The idea was simple enough: Make sure that health insurers spend the vast majority of their revenue on patient care, instead of using it for things such as advertising, profits and executive pay.
To that end, the new health-care law says an insurer must give money back to consumers if it devotes less than 80 percent of premiums to paying medical claims and improving care. For insurers serving large groups, the target is 85 percent.
But even before the health-care overhaul was signed into law last month, one of the nation’s largest insurance companies reclassified certain expenses in a way that increased its so-called medical-loss ratio. In January, WellPoint began including under medical benefits such costs as nurse hotlines, "medical management," and "clinical health policy," a WellPoint executive said in a March briefing for investors.
Redefining medical spending to make the requirement more attainable is just one way insurers might adapt to the new legislation.
Weeks after the law was enacted, insurers are still scouring it to figure out precisely what it allows. Many of the details won’t be known until government officials translate the legislative language into specific regulations, and some of the tightest restrictions won’t take effect for years.
In the meantime, health insurers face tactical and strategic choices that could alter their short-term fortunes. Should they boost premiums before rates become subject to greater oversight? Should they step up efforts to avoid people with preexisting conditions before they are required to accept even the sickest applicants?
Some analysts say the new law gives insurers powerful motivation to try to increase profits and reserves while they still can.
"They will absolutely try to cherry-pick as much as they can get away with between now and when the legislation is fully implemented," said Wendell Potter, a former spokesman for big insurer Cigna.
Insurers might conclude that they should "get our prices up while we can because after the revolution we’re not going to be able to," said Mark V. Pauly, a health-care economist at the Wharton School at the University of Pennsylvania.
But for all the incentives to get more aggressive in the short term, there are also counter-incentives, and it is hard to tell how they balance out.
From an economic standpoint, raising rates could cause insurers to lose business, especially in the more competitive markets.
From a regulatory standpoint, charging excessive premiums during the next few years could give authorities grounds to bar insurers from new marketplaces known as exchanges when they open for business in 2014.
From a political standpoint, pushing limits while officials are still writing the rules could boomerang for insurers. WellPoint’s plan to raise rates in California by 39 percent fueled arguments for reform earlier this year and helped drive the legislation to final passage.
"They’re very good at shooting themselves in the foot. I think it would be unwise to do it again," Pauly said.
After a stern warning from Health and Human Services Secretary Kathleen Sebelius, the insurance industry’s main lobby has already signaled that its members won’t try to exploit a potential loophole in the requirement that, starting this year, insurers cover children irrespective of their preexisting conditions.
Some of the openings for insurers are plain to see. For example, although the law bans annual and lifetime limits on the dollar value of benefits, it does not ban limits measured in other terms. That leaves the door open to limits based
on, say, the number of courses of treatment for an expensive problem such as infertility.
The coming expansion of Medicaid could trigger a land rush by private insurers seeking to manage care for Medicaid beneficiaries. In a report issued Thursday, big insurer UnitedHealth Group said state Medicaid programs serving low-income Americans could save billions of dollars by moving recipients into managed care.
(Private insurers have made the same argument about Medicare in years past, but the government has concluded that it was overpaying private health plans to care for Medicare beneficiaries. It cut such reimbursements in the recent legislation.)
Other issues are more complex.
Turning away the seriously ill while insurers still can might seem like an obvious choice. To be sure, the fact that insurance companies will be prohibited from rescinding policies once people get sick gives them cause to be more selective in the first place, said industry analyst Carl McDonald of Oppenheimer & Co.
But in the not-too-distant future, some insurers will be subject to a process called risk-adjustment, which will attempt to neutralize the incentive to cherry-pick. Under risk-adjustment, health plans that attract disproportionately healthy populations will be penalized, and plans that attract disproportionately sick populations will be awarded additional payments. Depending on how the risk-adjustment rules are written, insurers could lock in a lasting advantage by cherry-picking more vigorously now, or they could see that benefit erased, said Jerry Flanagan of the advocacy group Consumer Watchdog.
Similarly, the requirement that insurers devote 80 or 85 percent of premiums to medical claims and related expenses creates conflicting incentives. At its simplest, it encourages insurers to cut overhead expenses. In addition, it might give insurers pause before raising copayments and deductibles, turning away applicants with preexisting conditions, or squeezing payments to doctors and hospitals, because each of those steps would reduce medical spending and make it harder for insurers to meet the required ratios.
On the other hand, the target ratios might give them added incentive to raise premiums. By doing so, they could keep overhead and profit fixed, even as those items decline as a percentage of the premium dollar.
WellPoint spokesman Jon Mills said in an e-mail that it is appropriate for his company to reclassify expenses related to the management of members’ health.
In effect, WellPoint turned more than $500 million of administrative items into medical expenses, the Senate Commerce Committee’s Democratic staff said in report Thursday.
Scott Serota, chief executive of the Blue Cross and Blue Shield Association, said the insurers in his group "are committed to make sure that both the letter and the intent of this law is implemented in a manner in which benefits all Americans.
"The cynic can find all kinds of opportunities here," he said. "That’s just not what we’re going to do."