The Sausage-Making of Insurance Reform

As politicians revisit the merits of health insurance reform and courts deliberate its constitutionality, government regulators are busily working on the wonky details of implementation. The Affordable Care Act leaves vast swaths of regulation for various agencies to prescribe, most notably the Department of Health and Human Services. Infamously (or perhaps apocryphally, since I'm certainly not going to bother counting), the statute contains more than a thousand commands to the effect of, "the Secretary shall decide." This massive delegation of authority is unavoidable in any attempt to comprehensively reform, yet preserve, our Byzantine health insurance system.

Throughout this regulatory nativity, the government must engage and reengage with the same warring factions that fought the intense legislative battles leading up to enactment of the Affordable Care Act. Insurers, brokers, providers, employers, public advocates, market advocates, and countless others each have their view of how best to interpret and implement the law's plethoric provisions. At each of these regulatory junctures, Secretary Kathleen Sibelius or her designees must decide where the balance of public interest lies, and in which direction the political winds blow. To use Bismarck's metaphor, this regulatory deliberation and compromise can be just as messy as the sausage-making legislative process itself.

Consider, for instance, the first decision DHHS issued, immediately after enactment. By September 2010, long before the rest of insurance reforms take effect in 2014, insurers may not: (1) refuse to cover children or (2) refuse to cover any preexisting health conditions children have. The statute clearly requires (2) but is silent on (1). Insurers and their regulators obviously understand the difference between mandating coverage of people and mandating coverage of all their conditions. And the reform law reflects the same understanding, by addressing covered people and covered conditions in separate sections. Thus, it seems a stretch to require insurers to do both in the first year, when the statute only requires the second.

There was a political problem, however. In comments to the press just prior to the enactment, President Obama touted availability of insurance for children as one of the law's immediate benefits: "Starting this year, insurance companies will be banned forever from denying coverage to children with preexisting conditions." Secretary Sibelius had little choice but to back up her leader and defy the insurance industry to challenge her. Rather than sue, the industry boycotted. The five largest national insurers announced they will stop selling insurance that covers only children. One can demonize this recalcitrance, but insurers are genuinely fearful that, without any requirement until 2014 that most children have coverage, being unable to refuse children with preexisting conditions will lead to "adverse selection"—the form of market gaming in which parents wait to cover their children until they have an expensive condition that needs immediate treatment.

Perhaps there was no good way out of that particular box. Requiring insurers to cover all children caused most to stop selling child-only coverage, but requiring insurers only to cover all conditions for children they choose to insure would only lead them to be pickier about which children they accept. So maybe an all-or-nothing solution is the least worst for now. But other regulatory dilemmas present more room for compromise. A case in point is defining the "medical loss ratio" that limits what insurers can spend on overhead and profits. In the insurance world, medical "loss" means paying claims for treatment. The notion is that at least 80 percent of premium dollars collected from individual and small-group insurance, or 85 percent from large groups, should be paid back out for medical care.

What exactly should count in the numerator of medical claims? One would think this accounting convention would already be well settled in an industry where the loss ratio concept is longstanding and closely monitored by investors. But no. The relatively straightforward task of defining this ratio took the National Association of Insurance Commissioners five months of intensive meetings that stirred up a tumult of lobbying and advocacy. Insurers wanted to count their claims administration expenses, hospitals wanted to exclude a portion of capitation payments, and brokers absurdly wanted to...