Your eyes on California Government

Feb. 20, 2013

By Dave Roberts

When tens of thousands of state employees signed up for the California Public Employees Retirement System‘s long-term care insurance plan as it was first offered in 1995, they thought they were doing the prudent thing for themselves and their loved ones. For a reasonable premium, they were ensuring they would not be a burden to their families should they become incapacitated in their old age.

But the CalPERS plan has been so over-promised and under-funded that what was supposed to be a comfort for retirees has instead turned into a nightmare of premium increases and benefit cutbacks. The latest rate hike — a whopping 85 percent — has been hitting in recent days. Many policy holders threatening to cancel, thereby losing the tens of thousands of dollars they may have already paid in. There even are calls for a class-action lawsuit against CalPERS.

Employees and retirees recently have contacted CalWatchdog.com. And a September, 2010 article on CalWatchdog.com, “CalPERS’ Ailing Long-Term Care Plan,” started lighting up with new comments from those affected and outraged.

Outrage

Their outrage was eloquently expressed by Katie Greene, a long-time care policy holder and member of the Retired Public Employees Association. She was speaking at the October 17, 2012 CalPERS meeting just before the board considered the 85 percent rate hike:

“I adamantly oppose, object and disagree with this proposal before you today. This proposal is onerous, noxious and unfair. It is punitive to those of us who chose the ‘lifetime with inflation protection.’ It appears designed and calculated to force us in the lifetime with inflation protection out of this plan and into the 10-year plan. Or to force us out of CalPERS long-term care, period. This is a huge increase in rate. And it’s contrary to the basic spirit, reason and rationale for purchasing long-term care insurance.

“I chose a long-term care plan to be prepared and ready for the anticipated demands of my health needs in my old age. Instead I find myself in old age with a fixed income in a battle with CalPERS, which I trusted, with an ever-rising premium and an ever-changing long-term care insurance program. I entered into an agreement with you, which has turned out to be troublesome, tumultuous and now a financial disaster.

“Over 150,000 of us trusted and depended on CalPERS to hire competent, capable, intelligent experts, managers and administrators of this program to invest our long-term care funds wisely and prudently. Instead, you’re here today saying to me, who’s now a senior on a fixed income, that I have to agree to a lesser policy or face this 85 percent increase. I ask, ‘Is there any health care plan that isn’t being inflated?’ Yet you’re asking me to decide on a different policy without inflation [protection].

“You have not been forthcoming with us. You have not given us any assurances that this plan will work. How do we know that in 3, 5, 10, 15 years you will not be here asking us to suck it up again and take a huge increase? This is certainly not the bargain I made with you over a decade ago. I urge you to vote a resounding no on this unfair proposal. It is not in keeping with an agreement that we made. Send it back to us with a more fair, more fair, fair and equitable, solution. Honor your agreement.”

The 85 percent rate hike would have CalPERS retirees who are 70 and older and want lifetime protection paying $21,475 annually for a joint policy. That’s about three times the rate for federal employees and double the rate of some private insurance plans. And that’s for just the base plan without optional riders covering things like inflation protection, the restoration of benefits and the return of the premium death benefit, which can add thousands more to the annual cost.

Two years

To lessen the pain, CalPERS is spreading the 85 percent rate hike over two years beginning in July 2015. For those who prefer to take their medicine in one lump in just one year, the rate hike would be “only 79 percent,” as it’s phrased in a CalPERS press release.

The rate hike is targeted at those who purchased policies between 1995 and 2004 that provide three-year, six-year or lifetime benefits with inflation protection. (Benefits automatically increase with health care inflation.) Or lifetime benefits without inflation protection. Comprising the majority of the more than 148,000 LTC policy holders, they are starting to receive letters from CalPERS notifying them of the rate increase.

They can avoid the rate hike by reducing their coverage to a maximum of 10 years of benefits without inflation protection. The 85 percent rate hike was calculated based on the assumption that 10 percent of those with lifetime benefits will switch to the 10-year maximum plan.

If more than 10 percent switch, the rate hike might be reduced. But if fewer than 10 percent switch, the rate hike could be greater than 85 percent. CalPERS officials argue that it makes sense to switch to shorter term coverage because the average long-term care claim lasts 3.6 years.

The rate hike is just the latest in a series of premium increases since 2003. In July 2010, policy holders were hit with a 15-22 percent hike. Many have also suffered 5 percent increases annually since then.

