One of the central challenges of health care reform is getting insurers to behave better. And it's really a round-peg-into-square-hole sort of problem.

The primary obligation of a for-profit insurer is to satisfy its shareholders and make a lot of money. But that's not always, or even usually, good for the people who want or need insurance. To take one classic example, somebody with a serious chronic disease will need expensive, ongoing care. An insurer who has that person on its rolls may try to skimp on that person's care, in the hopes of spending less money or, better still, convincing that person to switch policies.

Non-profit insurers may or may not want to pursue similar business strategies, but, in a market dominated by for-profits, they don't really have much choice if they want to compete.

The simplest and, in my opinion, best way to solve this problem would have been to supplant private insurance with a government-run, single-payer system like Medicare. But political constraints made that impossible, which is why the Affordable Care Act instead will expand coverage by putting a large chunk of the working-age population into regulated private insurance plans.

It's not an impossible task. Countries like the Netherlands and Switzerland both have adopted this model with considerable success. But it's a difficult task, particularly in a country like ours without the same tradition of strong regulation and enlightened corporate management.

The architects of the Affordable Care Act understood this and, to the extent they could, they packed the law with regulations designed to force insurers change their behavior. But, by design and necessity, the law was relatively vague on a lot of matters, leaving final determination of the rules to the Secretary of Health and Human Services and her department.

The good news is that Secretary Kathleen Sebelius has recruited some of the country's most respected and seasoned regulators to carry out this task. And, so far, they seem determined to get aggressive with the insurance industry. Very few people outside the world of health care policy seem to have noticed this. But, if you're interested, I have a longer explanation in an article I wrote for the American Prospect, whose 20th anniversary issue includes a special report on health care reform implementation.

One surprising thing I learned, while reporting, was that insurers seemed to be playing nice--that, notwithstanding the scorched earth strategy they'd pursued during the legislative debate, they'd made their peace with reform and were sending signals of cooperation. But that was earlier in the summer and, just recently, they've started to make noise about regulation of the so-called medical loss ratio.

Here's the background--again, from my Prospect story:

The Affordable Care Act sets a minimum threshold for what's known as the "medical loss ratio" -- the percentage of premium dollars that go into medical care (a "loss" from Wall Street's view) rather than into overhead or profits. For plans sold to small businesses or directly to individuals, that ratio must be at least 80 percent; for plans sold to large groups, it must be at least 85 percent.
For big insurance companies that sell predominantly to big employers, the medical loss ratio shouldn't be hard to meet. With their economies of scale, these insurers and employers together provide coverage at relatively low administrative cost (although, it should be noted, Medicare's overhead is even lower). But smaller insurers that deal primarily with individuals or small businesses will have a tougher time. Among other things, they typically lose 8 percent of premiums on commissions to agents and brokers who sell policies on their behalf. (Once the insurance exchanges exist, much of that cost will disappear.) These are also the insurers most likely to bilk consumers, since individuals buying coverage on their own typically lack the knowledge -- or ability -- to bargain as shrewdly as corporate benefits managers do. (The exchanges should also help with improved information and bargaining leverage.)
There's leeway in the rule in two key places. The law doesn't dictate a precise formula for calculating the medical-loss ratio. It's up to the administration which "care management" activities count as medical care, whether taxes should be part of the calculation, and the extent to which carriers can average out the ratio among different plans. And while the law calls for the requirement to take effect starting in January 2011, the Department of Health and Human Services has the authority to phase it in; Sebelius could, for instance, set the floor at 70 percent for 2011 and then gradually ratchet it up until 2014. Some insurance and employer lobbyists have urged the administration to move slowly, lest insurers unable to meet those requirements go out of business. Then again, insurers that can't meet those requirements are, by definition, less efficient.

The issue is in the news today because the National Association of Insurance Commissioners is voting on how it thinks the ratio should be calculated. As Politico's Sarah Kliff and Jennifer Haberkorn have been reporting in their daily "Pulse" newsletter, the debate has generated a lot of controversy in Seattle, where the group is meeting. And the latest rumor is that NAIC will side with the insurers are opt for a more lenient standard.

It's worth noting that even some strong consumer advocates, like Maine Insurance Commissioner Mila Kofman, have said they support phasing in the requirement at least in some places. And while insurers can use "care management" as a synonym for "denying care to patients who need it," smart care management--i.e., making sure the chronically ill get routine care, avoiding over-treatment--is absolutely worthwhile. Still, at 80 and 85 percent the ratio ought to allow for such activities. Folks I know who follow (and care about) this think that giving a lot of ground to insurers would be a mistake.

The Affordable Care Act stipulates that the HHS Secretary consider the commissioners' recommendations when writing regulations. But it doesn't say she has to follow it. If indeed the commissioners recommend scaling back the regulation, it will be interesting to see whether Sebelius goes along.