Consumer Watchdog has been warning for weeks that the health reform law will be riddled with costly loopholes if insurers get their way in implementing the regulations that control big expansions in health coverage. It’s a hard slog, especially when you’re talking about technical, math-laden stuff like "medical loss ratio" and "rate and premium review." Now our concerns are hitting the mainstream.

The New York Times editorial page today tackles medical loss ratio, insurance lingo for how much insurers will have to spend on actual health care and, more importantly, how insurers will get to define what they can count as health care. The editorial clearly shows the pitfalls in letting insurers into the tent.

The law leaves plenty of room for finagling over what can be counted as
a [health] quality improvement activity. The National Association of Insurance
Commissioners, which is helping the administration develop standards,
is being lobbied by insurers to adopt a broad definition and by
consumer advocates to keep it narrow.

Some insurers are clearly overreaching. They argue that much of the
cost of setting up networks of providers should count as quality
improvement, because they check the credentials and disciplinary
records of doctors. They want to include programs to root out fraud or
overbilling because they probably weed out some bad doctors as well.
And they would include the cost of programs, including
precertification, that judge whether care is covered and appropriate.
All these look like activities whose primary purpose is to reduce costs
for the insurer with quality at best a secondary issue.

Senator Jay Rockefeller, chairman of the commerce committee, says his
staff has found that insurers are already reclassifying many
administrative costs as medical expenses to create the appearance of a
higher medical loss ratio. He is rightly urging a rigorous standard.

I’ve listened in on conference calls sponsored by the regulation-writers; every major insurer has someone on every call, pushing and prodding to, for instance, include insurers’ property tax bills as health care. I’ve heard the tortured argument of Blue Cross that claims and billing expenses should be moved into the health care column as well.

So far the regulation-writers are resisting, but the insurers are spending hundreds of millions of dollars on lobbying. They don’t give up, and they know the regulations have to get the approval of the more politicized board of directors of the National Association of Insurance Commissioners before being sent up to federal regulators.

The Los Angeles Times over the weekend took up an even more important problem–regulation and control of what insurers can charge. If insurance companies can just keep charging whatever their in-house actuaries decide, no amount of other restrictions will keep premiums down. An actuary whose salary depends on it can defend any overblown projection of future costs to justify any kind of premium increase–including the recent Blue Cross spikes that had Californians screaming with rage:

When Anthem Blue Cross notified 800,000 California customers of a
jaw-dropping double-digit increase in premiums, it exposed a crucial
gap in state law: Regulators can limit how much insurers charge for
policies covering autos, homes and property, but they can’t block
exorbitant increases in health insurance premiums. The new federal
healthcare law lets Washington order rebates for consumers when
insurers spend too little of their premium revenue on medical costs, but it leaves it to states to scrutinize premium hikes before they’re imposed. And California has no real authority to do so.

Assemblyman Dave Jones (D-Sacramento) proposes to solve that problem by
allowing two state agencies, the Department of Insurance and the
Department of Managed Health Care, to block proposed increases in
premiums and out-of-pocket costs if they are "excessive," "inadequate"
or "unfairly discriminatory." His bill, (AB 2578), is awaiting action in the Appropriations Committee, and we urge the panel to pass it before it expires next week.

State law currently requires health insurers to give the state 30 days
notice before a rate increase and to spend at least 70% of their
premium income on health services for their customers. Beyond that, the
state has no say in rate increases. Anthem could have raised its premiums months ago despite the outcry, but it held off voluntarily to give the state more time to review its rates. (It eventually canceled the increase
after independent actuaries found it was based on faulty math.) That’s
an unreasonable amount of faith to put into an industry that will soon
have a much stronger grip on consumers’ wallets; under the new federal
healthcare law, virtually every adult will be required to purchase
health insurance by 2014.

Opponents of the bill, including lobbyists for insurers, hospitals and
doctors, argue that it wouldn’t slow the growth in premiums. The main
reason insurance prices are shooting up, they say, is because the cost
of medical care is rising significantly faster than inflation. That’s
true, but the Anthem episode illustrates that insurers sometimes seek
premium increases far larger than the average uptick in medical bills.

A federal bill being sponsored by Sens. Dianne Feinstein and Rep. Jan Schakowski would force states to enact something like the California bill, or let federal regulators approve or deny health insurance rate changes if the states fail to act.

But as usual, the lobbying against rate regulation is furious.

As the Times editorial notes, regulation works just fine for auto and property insurers in California, and other states already regulate health insurance rates successfully:

Jones’ bill is hardly a radical expansion of state government. The
framework it proposes for judging premiums is modeled after the one
Proposition 103 established for auto and property insurance in 1988.
And most states across the country already require health insurers to
obtain prior approval for premium increases.

We never doubted how important these geeky issues would be, but it’s still a pleasure to see the mainstream catching on so thoroughly.