The following is an edited presentation of testimony offered by Bluegrass Institute CEO Jim Waters to the Kentucky Senate Health and Welfare Committee on April 11, 2016, in Frankfort.

Good morning ladies and gentlemen. I’m Jim Waters, president of the Bluegrass Institute for Public Policy Solutions at bipps.org. The Bluegrass Institute is a free-market think tank focused on offering common sense, economically sound solutions to Kentucky’s greatest challenges.

Certainly one of the great challenges faced by too many of our fellow Kentuckians is finding affordable health insurance that provides an acceptable quality of care. Yet while the intention of government programs – and of most policymakers who vote for them – is to help the less fortunate, they often end up not only falling far short of fulfilling those intentions, but actually harming the very constituency they are meant to assist.

Kynect

When former Gov. Steve Beshear established the state-based exchange Kynect by executive order in 2013, his administration projected the online insurance marketplace would provide 332,000 uninsured Kentuckians with access to affordable coverage. Yet fewer than a third of that anticipated number actually ever obtained coverage through the state-based exchange.

Seventy-five percent of those who signed up for plans on the exchange are being forced to find a new insurer as the Kentucky Health Cooperative, the exchange’s largest insurer, is closing down after losing $50 million last year – the most of any of the 22 Obamacare-subsidized cooperatives nationwide.

Even if the co-op would have remained open, its request to raise premiums by 25 percent during this past year – had they remained opened – combined with the previous year’s 20 percent in rate hikes would no doubt have exacerbated the situation reported by a recent study by Families USA study showing that high-deductible plans purchased though the state exchanges have resulted in one in four of those customers skipping doctor’s appointments and important medical tests.

Some supporters in their zeal have made an apples-to-bananas comparison concerning fee increases for policies purchases through the federal exchange. But let’s be accurate here – there will be a 3 percent fee on policies purchased by those signing up for plans through the federal exchange, whereas the 1 percent fee that had been funding the exchange was being paid on all insurance policies purchased in the commonwealth.

The intentions of the state-based exchange were commendable; unfortunately, the results reveal that many of those purchasing plans through the exchange cannot afford to both pay their premiums and out-of-pocket deductibles while still actually going to the doctor and obtaining both important tests and treatment.

A primary reason the Kentucky Health Co-op announced it was closing its doors – even before the Bevin administration took office – was because of the federal government’s failure to help the initial spike in claims. Federal officials had convinced the commonwealth that Washington not only had anticipated the problem but was prepared to increase funding to the exchange to cover the increased costs.

Many who purchased plans through the exchange had previously been uninsured or underinsured and therefore had put off getting treated for their health conditions. When they finally obtained coverage, there was an initial run on the system with not only a high number of claims but with higher price tags.

The Kentucky Health Co-op received only $10 million of the expected $77 million this year that was expected from the federal government to help cover these losses. Not even the co-op’s steep premium increases during the past two years could plug such a gap.

Those who support maintaining the exchange claim it gives Kentucky more control over the exchange versus turning it over to the federal government. Yet there isn’t much to control. The major aspects are policies and premiums. The federal government mandates what policies must cover and gives insurers on state exchanges very little flexibility. And then companies establish premiums based on the coverage they must provide and the rules they must follow.

Back when the questionably named Affordable Care Act was being debated, University of Kentucky economist and Bluegrass Institute Board of Scholars chairman John Garen, Ph.D., warned in a Bluegrass Institute policy brief:

States really do not have much flexibility in setting up their exchanges. In nearly all aspects, the state is merely carrying out the dictates of the federal government. Once past the initial stages of federal support, the state is responsible for the expenses of operating the exchange. It also will be responsible for enforcing the perverse and counterproductive incentives embedded in the rules for exchanges. The state will take the blame for difficulties high-risk consumers will have in getting coverage, for people dropped from employer coverage onto the exchange and for the healthy who are forced to buy overpriced insurance. Better to leave the federal government with the expense and headaches of its own creation.

It’s Washington, not Frankfort, for example, requiring single men and couples in their sixties to pay for maternity coverage. Such nonsense is a primary reason why participation in Kynect was so much lower than anticipated. How do such mandates incentivize younger, healthier Kentuckians who would help keep costs down to sign up? In fact, one of the primary reasons that this gap exists is because many of those who had been anticipated to sign up for plans through the exchange and did not are the very demographic that are needed to keep costs down.

