Vermont’s healthcare system did not become one of the most expensive in the country overnight. Today’s high premiums, limited insurer competition, and financial strain on hospitals are the result of decades of government intervention. Beginning in the late 1980s, Vermont increasingly pursued policies aimed at expanding government involvement in healthcare. Although a fully government-run single-payer system was never implemented because of its projected cost, many of the reforms adopted over the following decades (including community rating, guaranteed issue, Medicaid expansion, and additional insurance regulations) moved the state in that direction. Rather than creating a more affordable and competitive healthcare market, these policies reduced competition, distorted market incentives, and shifted costs throughout the healthcare system.
The most significant structural change occurred in 1992 with the passage of Act 52. At the time, Blue Cross Blue Shield of Vermont occupied a unique position in the state’s insurance market. As the state’s non-profit insurer, it received favorable tax treatment in exchange for serving as Vermont’s insurer of last resort. Because of that designation, BCBS was already subject to community rating and guaranteed issue requirements, meaning it was required to charge nearly identical premiums regardless of age or health status and accept all applicants regardless of pre-existing conditions.
These regulations made it difficult for BCBS to compete for younger, healthier customers whose premiums helped offset the cost of covering older and less healthy individuals. After requesting a 30% premium increase in the mid-1980s to address mounting losses. After the request was denied, lawmakers faced two choices. Rather than removing BCBS’s special tax treatment and deregulating the market to allow the company to compete on equal footing with other insurers, they decided to adopt legislation championed by Blue Cross that extended community rating and guaranteed issue requirements to every insurer in the state, the consequences of which Vermont still grapples with today.
Act 52 required insurers in Vermont’s small-group market to adopt community rating and guaranteed issue beginning in 1992, and extended those requirements to the individual market in 1993. In 1994, the Director of Insurance Regulation, Thomas Van Cooper, sent a memo to the legislature in which he stated:
“Community rating and guarantee issuance represent good social policy, good insurance policy and good business policy. The Vermont legislature quickly saw through the self-interested doomsday prophesies of the commercial industry about radical price increases and the destruction of Vermont’s insurance market, and instead recognized that there was no reason insurers could not make a fair profit playing on a level playing field, where they could compete on the quality of service they provided and the management of costs rather than the avoidance of risk. Vermont consumers need no longer worry about whether they will be able to have access to this essential product.”
But his statement was quickly proven false as the “doomsday prophecies” and “radical price increases” materialized. Vermont’s commercial insurance market began to contract almost immediately because people could not afford the premium increases. Between 1994 and 1998, enrollment in the individual market declined by more than 30%. Small-group enrollment fell by nearly 25%. Overall commercial insurance enrollment also fell, despite Vermont’s population continuing to grow during that period. As insurers left the state, consumers had fewer coverage options and premiums continued to rise.
The economics behind the decline were predictable. Because insurers could no longer price premiums according to individual risk, younger and healthier Vermonters often paid substantially more than the healthcare they were expected to use. Many chose to remain uninsured until they needed care, leaving insurers with older, sicker risk pools. That adverse selection forced premiums even higher, driving even more healthy people out of the market. Over the following decades, more than a dozen insurers exited Vermont. Today, only two insurers (BCBS of Vermont and MVP Health Care) offer individual health insurance plans in the state.
Initially, BCBS absorbed many policyholders displaced by departing insurers and, at the state’s direction, offered them coverage at rates comparable to what they had previously paid. However, those policies proved financially unsustainable. By 1995, BCBS was once again operating at a loss and ultimately received approval for a 20% increase on non-group policies and a 37% premium increase for its safety-net pool – a larger increase than the one regulators had denied a decade earlier. Because of the government’s willingness to pick winners and losers in the insurance market, consumers were left with higher premiums, fewer insurance choices, and a steadily less competitive marketplace.
As Vermont’s private insurance market weakened, policymakers increasingly expanded public coverage through programs such as Dr. Dynasaur and the Vermont Health Access Plan (VHAP). Between 1994 and 1998, Medicaid enrollment grew by 26% and total public insurance enrollment increased to 29.5% of the state’s population, more than 174,000 people. That number remains around 27% today after peaking at 32% in 2016.
These programs did expand access to healthcare coverage, but they also expanded a payment system that reimburses hospitals and physicians below the actual cost of providing care. When government programs pay less than the cost of treatment, providers must recover those losses elsewhere. Economists refer to this as cost shifting. By the late 1990s, Vermont hospitals were experiencing nearly $40 million in annual Medicaid-related shortfalls, requiring them to negotiate higher reimbursement rates from private insurers to remain financially viable. Those higher provider payments translated directly into higher insurance premiums for employers and families. By 1998, both Blue Cross Blue Shield and Kaiser Permanente were again requesting premium increases of roughly 15%.
As premiums continued to rise, many employers sought alternatives. Federal law under the Employee Retirement Income Security Act (ERISA) allows businesses to self-fund employee health benefits in lieu of purchasing traditional fully insured plans. Small employers can manage financial risk by purchasing stop-loss insurance to protect against unusually expensive claims.
Recognizing that self-funded plans could draw healthier employers out of the fully insured market, Vermont once again used protectionist regulations to minimize the effects at the expense of small businesses. In 1999, the Insurance Commissioner proposed regulations increasing stop-loss attachment points, making self-insurance substantially more difficult for smaller employers. Today, Vermont requires employers with fewer than 25 employees to absorb the first $40,000 of an individual’s medical claims before stop-loss coverage begins. That threshold is twice the National Association of Insurance Commissioners’ model recommendation and double New Hampshire’s requirement, making self-funded health plans impractical for many small businesses.
More than three decades later, the long-term effects of these policy choices are impossible to ignore. Vermont now has only two insurers offering individual coverage, the highest commercial insurance premiums in the nation, and hospitals that increasingly depend on charging private insurers more to offset government underpayments.
The history of Vermont’s healthcare system demonstrates that striving for state-sponsored universal coverage and creating an affordable healthcare market are not the same objective. Rather than continuing to layer new regulations onto an already distorted system, policymakers should focus on restoring competition by removing unnecessary regulatory barriers, expanding consumer choice, encouraging innovative coverage options such as ICHRAs and self-funded plans, increasing price transparency, and ensuring hospitals can compete in a market where reimbursement better reflects the cost of care. Vermont’s experience demonstrates that affordability is most likely to emerge from competition and consumer choice, not from continued government management of the insurance market.
