Magazine | May 3, 2010, Issue

Kentucky Syndrome

Repeal veteran Trey Grayson (Ed Reinke/AP)
Obamacare will infect the country with it, but case studies reveal a cure

In the mid-1990s, Kentucky was one of eight state governments that voluntarily adopted aspects of Hillary Clinton’s health-care plan even though the federal government had abandoned it. Insurance premiums in these states skyrocketed; healthy people stopped buying insurance; and insurance companies fled in droves. Even so, only Washington, New Hampshire, and Kentucky had the good sense to roll back the harmful provisions, and only Kentucky managed to pull off a full repeal. In the wake of Obamacare’s passage, it’s worth looking at what made repeal possible in Kentucky, and why it proved impossible in places such as Maine and Massachusetts, where state governments instead tried to mend their self-inflicted wounds with even more, and more harmful, regulation.

In 1994, Kentucky governor Brereton Jones, a Democrat, strong-armed a series of health-care reforms through the Democrat-controlled state legislature over the reservations of Republicans and some conservative Democrats. Like both Clintoncare and Obamacare, Kentucky’s House Bill 250 forbade insurance companies to deny people coverage because of preexisting illnesses or charge them higher rates based on their medical histories.

This idea, though popular, has catastrophic effects on health-insurance markets. Insurance, properly understood, involves paying premiums to hedge against risk. But under Kentucky’s laws, as under Obamacare, you could wait until you got sick to buy coverage and still obtain it at the same rates as everyone else. Given such an option, many healthy people make the economically rational decision to drop their coverage until such time as they need it. As healthy people stop paying into the risk pool, premiums for those who remain grow more expensive. If insurance companies are forbidden to increase premiums to keep up with costs, they leave town or close up shop. In Kentucky, average premiums increased between 36 and 165 percent over the four years following the reforms, and more than 40 insurance companies left the individual-insurance market. The two remaining providers, Anthem Blue Cross and Blue Shield and a state-run plan called Kentucky Kare, teetered on the brink of insolvency (Kentucky Kare went under in 1999).

Trey Grayson was elected Kentucky secretary of state in 2003, the year before Gov. Ernie Fletcher was able to finalize the repeal — you’ll note it took ten years to accomplish. By the late 1990s, Grayson says, “if you said House Bill 250, it was a four-letter word.”

Grayson, who is currently running for the Republican nomination to replace Jim Bunning in the U.S. Senate, says that those pushing to repeal Obamacare can take a few lessons from the Kentucky experience. “On the one hand it gives you some hope, because in Kentucky we were able to gradually repeal the elements that were driving up the number of uninsured, that were increasing premiums at a rate higher than the national average, that were driving insurance companies out of the state,” Grayson says. “But unfortunately it took ten years, caused rates to be higher, hurt our economy, and hurt our state government from a revenue standpoint. So a lot of damage was done.”

#page#In 1998, the Kentucky legislature, still controlled by Democrats, started repairing the damage by passing a reform package that modified the insurance requirements but didn’t repeal them. In 1999, party switches gave Republicans control of the state senate, and the legislature proceeded to repeal most of the harmful provisions. Finally, in 2003, Kentucky elected Fletcher, the commonwealth’s first Republican governor since 1967, and one of his first acts was to sign a moratorium on new insurance mandates. These reforms slowed the rise of premiums and started bringing insurance companies back to the state.

“What was interesting,” Grayson notes, “is that the repeals were done in a bipartisan manner. Democrats, many of whom voted for House Bill 250, saw the negative impact.” Rising premiums and fleeing insurance companies gave opponents of the bill a compelling story to tell. “When we had evidence, we used it,” Grayson says. “That was what convinced Kentucky voters.”

