On March 31, Washington Governor Gary Locke (D) signed into law HB 2460, an act that redefines a small group as any employer group with 2 to 50 employees. But the small group reforms contained in HB 2460 only begin to undo policy failures adopted in the early 1990s by Washington state legislators and then-Governor Mike Lowry (D).
In September 1993, Lowry signed the Washington Health Services Act (WHSA), a sweeping measure not unlike the Clinton administration’s proposal to nationalize the country’s health care system. Indeed, Lowry all but took credit for the Clinton plan, saying, “I am pleased President Clinton’s reform proposals so closely resemble Washington State’s new law.”
State Representative Phil Dyer, ranking minority leader on the Health Care Committee at the time, said, “I watched the passage of a bill that was constantly being revised with [area code] 202 fax headers–the latest wisdom from Washington, DC–coming into the caucus, because in that Spring of 1993, the Ira Magaziner [health care] task force had been formed, and was, in fact, operating.”
As if sending a warning to the rest of the nation, a solidly liberal Washington state legislature eventually passed individual health insurance reform that included key elements of the original Clinton plan:
- Insurers were required to guarantee issue insurance.
- Insurers were required to offer a Basic Health Plan covering a government-defined set of benefits. Insurers were permitted to offer other plans, including plans with fewer benefits.
- Insurers were required to use a modified community rating scheme, allowing premium variations only for geography, age, family size, length of time with insurance from that company, and wellness.
- Insurers were permitted to adjust premiums only annually, except in cases where the insured’s family composition or benefits choice changed, or if laws were passed that would affect premiums.
- Insurers were permitted to exclude coverage of preexisting conditions for only 90 days prior to the effective date of insurance coverage.
- The state department of insurance was given authority to approve or disapprove all insurance-related regulatory actions, including actions on rate increases, benefit designs, community rating parameters, and guaranteed issue provisions.
Implementation of the WHSA was left in the hands of Insurance Commissioner Deborah Senn. Washington is one of only a few states where the insurance commissioner is an elected position, and Senn’s efforts on the WHSA initiative often seemed to reflect her need to “campaign” for popularity among voters.
Early in 1994, Senn and a group of insurance company officials announced at a news conference the first step of her plan: a three-month open-enrollment period beginning in July 1994. During that period, any of the state’s 600,000 uninsured residents could apply for individual insurance policies at community rates mandated by state law, which the insurers guaranteed they would issue. State actuaries estimated the reforms would raise overall insurance rates by only 3 to 5 percent, with no single insurer carrying the bulk of the cost.
The success of the WHSA hinged on the ability of insurers to spread the cost of the new enrollees, many of them considered high-risk for health insurance purposes, among the state’s 4.4 million policyholders. To do that, Senn needed approval from the state legislature and a congressional waiver of regulations that would otherwise exclude from the state’s cost-sharing program 1.4 million Washington residents whose employers were self-insured under ERISA.
During the open enrollment period, thousands of formerly uninsured Evergreen State residents signed up. With the prospect of thousands of new customers and only modestly higher costs, some insurers eagerly took advantage of open enrollment. One of the state’s major insurers, Pierce County Medical Bureau Inc., began signing up enrollees several months before the official start of the program and added some 6,000 customers. Principal Mutual signed up 2,200 enrollees, increasing its roster of individual policyholders by more than a third.
Reforms Begin to Unravel
It wasn’t long, though, before the WHSA began to unravel.
After the 1994 election, the new Republican-dominated Congress, fundamentally opposed to Clinton-style health care reform, refused to waive the regulation that excluded people in company self-insured programs from the state’s cost-sharing program. Without that waiver, Senn had 1.4 million fewer policyholders to absorb the cost of her new effort.
In 1995, the state legislature repealed most of the cost-sharing provisions that had made the WHSA palatable to the state’s insurers. Legislators did not, however, lift the open enrollment provision or the guaranteed issue and community rating mandates.
With insurers’ rolls over-flowing with new, often high-risk policyholders and no way to spread the cost, the bills began to pile up.
Pierce County Medical said its monthly medical costs for individual policyholders soared 67 percent in the first year to nearly $100 a month, up from about $60. Its 6,000 new policyholders cost even more–an average of $131.44 a month, according to John Holtermann, the company’s chief operating officer. The company was paying about $1 million a month more in claims against individual policies than it was receiving in premiums.
Principal Mutual fared even worse. Its generous plan drew some of the highest-risk enrollees. By 1995, the Des Moines, Iowa insurer logged about $32 million in health insurance claims in Washington State alone, but raised just $20 million in premiums–nearly twice the average cost of its claims elsewhere in the U.S.
Insurers Seek Rate Increases
Insurers doing business in Washington’s individual market began filing for big rate increases to cover the soaring costs. During the 1995-1996 rating period, Blue Cross of Washington and Alaska filed for a 19 percent increase for 80,000 individual policyholders. Pierce County Medical wanted a 34 percent boost on its individual policies. Rate increases were denied. Principal Mutual notified Senn’s department it planned to stop writing individual health insurance policies altogether.
Senn said insurers deliberately tried to sabotage her efforts. Insurers denied the accusation, noting Senn threw open the state’s insurance rolls before cost-sharing was in place. Rep. Dyer said of Senn, “She had no technical expertise in this area. She just wanted to rush in and make people happy.”
