KY insurance chief says reforms have failed; urges changes before market collapses
KY Reforms Fail
Kentucky’s insurance market "is unstable and will not be able to sustain itself over the long term," warns Insurance Commissioner George Nichols in an exhaustive analysis of the impact of the state’s insurance reforms on the market.
The detailed report, released last month, concludes that Kentucky’s insurance reform law is a failure and that the law needs to be changed as soon as possible. A special session of the legislature is expected to be called—perhaps as soon as late May—to alter or scrap the three-year-old reforms.
Kentucky is one of only eight states with laws requiring both guaranteed issue and modified community rating in the individual market and, according to the commissioner, "few of the laws are as comprehensive." The reforms include requirements for standard plans and the establishment of a purchasing alliance that, in theory, could leverage the purchasing clout of state employees to get better rates for small groups and individuals.
The commissioner’s report confirmed what many have been saying for months—that an exemption approved by the legislature last year, allowing associations to offer experience-rated policies has drained the modified community-rated market of most low-risk individuals.
But, he cautioned against blaming the current state of affairs—rising premiums and limited choice for consumers and financial losses for carriers—on only one or two provisions of the law. He notes that the interplay of all the reforms and provisions is to blame.
About 40% of the total insured market (including public sector groups) is impacted by the reforms, the report notes.
The report also provides important vindication for insurance carriers, including Anthem Blue Cross Blue Shield. It supports insurers’ claims that many of the problems in the market are the result of poor planning and timing by state officials rather than poor management by carriers or a deliberate effort by carriers to undermine reform, as some critics charged.
Commissioner Nichols did not specify how the existing law should be changed. However, he warned that unless action is taken soon, the trend toward associations luring low-risk people out of the market with experience-rated policies will "escalate quickly in a downward spiral for insurers outside the association market" that community-rate their policies. Eight to 10 carriers are selling experience-rated products to individuals through associations;
Only two carriers currently write policies in the individual market—Anthem Blue Cross/Blue Shield and Kentucky Kare, a state self-funded plan for state employees, that entered the private market to offer an alternative to Anthem. About 45 carriers have left the market.
Financial losses for carriers
Anthem Blue Cross/Blue Shield, which sells both experience-rated association business and modified community-rated individual policies, reported a $60 million underwriting loss in 1996 and was forced to seek a $44 million cash infusion from its corporate parent, Anthem Inc., in March of this year.
Kentucky Kare reported total losses of more than $30 million over the past 20 months and continues to lose about $2 million a month despite receiving a 28% rate increase recently. "This self-insurance fund is draining its reserves at such a rapid rate, that it is clear that this action is not a sustainable one," the commissioner said.
Both the commissioner and other experts say the current crisis is compounded by the expiration July 15 of thousands of "old style" non-standard policies designed before the reforms took effect. The new entries into the market represent one-third of the total individual market, according to Sandi Hunt of the Coopers & Lybrand accounting firm, which has been consulting with the commissioner.
The commissioner’s report also cites these key findings:
• the standard health benefit plans all contain comprehensive, rich benefits which contribute to high cost of the plans;
• twelve-month limits on rate increases prevent timely adjustments to stem the influx of persons into plans with inadequate rates;
• mandatory rate hearings effectively place a cap on rate increases or delay indefinitely the effective date of the increases; and
• the any willing provider statute reduces leverage to get significant provider discounts to reduce medical expenses.
No specific proposal for changes has been offered by the commissioner, insurance carriers, or consumer advocacy groups.
Tom Templin, a member of the consumer task force advising the commissioner, and Sheila Shuster of Kentuckians for Health Care Reform, a coalition of more than 65 non-profit associations and human services agencies, warn that it would be a mistake for Kentucky to become the first state to make a full-scale retreat from community rating.
However, Ms. Shuster says she fears that modified community rating is a lost cause in the state. The most supporters of insurance reforms can probably hope for is "limited risk rating with perhaps 25% banding" between rates charged, she says. . A spokeswoman for Anthem, which now writes about 91% of the state's individual policies—up from 85% before 45 carriers withdrew from the market—says the company has not made a specific proposal for "reforming the reforms," but top Anthem officials have suggested the state rely much more heavily on a high-risk insurance pool to ensure access to coverage for all residents.
Danger of high risk pool
That approach is staunchly opposed by Kentuckians for Health Care Reform as an inappropriate and dangerous step that could leave many state residents with inferior benefits at high cost.
A better approach, says Ms. Shuster, might be to establish a reinsurance pool, which could provide a degree of protection for carriers willing to participate in the individual market.
Bob Quirk of the Kentucky Association of HMOs, agrees that "high risk pools in general have tended not to work," and may not be needed if major changes are made in other areas such as ensuring that guaranteed issue is applied across-the-board. One of the keys, he says, is ensuring that carriers can get adequate rates. Profit margins have been dropping dramatically for many HMOs, Mr. Quirk says.
Guaranteed issue of two plans
Nancy Galvagni, vice president of the Kentucky Hospital Association, says her group believes that there should be guaranteed issue of at least two plans—a comprehensive plan and a basic plan—but perhaps not of all plans as there is now. Rather than greater reliance on a high-risk pool, the KHA would prefer to see some twist on the "pay or play" approach, such as requiring carriers to sell in the individual market or pay a portion of the costs if they want to operate in the group market.
Mr. Templin argues against the reduction in guaranteed issue, however, arguing that if all products are not offered on a guaranteed basis, carriers could tailor coverage to concentrate low-risk people in separate plans.
Meanwhile, the future direction of the non-profit Kentucky Kare plan remains unclear. The plan is now seeking bids to lease a managed care network," says Director Jerry Philpot, who notes that "it is just not viable" to continue operations as an indemnity plan only. In the long, run, Mr. Philpot says Kentucky Kare would like to get out of the individual market altogether, he says. As of March 31, the state-established plan had 6,777 individual contracts, covering 11,433 lives.
As part of the changes at the health plan, Mr. Philpot's own position is up for grabs. The newly appointed Kentucky Kare Health Insurance Authority Board plans to advertise for an executive director, he says..
Contact Commissioner Nichols at 502-564-6026; Ms. Galvagni at 502-426-6220; Mr. Quirk at 513-784-5120; Mr. Philpot at 502-564-6700; Mr. Templin at 606-277-1989; and Ms. Shuster at 502-894-0222.
KY insurance chief says reforms have failed; urges changes before market collapses
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