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HEALTHCARE
- May
2000 Feature Article
Insuring
Progress IF you’ve been following the tortuous route of health care legislation through the General Assembly, you probably already know that George Nichols III is the activist Commissioner of Insurance. And you know how much impact he and his department have on our economic lives. But did you know that George Nichols III may be Kentucky’s most influential administrator on a national level? Or that he is the Commonwealth’s highest ranking African-American public official? George Nichols III is very aware of his roles. Commissioner Nichols is just completing his first four-year term and is about to accept a second from Governor Paul Patton, which will make him the longest serving commissioner in the state’s history. His tenure contrasts with a series of revolving commissioners during the administrations of Patton’s immediate successors, a period of real turmoil in the insurance industry, especially in Kentucky. Calling his longevity a "real plus for the Commonwealth," Nichols stresses that the governor and his cabinet "have never wavered in their support for this department." He believes, and others agree, that Kentucky now has "one of the top-notch insurance departments in the country."
Growing to meet demand The Department of Insurance has grown dramatically since Nichols was first appointed in April, 1996. A division of the Public Protection & Regulation Cabinet, the department now has a $14.4 million budget and 160 employees – a 60 percent increase. It serves the Commonwealth’s citizens, virtually all of whom are covered by some form of private insurance; regulates the 1,700 private insurers doing business in the state; and licenses and disciplines 69,000 practicing agents. And as Nichols points out, the department earns back almost all of its annual budget – about $13 million – in fees. Nichols oversees four traditional divisions he inherited and three others he either created or expanded. The core divisions govern the activities of the two major types of agent (life and health or property and casualty), conduct financial examinations of admitted companies, and purchase the state’s own insurance packages. While these may be routine administrative functions, Nichols and his department receive praise for their efficiency and fairness. Consumer protection is a major tenet of Nichols’ administration. The commissioner broadened the role of the consumer protection division from only investigating complaints against agents or companies to disseminating factual information about insurance products, such as detailing consumer guides to long-term care and auto and homeowner insurance. He also appointed an ombudsman to monitor the department itself. Nichols created the fraud division to protect insurers from criminal actions but sees that as consistent with his consumerist philosophy. He believes consumers ultimately pay the price of fraud in higher premiums and fewer choices. Finally, he established the health insurance policy and managed care division to regulate the most vexing issue in Kentucky during the last 10 years, and one that has continued to trouble the legislature in its current session. The Commissioner’s state influence may be exceeded by his national role. Nichols is the current president of the National Association of Insurance Commissioners, perhaps the most important regulatory group you’ve never heard of. He is presiding over what may be the most critical year in the organization’s 129-year history. Until now, the NAIC has been a voluntary organization that pursued uniform regulation of the industry by its members. It’s a big operation, with a $42 million budget and 380 employees in its headquarters in Kansas City, Missouri, and regional offices in New York City and Washington, D.C. As he’s worked his way through the NAIC’s chain of command, Nichols has frequently been quoted in national media and is regarded as a forthright and articulate spokesman. He is often cited as an authority on the issue of banks entering the insurance business, an issue that will have so much impact on the NAIC itself. Last fall, the U.S. Congress passed the Financial Modernization Act after years of contentious wrangling. It established new ground rules for the role of federally-chartered banks into what had been an exclusively state-regulated insurance business. While the new law did not repeal the McCarran-Ferguson Act – which has prohibited a federal role in insurance regulation since 1946 – it does threaten to eclipse the state by designating the Federal Trade Commission as the final arbiter of disputes. The states, through the NAIC, are also mandated to create a series of uniform regulations that would not unfairly bar banks from pursuing activities otherwise approved by the office of Controller of the Currency. The clear implication is that failure to do so could cause Congress to supercede both the NAIC and state regulation, in effect shutting down the organization and state departments of insurance.
