Kentucky Gov. Fletcher Seeks Insurance Reform

Published May 1, 2004

On April 2, Kentucky Governor Ernie Fletcher signed HB 650, legislation aimed at resuscitating a health insurance market that has suffered greatly from a decade of state government interference.

The bill, titled simply “an act relating to Health Benefit Plans,” passed the House of Representative on a 95-2 vote and the Senate by 35-1 in March. The measure will

  • ban for three years all new state mandates requiring health insurers to cover specific medical conditions and treatments;
  • eliminate regulations that require all insurers to offer standard benefit plans; and
  • reduce bureaucratic paperwork and insurance rules to make them comparable to other states that compete with Kentucky.

Observers hope the new law will encourage the return of many insurers who left the state since 1994. Presently, only Anthem Blue Cross/Blue Shield, Humana, Fortis, John Alden, Mega Life and Health Insurance Company, and Physicians Mutual operate in Kentucky.

Unintended Consequences

In 1994–with the nation still abuzz over the Clinton administration’s 1993 proposal to nationalize the country’s health care system–the Kentucky legislature passed sweeping measures policymakers believed would make health insurance more affordable, and health care more accessible, for the state’s residents.

The key provisions of the reform measure, HB 250, included modified community rating and guaranteed-issue mandates on insurers; a risk-adjustment process among insurers that favored Blue Cross Blue Shield (BCBS); and five standard benefit plans that differed relatively little with respect to deductible, co-pay level, etc. The benefit plans could not be amended until July 1995.

Policymakers also mandated the establishment of a statewide health purchasing alliance, known as Kentucky Kare. To ensure the plan’s financial viability, policymakers required all state government employees to join. Kentucky Kare also served as the “insurer of last resort” for the uninsured not eligible for Medicaid.

The mandates were imposed on top of an existing, complex system of consumer safeguards that included federal government requirements under the Consolidated Omnibus Budget Reconciliation Act (COBRA), mini-COBRA, benefit mandates, underwriting mandates, and financial reserve requirements. Little attention was paid, by state legislators or activists lobbying for the new mandates, to potential interactions between regulations old and new.

The combination of modified community rating, guaranteed issue, mandated benefit packages, and patient access laws created contradictory and counter-productive incentives that hurt consumers, insurance companies, and health care providers alike.

A 1996 law freezing premiums in the individual and small group markets at pre-reform rates made the mess even worse, while hiding the mounting problems from the general public. Healthy Kentuckians generally sought out policies with premium rates frozen at lower levels, while the unhealthy population was forced to choose between more expensive community-rated plans, Kentucky Kare, or Medicaid.

Insurance Market in Turmoil

The new insurance industry regulations favoring BCBS and the mandate making government employees captive to Kentucky Kare had a devastating impact on the state’s private individual and small group health insurance market. In April 1997, the Kentucky Department of Insurance reported:

  • by December 1996, 45 insurance companies had pulled out from the state’s individual insurance market. Insurance Commissioner George Nichols told the Louisville Courier-Journal the state was “moving toward a crisis.”
  • Anthem BCBS–for years the state’s largest insurer in the individual market and by 1996 virtually the only insurer in the market–reported an underwriting loss of $60 million;
  • Kentucky Kare reported a $30 million underwriting loss over the previous 20 months and increased premiums 28 percent for 1996.

Premium Increases

As competition in Kentucky’s individual insurance market fell and remaining insurers offered benefit packages mandated by the state, Kentuckians got a rude awakening. Out-of-pocket expenses rose above what they had been in pre-reform days and average premiums jumped between 36 and 165 percent.

Donald Harden, a Florence insurance agent and president of the Northern Kentucky Association of Life Underwriters, reported at the time that one of his customers had been paying $380 a month for a family plan in the private insurance market. After the legislature’s 1994 actions, Harden’s client had to buy into the Kentucky Kare plan … for a monthly premium of $700, with reduced benefits.

Reported the Courier-Journal on October 17, 1997, “Gail Collins, a self-employed food distributor in Louisville, said she had individual insurance but didn’t think she should have to pay inflated premiums for the unhealthy.

“Steve Carter, owner of the 4th Avenue Deli, also in Louisville, is healthy but can’t afford to buy insurance for himself and his seven employees,” the Courier-Journal continued.

All told, some 850,000 Kentuckians faced dramatically higher premium payments after the 1994 reforms.

Increase in Uninsured Population

U.S. Census Bureau data suggest the Kentucky reforms may have resulted in an increase in the share of the state’s population that was uninsured. In 1993, the year before the reform measure was passed, 12.5 percent of the state’s population was uninsured. By 1996, that figure had reached 15.6 percent. It has since fallen again, to 13.6 percent in 2002 (the most recent year for which data are available)–still higher than the pre-reform figure.