Some state legislators tried to undo the damage. Republicans and Democrats alike offered bills during the 1996 session to raise funds to cover the spiraling health insurance claims. The bills were rejected.
As Bill Baldwin, president of the Washington Institute for Policy Studies, noted in 1997, “The market for individually-purchased health insurance in Washington is ‘hemorrhaging,’ ‘bleeding,’ and ‘in jeopardy.’ This bad news has meant: rising costs, double-digit premium increases, declining enrollment, carrier losses in the millions of dollars every year, increasingly stingy plans, and fewer carriers from which consumers can choose.”
Consumers Flee Individual Market
The Puget Sound Business Journal reported in November 1997 that some 14,000 state residents had dropped their individual health insurance during the first half of the year. That followed an even steeper decline in 1996, when nearly 40,000 policyholders insured by the state’s largest health insurers allowed their policies to lapse.
Through 1999, state legislators tried incrementally to address the problems caused by the 1993 law. With every adjustment, new problems arose. Even after a more conservative legislature repealed some elements of the early legislation, major portions remained intact.
In September 1999, Dr. Pete McGough, medical director for Providence Health Center in Redmond, and George Schneider M.D., part-time professor at Washington State University, wrote in the Seattle Post-Intelligencer, “Washington’s health care financing mess will not blow over in a day, and the worst is yet to come. The financial burdens on doctors and hospitals, as they struggle to maintain full services with dwindling resources, pose a real threat to all Washington residents at all social and economic levels.”
“By now,” McGough and Schneider continued, “every major health insurance carrier has dropped out of the individual insurance market.”
Group Health and Regence Blue Shield left, leaving individuals and families in 32 of the state’s 39 counties without private individual health insurance options. To make matters worse, officials for Basic Health Plan (BHP), the state-run “safety net,” announced the plan would not accept new patients after January 2000. At the same time, State Senator Pat Thibaudeau (D-Seattle) announced roughly 11 percent of the state’s population was uninsured–about 600,000 residents, as many as were uninsured when the WHSA reform was adopted in 1993.
In 1993, roughly 880,000 individuals and families in Washington State were insured in the individual health insurance market. By 1998, the number had dropped to 513,000. (The figure has since climbed to 653,000 in 2001 as legislators adopted new reforms.)
Between 1993 and 2001, the number of Washington State residents insured by taxpayer-funded Medicaid increased by nearly 70 percent, from 405,000 in 1993 to 685,000 in 2001.
Before the WHSA, 30 insurers sold individual health insurance in Washington. Today there are seven: Premara Blue Cross, Regence Blue Shield, and Group Health Plan of Puget Sound (the three dominant providers), plus Regence Blue Shield of Idaho, Regence BCBS of Oregon, KPS Health Plan, and Premara Lifewise Health Plan.
In late 1999, Insurance Commissioner Senn reopened the state’s high-risk health insurance pool to anyone seeking individual health insurance in counties with no private options. But few could afford to participate; as is true of most state-run high-risk pools, premiums for those enrolled in the pool were capped at 125 percent of average premiums if they chose the managed care option, and 150 percent of average if they chose the fee-for-service option.
In November 1999, a low-cost managed care plan was added to the risk pool for all counties where private insurance companies had been regulated out of business. Because most residents had access to that new low-cost option (32 of 39 counties had no private individual health insurance options), and because the guaranteed issue mandate meant they could not be denied entrance to the pool, healthy consumers were encourage to “game” the system by signing up for insurance only when they needed hospitalization, prescription drugs, or maternity care, exiting the pool when the medical event passed.
This created problems for the high-risk pool no different from those that had developed in the private health insurance market. For example, the April 5, 1996 issue of the Wall Street Journal reported,
“A [Washington State] woman wrote to her insurance company congratulating them for their excellent maternity care while having her first baby. She had been uninsured, but signed up after she got pregnant. Now that her baby was born, she was canceling her policy, but assured the insurance company she would come back if she ever got pregnant again.”
Road to Recovery
In 2000, Governor Locke, determined to restore a competitive individual health insurance market, signed SB 6199, a bill that put Washington on the road to recovery. Under the new law:
- Insurers were allowed to return to risk-based underwriting. Persons who applied for individual health insurance but could not pass a health screening were allowed to apply for insurance in the high-risk pool.
- Premiums were still subject to modified community rating, but the Insurance Commissioner no longer has rating authority. Instead, the insurer must meet a 72 percent loss ratio standard. Under the new arrangement, an insurance company can get approval for a rate increase if it can document it is losing money on claims experience.
- The guaranteed issue mandate was adjusted to allow insurers to exclude coverage for preexisting conditions for up to nine months.
- An employee who loses his or her job through no fault of his or her own is entitled to guaranteed-issue health insurance after all other sources (such as COBRA) are exhausted. Once those options are exhausted (or if the person had no such options to begin with), he or she has 63 days to sign up for an insurance policy, and that policy cannot be denied. This portability provision made Washington state law consistent with federal law.
Into the Future
The reform steps taken by Washington state policymakers in 2000 and 2004 have been in the right direction. Today, all counties report at least two insurers offering individual health insurance polices.
But, as the state’s business groups and policy analysts have made clear, the state has a long way to go before it has undone the damage caused by the 1993 reform experiment.
Next (in August; July is a scheduled “skip month” for Health Care News): Massachusetts.
Conrad F. Meier is managing editor of Health Care News. His email address is [email protected].