Keeping Kentucky at the forefront It is unlikely that doomsday scenario would occur, but Nichols has taken aggressive action in the General Assembly to keep Kentucky in the forefront of state regulation. He and his staff drafted successful pieces of legislation to allow domestic insurers to "demutualize" (in order to raise capital efficiently through markets), and to permit the department to form inter-state compacts with others without seeking specific legislative approval for each one. Had these two provisions been in place a short time ago, they "would have given a different perspective" on the absorption of Kentucky Blue Cross by Anthem of Indianapolis, Nichols believes. (He was an officer of the local company at that time.) The uniform act most dear to Nichols is the "producer model bill" that would establish a national system of licensing and record-keeping for agents. General Assembly passage meant Kentucky was the first state in the nation to adopt this piece of uniformity. Despite the department’s overall success, Nichols did see two "uniform" acts die: a bill that would have established the department as a central clearinghouse for the collection and distribution of premium taxes and the "mental health parity" bill, a critical element in the continuing health insurance reform and counter-reform process. The most important element in Nichols’ agenda is the bill that would create a high risk pool for insureds outside of the individual or small group markets. He calls it critical because without the right to segregate impaired risks into one group, insurance companies won’t re-enter the Kentucky market. Without competitive pressures, health insurance premiums would almost certainly continue to rise, regardless of the costs of actual medical services. In a 92-page booklet distributed to legislators before the session, Nichols and his staff chronicled how Kentucky’s reform process produced contrary results: All but two active companies left the state. (The companies didn’t leave physically, since they were domiciled in other states; they left the Kentucky market.) Nichols believes the reforms were too pioneering and the state too small to entice the companies to stay despite the reforms. Nichols also undertook two other steps to facilitate passage: He devised a plan to subsidize rates for the estimated 5,000 participants in the high-risk pool by utilizing $39 million in tobacco settlement funds and he enlisted the active support of a bipartisan group of representatives with insurance backgrounds, notably Democrats Steven Riggs and James Gooch and Republican Ron Crimm. This latter action was vital because insurance agents actively campaigned against the various reforms while the companies walked away. Nevertheless, Nichols was not able to reconcile his bill with three opposing groups: consumer advocates, state trade associations and the two domestic health insurers. Those groups enlisted some Democratic House leaders to their cause. The bill passed by one vote in both the Democrat-controlled House and the Republican-controlled Senate. The commissioner calls his plan an attempt "to balance insurance company marketing" and the "right to have a reasonable level of profit" with his department’s "responsibility to protect the insurance-buying public." He stresses his department "acted with integrity" throughout the legislative debates and predicts individual and small group rates will decline by 10 percent after the high-risk pool is operating. About half the states already have such pools. Furthermore, Nichols believes his effort for the high-risk pool reflects his long-term goals for the state. He wants to solidify the industry that is already based here, but also attract new companies, whether as a state of domicile for captive insurers (companies controlled by a specific employer), or as a "port of entry" for alien insurers (foreign-based companies). "These are good jobs," he stresses. "High dollar incomes, employees of choice and clean, progressive employers."
Compliments and criticisms Although his staff in the Department and the NAIC are almost universal in their praise for their boss, George Nichols does have some detractors. Some media reports suggest that he does not get along with Attorney General Ben Chandler over the Anthem settlement. (Anthem agreed to pay $45 million to the state in response to a suit by Chandler claiming the for-profit company improperly seized the charitable assets of the original not-for-profit Blue Cross.) But Nichols says he has "no disagreement with the attorney general" and explains that his department "signed off on" the eventual settlement. Finally, a few criticize his active participation in the NAIC. Nichols, and others, demur. "Kentucky has benefitted greatly from George’s involvement," one journalist reports. Nichols himself says "the exposure is a free opportunity to promote the image of the Commonwealth. We are now in the forefront of new financial services." Nichols also makes no apologies for the perceptions that he wants to be a role model for other African-Americans. He says he follows the Christian example set by his father, and feels an obligation to conduct himself with professionalism and dignity. A long-time Big Brother, he admits "I’m the only Bible some (young people) will read." The commissioner’s deeds echo his words. Nichols has dramatically raised the profile of African-Americans and women during his tenure. He increased the number of blacks in the department from three to 18, with three in management positions. And he appointed seven women to fill the 11 top management positions, where previously there had been none. "We offer great opportunities to smart people, qualified people," he explains. So… popular and progressive insurance commissioner, successful legislature manager, president of a key national body during a watershed period, recognized role model. What else can George Nichols III achieve? He won’t say, except to emphasize he wants to be "the best commissioner this state has ever had." " I’m comfortable with the results," he concludes, "if we serve the people."
Robert Carter (robertcarter@lanereport.com) is associate editor of The Lane Report and a practicing life and health insurance agent.
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