Interim Joint Committee on State Government


Minutes of the<MeetNo1> 4th Meeting

of the 2010 Interim


<MeetMDY1> October 27, 2010


Call to Order and Roll Call

The<MeetNo2> fourth meeting of the Interim Joint Committee on State Government was held on<Day> Wednesday,<MeetMDY2> October 27, 2010, at<MeetTime> 1:00 PM, in<Room> Room 154 of the Capitol Annex. Representative Mike Cherry, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Ernie Harris, Alice Forgy Kerr, John Schickel, Elizabeth Tori, Johnny Ray Turner, and Robin Webb; Representatives Eddie Ballard, Dwight Butler, John "Bam" Carney, Larry Clark, James Comer Jr., Tim Couch, Danny Ford, Derrick Graham, Mike Harmon, Charlie Hoffman, Jimmie Lee, Brad Montell, Sannie Overly, Darryl Owens, Tom Riner, Carl Rollins II, Steven Rudy, Sal Santoro, Kent Stevens, John Tilley, Jim Wayne, and Brent Yonts.


Guests: Fred Nelson and Joe Cowles, Personnel Cabinet; Marcheta Sparrow, Tiffany Yeast, and Gerry van der Meer – Tourism, Arts and Heritage Cabinet; Sharon Clark, D. J. Wasson, and William Nold – Department of Insurance (DOI).


LRC Staff: Judy Fritz, Kevin Devlin, Brad Gross, Alisha Miller, Karen Powell, Bill VanArsdall, Greg Woosley, Sean Donaldson, and Peggy Sciantarelli.


Correspondence and Announcements

Representative Cherry noted that the meeting materials included a copy of an October 5 letter to Randy Overstreet, Chairman of the Board of Trustees of Kentucky Retirement Systems (KRS), from State Auditor Crit Luallen regarding her office’s plans to perform a review to evaluate the oversight and operation of KRS. Representative Cherry said that Auditor Luallen will be available at a future date to discuss the audit findings with the Committee.


Senator Thayer expressed appreciation to Representative Cherry for agreeing to meet jointly with the Local Government Committee in September at the Toyota Motor Manufacturing facility. He also thanked the members who were able to attend the joint meeting.


Approval of Minutes

The minutes of the September 22 meeting were approved without objection.


Kentucky Employees’ Health Plan

Guest speakers from the Personnel Cabinet’s Department of Employee Insurance were Fred Nelson, Commissioner, and Joe Cowles, General Counsel. They gave an overview of rates and benefits for the Kentucky Employees’ Health Plan (KEHP) for the 2011 plan year.


Mr. Cowles spoke about challenges, principles, and goals for the 2011 plan year. He said that the Commonwealth budget did not provide for an increase in the employer contribution for 2011 and that health plan inflation continues to be high. He said that there is a continued need to improve member tools and education and to increase participation in wellness and disease management programs. Federal health care reform mandates applicable to the 2011 plan have presented a challenge. These include the expansion of dependent eligibility, which has added about $25 million in additional cost to KEHP. However, because it has grandfathered status, KEHP can exclude dependents who have employer-sponsored health care on their own. Though pre-existing condition clauses were eliminated in the federal law for children under the age of 19, this did not have a significant financial impact on the plan. KEHP had to comply with specified limits on changes in plan design and employee contributions in order to maintain grandfathered status. In addition, a state mandate (HB 159, enacted in 2010) to increase the annual benefit for treatment of autism for children through age 21 will cost the plan about $15 million in 2011.


The Kentucky Group Health Insurance Board has approved the following guiding principles for KEHP: to provide uniform coverage across the Commonwealth, plan alternatives that are accessible for retirees, preventive care at little or no cost, a quality PPO option, and plans with unlimited lifetime maximums; encourage wellness and healthy lifestyles; improve chronic disease care; educate members about plans appropriate for their health needs; and strive to hold down costs for families and dependents. KEHP’s subsidy for single coverage ranks in the top 10 percent nationally, while the subsidy for family coverage ranks closer to the middle.


Goals for the 2011 plan year are:  maintain a low cost plan option, including a zero dollar plan for singles; offer the same four plans offered in 2010; maintain unlimited lifetime maximums; keep premiums and benefits unchanged in the Commonwealth Standard Plan—the lower cost PPO option; offer options for health and wellness and for consumer-driven health care; keep premiums competitive with other states; require use of the Benefits Analyzer; provide preventative care at little or no cost; maintain benefits comparable to the 2010 plan; and maintain medical benefits and contribution increases within grandfathered limits. In conclusion, Mr. Cowles said that KEHP covers approximately 285,000 Kentuckians and has the continuing unwritten goal to create the best plan possible with the dollars that are budgeted.


