CalPERS' Ailing Long-Term Care Plan

Editor’s note: A new article on this controversy, published Feb. 20, 2013, is here. It concerns the recent 85 percent rate hike.

SEPT. 16, 2010

By ANTHONY PIGNATARO

For a long-term care benefit plan, the news has mostly been bad. Last year saw a huge budget deficit of more than $800 million, the biggest since 2007. Eight of the last 10 years have been in the red. The plan’s investment portfolio lost 16.2 percent of its value last year; over the previous five years, it’s grown an anemic 1.9 percent. It’s been more than two years since people could join. Though there have been three big rate hikes since 2003 – the most recent, in 2009, was 22 percent – operating revenues have either stagnated or dropped.

Beyond that, not much is known. That’s because the benefit plan in question is run by the California Public Employees’ Retirement System (CalPERS), and it’s not subject to any substantial public oversight. In fact – and unlike private insurance plans operated in other states by companies like John Hancock or Met Life – the CalPERS long-term care benefit program is not regulated by the state Department of Insurance.

“We’re self-insured, so there’s no oversight, just as if you were self-insured,” said Bill Madison, a CalPERS spokesman. Madison compared CalPERS’ long-term care benefit to a driver who posts a bond to satisfy the state’s auto-insurance requirement. “He’s self-insured, and there’s no oversight of him.”

California is the only state in the U.S. that has gone the self-funded route for its public employee long-term care benefit plan. And that makes some officials very nervous.

“You can do whatever you want when you don’t have oversight,” said one state official who requested anonymity because he’s not authorized to speak about CalPERS. “Oversight has a cost, and they probably thought that getting rid of it meant they could deliver services cheaper. But that hasn’t been the case.”

The long-term care benefit dates to January 1995. “Long-term care is fast emerging as a critical need for our members,” then-CalPERS Board President Dr. William D. Crist said at the time. “Our attempt is to offer members the most cost-effective, high-quality plan possible at the lowest premiums.”

It was a laudable goal, but CalPERS went about it in a strange way. “This all came from legislation signed by Gov. Pete Wilson,” said one California insurance company official familiar with the CalPERS benefit program. “It was a breakthrough – a very consumer-friendly policy. No other state had this. It was revolutionary.”

CalPERS offered three benefit plans. The Comprehensive Plan provides for adult day care, home care, assisted living facilities and nursing homes with a one-time 90-day deductible period. The Facilities-Only Plan was similar to the Comprehensive Plan except that it lacked home and community-based care. The last, the Partnership Plan, offered home care, adult day care, assisted living facilities and nursing homes with a one-time 30-day deductible. There’s also optional inflation protection and the benefit is “fully portable.”

What’s more, the program was open to “all California public employees, retirees, their spouses, parents, parents-in-law, and adult siblings” aged 18-79 (same-sex spouses aren’t eligible, and there’s a class action lawsuit on that very subject pending in U.S. District Court in San Francisco). To receive benefits, a person “must be unable to perform any two activities of daily living – for example, eating, bathing or dressing – without help, or have a severe cognitive impairment,” states a 2008 CalPERS press release.

The latest figures from CalPERS show that the long-term care program has 165,023 enrolled members, making it one of the largest such benefits in the nation. But for a program that survives on recruiting new policy holders, it’s odd that CalPERS hasn’t had an open application period since June 2008.

“In 2009 and 2010 the board didn’t establish one because it wanted to make sure the fund was self-sufficient,” Madison said. “They wanted to keep things at a level they could support those who are insured.” Madison added that the “stability of the fund” was the board’s highest priority.

Whereas most states put such a benefit program out for bid with the big insurance companies, California rejected the bids it solicited and decided to run the program in-house. Doing so meant the state insurance commissioner would have no say in how the program operated.

CalPERS sold the plan to prospective customers as a consumer-friendly choice: “Because there is no insurance company involved and because of the size of the CalPERS purchasing pool, the premiums for the long-term care insurance program will be 20 percent to 25 percent less than a comparable program offered by an insurance company,” stated a July 14, 1994 CalPERS press release.

But it didn’t work out that way. For reasons that aren’t clearly stated in CalPERS’ publicly available financial statements (the long-term care benefit appears on just six of the 2009 CalPERS Comprehensive Annual Financial Report’s 198 pages), the benefit in the last few years has accumulated sky-rocketing claims, massive investment losses and ballooning deficits, even in the face of three large premium hikes.

The most recent program deficit is so large that even the CalPERS annual report can’t gloss over it.

“The unrestricted net deficits of the Long-Term Care Program increased by $676.9 million to $811.6 million during the 2009 fiscal year primarily as a result of the increase in the long-term estimated liability and the unfavorable fiscal year 2008-09 investment experience,” states the report. “The fund’s management is evaluating the results to determine if additional mitigating action is necessary.”

That “additional mitigating action” turned out to be a substantial rate hike. CalPERS previously instituted rate hikes in 2003 and 2006, but the long-term care fund’s 10-year review included in the annual report shows the resulting revenue growth from the hikes did little to offset the already considerable budget deficits. “We’ve had a few rate increases,” CalPERS’ Madison said, “but our rates are still competitive.”

A 17 percent hike in 2003 seemed to work, raising operating revenues from $186.6 million to $200.9 million, which helped turn 2002’s $261.8 million budget deficit into a $20.3 million surplus. But that was the last year CalPERS’ long-term benefit was in the black.

In 2006, a 33 percent rate hike translated into barely $2 million more in operating revenue which did nothing to help with the year’s ending $771.5 million deficit. Three years later, a 22 percent rate hike hit all policies issued prior to 2005 (those applying 2005 received a 15 percent hike).

“This premium increase comes during economic hard times for many of our members and their families and, at the same time, we have an obligation to our members using and needing this coverage to maintain this program’s stability,” CalPERS Board of Administration President Rob Feckner said in a Dec. 16, 2009 statement. How that rate hike affected the fund’s balance sheet is unknown, but the 2009 annual report shows that the long-term benefit fund was having an exceptionally bad shape that year, with revenue nearly $3 million less than the previous year and a budget $800 million in the red.

Claims are at least part of the reason for the massive deficits. Since 2000, claims increased by an order of magnitude, from $10.6 million to $116.2 million in 2009.

Investment income over the same period has also been volatile. The best year was 2007, which $281.1 million in revenue, but that was erased by 2009, which saw $369 million in losses. The annual report blames this on “poorly performing equity markets.” A fund breakdown shows 18.3 percent of the fund is in international stocks, 28 percent in domestic stocks, 48.8 percent in domestic debt securities (mortgage debt and so forth) and the remaining 4.9 percent in real estate.

“That’s pretty volatile,” said the insurance company official. “They shouldn’t even be in equity. And that $800 million deficit – how do they survive that? Is there no way to do an audit of them? If they had to put their finances on the table for scrutiny like any other insurance company, what would their rating be? I’ve got a bad feeling that this is a ticking time bomb.”

Photo of CalPERS headquarters courtesy of CalPERS.