The online blog Naked Capitalism recently posted a lengthy article on the current state of the CalPERS Long-Term Care Program. The article includes an analysis and discussion of the program by Lawrence Grossman, who is a CalPERS Long-Term Care policy holder himself and a Certified Financial Planner, Accredited Investment Fiduciary, and Registered Investment Adviser.
The CalPERS Long-Term Care Program was established by an act of the California State Legislature in 1995. Under the act, the program was established as an independent, self-funded, non-profit entity. Neither the state nor CalPERS itself was responsible for maintaining the solvency of the program.
Self-funding means that the program collects premiums from its policyholders, invests those funds to provide additional income to cover claims, and pays claims out the funds collected. (An alternative to self-funding would have been for the program to purchase conventional long-term care policies from licensed insurance carriers at group rates. But that was not permitted by the act establishing the program.)
As Grossman noted in his analysis, the self-funded, non-profit status of the program removed it from the oversight of the California Department of Insurance, and from the protection of insurance industry guarantee funds that were established to pay the legitimate claims of policyholders when an insurance company becomes insolvent.
Long-term care insurance issues:
Grossman also notes that the long-term care insurance industry has faced significant problems in the past 20 years. The cost of long-term care has increased at roughly twice the inflation rate during that period, and all insurance carriers offering these policies have had to raise rates. However, the CalPERS program has been an outlier when it comes to rate increases. While the cost of long-term care has increased about 200% in the past 20 years, the cost of a CalPERS long-term care policy that offers the same coverage that was offered when the program first was established has risen approximately 1,000%. As a result, many policyholders have chosen to let their policies lapse, or have accepted much lower benefit levels to keep their out-of-pocket costs reasonable.
The result has been that the number of policyholders has dropped from 175,000 in the early days of the program to about 113,000 currently. Additionally, the average age of current policyholders is about 75.
In Grossman’s view, which may well be correct, the program currently is insolvent. The CalPERS staff responsible for the program have indicated that another round of steep rate increases will be needed to meet claims, and policyholders are likely to be hit with those increases in the second half of 2021.
Another complicating factor is the class-action suit against the program that now is pending. This suit claims that the steep premium increases that have taken place in the past few years to keep the program in operation violate the contracts that policyholders entered into many years ago. That case is yet to go to trial, but the judge hearing the case has indicated that the likelihood of the CalPERS position that the rate increases are justified prevailing is low.
Should the plaintiffs prevail in the class action suite, the consequences would be a hefty payday for the lawyers, and insolvency for the program. The policyholders would get some money returned to them, but far less than the amounts they paid in premiums.
Questions That Arise:
Grossman is unsparing in his criticism of CalPERS for mismanagement of the long-term care program, but some questions remain unanswered. The most glaring one perhaps is why has the CalPERS long-term care program fared so poorly compared to similar programs offered by the licensed insurance carriers? All the carriers have had to raise rates to stay solvent, but nowhere near as much as the CalPERS program increases.
Was the initial design of the program fatally flawed – were underwriting assumptions made that were unrealistic? For example, were the demographics of the likely CalPERS program policy purchasers substantially different from those of long-term care policy purchasers in general, leading to higher-than-expected claims?
Were the policy provisions offered unrealistically generous?
Was it a good idea to close the program to potential new policyholders for such a long time? After all, insurance is about spreading the risk among a large number of policyholders. Reducing the number of policyholders is a sure way to increase risk.
We probably will never know the answers to these questions, but one thing that does appear certain is that the odds of the CalPERS program remaining solvent are decreasing.