California retired government employees are poised to receive substantial payouts, potentially tens of thousands of dollars, as part of a settlement concerning their long-term care insurance program. This agreement addresses claims that the California Public Employees’ Retirement System (CalPERS) misled retirees about the stability of premiums when the program was introduced in the late 1990s.
CalPERS, the largest public pension fund in the nation, is set to distribute approximately $800 million to resolve allegations that it misrepresented the long-term care insurance plans offered decades ago. These plans, marketed with “inflation protection,” were intended to reassure members that they would be shielded from significant premium increases. However, retirees faced an 85% rate hike in 2012, followed by further increases in subsequent years, placing a heavy burden on their fixed incomes.
This settlement, which received preliminary approval from a Los Angeles Superior Court judge earlier this month, directly addresses a lawsuit triggered by the sharp 2012 rate increase. Before the settlement is finalized, plaintiffs in the class-action lawsuit will review the terms and have the opportunity to submit comments to the court between April and early June.
The CalPERS long-term care program operates from a dedicated fund, separate from the $443 billion portfolio that supports pensions for its 2 million members. As of June, this fund held approximately $4.9 billion and covered around 105,000 active policies.
This settlement represents the second court-approved agreement in this case. Notably, it is significantly less costly for CalPERS than the initial proposed agreement, which would have amounted to $2.7 billion and required retirees to relinquish their long-term care coverage in exchange for payments potentially reaching $50,000 each.
“This plan is going to run on a basis that is economically solvent without regard to what was said 20-plus years ago when it was first offered.”
Los Angeles Superior Court Judge William Highberger
The previous settlement was rejected by many retirees who prioritized maintaining their long-term care insurance over receiving a cash payment, according to the plaintiffs’ legal representatives.
Under the terms of the new settlement, retirees who choose to discontinue their long-term care insurance will receive 80% of the total premiums they have paid into the CalPERS long-term care fund. This could translate to substantial sums for many retirees, with no cap on individual payouts. For those who prefer to keep their long-term care insurance, the settlement offers $1,000 and a guarantee that their premiums will not increase before November 2024.
Approximately 79,000 households are expected to benefit from this settlement, including families of deceased policyholders, as stated by Stuart Talley, the plaintiffs’ attorney. Of the total settlement amount, roughly $740 million is allocated to the plaintiffs, with the remaining $80 million covering legal and administrative expenses.
Talley described the new agreement as a “balance” for policyholders, accommodating those seeking to exit the program due to escalating costs and those desiring reassurance about the long-term financial stability of the CalPERS long-term care fund to ensure future benefit payments.
The average age of the class members is 76, and tragically, around 14,846 individuals involved in the lawsuit have passed away since its inception, according to the settlement order. Attorneys estimate that if the case proceeded to trial and extended beyond two years, an additional 9,000 individuals could die before receiving any benefits.
“There are so many people who want out of this program. Even though this isn’t the greatest settlement in the world, I think it’s best to move forward,” Talley commented, highlighting the urgency and the pragmatic approach of the agreement.
The Misjudgment of the Long-Term Care Insurance Market
CalPERS entered the long-term care insurance market during a period of financial optimism, confident in achieving 8% investment returns. They promoted these plans, emphasizing “inflation protection,” which led many members to believe they were securing affordable, stable insurance without the risk of significant premium hikes.
While rates did increase gradually initially, the 85% surge in 2012 was triggered by lower-than-anticipated investment earnings and higher-than-projected claims. This drastic increase forced many CalPERS members to reduce their coverage levels to manage costs, as documented in court records.
CalPERS was not alone in miscalculating the dynamics of the long-term care insurance market. A 2018 AARP report indicated that over 100 insurance carriers offered such policies in the 1990s, a number that has since dwindled to approximately 15.
“It’s a toxic product for insurers, and CalPERS in 1995 decided to jump in with both feet.”
Stuart Talley, attorney for the plaintiffs
In fact, the previous settlement agreement included provisions for CalPERS and the plaintiffs’ attorneys to find a replacement long-term care insurance provider for members who wished to maintain their coverage. However, despite approaching over 90 insurers, they were unable to find a company willing to take on these new customers, as per settlement documents.
“It’s a toxic product for insurers, and CalPERS in 1995 decided to jump in with both feet,” Talley reiterated, underscoring the challenging nature of the long-term care insurance market for providers.
Had the case proceeded to trial, CalPERS was expected to argue that the 2012 rate increase was a necessary response to changes in expected investment returns. They also intended to argue that members who reduced their benefits due to the rate hike did not experience financial harm, according to a summary of the settlement that will be sent to policyholders in April.
CalPERS ceased selling new long-term care policies in 2020, citing market uncertainties. Furthermore, they recently implemented significant rate increases: 52% in November 2021 and 25% in November 2022.
Understanding CalPERS Long-Term Care Costs
Currently, the average monthly premium for a CalPERS long-term care policy is $280.41, according to CalPERS data. However, Talley’s clients who purchased policies in the 1990s initially paid as little as $60 per month. Many of these policyholders now face monthly premiums exceeding $400.
CalPERS declined to provide an interview regarding the settlement but offered written information about the financial status of the long-term care fund.
Matt Jacobs, CalPERS’ general counsel, stated at a recent court hearing that the long-term care fund would remain financially sound even after the settlement payouts, according to court transcripts.
“The new settlement reflects the parties’ work to provide policyholders who are counting on their policies to provide critical care with a choice to keep their policies,” Jacobs said in a press release about the agreement. “We believe this new settlement resolves what are very complex issues in a fair and equitable manner.”
Judge William Highberger acknowledged the settlement as a compromise, noting it wasn’t the “happiest of outcomes.” However, he emphasized the positive aspect of moving forward with a realistic financial outlook for the program.
“One of the consequences of the settlement is the hideously inaccurate actuarial data which some of the original pie-in-the-sky marketing materials were based on will all go in the rear view mirror and be gone and released,” Judge Highberger stated. “Everybody going forward is going to have a clear-eyed view. This plan is going to run on a basis that is economically solvent without regard to what was said 20-plus years ago when it was first offered.”
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