless you actually need care, as in can’t perform enough of the so-called activities of daily living to qualify. But at the margin, policy-holders who were delaying putting in a claim (think of an elderly couple where one still can take of their spouse even though the spouse is incapable of functioning independently) would have the incentive to start drawing benefits as soon as they could.