Golden Rule Ins. Co. v. Stephens, 94-125.

• Decision Date: 02 November 1995
• Docket Number: No. 94-125.,94-125.
• Parties: GOLDEN RULE INSURANCE COMPANY, Plaintiff, v. Don W. STEPHENS, et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

912 F. Supp. 261

GOLDEN RULE INSURANCE COMPANY, Plaintiff, v. Don W. STEPHENS, et al., Defendants.

No. 94-125.

United States District Court, E.D. Kentucky, Covington Division.

November 2, 1995.

COPYRIGHT MATERIAL OMITTED

Jeffrey C. Mando, Adams, Brooking, Stepner, Woltermann & Dusing, Covington, KY, Curtis J. Dickinson, Dickinson & Associates, Indianapolis, IN, for Plaintiff.

E.D. Klatte, Cabinet for Human Resources, Commonwealth of Kentucky, Frankfort, KY, Garrick F. Cole, Paul W. Johnson, Smith, Duggan & Johnson, Boston, MA, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BERTELSMAN, Chief Judge:

Plaintiff, the Golden Rule Insurance Company, challenges the constitutionality of provisions of House Bill 250 ("HB 250"), a comprehensive health care reform measure enacted by the Kentucky Legislature. The matter was tried to the court, sitting without a jury, on May 30 and 31, 1995 and July 28, 1995.

FINDINGS OF FACT

A. The Act

On April 15, 1994, the Kentucky General Assembly enacted HB 250. The Act creates the Kentucky Health Policy Board ("the Board"), an independent agency of state government, and states that "the goal of the board shall be to control health care costs, improve quality and efficiency, encourage competition, and develop a system of integrated health care delivery which makes necessary health services available to all residents of the Commonwealth." HB 250 § 2(1).

The Board is statutorily empowered to develop a listing of minimum health benefits which must be offered by all insurance companies doing business in Kentucky. HB 250 § 59. The Board has adopted four standard benefit plans which provide Kentucky residents with 28 or 29 different options for insurance coverage. Each of the four standard plans has an indemnity version (traditional insurance coverage) and a managed care version (health maintenance organizations), and each provides a high and low coverage option for both the indemnity and managed health care plans.

The Act provides that all health insurance policies issued or renewed on or after the Act's effective date shall be "guaranteed issued," that is, an applicant for insurance may not be denied coverage based on his or her health. In addition, an insurance company may not exclude any preexisting condition from coverage, but the insurer is not required to provide coverage for expenses incurred for treatment of the preexisting condition for the first six months of the policy's coverage. HB 250 § 54(2)(a).

The Act also provides for "portability of coverage." This means that any insured who obtains new coverage within 60 days after previous insurance has terminated may have the prior coverage credited to any preexisting condition limitation in the new plan. HB 250 § 54(2)(b). In other words, the six month exclusion for preexisting conditions is not applicable if the insured served the six month exclusion term under a previous policy.

All policies issued or renewed after July 15, 1995, must also be "guaranteed renewable." Section 54(1) of the Act requires that all policies be renewed at the insured's option unless required premiums have not been paid, the insured is guilty of fraud or misrepresentation, or the insurer ceases to do business in Kentucky.

Insurance premiums are established by the insurance companies, subject to state approval, based on a modified community rating. Under the modified community rating, the insurance company bases premiums on objective factors such as age, geography, family composition and benefit plan design.

The Act also creates a "Health Purchasing Alliance" which operates as a statewide purchaser of health care services. Participation in the alliance is mandatory for most state employees, but it is voluntary for employers with 100 or fewer employees and for individuals.

The alliance has authority to accept bids from and to enter into agreements with insurance companies to obtain group coverage for Alliance members. It is anticipated that the Purchasing Alliance will be able to secure lower premium rates through its negotiating power.

Finally, the Act provides for a "risk adjustment procedure," under which an insurance company may apply to the Board for reimbursement of losses. The fund from which an insurer is reimbursed is funded from mandatory contributions paid quarterly by the insurance companies and is administered by the Health Purchasing Alliance.

