Long-term-care policies: Pouring money down a hole?

The saddest lesson of recent years for the American middle class is that those who “do the right thing” are first in line to get hammered.

You devote a lifetime to a single employer, only to get laid off with a cheese-paring severance package. You finance your own retirement by religiously funding your 401(k), and Wall Street lays an egg on your head.

Here’s a lesson baby boomers are just beginning to learn: You pay for long-term-care insurance for years, even decades, and then your insurance company changes the rules.

Consider the experience of Marvin and Joan Klotz of Los Angeles, retired employees of the state university system, who purchased a long-term-care policy for Joan from CalPERS in 1997, when she was 61.

Their goal was to shoulder some of the burden of their own late-in-life needs, like any responsible couple. The policy was to pay up to $120 a day in nursing-home care, $60 for an assisted-living facility or $1,800 a month for home care. The figures were to increase with inflation and the money would keep flowing for Joan’s lifetime. The annual premium was $1,656.

Since 2004, CalPERS has raised the premium three times, with the latest hike scheduled to take effect this year. That will bring the cost to $3,365, or 103% higher than where it started. CalPERS says that if Joan elects to keep her lifetime benefit and inflation protection, the charge will keep rising by at least 5% a year thereafter.

“It strikes me as outrageous,” Marvin Klotz, who is 81, told me. He says CalPERS never promised not to raise rates, but it did say that the inflation provision would not cost extra; given that the inflation factor is 5% a year and the premium will keep rising by that amount, it sure seems as if CalPERS is now sticking its customers with the inflation risk it had promised to absorb.

This sort of thing has made the long-term-care market look like the Wild West of the insurance business. “The more complicated a product is, the harder it is to regulate,” says Kansas Insurance Commissioner Sandy Praeger, chairwoman of the health insurance committee of the National Assn. of Insurance Commissioners. “And these are very complicated.”

At the moment, long-term plans are a blip in the overall insurance market: slightly more than 8 million Americans hold such policies, compared with 255 million covered by health insurance.

But government agencies are trying to encourage more Americans to buy long-term-care insurance so the burgeoning cost of their care doesn’t completely drain the public purse. Almost half the states already are planning to slash Medicaid, which currently pays for 70% of nursing-home patients, according to the Kaiser Family Foundation.

Recognizing reality, Congress quietly embedded an enrollee-paid long-term-care plan called the CLASS Act (for “Community Living Assistance Services and Supports Act”) in the recently passed healthcare reform bill. The program will pay an average of at least $50 a day in cash to enrollees once they need long-term care. Premiums, which are to be deducted from paychecks a la Social Security starting next year, haven’t yet been set, but everyone will have the chance to opt out before then.

That won’t resolve the problems in the private market, which insurance regulators have been trying to get their hands around for more than 10 years now. Although California and a few other states have tightened the rules for marketing and pricing the policies, more needs to be done to keep millions of Americans from getting scammed.

The first thing to keep in mind is that long-term-care insurance is unique. Typically you start paying premiums years, even decades, in advance of when you expect to claim benefits, and you have to keep paying to keep the policy alive. (In many cases, you lose what you’ve already paid in if it lapses for even a few months.)

Though it’s true that you also pay premiums for life insurance well in advance of when you expect to need it, you know from the outset exactly how much your heirs will collect on your carcass, and the insurer knows to a statistical nicety how far off, on average, that moment will be.

The actuarial complexities of long-term-care insurance don’t yield to such an easy solution. For one thing, long-term care is a moving target. Methods, techniques and standards are evolving; today they encompass services such as in-home care that weren’t widely accepted years ago. One relatively new wrinkle is the rise of assisted-living facilities, which were uncommon in the 1980s. Actuaries don’t have much experience at figuring out patterns of use of those facilities, including the state of impairment at which people will typically enter them and how long they’ll remain before moving on to a nursing home, so figuring how much assisted living will cost insurers is a work in progress.

The most common problem with long-term-care insurance has been mispricing. Through the 1990s, insurers set rates low to drum up business and failed to keep adequate reserves against their risks. They threw in lifetime benefits and inflation protection as come-ons, only to discover that these were “problematic, because they didn’t know how to price the risks,” says Bonnie Burns of California Health Advocates, a Medicare advocacy group.

The insurers assumed, correctly, that regulators would wave rate increases through or allow for reductions in benefits to keep customers from being abandoned outright. But as Burns notes, when a premium increase is implemented many years after a policy originates, it may fall hard on customers who are already retired and on fixed incomes.

Something like that has happened with CalPERS. Its 22% rate increase this year is aimed especially at policies taken out as long ago as 1995. CalPERS says the increase is needed to fill a 33% deficit in the program created by its miscalculations about program claims and by a 23% drop in its investment portfolio. The pension fund closed the program to new enrollees in 2009 and won’t say when or if it will reopen.

CalPERS is offering its roughly 160,000 customers several none-too-great options. Klotz told me his choices are limited to cutting his wife’s maximum daily benefit by 17% to keep her premium at last year’s level, or cutting her total benefit to as little as three years (for a premium reduction). Thus far, he figures, they’ve paid $25,881 to CalPERS. They don’t know if they’ll get their money’s worth because they’ve never had to make a claim (kinehora). But like many other long-term-care insurance customers nationwide, they’ve learned this much: They won’t be getting what they signed up for.

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at www.latimes.com/hiltzik, and follow @latimeshiltzik on Twitter.