Health Insurance Meltdown in Vermont

Published March 1, 2004

Former Vermont Governor Howard Dean, a physician now running for the Democratic Party’s nomination for President, considers his state a model for health care reform.

“In Vermont, where I served as governor for the last 11 years, nearly 92 percent of adults now have [health insurance] coverage,” boasts Dean’s campaign Web site. “Most importantly, 99 percent of all Vermont children are eligible for health insurance and 96 percent have it.”

Universal health care–more accurately, universal health insurance–has been a Dean rallying cry for more than a decade. In 1992, his first year as governor, Dean pushed through to passage Act 160, which created the Vermont Health Care Authority and charged it with bringing forth two sweeping health care reforms: a single-payer plan Dean had championed in 1991 as lieutenant governor and a measure he dubbed “regulated multi-payer.”

Guaranteed Issue

Guaranteed issue (GI) laws forbid health insurance companies from denying coverage to anyone who applies for health insurance, including those individuals who apply for insurance after the onset of a chronic health condition or who have made lifestyle choices known to be unhealthy. Adopted to help end “job lock,” GI has the unintended consequence of encouraging people to wait until they get sick before buying health insurance, which increases the number of uninsured and the premium costs for those who remain insured.

Community Rating

Pure community rating (CR) laws require health insurance companies to charge the same premium to everyone, regardless of age, sex, health history, lifestyle choices, and regional demographics. This one-size-fits-all rate results in charging young and healthy people higher premiums than their expected medical expenses would otherwise justify in order to subsidize rates for middle-aged, older, and less-healthy people.

Under “modified” CR, premium variations are allowed to compensate for certain risk characteristics such as age, sex, and family size, but not for others such as health status or lifestyle choices.

Dean’s effort to make health insurance universally available in Vermont has in many ways backfired. What has become “universal” in the state are high health insurance premiums and a heavy tax burden needed to support the growing number of Vermonters covered not by private insurance but by government-run Medicaid. Moreover, the number of uninsured Vermonters has increased, not fallen, since Dean’s reforms took effect.

Legislative Mischief

In 1991, the Vermont legislature passed Act 52, mandating guaranteed issue and community rating of insurance policies issued in the small group market. This caused young, healthy worker groups to face startling increases in premiums, since their age could no longer be taken into account in determining their risk. Many small businesses dropped their newly unaffordable plans and sent their employees to buy policies in the individual market. To close this “loophole,” the legislature followed up with Act 160 in 1992, extending the guaranteed issue and community rating mandates to insurers offering policies in the individual market.

By law, insurers are prohibited from using medical underwriting to set premiums. As permitted by law, the state’s insurance commissioner initially permitted commercial insurers to deviate from a community-rated premium by 20 percent, but did not permit Blue Cross/Blue Shield (BC/BS) or Community Health Plan (CHP), the state’s original nonprofit HMO, to deviate. For several years, BC/BS lobbied for a change in the regulation. Effective January 1, 2000, the commissioner eliminated the rate deviation for all newly sold policies and phased out the deviation on all existing policies for the few remaining carriers. Vermont now has the most absolute community rating–zero deviation–in the country.

More Uninsured

Community rating and guaranteed issue have wreaked havoc on Vermont’s small group and individual insurance markets, just as they have in states across the country. The percentage of the state’s population that is uninsured has increased, not fallen, since the mandates were imposed; premium rates have increased; and more Vermonters than ever are having to settle for government-run Medicaid in order to get insurance. Vermont is now second in the nation, after Tennessee, in the proportion of its under-65 population covered by Medicaid (21 percent).

Dean boasts that the share of Vermont’s population without insurance fell during his tenure. In June 2000, an 11-member panel of state officials reported the percentage of the state’s population that is uninsured had fallen from 10.8 percent in 1993 to 6.8 percent in 1997.

But those figures do not square with statistics compiled by the U.S. Census Bureau. In a November 19, 2002 Ethan Allen Institute commentary, John McClaughry, the group’s president and a member of the Vermont Senate between 1989 and 1992, noted, “According to Census Bureau figures, [the uninsured rate in Vermont] has gone from 9.5 percent (1992) to 9.7 percent (averaged over 1999-2001). In 1994 … that data series ranked Vermont second among the states. The 2001 ranking for health insurance coverage placed Vermont 10th in the nation.”

McClaughry acknowledges that due to the small sample size used by the Census Bureau’s Current Population Survey, estimates of the uninsured population can vary widely from year to year. In defending his Medicaid expansion in 1997, however, Dean touted his state’s high ranking (second in 1994). The 1995 CPS, however, had dropped Vermont to 23rd. Dean did not acknowledge the new ranking.

Insurers Leave

According to State Rep. Frank Mazur (R-South Burlington), “former Governor Dean’s community rating and guaranteed issue policy initiatives have driven out private insurers from Vermont.”

