Lessons From CalPERS LTC Insurance CrisisAdvisor Perspectives
Since the 1990s, the California state pension fund (CalPERS) sold long-term care (LTC) policies to its residents. The lawsuit over claims related to those policies illustrates the dangers clients face with government-sponsored insurance programs.
The $2.7 billion CalPERS LTC insurance class action settlement, preliminarily approved in 2021, collapsed on April 22, 2022. Though little has been written about the suit, it was to be one of the largest settlements in U.S. history. Policyholders who were forced to continue paying premiums for the last year to just participate in the settlement, now find that they will get nothing for that gamble, other than the options of paying a 90% increase in their insurance premiums or walking away from their policies. This increase brings total premium increases to 900% for policies thought to have guaranteed level premiums.
This is a financial and health care crisis for 120,000 policy holders, who are overwhelmingly elderly, and their families. Many of these policyholders will soon need LTC 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.
This is also a crisis for CalPERS and its three decades of presumably well-intentioned public policy that massively failed in implementation. The crisis has been shaded from view because CalPERS is an independent entity and denies any crisis exists. It effectively is not overseen by either its Board or the California State Legislature. The LTC failures have been massive and manifold – the enabling legislation, the implementation by CalPERS, the lack of oversight by the California Legislature and the Department of Insurance, and the overarching failure to properly disclose to policyholders what insurance CalPERS was selling.
The lawsuit itself, technically limited in many ways, is far from perfect in addressing all the major problems with the CalPERS program. Roughly half of all policies sold were excluded from the lawsuit, 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, the legal process alone is not adequate to address all the damage that CalPERS has done and continues to do with its LTC program.
This is also an object lesson for advisors who deal with public entities, by choice or perforce, while providing financial services. Like all large social entities, public entities can be extremely powerful and have bureaucratic interests that at times improperly dominate those of the entity as a whole and the public it serves. CalPERS, ironically, is an example of where neither the typical critique from the right or the left fits perfectly. Conservatives will surely look upon this fiasco as further proof of the failings of government entities providing services. Liberals will see those same failings, but they will argue that the disaster would have been avoided or greatly mitigated if CalPERS had been regulated by the Department of Insurance.
CalPERS disreputable behavior goes back to the 1990s when it sold its first LTC policies to CalPERS employees, many of whom are alive today. “Justice delayed is justice denied,” is a well-known legal maxim. The wisdom of that precept is as true now as when the plaintiffs will be elderly and planning for care in their final days.
Here is how the crisis has unfolded.