Ernest Goldsmith made a tough choice when CalPERS told him it was raising the price of his long term care insurance by 85 percent six years ago.
Goldsmith, 83, of Berkeley, switched to a more affordable plan that will pay less if he ends up in a nursing home. About 57,000 other people with the same plans also switched, and they are now part of a $1.2 billion class action lawsuit over the 2013 increase.
Goldsmith was alarmed three months ago when CalPERS sent him a notice with another big price jump.
This one said he would have to pay more than 90 percent more if he wanted to exercise an option on his and his wife’s insurance plans to increase their benefits by 16 percent. The option amounted to nearly $4,000 a year more per plan. If he didn’t pay, he would keep the same level of benefits.
He bought the plans in 1997, when CalPERS was aggressively marketing them. In his view, he shouldn’t face such large price increases after paying into the plans for two decades.
“This just doesn’t make sense,” said Goldsmith, a retired Superior Court judge.
CalPERS declined to comment for this story due to the lawsuit.
Long term care insurance was new in the 1990s, and CalPERS, like many other insurers, used assumptions to set prices on the plans that turned out to be far too low for the premiums to cover costs over time. A 2016 survey from consulting firm Milliman found that annual rate increases of 40 percent or more were common.
As CalPERS and the few insurers who remain in the long term care insurance market adjust, people like Goldsmith are experiencing sticker shock and questioning their responsibility for the initial miscalculations.
Mike Bidart, an attorney representing policyholders in the class-action lawsuit, said his office has heard from Goldsmith and others who are seeing the big increases in their benefit options. Bidart said his office is reviewing them.
The lawsuit, which is in settlement talks ahead of an April trial date, focuses on whether CalPERS improperly raised rates on plans like the one Goldsmith originally had. The optional increase on his newer plan is different.
Lower benefits, higher prices
Don Moulds, the chief health director in CalPERS’ health policy and benefits branch, said in a letter to Goldsmith that outside auditors and actuaries have determined CalPERS’ rates are in line with the rest of the market.
Industry experts determined in 2018 that CalPERS’ rates were “among the most competitive in the marketplace,” according to the letter.
The plan Goldsmith bought in 1997 came with “inflation protection.” Its benefit levels — such as the monthly maximum the plan would pay for nursing home care — would increase automatically each year without a corresponding premium increase, according to marketing materials. Premiums might go up, but not specifically due to the inflation protection benefit, according to advertisements for the plans cited in the lawsuit.
About 100,000 people had those plans, and are now part of the lawsuit. When CalPERS announced the 85 percent price hike on them, Goldsmith’s group of 57,000 opted to switch plans. About 30,000 paid the increase, while others dropped the insurance altogether.
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Many who switched chose plans that came with “benefit increase offers.” Every three years, they may choose whether to pay higher premiums to bump up their plan’s benefits. They are not required to pay the increase. If they pass up the offer twice, they lose the option.
Goldsmith’s plan pays up to $4,140 per month toward care in a nursing home or another setting for a quarterly premium of $972. If he were to take the offer, his monthly maximum would increase to $4,815 and his quarterly premium would go up to $1,815.
Plans sold today have less generous benefits and cost more.
Still recovering from the Great Recession
Moulds’ letter cited several reasons for the initial miscalculations: “low underwriting standards, increased claims experience, the rise in the cost of long term care services, low policy lapse rates, and investment losses incurred during the economic downturn of 2008.”
Goldsmith is particularly annoyed with that last part of the explanation.
“If CalPERS made inaccurate pricing decisions plus losing investments such as derivatives involved in the 2008 financial crash, we should not have to make up for those miscalculations,” Goldsmith told the CalPERS Pension and Health Benefits Committee at its November meeting.
“I respectfully ask that you not simply accept the product of an actuarial table designed to make up for past pricing problems, but ask you to make a tough decision: In this case, to roll back these impossible, draconian rate increases for this group who were forced off the inflation protection plan some years ago and do not penalize us with the two-time cutoffs,” he told the committee.
Moulds, in his letter, said that without the two-time cutoff, policyholders likely wouldn’t purchase the extra benefits until they needed them, which could result in claims outpacing premiums.
CalPERS has said that if it ends up owing money in the lawsuit or paying a settlement, the money would not come from its pension fund but from the long term care insurance branch. The fund has said a payout could result in another increase in long term care insurance premiums.