Actuaries cautioned CalPERS nearly 20 years ago that its new long-term care insurance fund was set up for failure, an attorney suing on behalf of policyholders says, but officials ignored the warning.
The California Public Employees’ Retirement System denies those and other allegations outlined by Stuart Talley, one of the lawyers who last week asked a Los Angeles court to grant class-action status for a lawsuit against CalPERS. The plaintiffs claim the fund and its business agents misrepresented the insurance in sales pitches and materials, then made poor business decisions that wound up foisting huge rate hikes on tens of thousands of policyholders.
“It blows your mind when you read this stuff,” Talley said.
From 1995 to 2004, about 150,000 state and local government employees took out private insurance coverage for convalescent care, assisted living and similar services. Most policies guaranteed lifelong coverage, inflation-adjusted coverage or both. Many purchasers believed their premiums would never increase.
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The program lost money despite incremental rate hikes over the years. CalPERS in 2012 announced dramatic increases on the best coverages this year and next. A $597 monthly premium, for example, jumped to $813 in July, according to the fund’s figures. Next year, that same policy will cost $1,220 per month. By comparison, a policy with fixed benefits costs as little as $237 per month.
Lawyers unearthed a 1996 Coopers & Lybrand LLP actuarial opinion that said, “We are concerned about the assumed investment return” of 8 percent and that the program’s pricing “is more competitive than it needs to be.”
But, Talley said, CalPERS ignored Coopers, kept premiums low, duped policy purchasers and greased sales.
CalPERS spokeswoman Rosanna Westmoreland said that assessment mischaracterizes the report, which also “found no unusual provisions” that would expose the program to risk. CalPERS had greater investment flexibility than private insurers, “a proven track record of investment returns” to support its pricing assumptions, she said, and wanted to pass savings along to policyholders.
While CalPERS wasn’t making money on long-term care, its private-sector business partners have. For example, the Long Term Care Group marketed the program on commission. Talley says that gave incentives to overpromising the program. (Currently, the company is in the middle of a five-year administrative services contract that pays up to $103 million.)
Paying commission for each policy sold is an industry standard, Westmoreland said, and the company’s per-enrollee compensation “declined dramatically” as the number of enrollments grew, “so it had no incentive to oversell,” she said.
Talley said plaintiffs want the Legislature to use tax money to make the fund whole. A judge will hear arguments on the class-action request in November, with a decision likely by the end of the year.