Mr. Nelson reviewed premium rates and benefits for the 2011 plans, as outlined in the KEHP Benefits Selection Guide. Focusing on the non-smoker rates, Mr. Nelson said that both the employee and employer contributions for the Standard PPO plan will not change, and single coverage will still be offered for a zero dollar employee contribution. Because of the inflationary trend, the employee contribution for each of the dependent coverages (Parent Plus, Couple, and Family) in the Maximum Choice, Capitol Choice, and Optimum PPO plans will increase by nine percent. The strategy in formulating rates was to keep dependent coverage premiums as low as possible because they are becoming so expensive that many people cannot afford them. Premium increases for single and family-cross-reference coverage were greater than nine percent and range from $17.00 to $25.00 per paycheck. Since those coverages have been heavily subsidized in the past, it was felt that the higher premiums would be affordable. Feedback thus far from employees who choose single and family-cross-reference coverage is that most are grateful for the past subsidy and feel that they can handle the increase.


Regarding “Smoker” rates, in the past the premium surcharge was $24.00 per month for single coverage and $48.00 per month for dependent coverages. In 2011, the single premium surcharge will increase by $2.00 and the dependent coverage surcharge by $4.50.


Financial challenges created by budget constraints and the additional costs incurred for the autism benefit and raising the dependent age to 26 made it necessary to adjust benefits somewhat. Benefits were not decreased in the Standard PPO plan, and out-of-network benefits were improved by lowering the maximum out of pocket. In order to maintain grandfathered status, increases in copays, deductibles and annual out-of-pocket maximum for the Maximum Choice, Capitol Choice, and Optimum PPO plans had to be kept within the maximum limits allowed by the federal health reform law. The law did not permit an increase in coinsurance percentages, and they will remain the same for 2011. Deductibles and annual out-of-pocket maximums have increased by about 15 percent. The increased copays for 2011 are competitive with private sector plans. Copays for prescription drugs were increased to the grandfathered limits.


The Optimum PPO plan has the highest percentage of members. Although the single premium has increased, it is still considerably less than traditional PPO options offered to public employees in Tennessee and Indiana. Despite the rate and benefit changes, according to PricewaterhouseCoopers, KEHP’s actuarial consultant, the plans are in line with, or better than, those offered by most private businesses.


Open enrollment has been extended to October 29 and, to date, 92 percent of members have enrolled. To conform with federal law, there is also is a special enrollment period for planholders wanting to enroll dependent children. Fifteen benefit fairs were conducted throughout the state, and online enrollment was available at 11 locations. Seven locations also included health screenings and flu shots.


Mr. Nelson concluded by explaining the Benefits Analyzer. He noted that in 2010, only about 14 percent of those enrolling used the Benefits Analyzer. For 2011, the Benefits Analyzer is integrated into web enrollment, and it appears that its use has at least doubled.


Responding to a question from Representative Cherry about the possibility of increased funding for the 2012 plan, Mr. Nelson said that under the federal health insurance reform law there is a program—the Early Retiree Reinsurance Program (ERRP)—which has a $5 billion fund administered by the U. S. Department of Health and Human Services (HHS) to reimburse programs that have early retirees. KEHP has approximately 50,000 early retirees and is one of 2,000 programs nationwide that will be competing for this pool of money. KEHP applied early, and the application has been approved by HHS. Claims can be submitted within the next month or two for early retirees who have at least $15,000.00 in claims during the 12-month period beginning January 1, 2010. The program will reimburse claims as high as $90,000.00 per early retiree. KEHP will be requesting reimbursement for probably $8 million per month. However, it is possible that the pool of funds may be depleted in one or two months.


Responding to a concern raised by Representative Carney regarding availability of network providers, Mr. Nelson said KEHP encourages Humana to include as many providers as possible in its network. Less than three percent of total claims are out of network. He acknowledged that finding a network provider is an issue of concern in some parts of the state, particularly along the borders. Mr. Cowles said that they will be glad to advise Humana of Representative Carney’s concern.


When Representative Clark asked about the additional cost to the plan for treatment of autism, Mr. Nelson said that the $15 million reflects pure cost, based on figures cited by proponents of the autism legislation. Representative Clark also said he had the impression that some money had been earmarked in the budget to cover that cost.


