Kentucky’s Lesson for Connecticut on State-Run Healthcare
As legislators race to pass a public health insurance option, without evaluating the ramifications or conducting analytical studies, let’s consider the events that unfolded from a similar program rolled out in Kentucky in the 1990s.
Kentucky’s 1994 Health Care Reform Act has become a lesson for states across the country.
The act expanded the Kentucky Kare program, a self-insured plan for the state’s municipal teachers, opening the market for individuals and qualifying small businesses to purchase the same insurance.
Much like Connecticut, the impetus behind Kentucky’s healthcare reform was addressing the availability and affordability of insurance by creating a so-called managed competition model.
While Kentucky anticipated that increased government intervention would limit the competitive playing field and drive down costs, the state ended up with many unintended consequences.
Like other public option plans, Kentucky subsidized its program with a new provider tax.
Physicians, hospitals, and other healthcare providers were charged a 2.5% tax on gross revenue. This resulted in providers leaving the state and costs being passed on to individuals and businesses in the form of higher healthcare premiums.
Providers are not the only ones who left Kentucky.
The new community rating and strict plan requirements increased average premiums between 36% to 165%, driving 40 insurance companies out of the state and leaving Blue Cross Blue Shield as the only remaining private carrier.
Kentucky Kare ultimately went insolvent in 1999.
‘Erosion of Choice’
Under Kentucky’s legislation, the carriers were only permitted to offer a limited variety of five plans with stringent parameters, which led to a serious erosion of consumer choice and employers dropping insurance.
Many of these unintended consequences stemmed from the unprecedented power of the Kentucky Health Policy Board, which is similar to the authority the Connecticut comptroller’s office is seeking in the bills now before the state legislature.
When the cost of Kentucky’s program became unsustainable, the legislature decided it had three options: increase premiums, impose a broad-base tax, or make participation in the plan mandatory.
Ultimately, Kentucky repealed the 1994 law, spending more than $60 million to restore the state’s healthcare system to where it was before enactment.
Other states have taken away lessons from Kentucky’s experience:
- Increased regulations lead to increased health insurance rates. Complying with the new government mandates became expensive for health insurance companies. Competition between carriers no longer affected prices, as all insurance carriers were bound by the same regulations with little flexibility.
- Higher rates drive out insurance companies. Under Kentucky’s plan, insurance companies were permitted to offer plans within the state established guidelines or not participate in the market at all. When the regulations became too burdensome, 40 carriers left the state.
- State-based health reform cannot be implemented in a geographic vacuum. The U.S. operates as a single-market economy. Private insurance companies are permitted to choose which markets they participate in, with the expectation of rendering a reasonable profit. There is no incentive for any privately operated business to remain in a state that stifles its earnings.
Kentucky’s experience demonstrates that political motives for micromanaging a state-run healthcare system are fiscally irresponsible, do not achieve the underlying objectives, and undermine the public trust.
Let’s use Kentucky’s “managed competition” system as a model to learn from, not to follow.
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