Retired California government workers will get tens of thousands of dollars if they give up their long-term care insurance.
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CalPERS is preparing to pay out roughly $800 million to settle claims that it misled retirees when it began offering long-term care insurance in the late 1990s and pledged it wouldn’t substantially raise rates on certain plans.
The nation’s largest public pension fund in the 1990s and early 2000s sold long-term care insurance with so-called inflation-protection that members believed would shield them from dramatic spikes in premiums. CalPERS nonetheless hiked long-term care insurance rates by 85% in 2012 and continued to raise fees in subsequent years, straining household budgets for retirees on fixed incomes.
The settlement, tentatively approved by a Los Angeles Superior Court judge earlier this month, would resolve a lawsuit that centers on that steep 2012 fee increase. The settlement cannot take effect until plaintiffs in the class-action lawsuit review it and have an opportunity to submit comments to the court on it in a process that’s expected to take place between April and early June, according to court records.
The California Public Employees’ Retirement System pays for long-term care out of a specific fund that is separate from the $443 billion portfolio that supports pensions for its 2 million members. The long-term care fund had about $4.9 billion as of June and about 105,000 active policies, according to CalPERS.
The agreement is the second court-approved settlement in the case. It is significantly less expensive for CalPERS than the first one.
The previous agreement would have cost CalPERS as much as $2.7 billion and required retirees to drop their long-term care plans in exchange for payments of as much as $50,000 apiece.
Thousands of retirees chose security over cash and rejected that agreement because they wanted to retain to long-term care insurance, according to attorneys representing the plaintiffs.
Under the new agreement, retirees who want to cancel their long-term care insurance will receive 80% of the premiums they paid into CalPERS’ long-term care fund. That could amount to tens of thousands of dollars for retirees. The settlement does not cap how much money a policyholder can receive.
Members of the class who want to keep their long-term care insurance will receive $1,000 and a commitment from CalPERS that their rates will not increase until November 2024.
About 79,000 households stand to benefit from the settlement, including relatives of deceased policyholders, said Stuart Talley, an attorney for the plaintiffs. In total, about $740 million will go to the plaintiffs, while another $80 million will go to lawyers and administrative fees.
He said the new agreement strikes “a sort of balance” between policyholders who want to drop their plans because of the fee increases and others who want assurances that CalPERS’ long-term care fund is able to pay benefits.
“Really what they’re getting is a program that is financially viable and solvent and will be there in the future for them,” he said.
The average age in the class is 76 and 14,846 members of the lawsuit have died since the litigation began, according to the settlement order. Attorneys estimate another 9,000 could die before seeing any benefit from the lawsuit if the case proceeds to trial and takes more than two years to resolve.
“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 said.
CalPERS began offering long-term care insurance in an era when the public pension fund was flush and confident it could earn 8% returns on investments. It marketed long-term care plans with inflation protection, giving members the impression they could “lock in” cheap insurance without risk of significant rate hikes.
Rates increased incrementally before the 85% jump in 2012, which was brought on by lower-than-expected investment earnings and higher-than-projected expenses. The increase led many CalPERS members to opt for lesser coverage to limit their costs, according to court records.
CalPERS was not the only provider to misjudge the market when it began offering those plans. AARP in a 2018 report noted that more than 100 carriers sold those policies in the 1990s, a number that shrank to about 15.
In April, the state will resume its annual eligibility reviews for Medi-Cal. With some enrollees no longer qualifying or unaware they need to renew their coverage, officials estimate 2 million to 3 million people could lose their insurance.
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