The Bluegrass Institute warned in a policy brief published in 2012 of other issues that would drive up costs of a government-run exchange.

Garen, Ph.D., also warned in that policy brief in 2012 about serious cost and coverage issues by guaranteeing coverage for all customers on exchanges regardless of pre-existing health conditions:

Some might regard these requirements as important benefits of the PPACA-regulated exchanges. However, there are some unfortunate consequences of this regulation:

• Mandating the same price for everyone regardless of health status (aside from the above noted exceptions) means that the less healthy will obtain insurance for lower premiums. But this also means that those in good health will overpay for their insurance, so this group clearly does not benefit. In effect, these rules are equivalent to levying a tax on health insurance for healthy people to fund a health insurance subsidy for those in poor health. While we might agree that it is appropriate to help the truly needy who are in poor health, why put the burden of doing so just on the health insurance premiums of others?

• Such mandated pricing puts insurance companies at odds with their customers. For healthy customers, insurance is overpriced. Individuals in this group will seek less insurance since while insurers would like more of these customers. For the unhealthy, insurance is underpriced, so these individuals seek insurance and more coverage – because it is underpriced – while insurers desire fewer of these customers and would prefer to limit their coverage. Why set up a system where insurance companies do better by avoiding the very customers that the reform allegedly wants to help?

• The essentially uniform pricing of insurance regardless of risk works against providing incentives to adopt healthy behaviors. Many of the biggest health issues today – such as obesity, diabetes and heart disease – are related to diet and exercise behavior. Disallowing individual rating of health insurance premiums leaves no scope for lower premiums as an incentive for healthy behavior. Bad health habits are, in effect, rewarded.

There are much better ways to assist those truly in need of health care assistance rather than follow the path of PPACA into exchanges fraught with perverse incentives.

House Bill 5 is the wrong thing to do. Shutting down the exchange and transferring its participants to the federal government is the right thing to do – even if it’s in better-late-than-never mode. The intention may have been to help the uninsured obtain affordable health insurance. The results have been something far different.

Expanding Medicaid

House Bill 6 states “it is the policy of the Commonwealth to take advantage of all federal funds that may be available.”

Is this what our goal is – simply to see how good we can get at standing by the roadside begging – with our hands out to Washington? This approach is especially unfair and immoral if doing so fails to help those for whom the program was created in the first place while inciting participation by those who – given the opportunity – could purchase their own insurance.

For example, Kentucky Medicaid now includes 400,000 enrollees with household incomes between 69 percent and 138 percent of the federal poverty level – many of whom could purchase private insurance if they weren’t being encouraged to move to the government dole. According to the Cabinet for Health and Family Services, an additional 432,000 Kentuckians have signed up for Medicaid – far more than the 308,000 predicted by the former administration. The Cabinet also reports that Kentucky will spend $10.4 billion in combined federal, state and restricted funds on this entitlement program this year. Unfortunately, such spending does not guarantee that recipients will receive the care they anticipate.

Deamonte Driver was a black seventh-grader being raised by his poor single mother in Prince George’s County, Maryland. But Deamonte, who tragically died at the age of 12 years old, wasn’t the victim of gang violence or drugs. Instead, he died of a toothache.

After he began having toothaches, it took several months and more phone calls before even finding and getting an appointment with a dentist; many dentists in the area where Deamonte lived had quit accepting Medicaid patients. This was followed by another search of several more months before an appointment could be obtained with an oral surgeon willing to extract Deamonte’s six abscessed teeth. Less than a week before that appointment, Deamonte began to complain of a headache, which was followed by emergency brain surgery. Within a few weeks, he was dead.

“Deamonte did not die because he was uninsured,” Roy writes. “He died because he was insured: or, more precisely, because he was insured, in bad faith, by the government.”

Even before passage of the federal health-care reform, many of Kentucky’s doctors and dentists had quit accepting Medicaid patients because of low reimbursement rates and longer and longer wait times on receiving payment from the government. Just like it was unfair and immoral for a 12-year-old boy to die of a toothache, isn’t is just as unfair and immoral for us to give 432,000 more Kentuckians a card saying they have care only to call the number and no one answers?

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