About 25 percent of Vermont’s private health insurance market–about 18,000 people in the individual market and 33,000 in the small group market–is subject to community rating. The remaining 75 percent of the market–associations, large groups, and self-insured companies–have premiums based on health underwriting and experience rating.

What was formerly a healthy and affordable individual and small group health insurance market boasting 33 competitive insurance companies is now a shell of its former self. Such highly regarded companies as Aetna, Fortis, Golden Rule Insurance, Kaiser Permanente, Nationwide, Trustmark, and, most recently, Mutual of Omaha, have all left a market known to be a hostile environment in which to do business.

Today the only significant player in the individual health insurance market is BC/BS. In 2002, BC/BS had 9,182 policies in force in Vermont’s individual market, or 51.8 percent of the total. Mutual of Omaha had 8,275 policies. But with Mutual of Omaha’s departure, the only other entity actively selling individual health policies in Vermont is MVP Health Plan, Inc. MVP had only 120 policies in force in 2002.

The legislature clearly anticipated most insurance companies would abandon the state when it legislated guaranteed issue and community rating in 1992. As carriers left Vermont, their insureds became eligible for a “safety net” established by the legislature. The safety net’s key provisions:

  • Health insurance must be made available to persons whose “insurer withdraws from the marketplace in Vermont.”
  • BC/BS is required to provide safety net coverage at “substantially similar terms and prices” as what the insured originally had.
  • “Substantially similar prices” is defined as prices identical to those paid by the insured during the preceding year, adjusted for trend by an amount up to 15 percent. The legislation also allows additional annual adjustments of up to 15 percent, provided the insurer providing the safety net coverage has at least an 80 percent loss ratio. Finally, the insurance commissioner is authorized by the legislation to permit an additional 15 percent increase if BC/BS would be hurt without it.

For Whose Protection?

The legislative “safety net,” alleged to be for the protection of Vermont’s insured, appears to have worked more in favor of BC/BS.

In early 1994, BC/BS reported it would face a $6.2 million loss in 1994. Its surplus was down to $8.8 million, $7.1 million of which was its home office real estate.

BC/BS reported that its loss ratio for the safety net business for 1994 was 88.4 percent. Insurance industry analysts say that, allowing for a reasonable administrative load, the company likely had a profit on its safety net business. But BC/BS reported an underwriting loss of $1.4 million. It reported administrative costs twice that permitted by law. It then used a trend of 19 percent (unsupported in its rate filing with the state) to justify a rate increase of 37 percent for the safety net business.

That increase was approved by state officials in August 1995–apparently allowing BC/BS to use the safety net business to subsidize losses in its own business.

Premiums Rise

“In 1992, nearly everyone (except the insurance industry) held the euphoric belief that ‘reforming’ health insurance would be a piece of cake,” wrote Ted Cote in the St. Albans Messenger on August 21, 1995. “The fact that Vermont is still wistfully enamored with a socialist/single payer scheme will likely guarantee continued failure.”

Things have gone from bad to worse since Cote made his prediction in 1995.

According to Mazur, “a high-deductible ($2,250) individual insurance policy for a 33-year-old in Vermont currently costs $215 a month. In New Hampshire the policy costs $128 a month, and in South Carolina, $76 a month. Differences in population are a minor factor but community rating and guaranteed issue are major impediments to health insurance costs in Vermont compared to other states.”

There is also significant variance in the cost of family health insurance plans. In a 2001 article for Health Care News, Mazur reported that in Pennsylvania, a family plan with a $1,000 deductible cost $190 a month; in Connecticut, $230 a month. In Vermont, such a policy would cost more than twice as much, $543 a month.

“Insurance premiums are sky high,” writes physician David Gratzer, a senior fellow at the Manhattan Institute, in the January 12, 2004 issue of The Weekly Standard. “‘I’m paying a lot and getting little choice,’ a self-employed Burlington resident told me. He wasn’t kidding: To cover his wife and himself, he pays $5,000 a year for a plan with a $1,000 deductible. Because most carriers have left the state, there are only a few insurance companies left in business.”

Shift to Taxpayers

The premium increases led many younger Vermonters to drop their private-sector insurance coverage. Dean administration reformers stepped in, extending eligibility for Medicaid to a wider swath of the state’s population. The program has been expanded to the point where children in a family of four earning three times the federal poverty level (now around $52,000) can get “free” health care from the state. The Dean administration actively promoted government coverage, urging parents to take their children off their private insurance and enroll them in the state program. Medicaid in Vermont has become a welfare program for the middle class.

According to Mazur, Dean’s “attempt for a ‘universal’ health care solution further expanded Medicaid to almost 25 percent of our population.” McClaughry notes, “Eleven Dean years have now gone by. The state share of Medicaid spending has risen from $86.7 million to $263.5 million.” Medicaid is a joint state-federal program, and federal taxpayers pay about $458 million for Vermont’s generosity.