Higher claims

According to a CalPERS press release, the 85 percent increase “is necessary to offset the effect of higher-than-expected claims, lower-than-expected investment income, the Board’s adoption of a more conservative LTC Fund investment mix, and a lowering of the Fund’s investment discount rate to 5.75 percent to align with the more conservative investment portfolio.”

Concerning the higher-than-expected claims, CalPERS officials “missed two key factors: the enormous increase in Alzheimer’s Disease and more families’ willingness to move their loved ones into a facility for care,” wrote California State Retirees President Susan Sears in the December CSR newsletter. “Decades ago, both personal bankruptcy and ‘rest homes’ had a fair amount of stigma attached to them; both have become fairly commonplace nowadays. Exhausted caregivers are discovering they simply cannot provide 24/7 care for loved ones; they are forced to find a safe, comfortable place with different people working three shifts to care for the residents.”

Like CalPERS officials, Sears is hoping the 85 percent rate hike will induce many of those with lifetime benefits to switch to 10-year plans.

“Because the 10-year option is finite, people might not rush into receiving care until they’re absolutely sure it’s needed,” she wrote. “With the present, unlimited plans, people often go into care sooner than they really need to — which drives up the cost. We’re all living much longer, and the likelihood of most of us needing more than 10 years of LTC is greatly reduced.”

She’s also looking forward to CalPERS re-opening enrollment in its long-term care plan at the end of this year, which would bring in more revenue from younger policy holders. Currently the average age is 65.

CalPERS’ decision

CalPERS officials believe they’ve done the right thing for their policy holders with the 85 percent rate hike.

“We took great care to listen to the concerns of our policy holder constituent groups, and weighed staff proposals for these options carefully before making our decision,” said Board President Rob Feckner. “We are taking these actions to ensure the sustainability of the Long-Term Care Fund and the availability of benefits for our policy holders.”

Priya Mathur, chairwoman of the board’s Pension and Health Benefits Committee, said, “We feel the plan options we will offer our policy holders make this a win-win situation, especially for those with lifetime benefit policies. With the average length of stay in a care facility a little over three years, we think the 10-year conversion option will provide more than adequate coverage when our policy holders need it.”

Ann Boynton, CalPERS’ deputy executive officer in charge of the LTC program, responded to Greene’s allegation that CalPERS failed to hire “competent, capable, intelligent experts, managers and administrators.”

“The staff has been working incredibly hard to ensure that this program is sustainable over the long-term,” Boynton told the CalPERS board. “The issues that we are facing relative to the need to propose to you a rate increase are not tied to the competency of the managers of the program.”

But Boynton then stated that previous managers had failed to ensure adequate funding.

“This is a fundamental question of a failure to set these premium levels at a rate that will be sustainable into the future,” she said. “As a board you’ve been wrestling with this challenge since 2003, when you first began to really look at it. We understand that this has been a long journey for the policy holders. We are full intent by bringing this to you at this point with a single rate increase spread over two years or taken in one that we will finally be able to provide the policy holders with sustainability and predictability into the future.

“That is, to the best of our ability to predict what will happen, they will be able to count on their premiums staying stable. If we ever for whatever reason should need to come before you again to look at a premium increase, we will work that issue with you well in advance apprising you of all of the circumstances that might lead to that.”

Meetings

Although the vote for the 85 percent rate hike was unanimous, some board members were not happy about it.

“This is a very painful pill to swallow, and obviously a difficult issue to vote for just based on the percentages,” said Dan Dunmoyer. “The challenge of long-term care is that as people live longer it becomes, as we can see here, very, very expensive to sustain it. … It’s the joy of life expectancy growing and living longer. But it’s also the challenge from an actuarial and benefit perspective of providing this benefit with any degree of success. We should stick to our knitting. And in this case this is really not our best knitting. I’m going to support this. But this is a very difficult business to be in.”

The CalPERS Pension and Health Benefits Committee, which oversees the long-term care program, meets Wednesday, Feb. 20 at 8:30 a.m. in the Lincoln Plaza North auditorium in Sacramento. The full board meets on Thursday, Feb. 21 at 9 a.m. in the same location.

Tags: CalPERS, Dan Dunmoyer, Dave Roberts, Katie Greene, Long Term Care, Retired Public Employees Association