Will New Health Insurance Rules Give Consumers the Clout They Need?

My fantasy of health reform is that it will put private insurance companies on the side of policyholders instead of shareholders, but this is clearly the pipe dream of a onetime public-option fanatic. Second best, in the real world, would be enough regulation to make medical care as important to companies as their bottom lines.

Will these new rules prove stronger than those thin strings? Certainly the health bills are a concrete start toward a different balance of power. Under some of the best known provisions in both bills, insurance companies would not be able to set lifetime coverage limits, reject people with pre-existing medical conditions, charge different rates based on gender, or cancel or weaken policies if somebody gets sick.

The final product could give consumers an even better hand. It all depends on which way things go when House and Senate negotiators come to grips with the differences between their bills. (Politico has posted a comparison chart prepared by congressional aides; the Kaiser Family Foundation lets you create your own chart.)

For the most consumer-friendly product, negotiators should adopt the Senate's ban on annual coverage caps and its penalties on companies that jack up rates. They'd have to go with repeal of the anti-trust exemption for health insurance companies (House bill); the House ratio for what you can charge older people versus younger people (twice as much, as opposed to three times as much in the Senate bill); and the House's more extensive protections for consumers (plans must have, among other things, transparency, a clear appeals process and enough doctors and hospitals to serve its policyholders.

The final bill should also adopt the House's national version of an exchange, or competitive insurance marketplace -- not the state exchanges in the Senate bill. Short of adopting the House's public alternative to private insurance, it should include a public plan to be triggered if the private sector cannot or does not step up. And it should take a combo approach to the "medical loss ratio," or how much of your premiums insurers must spend on actual medical services: Adopt the House's level of 85 percent (five points higher than the Senate) and make that permanent (as the Senate does) instead of phasing it out (the House version).

It all sounds wonderful, except for the potential complications. Let's start with the idea of state exchanges. The insurance industry is all for them. The state exchanges in the Senate bill would be models of "responsiveness and flexibility," two officials of the National Association of Insurance Commissioners wrote this week in USA TODAY. Robert Zirkelbach, a spokesman for America's Health Insurance Plans, told me the Senate bill is better because it doesn't create sweeping, duplicative powers at the federal level and "because it builds on what's already working at the state level."

But not everyone agrees that things are working at the state level. "It is a very, very mixed bag out there," DeAnn Friedholm, director of the Consumer Union's health reform campaign, told me. She said some states would do a good job putting together and running a state exchange -- from deciding which plans can participate to making sure they meet new federal requirements. But an equal number of states lack that kind of administrative capacity and "don't have a very strong track record" on regulation, she said.

Families USA documented the uneven performances in a 2008 study headlined "Most States Fail to Protect Consumers Against Insurance Company Abuses." Ron Pollack, executive director of the group, explains why: "In many of the states, the insurance industry is very powerful and is very effective in promoting its point of view. That often results in very lax standards." A national exchange, run by a new federal health choices commissioner, would have "greater power" in dealing with insurance companies, Pollack told me. But he added that it's doubtful the Senate would pass it.

There are also worries about the requirement that a certain share of premium revenues go toward medical care, as opposed to profits, salaries, advertising, and administrative costs. For example, what constitutes care and what is an administrative cost? Creative definitions of those terms could help an insurer's bottom line. "There's going to have to be a carefully crafted definition that doesn't allow enormous wiggle room," Pollack said.

Premium hikes are another potential way to circumvent the requirement. "They could just raise their rates and get to the bottom line they need," Friedholm said. She's trying to make sure the data on health and administrative spending are submitted in a form that can be audited. "Our most important concern is that it be information that we can verify," she told me.

The exchanges pose a different kind of challenge. If they work the way they are supposed to, they will be selling the most competitive, transparent, consumer-friendly insurance policies in the country. Yet they are not open to all. At least at first, they would be available almost solely to individuals who don't have insurance and small businesses that don't provide it. The rest of the country -- presumably with health care through the workplace -- is left out. If the exchanges work the way many hope, they will affect the whole health insurance market. Pollack says that may happen quickly through market pressure or later through legislation in Congress.

Whether the new system achieves the desired results -- decent, affordable, near-universal coverage -- depends in large part on the expectations and role of insurance companies going forward. They can't be, at the same time, pillars of our health care system and Wall Street masters of the universe. "Can we develop a marketplace setting where the rules are such that the companies can continue to thrive, and yet not at the expense of consumers who need health care? That's the fundamental question that remains to be seen," Friedholm said.

If there is a chance at success, it will come from following the example of the Lilliputians confronted by Gulliver. The strings alone were not strong enough to contain him, but they did the job when combined with vigilance and much shooting of tiny arrows.