Numerous types of insurance are exempted from the provisions of HB 250. The Act does not cover insurance provided through Medicare or Medicaid, does not regulate self-insurers, and does not affect insurance coverage provided by out-of-state employers under a group plan, where the plan was purchased out-of-state and the majority of the employer's employees reside outside the Commonwealth. In addition, the Board exempted all guaranteed renewable policies issued before January 1, 1994, from the definition of health benefit plan.

B. Plaintiff's Claims

Golden Rule Insurance Company is an Illinois corporation which has been engaged in the business of providing health insurance to Kentucky residents since 1978. Golden Rule issues two types of policies to residents of Kentucky: individual major medical policies; and group major medical insurance in the form of a Master Policy issued to an Illinois association, the Federation of American Consumers and Travelers ("FACT"). The group policy is issued in Illinois; Kentucky FACT members are provided with a certificate which evidences the insurance coverage.

Golden Rule has issued approximately 1,034 individual insurance policies to Kentucky residents under which it insures approximately 1,969 Kentuckians. Golden Rule provides insurance to an additional 9,398 Kentucky citizens under the 4,972 certificates issued through the Illinois association. For the twelve month period ending in January, 1995, Golden Rule collected $10,717,414 in earned premiums under the individual and FACT policies. See Plaintiff's Ex. 9.

Golden Rule's ability to cancel coverage under both the individual policies and the Illinois Master Policy is limited. The renewal provision in the individual policies generally provides:

You may keep this policy in force for life by timely payment of the premiums. However, we may refuse renewal if: (1) we refuse to renew all policies issued on this form, with the same type and level of benefits, to residents of the state where you then live; or (2) there is fraud or a material misrepresentation.... We will not refuse renewal for reason (1) above except on an anniversary of the policy's effective date, or the next following due date if the anniversary date is not also a premium due date. We may refuse renewal for reason (2) above as of any premium due date.

* * * * * *

This policy is renewable for life, subject only to the two conditions set forth in the renewal clause and our right to change premiums.

(emphasis in original).

Golden Rule's group major medical policy issued through the Federation of American Consumers and Travelers provides that it may only be terminated as follows:

This policy is issued for an indefinite term, beginning on the effective date of the policy shown on the face page. The policy continues in force, so long as premiums are paid when due, until terminated according to the following paragraphs.

* * * * * *

We may terminate any or all of the insurance under this policy, as of any premium due date, by giving written notice to the policyholder and affected members at least 30 days prior to that date. We will not terminate your certificate, unless we terminate all certificates just like yours, issued under the policy to those then residing in your state.

(emphasis in original).

Golden Rule "underwrites" its policies. Through this process, the company is able to select low risk insureds using actuarial principles and standards, such as the establishment of rates based upon risk classifications in force at the time the policy is issued, the claims experience of a group of insureds, the deductible, the family composition, geographic location and age of the insureds. The premiums for the certificate holders of the Illinois association are based on a nationwide experience of all certificate holders. Premium increases are across the board for a given "block of business."

It is important to understand the concept of a "block of business." As described in the testimony and evidence, a "block of business" is a group of insureds insured under a given policy form. When a new policy form is introduced, a group of insureds is written under it. This group is highly "underwritten." That is, carefully screened to insure good health and low risk. After the initial underwriting, no additional insureds may join this block of insurance.

Initially, the insurer's profit on the block is very high. As the block ages and its members become sick, age, or decline to continue coverage the insurance experience worsens. When it reaches a certain point, the Company can either raise premiums until the entire block declines the coverage or cancel the entire policy form.

It is critical to understand that the above quoted policy provisions do not require the company to cancel all policies in the state to divest itself of insureds that have become risky. Rather, the company need only cancel the policy form for a given block of business.

As a result, the average life of a Golden Rule health policy is three years. Therefore, to describe Golden Rule's policies as "guaranteed renewable" is at best highly illusory.

Golden Rule does not challenge the Commonwealth's ability to prospectively regulate the insurance industry within Kentucky. Rather, Golden Rule limits its constitutional challenge to the Commonwealth's ability to apply the provisions of HB 250 to policies issued before the Act's effective date but renewed thereafter.

Golden Rule's expert witness, Randall Suttles, the company's senior vice-president and chief financial officer,...