Yes, I did this calculation at the time. I don't recall the specifics, but the required rate of return on the side fund was very high, and totally unobtainable given the level of risk one would want to take for a fund with this purpose.
Well, not quite. Since I wrote the initial post, the insurance company significantly increased their rates on policies with the included inflation protection, so even the "big boys" weren't able to make it work. This was because their investments weren't producing the expected returns, not because the cost of care had gone up (they pay out a set daily dollar rate, so the LTC insurers are largely insulated from rising care costs, that risk is left to the policyholder). In addition, insurers have some advantages that we'd lack-they get the benefit of all the policies that lapse or are abandoned early, and each policy doesn't need to cover that specific patient's costs (as long as all the policies written, in aggregate, cover all costs, in aggregate).
As I said, I think these FPO policies may make some sense as part of a complete package. It's "cheap" coverage against a very early need for LTC, and one can still retain the flat benefit (without buying additional coverage to keep up with inflation) at moderate cost if additional insurance is declined starting at about age 65-70. But this requires a good understanding of the risks one is taking, especially with regard to inflation.
