CalPERS long-term care insurance lawsuit settlement canceled

An agreement in which CalPERS would have paid up to $2.7 billion to settle a lawsuit over the cost of its long-term care coverage has been scrapped, creating new uncertainty for tens of thousands of policyholders.

A group of policyholders with inflation protection benefits sued the California Public Employees’ Retirement System over an 85% rate hike that was announced in 2013. CalPERS had promised in marketing materials that the optional benefit, which increased coverage amounts for things like nursing home stays, wouldn’t drive up their premiums.

The policyholders argued in the lawsuit the rate hike violated their policy agreements. CalPERS argued they had the authority to raise rates and did so to keep the plans afloat.

The settlement in the class-action lawsuit, reached last July, gave policyholders a choice: they could give up their plans and get a refund of all premiums they had paid — up to about $50,000 — or they could opt out of the settlement and keep their coverage, which got even more expensive last year.

The agreement included the caveat that if more than 10% of policyholders chose to keep their plans, CalPERS could exit the deal. Last month, attorneys representing the plaintiffs announced 30% had decided to stay, and both sides had agreed the settlement was off.

Attorneys for CalPERS and policyholders have resumed negotiations. If they don’t reach a new agreement, the case will go to a jury trial, likely not before next year.

CalPERS declined to comment beyond an emailed statement attributed to general counsel Matt Jacobs, who said the parties are “working in good faith to reach an alternate settlement” and will proceed to trial if needed.

In the email, Jacobs said CalPERS “acted appropriately at all times, and fully complied with its contractual obligations.”

More price increases

The settlement’s collapse means more difficult choices for about 60,000 policyholders who would have been covered by the deal, which helps cover costs associated with nursing home stays and in-home care.

The agreement included those who elected to pay extra for inflation protection when they purchased long-term care insurance from CalPERS as early as the 1990s. Those in the settlement group purchased the plans before 2004 and were living in California in 2013, when CalPERS announced that it planned to raise rates by 85% in 2015 and 2016.

The agreement covered people who paid the increases, those who dropped their plans to avoid the higher prices and beneficiaries of policyholders who have died.

Juanita Stever, 83, of Arroyo Grande, was among those included in the agreement. Stever decided to drop her plan and get a refund of $46,000 in premiums she had paid since enrolling in 1998, said her husband, Don Stever, 88.

Don Stever said he also has a policy, but not inflation protection, so he’s not part of the lawsuit.

He said his wife’s plan, which costs $255 per month, covers up to $281,000 in expenses, including up to $257 per day for nursing home care.

“We were rather gratified to hear at the onset that we were going to get a little money back, and that was good, and now it looks like it will be tied up forever,” he said. “And now we’re chewing on this and saying, ‘should we hang on to this and keep draining our budget?’”

All policyholders, including those who aren’t part of the lawsuit and those who are, were confronted with a new round of rate hikes last year and this year totaling 90% when compounded. Premiums increased 52% last November and will go up another 25% this November, according to a CalPERS website.

They were given options to pay the increases, drop their plans or to pay less for reduced benefits.

The 30% opt-out rate shows a significant number of people electing to keep paying for the plans despite the increases, and could reflect the difficulty of obtaining long-term care insurance at any cost today.

“It became clear to me that a far greater percentage of people than we anticipated decided they wanted to stay with CalPERS even though their premiums had been wrongly increased,” said Mike Bidart, an attorney representing policyholders with Los Angeles-based firm Shernoff Bidart Echeverria. “In other words, they didn’t want to lose having the coverage.”

Few other carriers

Long-term care insurance was a new product in the 1990s when CalPERS and other insurers started selling it. But carriers paid more in claims than expected and did not earn enough on investment portfolios to cover extra costs. They have repeatedly raised premiums to keep pace with costs.

Plans sold today are less generous and cost even more, and many insurers have dropped the product. Only five still sell long-term care insurance in California, while 56 have stopped, according to an Insurance Department website.

CalPERS also has suspended enrollment, citing “uncertainty in the long-term care market.”

Plaintiffs’ attorneys tried to find another insurer for those who wanted to drop CalPERS but still wanted long-term care insurance, Bidart said. They shared data from the group that enabled carriers to evaluate risks and pricing, but couldn’t find a reputable one despite “a tremendous amount of effort,” he said.

CalPERS representatives have said that any money it has to pay as a result of the lawsuit would come from the long-term care insurance fund, not from the system’s pension fund, recently valued at $446 billion.

Payouts resulting from the lawsuit could result in more price hikes, according to CalPERS.

This story was originally published May 16, 2022 5:00 AM.