Responding to a question from Representative Butler about University of Louisville physicians being excluded from Humana’s provider network, Mr. Nelson said that the University Physicians Associates (UPA) physicians are still outside the network but that negotiations are continuing. KEHP members who are already patients of those physicians will be allowed to continue that care for two or three months if needed. Waivers have also been granted to treat UPA physicians as “in network” if they are the only specialists of their kind in the Louisville area. There were no further questions, and Representative Cherry thanked the speakers.


Privatization of State Parks

Guest speakers from the Tourism, Arts and Heritage Cabinet were Secretary Marcheta Sparrow; Department of Parks Commissioner Gerry van der Meer; and Tiffany Yeast, Executive Director of Personnel. They were present to answer questions regarding the Department of Parks’ proposed use of concessionaires for some state park operations, and to follow up on previous discussion of this issue at the Committee’s July 2010 meeting.


Representative Clark expressed concern about privatization causing a loss of jobs, especially in remote areas of the state. He said he does not believe it will save much money in the long term, that the Commonwealth would probably be better served by strengthening park management, and that he hopes the agency will reconsider and decide not to privatize. Secretary Sparrow said she appreciates the comments and understands the concern, since concessioning would be a major change in the way the parks operate. She said that the agency is continuing to look at concessioning of various park operations, in accord with recommendations in the Kentucky State Parks Strategic Plan, but that no decision has been made at this time.


Representative Wayne said he shares Representative Clark’s concerns. When he asked whether the agency would be open to considering a management audit, Secretary Sparrow said they are always open to looking at ways to operate more efficiently and better serve the people of Commonwealth.


Responding to a question from Representative Owens, Secretary Sparrow said that the State Government Committee and legislators that have parks in their districts will be informed when the decision has been made whether to proceed with privatization. Information about anticipated cost savings will also be available.


Senator Webb requested that, prior to making the decision, the Cabinet provide information about the statewide contract with Adecco for temporary services and who would benefit from it; the immediate and projected cost savings and the cost/benefit analysis system that is being used; and criteria to justify the move. She said she knows the Cabinet would not make such a change lightly but that if it is not done in a cost efficient and humanitarian manner, she will do everything in her power to stop it.


Secretary Sparrow said the Department of Parks staff statewide is tremendously dedicated, and she apologized for any anguish that employees might be feeling. She said merit system employees in the state parks system should not be concerned about their jobs if they are performing according to standard. Whether to privatize certain park operations is still in the investigative stage. Kentucky has the largest state government-run parks system in the United States. It is also the most successful state parks system, with only 35 percent of revenue provided through the General Fund. The agency consistently falls $5 million below the projected budget, but it is felt that the gap can be closed this year. In closing, she said the Cabinet does not take its responsibility lightly and will base its decision on what is good for everyone involved.


Senator Kerr complimented the Cabinet on its work relating to the World Equestrian Games. Secretary Sparrow thanked her and also expressed appreciation for the work of her own staff, the General Assembly, and everyone involved in support of the event. There were no further questions, and Representative Cherry thanked the speakers.


Health Insurance Reform

The following representatives of the Kentucky Department of Insurance testified: Commissioner Sharon Clark; William Nold, Director, Health and Life Division; and D. J. Wasson, Legislative Liaison. Ms. Clark and Mr. Nold gave the following overview of federal health insurance reform and its implementation in Kentucky, as outlined in their slide presentation.


The new health insurance reform legislation has greatly increased DOI’s responsibility and workload. To avoid putting the Commonwealth in financial jeopardy, Kentucky opted for the federal government to operate the temporary high risk pool—the “pre-existing condition insurance plan”—in lieu of state operation. A major reason for this decision was that, during its first three years of operation, claims costs for the Kentucky Access insurance program were approximately $65 million, while only $63 million had been allocated for that period.


Grandfathered plans are defined as those existing on March 23, 2010, when the health insurance reform legislation was signed into law. Grandfathered plans can raise premiums to reasonably keep pace with health care costs; make some changes in benefits; increase deductibles and other out-of-pocket costs within limits; and continue to enroll new employees and new family members. The insurer—or employer if self-funded—is required to provide notice in any plan materials indicating whether the plan is a grandfathered plan. Because any new plans issued after September 23, 2010, have to be regulated differently than grandfathered plans, DOI is charged with two methods of regulation until January 1, 2014.


