The CalPERS long-term care fiasco continues, with the board and staff taking a course of action that increases harm to policyholders by continuing to bleed them rather than put the program in bankruptcy.
For those new to this train wreck, the public comment at the February 14 CalPERS board meeting by policy-holder and certified financial planner Lawrence Grossman provides an introduction. A key bit of background is that state legislation allowed CalPERS to jump on the long-term care insurance bandwagon in the 1990s. Most of these insurance plans have gotten into a world of hurt by underestimating the degree to which proper elder care would extend lifepsans of policy-holders and overestimating the lapse rate (lapsed policies mean the premiums paid by dropouts benefit the remaining policyholders). But CalPERS’ recklessness and incompetence were in a league of its own.
CalPERS not only considerably underpriced its policies compared to commercial competitors, but it made matters worse via giving CalPERS policyholders the options of lifetime benefits (as opposed to fixed dollar benefits) and inflation protection. Inflation protection would seem like an incredible promise for any long-term insurance scheme. Yet the policies were advertised as CalPERS policies, not those of a free-standing “CalPERS Long-Term Care Fund,” as in not backed by CalPERS or the state of California.
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.
If the case results in a significant money judgment against CalPERS, and the judge’s body language is that that’s a probable outcome, the only place the funds can come from is the long-term care plans themselves. As we’ll discuss, that means that CalPERS would need to bankrupt the long-term care plan or take other measures to deal with their insolvency. Note that CalPERS has just put out a bid opportunity for an outside bankruptcy counsel.
But expect CalPERS to drag things out. Defaulting on this scale would be a huge embarrassment. CEO Marcie Frost and General Counsel Matt Jacobs will do everything they can to try to kick this mess over to successors. The most likely course is for CalPERS to appeal and put off a formal bankruptcy or alternative (a runoff plan?) as long as possible.
Four years later and things are going according to CalPERS’ abusive plan. Even though Judge Highberger clearly rejected CalPERS’ position that it can violate policy terms and raise premiums, CalPERS has continued to increase premiums because the court so far has issued only preliminary decisions. Note these increases are vastly in excess of those implemented by commercial carriers.
By dragging things out and putting through punitive premium increases, CalPERS hopes to accomplish two things:
Have more policy holders die, reducing the number of potential claimants on a too small pot of funds
Having more policy holders lapse, either due to inability to afford the vastly higher premiums or dropping the policy out of the belief that the cost of keeping the policy is too high compared to any payoff.
Notice CalPERS’ abusive approach is succeeding. We wrote of “over 100,000” plaintiffs in the class action suit in 2019. It’s now down to “over 80,000”.
Now to Grossman’s update, starting at 1:10:
President Taylor, members of the Board, good morning, thank you for five minutes.
My name is Lawrence Grossman and I live in Benicia, California. I am here to comment on the CalPERS long-term care insurance crisis.
Permit me to be perfectly frank: If the CalPERS long-term care insurance program had honestly disclosed what it is, I believe that no reasonable person would have bought a policy.
But CalPERS has been extremely dishonest by not disclosing material facts. And it sold about a quarter of a million policies.
The program has been implemented incompetently and is now a financial disaster, primarily of CalPERS’ creation. Yet CalPERS wants policyholders to pay for its failings and to that end has broken contracts and has risen premiums at times ten fold, as in 100% .
The ongoing class action lawsuit, which this Board has fought for nine years, addresses only part of the problem. There remain earlier and later rate increases which are inconsistent with policy contracts as well as damages caused by deceptive sales practices.
This is why a public audit of the program is necessary.
Likely you noticed that each candidate last year for the CalPERS Board seat that Ms. Walker won emphatically stated during their debate that the CalPERS long-term care program is a “failure” or “debacle”. This Board has denied that, with staff asserting publicly that the CalPERS program has simply experienced problems which all the commercial long-term care insurance companies have experienced. That assertion seems quite inconsistent with the facts and needs to be publicly examined.
CalPERS has failed to follow its enabling legislation which requires it to offer a commercial policy option in the CalPERS program if there is a program at all. But CalPERS decided to ignore the law because, I have been told by former CalPERS Board members, staff asserted that the so-called self-funded option was far superior.
Yet even if one believes the commercial option is less attractive, how was it possible to ignore the law? Why did CalPERS not let consumers choose? CalPERS’ General Counsel was asked that question in writing by a colleague of mine. The General Counsel had an associate respond, who simply wrote that “this is how the long-term care program has always operated and there are no present plans to change it”.
Not offering a commercial long-term care insurance option means that the self-funded option did not have to compete with another policy that CalPERS endorsed. Competition would have let buyers see the crucial differences between a policy subject to Department of Insurance oversight and a self-funded one without oversight.
The self-funded option, I submit, also is dangerously convenient to CalPERS. It means that CalPERS is not subject to Department of Insurance regulation. Undoubtably, the Department of Insurance would not have permitted the 900% premium increases that CalPERS has imposed; the Department of Insurance certainly has not approved such rate increases for any commercial carrier.
As President Biden said recently during his State of the Union address, “Capitalism without competition is not capitalism. It’s extortion. It’s exploitation”. Effectively, that is what we have with the CalPERS long-term care program. We have neither competition nor regulation, just extortion and exploitation.
In just a few months, one of the largest class-action lawsuits in US history will go to trial in Los Angeles, CalPERS versus 80,000 or so of its long-term care policyholders, the remaining ones. CalPERS settling the suit now with policyholders on equitable terms is both necessary and the ethical thing to do. Then CalPERS must turn to the remainder of the long-term care mess. Until it is cleaned up, we aggrieved policyholders are not going away.
And since I have 42 seconds, thank you, permit me a personal comment. I wonder if any of you has spoken with a long-term care policyholder; it is heart-breaking to do so. I have spoken with nearly a hundred policyholders who reached out to me for help after reading my articles about this long-term care CalPERS crisis. Each one believes that they have been cheated by CalPERS and that their financial and physical security during their final days has been stolen by CalPERS. As an eighty-year-old policyholder wrote me: “There is no escaping the conclusion that the people we have totally entrusted to look out for our interests have decided to ride it out, waiting for us to die.”
Of course the board ignored Grossman and went on to the next person on deck for public comments. The current board has no incentive to deal with the plaintiffs in good faith because they have no skin in the game. Only seven former board members are named defendants. No executives are named.
I urge the attorneys pursuing this case to consider amending this case to include current executives and board members as defendants for the additional, willful damage done since the filing of this case by their punitive treatment of the plaintiffs, in defiance of the judge’s repeated rulings about CalPERS’ permitted scope of action. CalPERS’ top brass has relied over-much on self-dealing, underpriced self-insurance rather than third party directors’ and officers’ policies. It is very likely that the perps in the financial torture of aged CalPERS long-term care insureds are flying naked as far as their exposure is concerned. Turning the heat on them could expedite a long-overdue settlement.