It helped that Kentucky voters were open to conservative arguments. Like many southern states, Kentucky was controlled by the Democratic party for many decades following Reconstruction, shifting toward the GOP only in the later decades of the 20th century. The commonwealth’s voters happened to be rejecting overweening liberalism and electing Republicans at precisely the right time. Democrats interested in preserving their jobs could not argue, as Democrats in other states did, that the solution to the commonwealth’s health-care woes lay in the application of more liberalism.

Take Massachusetts, a much more liberal state that experienced some of the same problems Kentucky did after enacting similar regulations in 1996. One of the points that supporters of these regulations have made is that they would work if healthy people were required to buy insurance (and offered subsidies if they couldn’t afford it). This would keep them from dropping out of the risk pool as premiums rose. But that is precisely the “fix” that Massachusetts imposed on its citizens in 2006, and it hasn’t worked. In early April, the Boston Globe reported that short-term customers are gaming the system and driving health-care costs through the roof. It turns out that the penalty for failing to comply with the state’s mandate is quite small compared with the high cost of health insurance in Massachusetts. Many people are choosing to pay the penalty, signing up for health insurance only when they need an expensive procedure.

Obamacare also includes a requirement that healthy people have insurance, which its proponents say will prevent the premium hikes and insurance-company flight that Kentucky experienced. But, as in Massachusetts, the penalty for evading this requirement is relatively small. Its constitutionality is also suspect — 19 state attorneys general have filed a lawsuit to overturn it on the grounds that Congress does not have the authority to impose such a mandate — and it might not even be enforceable. The IRS’s ability to collect the penalty appears to be limited to confiscating tax refunds, which uninsured citizens could avoid with a few simple adjustments to their withholdings.

#page#Liberals are much more influential in Washington than in Kentucky, but fortunately not as influential as they are in Massachusetts. When the big problems with Obamacare start surfacing, they will push, not for repealing the bill, but for nationalizing even more of the health-care industry. They will call for a stronger penalty for not purchasing insurance or, if the Supreme Court invalidates that provision, they might push for a “public option” to offer a taxpayer-subsidized alternative to the private insurance companies they have broken. When the public option doesn’t work (and we know it won’t, thanks to another failed state experiment in Maine), liberals will argue that the only way to fix the broken system is to make the government the “single payer” for all medical costs.

Opponents of Obamacare must be prepared to make the opposite case, starting this election cycle. They can prepare themselves by studying Kentucky’s example. First, they should construct a narrative around all of the bill’s negative consequences. “So, for example, we’ve already had John Deere and Verizon and some other companies take charges for the next quarter,” Grayson says. “As we learn about businesses choosing to drop insurance or delay expansion plans or whatever they have to do to avoid this, I think we have to take those real-life consequences and tell the public.”

The second lesson, he says, “is that you don’t have to do a full repeal right off the bat. If you can start getting rid of some of the bad elements, try that.” Repealing the most unpopular parts of the bill — new taxes on investment, on income, on medical devices — can pave the way for repealing the spending provisions: “If those taxes have to be repealed or phased out,” Grayson says, “then you start to have a financial concern: How you are going to pay for all this stuff as the subsidies are phased in?”

Finally, conservatives must be prepared to rebut the Left’s “solutions” to the problems it created with more evidence from the states. Maine’s public option, DirigoChoice, is running out of money. Massachusetts is being sued by six non-profit (!) insurance companies because its insurance regulations are driving them into insolvency. Health-care costs more in New England than it does anywhere else in the country. Insurance companies have fled the region, leading to less competition and higher premiums.

What Kentucky shows is that it is possible to repeal such regulations when they fail, and to repair some of the damage. At least seven insurance companies have returned to the commonwealth since repeal, and the rate at which insurance premiums are rising has fallen below the national average. Another encouraging sign is that candidates such as Grayson are running on repeal. Health-care reform “is clearly on the minds of voters,” he says — it’s the second thing people want to talk to him about, after the University of Kentucky basketball team — “and most folks I talk to are not real pleased. I think voters want us to do something about it — hopefully before the damage gets done.”

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