Many of the immediate market reforms for consumer protection are currently addressed in Kentucky’s insurance code. The code will have to be revised to address some reforms, such as extension of dependent coverage until age 26 and coverage in new plans for preventive health services without cost-sharing. The rate review process requires Health and Human Services, in conjunction with the states, to develop a process for annual review of unreasonable premium increases for health insurance coverage. DOI thus far has not been able to obtain some of the information it needs from HHS, such as a definition of “unreasonable premium increases.” One goal of the rate review process is to increase transparency.


The health reform bill specifies that in the large group market 85 cents of every dollar must be spent for medical costs, with only 15 cents going toward administrative costs. In the small group and individual market the ratio is 80/20. Congress charged the National Association of Insurance Commissioners (NAIC) with responsibility for defining “medical loss ratio.” NAIC finalized the process at its national meeting and on October 21 transmitted its recommendations to HHS for review. This will serve as the defining standard whether an insurance company is meeting provisions of the health reform bill and whether they will have to rebate premium dollars on the basis of the calculation. Calculation of medical/loss ratio has been an arduous task, with a lot of lobbying, mainly from consumer groups. To comply with the requirement for uniform explanation of coverage documents and standardized definitions, NAIC is developing a glossary of health insurance, medical terms, and standard definitions.


Kentucky was awarded a premium review grant of $1 million on August 16. The funds will be used for the gathering of new data, for DOI’s additional responsibilities relating to rate filing, to develop a publication to explain the rate review process in plain language, and to conduct surveys and hold open meetings for consumers. Kentucky was also awarded a $215,784.00 Consumer Assistance Program Grant on October 19 and has also become eligible for an additional $270,280.00 supplemental grant.


Kentucky was awarded a $1 million Exchange Planning Grant on September 30. The exchange, which is an organized marketplace for the purchase of health insurance, must be operational by January 1, 2014. At that time Kentucky’s high risk pool will end because there will be guaranteed issue for any person, regardless of preexisting conditions. Kentucky has approximately 600,000 uninsured, and DOI must find out who these people are. Exchange planning will be a collaborative effort between DOI and the Cabinet for Health and Family Services. It will involve county-level market research, stakeholder input, and discussions with other states. DOI will be conducting town tours around the end of November to meet with consumer groups, employers, health care providers, and any interested parties. It was the consensus of every group that met with DOI that Kentucky should opt for a state-operated, rather than federally-operated, exchange. This would give Kentucky the flexibility to do what is best for its population.


Ms. Clark said there have been preliminary conversations with Tennessee and West Virginia regarding creation of a multi-state regional exchange. She is not in favor of this because she feels that the board making decisions for Kentucky should be comprised solely of Kentuckians. A state-operated exchange, however, could probably be structured to allow state-to-state transfer of plan offerings. DOI will be making recommendations in the 2011 regular session for legislative changes needed to conform Kentucky’s insurance laws to the federal provisions. Representative Lee said that he, too, does not favor a multi-state exchange, and he emphasized that legislation to create infrastructure for the exchange needs to be ready for the 2011 session. Ms. Clark agreed that it should not be delayed until 2012. She said DOI has been asked to draft language for introduction in 2011 and that Kentucky has to be able to demonstrate by January 1, 2013, that the state is capable of operating the exchange.


Responding to questions from Representative Lee, Ms. Clark and Mr. Nold explained that the federal legislation permits states to enter into compacts. It also requires that the federal Office of Personnel Management, which oversees health insurance at the federal level, to offer two plans that would be available across state lines. DOI is consulting with other states, and the goal is to have as much flexibility as possible. HHS is aware of the states’ need for regulations, but it is the federal government’s policy not to release regulations until they are finalized. HHS’s priority list appears to be in line with what Kentucky needs to know in order to implement the reforms. Ms. Clark said she feels very comfortable with the process so far and that Kentucky will be ready.


Senator Thayer said that the only thing that will eliminate his frustration is total repeal of the health insurance reform legislation.


Representative Carney said that some small businesses in his district have indicated they will stop offering health insurance in 2014 and opt instead to pay the penalty, which he assumes will be paid directly to the federal government. Mr. Nold confirmed that the penalty fee will go to the federal government, to be administered through the federal tax code. He added that the complaints of small business are being heard in Washington and that there is talk of “tweaking” the bill to address their needs.


Subcommittee Report

Senator Thayer, Co-Chair of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs, read the subcommittee report of the Task Force’s September 28 and October 26 meetings. His motion to adopt the report passed by unanimous voice vote.


Business concluded, and the meeting was adjourned at 2:50 p.m.