Fully 548,000 Kentuckians were without health insurance in 2002–a 17.1 percent increase over the 468,000 uninsured in 1993. By contrast, the number of people in the United States who were uninsured increased just 9.7 percent between 1993 and 2002.

In 1993, the pre-reform year, 14.1 percent of Kentucky’s population was insured in the individual market, higher than the national average of 13.1 percent. By 2001, the national average had fallen to 8.3 percent … but in Kentucky, it fell even further. Just 6.9 percent of the state’s population was insured in the individual market in 2001. (See accompanying figure.)

As Bob Rich, an independent insurance broker from Florence, told the Kentucky Post in April 1997, “The system was working for 95 percent of the people. We basically destroyed a system that works to satisfy the other 5 percent.”

Not all Kentuckians agreed. In October 1997, a spokesperson for the Kentuckians for Health Care Coalition–an advocacy group that had lobbied hard for the 1994 legislation–told the Courier-Journal, “many Kentuckians with high-cost conditions today enjoy having insurance for the first time.”

Reforming the Reforms

In 1996, the legislature halfheartedly acknowledged the 1994 reforms weren’t achieving the intended result. Realizing the state had become a magnet for unhealthy people from other states, policymakers imposed a one-year residency requirement for enrollment in Kentucky Kare. Other reforms allowed private insurance companies to exclude coverage of pre-existing conditions for 12 months, and the band of rates private insurers could charge was widened. Such “tweaking” notwithstanding, guaranteed issue and community rating mandates were left mainly intact.

In 1997, a special session of the legislature was called to deal further with health insurance matters. The most notable result of the session was a 50 percent rate increase for the state’s near-monopolist private insurer, Anthem BCBS, pushing premiums to historic highs.

In 1998, legislators passed HB 315, a disastrously complicated attempt at reforming the reform. Insurers were still required to guarantee issue a standard plan along with their two most popular plans. More rating flexibility was approved and a streamlined rate review mechanism was put in place, but insurers were required to obtain state officials’ approval of their underwriting practices. A complicated risk-spreading system was approved, as was a “play or pay” measure similar to one that had been rejected during 1997’s special session.

By the end of the year, Kentucky Kare was being accused of “gross mismanagement” by the state auditor and the Lexington Herald-Leader. BCBS was saying it needed to raise rates an average of 52 percent because, reported the Herald-Leader, it was paying out $1.30 for every $1.00 it was taking in.

The legislature was not in session in 1999. No insurers had returned to the state, lending strength to an ultimately successful effort toward reform in 2000. HB 517, signed by the governor in April that year, took these positive steps (among others):

  • established a high-risk pool;
  • eliminated the guaranteed-issue mandate; and
  • broadened the rate band, although keeping community rating in place.

The measure was not perfect, leaving in place certain regulations that ensured the state’s climate for insurance carriers would remain less hospitable than other states. The five insurers that returned are a small share of the original 45 that once made up a vibrant and competitive insurance marketplace.

What the Future Holds

Rod Turner, vice president of American Republic Insurance–which pulled out of the Kentucky market in 1995–explained why the passage of legislation may not be enough to undo the damage done by the legislature in 1994. He told Patrick Howington, business editor of the Courier-Journal, “It may not be in our business plan, we may not have a distribution system there–there may be a lot of reasons why we would or would not go back.”

Golden Rule Insurance Company, now owned by UnitedHealth Group, told the Courier-Journal Kentucky “has come a long way to restoring a market that is viable.” While the company is weighing a decision to return, others will never return, as regulations adopted in Kentucky and elsewhere forced them out of the business of writing health insurance policies entirely.

“Kentucky’s health insurance market is recovering from legislative changes made in 1994 and 1996 that inadvertently set the stage for declining competition, higher costs, and general insurance market instability,” summarizes the Kentucky Chamber of Commerce in its 2003-04 Policy Document on health care.

Nevertheless, the Chamber continues, “the fact that the state has ‘reformed’ health insurance every two years since the original reform in 1994 has created a climate which is not conducive for getting objective data about the right course of action for guiding the state out of the morass.”

The measure just signed by Governor Fletcher–by banning new mandated benefits, freeing insurers from the standard benefit plan requirement, and cutting red tape and paperwork–should make it easier for insurers to return to the state.

Consumers, policy wonks, and insurance industry analysts will be watching closely. Kentucky may be on its way back from the abyss.

Next month: Washington State

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