CalPERS weighs huge premium hike for long-term care
Sacramento Bee Oct. 04, 2012
It's an old-age safety net offered to California public employees: insurance to cover the exorbitant cost of staying in nursing homes, assisted-living facilities and the like.
Now most of the 150,000 or so Californians who buy long-term care insurance from CalPERS are facing what could be a big rate hike.
CalPERS is considering imposing a 75 percent increase in premiums on the vast majority of its long-term care policyholders. They would pay hundreds of dollars a year more – thousands, in some cases – as the California Public Employees' Retirement System tries to fix financial holes in the program.
Customers would be offered a less comprehensive policy as a cheaper alternative. Still, the prospect of a big hike, which would take effect in July 2015, is rattling nerves.
"It's going to be traumatic," said Sacramento policyholder Harvey Robinson, 69, president of the Retired Public Employees Association of California. "You're going to have people go into sticker shock."
The looming rate hike comes as the population ages and the demand for long-term care rises. Some 70 percent of all Americans over the age of 65 eventually will need long-term care, according to the U.S. Department of Health and Human Services. A nursing home stay can be financially catastrophic, costing $75,000 a year or more and wiping out savings.
But as the need for long-term care is growing, insurance choices are shrinking.
Leading private insurers, facing declining profits and many of the same financial issues confronting CalPERS, are dropping coverage or restricting sales. Because it's difficult to buy coverage once someone turns 80, many CalPERS policyholders would have no alternative but to pay the higher premiums if they wanted to stay covered.
"People don't drop the program once they're in it," Robinson said. "There's a fear you're uninsurable if you get out of the program."
Robinson, a retired CalPERS employee who helped get the long-term care program started in the 1990s, pays $2,352 a year for coverage. A 75 percent rate hike would cost him another $1,764, although it's not yet clear exactly how large an increase he would face. The actual hikes would vary by age and type of policy.
Details on the proposal will be presented to CalPERS' pension and health benefits committee Oct. 16, with final approval by the full governing board expected a day later.
CalPERS says the program can pay its bills for the foreseeable future but needs a rate hike to stave off shortfalls in the decades to come. The program, unlike pension benefits, isn't funded by taxpayers and has to pay for itself.
"At current course and speed, we would not have enough money ... to pay anticipated claims," said Ann Boynton, CalPERS' deputy executive officer.
Because of the program's financial problems, CalPERS has suspended selling new policies since 2008. Boynton said it will stay that way until CalPERS decides the program is on more solid footing.
That's a big disappointment to one group of potential customers: Same-sex spouses and partners of public employees won the right to buy the CalPERS coverage in a landmark court ruling in May. A judge struck down portions of the federal Defense of Marriage Act that had prevented CalPERS from extending the coverage to gay employees' spouses and partners.
But the ruling has been put on hold while the case is being appealed. And, as a practical matter, CalPERS' decision not to sell any new policies for the time being means gay partners remain shut out.
"It's frustrating because the people who want to join the plan can't," said Claudia Center, a San Francisco attorney who sued to change Cal-PERS' policy. "Every year that goes by, it's more expensive."
Long-term care insurance originated in the private sector in the 1980s. In 1991, the Legislature authorized a long-term care program for public employees, and CalPERS began issuing policies four years later.
With 150,000 policyholders, the CalPERS plan is the second largest in the country, trailing only the federal government's, said Jesse Slome, executive director of the American Association for Long-Term Care Insurance.
Slome said private insurers got into the same pickle CalPERS did. In the early years, they priced policies too cheaply and didn't screen applicants carefully for risk. "Companies were ... happy to take on new business," he said.
The attitude changed when interest rates plummeted to historic lows.
Because insurers park most of their money in fixed-income securities, low interest rates dramatically reduced their investment earnings. That crippled profits, Slome said, prompting several big insurers to withdraw from the market in recent years.
CalPERS went through many of the same issues. Premiums were "at too low a level," Boynton said.
Also, CalPERS did little to evaluate the health risks of potential policyholders in the early years. Strict underwriting didn't start until 2005. Because the 16,000 members who bought policies starting in 2005 were more carefully vetted, they have been less of a financial drain on CalPERS and aren't facing the big rate hike.
CalPERS recently decided to shift to more conservative investments. Stock holdings are being slashed in the long-term care program's portfolio in favor of bonds. The idea is to make investment earnings more predictable. But it translates into lower yields – and increases the pressure to raise premiums.
CalPERS has imposed substantial rate hikes before, as much as 47 percent in 2007. But the 75 percent increase under consideration would be the biggest. It's so large, CalPERS is thinking of phasing it in over three to five years.
CalPERS also plans to give members the option of switching to a less comprehensive policy as a way of mitigating the rate hike.
Currently, most policies provide lifetime benefits with inflation protection. The new plan would cap benefits at 10 years without inflation protection. Because most people don't need more than a few years of nursing home care, CalPERS says the cheaper policy will prove popular.
The agency wants to provide members "a comfort level with a somewhat lesser benefit than they're purchasing now, but that's adequate," Boynton said. "We do think that they will be very receptive to it."