In spring 2002, the state’s Joint Fiscal Office projected the state Medicaid plan will be $42 million in the hole by 2006, even with no new beneficiaries. In his January 2004 budget message, Gov. Jim Douglas, Dean’s Republican successor, announced that if no corrective action is taken, the Medicaid deficit would come to $245 million by 2009.

Some observers have suggested Vermont’s shift from private-sector to government-run insurance was not an “unintended” consequence of the Dean reforms at all. “The root cause of Vermont’s problem came in the late 1980s,” explained McClaughry, “well before the Dean era, when Blue Cross/Blue Shield of Vermont was threatened with insolvency. It used all of its political muscle to impose community rating and guaranteed issue on its competitors, who were taking away their customers.

“The competitors then obligingly departed the state,” McClaughry continued. “Now, liberals stoutly defend a regressive single-payer health care, managed by Blue Cross/Blue Shield as a ward of the government.”

In a 1995 letter to the editor of the Hartford Courant, Wallingford, Vermont resident John McTaggart wrote,”Instead of being rewarded for initiative and healthy choices, I have to be thrown in with a pool of many who did not conduct their health care and lifestyle in a manner similar to my own pursuits. Truth is the state wants individuals like myself to subsidize the rest of policyholders, and the way to get this done was to close the doors to insurance companies that rewarded better risk applicants.”

Liberal Lawmakers in Denial

As the 2004 legislative session got underway in Vermont, some lawmakers continued to turn a blind eye toward the health insurance meltdown that has resulted from the state’s misguided public policy actions.

State Sen. Rod Gander (D-Windham) told the Brattleboro Reformer, “Preserving Vermont’s community rating law is a priority this session.” Several of his Democratic Party colleagues agreed. State Rep. Richard Marek (D-Newfane) maintains, “Community rating has worked well in Vermont, although it’s far from perfect.”

Jeffrey and Charlotte Tullar are among many of the state’s health care reform tragedies. The Tullars say they “never dreamed the state’s fling at health care reform would cause them to lose their health insurance.” Two years after the community rating and guaranteed issue mandates were passed, the Tullars faced a 170 percent premium increase. Their health insurance premium would have been more than their mortgage.

McClaughry notes, “Dean’s policy was to drive out insurance companies, make ever more people dependent on government health care, underpay the providers, and replace personal responsibility with ‘delivery of services.'”

Restoring the Free Market

In its 2004 Position Statement on Health Care, the Lake Champlain Regional Chamber of Commerce (LCRCC) encouraged policymakers to conduct a thorough review of the regulatory environment affecting the cost of health insurance in the state. The group also urged a movement away from community rating.

“It would be useful,” stated the LCRCC, “to examine proposals for limited modifications in community rating. Some examples of modifications that could be looked at include allowing a 10 percent plus or minus rate band, geographic rating, industry rating, or personal health accountability factors.”

The Burlington Free Press, the state’s leading newspaper, editorialized in September 1995 that community rating had already failed and should be repealed. “It has the best of intentions, but has resulted in driving people who were paying their own way off insurance, and toward dependency on the state.”

When Gov. Douglas was asked by reporters what measures he would implement to contain health insurance costs he replied, “First, I would revisit community rating to create more flexibility and competition in the health insurance marketplace. I would instead have a high-risk pool to subsidize those Vermonters who are uninsurable. I would work to end the Medicaid cost shift that passes the high costs of this program onto consumers of private insurance. I would reduce unnecessary government mandates and move toward Medical Savings Accounts so employers and employees could contribute to a special tax-free account to pay for high-deductible, low-premium health insurance.”

“Douglas also advocated providing more information to consumers and insurance discounts for healthy behavior,” said Mazur, which would appear to be a step away from community rating. “Most of his policy recommendations are included in H 196 and a subsequent bill that I introduced this year.”

If Vermont is going to back out of the mess it has made for itself, acknowledging that misguided public policies are to blame would seem to be an important first step. Repealing community rating and guaranteed issue mandates should be high on the reform agenda. Mandated insurance benefits, which needlessly raise the price of insurance, should also be rolled back. Giving individuals who buy insurance the same tax breaks as those whose employers provide insurance is yet another promising reform.

Vermonters also should consider additional reforms being entertained in other states, including a functional high-risk pool, to address the needs of the medically uninsured and uninsurable without skewing the insurance market for everyone else, and paying the reasonable charges of physicians, hospitals, and other health care providers who provide services for the beneficiaries of state government health programs.

“I think many fear it’s too much reform for the Democratically controlled state senate to accept,” warned Mazur. Nevertheless, he acknowledged, small steps in the right direction are being made.

Next month: New York

Conrad F. Meier is managing editor of Health Care News. His email address is [email protected].