CalPERS Approves 77% Increase For Long-Term Care Insurance Plans

Nov. 18--CalPERS leaders approved a 77% premium increase for its long term care insurance plans Tuesday, seven years after the announcement of a similar increase spurred a lawsuit.

The new rates will be introduced over two years, with a 52% hike coming in July 2021 and a 25% increase in July 2022, Chief Health Director Don Moulds told the California Public Employees' Retirement System's board Tuesday.

The plans help cover costs of care in nursing homes, long term care facilities and at home. The average premium for the plans was $163 per month as of Dec. 31, according to CalPERS.

The system plans to give policyholders options to reduce their benefits in order to hold down prices, Moulds said. Options could include accepting responsibility for a percentage of the costs of care, extending the amount of time a policyholder has to pay for their care before the plan kicks in, and reducing the amount of time for which the plan covers costs.

"We're in an unfortunate situation where any resolution is going to add to the financial burden facing our policyholders," Moulds told the board.

The process for notifying the 117,000 people with the plans will be similar to the process used before 2015, including letters outlining options. Policyholders will be able to call CalPERS and talk through specific options for reducing their benefits, he said.

He said the system is exploring options for expanding in-home care that could reduce the 2022 price increase.

Moulds warned the board in the spring that the coronavirus had exacerbated underlying problems with the long term care insurance plans by adding even more volatility into projections about future nursing home spending and investment returns.

The system suspended enrollment in the plans in June and has been working through options for how to proceed, he said.

"The steps we are taking will protect policyholders who are counting on the program for critical care," Moulds said in an emailed statement.

Lawsuit

CalPERS started selling long term care insurance in 1995. Like other insurers, the system soon learned it had set prices far too low, and raised rates several times. When it announced in 2013 that it would raise rates by 85 percent in 2015 and 2016, a group of policyholders sued.

The class-action lawsuit was filed on behalf of those who selected an "inflation protection" benefit when they signed up. They say the price hike violated promises made in marketing materials that their rates would be "locked in" if they paid much higher premiums than people who chose more basic plans.

CalPERS has said it has the authority to raise rates as needed to keep the plans viable in the long term.

The lawsuit's outcome could depend on whether a jury decides whether CalPERS raised rates specifically as a result of the inflation protection benefit, violating agreements. CalPERS maintains it didn't. Following several delays, the trial is scheduled to start March 29, 2021.

If CalPERS loses the lawsuit, it likely would raise premiums again, system spokespeople have said. Plaintiffs have estimated the system could owe about $1.2 billion, and the judge in the case has warned CalPERS it faces "very serious risk" in the suit.

The lawsuit's outcome won't affect CalPERS pensions, which are paid from a different fund, spokespeople have said.

The lawsuit concerns only the 85% rate increase. Michael Bidart, an attorney representing the policyholders in the suit, said he hasn't yet evaluated whether the upcoming rate hikes resembles those from five years ago.

"I know that on top of everything else they've gone through, that any additional increase is extremely difficult for these class members," Bidart said.

More risk

Even with another big price increase, the system can't be sure it won't have to raise rates again, Moulds said. The system expects the long term care insurance plans to "peak" in about 20 years, meaning that's when it will pay the most in claims, he said.

To avoid even larger price hikes next year, the system is switching to a riskier investment strategy for the fund that supports the long term care insurance plans.

The long term care fund has lower investment return expectations than the fund that pays for pensions. The fund's return target is 5.25%, compared to the pension fund's 7%.

That should mean the fund can park its money in safer long-term investments, such as bonds. But with interest rates low, bonds aren't earning enough to support the 5.25% rate.

In September, CalPERS employees told the board it should expect to earn 4% on its investments with its current portfolio. But if CalPERS used that number, a premium increase of 135% would have been required, staff members told the board this week.

To avoid that, staff members recommended the CalPERS board allow the long term care insurance fund to use private equity investments and lending to try to reach a 4.75% return target.

The change comes with a 30% increase in risk, which gave pause to some board members.

"I do feel very nervous about where we are with this," said CalHR Director and board member Eraina Ortega. "And I think we're just delaying the inevitable."

Nonetheless, the board opted for more risk and a smaller price increase.

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