The so-called "medical loss ratio" is one of the most important consumer protections in the federal health reform law. It is supposed to force insurance companies to reduce administrative waste, excessive profits and oversized executive salaries, giving us all more health care for our money. The rule – requiring at least 80 cents of every premium dollar be spent on health care and not overhead – has been highlighted in White House talking points as evidence that the reform law will rein in excessive health care costs to help consumers. But the Obama administration has started carving holes in that protection by exempting whole states from the rule for as long as three years (with every likelihood that insurance companies will lobby for new exemptions come 2014.) What gives?

Health insurance companies are playing a game of chicken with federal and state regulators. Their message is clear: block this rule or we'll stop selling insurance and leave consumers stranded without coverage.

Regulators shouldn't buy it. Health insurance companies spent too much money lobbying over the last two years to make sure health reform required every American to purchase insurance. They're not going to turn away from that guaranteed market after working so hard to win it.

The health insurance industry is just waiting to see who blinks. So far, it has stared down the Department of Health and Human Services and the insurance commissioners in twelve states. HHS has already waived the rule in three states with nine others pending. (See which states and read more about the waivers on the CCIIO website here.)

HHS seems to be basing its waiver decisions on the fact that some insurance companies will experience lower profits under the rule. But with 1st quarter 2011 profits for the top five insurance companies up an average of 16%, insurers have plenty of room to lower their take and give consumers some relief.

As we wrote in our letter urging HHS to reject Kentucky's application for a waiver:

If given the choice, most insurance companies would choose not to comply with the only provision in the Affordable Care Act with the potential to hammer insurance companies on cost – the medical loss ratio standard requiring insurers to spend 80% – 85% of premiums on health care instead of profits.

The industry spent the better part of the last year lobbying the NAIC to weaken this key insurance market reform, and the waiver process has become its latest mode of attack.

However the simple fact that most insurance companies do not like the medical loss ratio requirement does not mean that they are incapable of complying with it. Neither does the fact that some insurance companies will have to accept reduced profits in order to meet the standard. Creating greater value for consumers’ health care premiums was the purpose of the MLR rule. This should necessitate greater efficiency and lower profits for some insurance companies.

Waivers to the MLR standard are intended only for circumstances in which the rule will disrupt the individual insurance market and thus consumers’ access to insurance. We must again urge you to reject a state’s application for waiver: Kentucky has failed to make its case.

It's not just the big five that have been raking in cash from excessive consumer premiums. The smaller insurance companies have the cushion to adjust their spending and give consumers a break as well. As we commented on Kentucky's market:

Kentucky has requested a medical loss ratio waiver to allow insurance companies in its individual market to meet an MLR of just 65% this year, 70% in 2012 and 75% in 2013. Yet all four insurance companies large enough to be subject to the medical loss ratio rules had MLRs over 70% in 2010.

If you were to lower the MLR standard in Kentucky to 65% or 70%, every insurer in the state would be able to reduce the portion of premium it spends on patient care to well below the level they demonstrated they were capable of achieving in 2010. This would be a devastating step backwards for consumers, not a push towards greater efficiency.

The state’s dominant insurer, Anthem, controls 85% of the market and would have had a 78.2% MLR in 2010. A second insurer, Time, was over 75%. There is no reason to expect these companies already so close to the 80% standard could not match or at least remain close to it in 2011.

…Kentucky’s analysis also didn’t consider company profitability and reserves. Although the state refused to make basic financial information public, Golden Rule has reported an RBC ratio of 654% in other states, and Humana has reported 535%. Both are well above minimum standards.

Golden Rule reports enough net underwriting profit in Kentucky in 2010 to cover the full rebate that would have been required that year. Humana reports a net underwriting loss, however the company’s overall profitability was not disclosed. Nationally, Humana reported a 22% profit increase for the first quarter of 2011 alone. Such information suggests that both companies are in the financial position to pay expected rebates, or reduce premiums, to comply with the MLR standard this year.

We know the MLR standard is achievable because we've seen companies adapt in those states that have refused to seek exemptions on behalf of the insurance industry. Again from our letter:

The counterpoint to these MLR waiver requests are moves by insurance companies in some states to come into compliance. Aetna in Connecticut just submitted rate decreases of 5%- 19%, citing reduced health care spending. Blue Shield in California responded to criticism of excessive reserves and executive salaries by setting a 2% profit cap. Where they must, insurance companies have shown that they have the capacity to make the changes necessary to meet the MLR rules.

Most insurers have no intention of leaving. They have been careful to keep their threats to leave implicit so they don't have to follow through if they're challenged. And consumers are better off without those few companies that are selling such junk insurance policies that they in fact cannot meet the 80% spending rule, or refuse to give up exorbitant profits.

It's time for HHS to call industry's bluff.