Friday, August 16, 2019

CalPERS Faces ‘Very Serious Risk’ In $1.2B LTC Case, Judge Warns


Sacramento Bee (CA) August 15, 2019 
A judge is urging CalPERS to settle a major lawsuit over price increases for its long-term care insurance policies, suggesting the system could have to pay a lot of money if the lawsuit goes to a jury trial in October.
The lawsuit, filed in 2013, alleges CalPERS violated contracts when it hiked premiums by 85 percent for about 100,000 public employees after promising stable prices in marketing materials. CalPERS has said it had the authority to increase the rates and did so solely to keep the plans sustainable.
Superior Court Judge William Highberger issued a tentative ruling last month saying he was inclined to decide CalPERS raised rates for an impermissible reason for a group of about 85,000 policyholders with a unique plan benefit.
Those policyholders bought "inflation protection" plans, which featured steady increases to their benefits to cover the rising costs of long-term care -- coupled with promises that premiums would stay the same.
They agreed to pay about twice as much in premiums as policyholders with more basic plans, and CalPERS' marketing materials said their premiums would be "locked in." Marketing materials came with graphs that showed a flat-line projection for future premiums as policyholders aged.
Highberger said he is inclined to rule that the marketing language means CalPERS may not raise rates simply because they promised an inflation protection benefit. He didn't include roughly 18,000 policyholders who are part of the suit's class but didn't purchase the extra benefit.
If the lawsuit goes to trial as scheduled on Oct. 30, a jury will decide whether CalPERS did or didn't increase premiums specifically because of the inflation protection benefit. The jury could decide whether all, none, or part of the increase was specifically due to the benefit, which would determine how much money CalPERS would have to pay, if any.
Plaintiffs have estimated the lawsuit could cost CalPERS $1.2 billion if the retirement system loses.
"There is a very serious risk that a money judgment for a rather large amount of money will be issued in due course in this case," Highberger wrote, saying he agreed with plaintiffs' interpretation of the "your premiums will not increase" language.
CalPERS maintains it had the authority to selectively raise rates despite the language in the marketing materials.
"While we respectfully disagree with Judge Highberger's tentative ruling that the insurance policies limited CalPERS' ability to increase premiums, he did opine that increases are permitted in certain situations," CalPERS spokesman Joe DeAnda said in a prepared statement. He said CalPERS intends to prove that the increase "was one of those situations, and hence that it was consistent with the judge's ruling and was therefore permissible under the policies."
DeAnda said the outcome of the lawsuit wouldn't affect the rest of the retirement system's benefits. The $375 billion fund administers retirement benefits for about 2 million people, including pensions for about 596,000 retirees.
Highberger's tentative ruling said a settlement would "necessarily involve the state's executive branch, particularly the Department of Finance, and the Legislature."
He wrote that an inability by CalPERS to pay claims could "create an obvious default by an arm of the state in the fulfillment of its contract obligations. This, in turn, could seriously impair the credit rating of the state."
CalPERS' struggles with long-term care insurance aren't unique. Highberger's tentative ruling cites the challenges of pricing a new type of insurance in his explanation of how CalPERS ended up raising rates so dramatically in the two-part 85 percent increase in 2015 and 2016, which followed other rate increases in prior years.
While many insurers offered the plans in the 1990s, premium increases and insurer losses drove most out of that line of business, according to the AARP.
"We will continue to explore all legal and other options to maintain the viability of the long-term care insurance program, and will not enter into an agreement that would compromise the right of our policyholders to get the benefits to which they are entitled under their policies," DeAnda said in the statement.
(c)2019 The Sacramento Bee (Sacramento, Calif.)
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