Healthcare law challenge lies in closing loopholes and cleaning up ambiguities

And now for the closing of the loopholes.

Last month’s enactment of healthcare reform, after more than a year of political cabaret, has led quite rightly to copious commentary proclaiming that this is not the end of the reform process but the beginning.

Most commentators seem to think the rest of the process involves convincing the American public that Congress’ medicine is good for them. I personally doubt that’s the case; I’m confident that most people recognize instinctively that a law that places real limits on the health insurance industry’s ability to play them for suckers is worth having.

Rather, the challenge ahead lies in closing loopholes and cleaning up ambiguities left over from the legislative drafting system. This is not unique to healthcare reform -- Social Security was still being tinkered with more than two decades after its creation.

Note that I am not referring to what one might term the Fiorina Loophole, after Carly Fiorina, who is seeking the GOP nomination in California for U.S. Senate. Fiorina, a cancer survivor assured of insurance coverage through her husband’s employer-based health plan (backstopped by her personal millions), has signed a pledge to repeal the equivalent healthcare rights just enacted for the rest of us. In other words, her campaign theme is: “I’ve got mine, too bad about you.”

Fiorina’s political rhetoric doesn’t require her actually knowing what’s in the bill. Those who have read it, however, realize that there are numerous provisions needing to be clarified, tightened or fixed. It’s perhaps fortunate that the act doesn’t go fully into effect until 2014, because it might take that long to accomplish the job.

The best pointers to what must be shored up in the reform law may come from the insurance industry, which will set legions of lawyers to finding gaps it can exploit. The first example of that came only days after enactment and involved a provision prohibiting exclusions for preexisting conditions on policies covering children, starting in six months.

The insurers said that nothing in the act would prevent them from simply refusing to cover some children prior to 2014, when the act requires that they issue policies to all applicants. This generated a sharp response from Health and Human Services Secretary Kathleen Sebelius, who stated that the law forbids them from excluding treatments for specific conditions and from refusing coverage at all, and that she would shortly issue regulations to that effect.

The industry, sensing a PR debacle looming, backed down. But the regulations are still forthcoming. Who knows what evasions will still be possible?

Indeed, regulations to be drafted by Sebelius’ agency on a raft of issues are the key to making the law function. The law has left HHS plenty of work to do. Consider a provision empowering the agency to exclude an insurance company from the exchanges to be set up for the purchase of individual and small group policies beginning in 2014, if HHS determines that it has implemented “unreasonable” premium increases in the meantime.

What’s “unreasonable”? No one’s sure, in part because there are no nationwide data on premium trends or on how insurers justify their charges. On the other hand, now we’ll get some, because the act appropriates $250 million to help the states collect it, and requires them to send the information to Washington and make it public.

Another regulation will address insurance firms’ “medical loss ratios” -- the percentage of income spent on actual healthcare. The law says this can be no lower than 85% for large group plans and 80% for individual and small group policies, but regulations will specify exactly what should qualify as a medical expense, a level of oversight that hasn’t existed before.

“Right now, the insurance industry could tell us the sky was blue and we wouldn’t believe them,” Len Nichols, a health economist at George Mason University, told me last week. “So the transparency mandated in this bill is very good.”

Yet while the feds will make the rules on insurance company behavior, it will be up to the states to enforce them. That means there could be up to 50 different levels of oversight. Some states will have plenty of resources for enforcement, some very little. In some states there will be independent regulators, in others they’ll be in bed with the insurance industry.

“Some legislatures are going to see this as an opportunity to water down the bill,” says Timothy Jost of Washington & Lee Law School.

But let’s give credit to the drafters: If any state shows it’s not up to the job, or refuses to do its part, the federal government has the power to step in.

The most contentious part of the reform act is the mandate that all Americans have health coverage, beginning in 2014. For those who don’t comply, the measure provides tax penalties of as much as $695 per adult (up to $2,085 per family), or 2.5% of household income, whichever is higher.

This provision provided reform opponents with an opportunity to gin up hallucinations of disobedient Americans carted off to tax jail. In fact, the bill rules out criminal penalties or even property liens for resisters.

“The problem with the mandate is it’s not much of a mandate, and enforcement is negligible,” says Paul Starr of Princeton University. As a result, he says, it may be economically rational for healthy, low-income people to wait to buy insurance until they’re sick, paying the penalty in the meantime.

Such a practice will drive up costs for everyone, though Starr says it can be discouraged by allowing people to sign up for policies only during annual open enrollment periods rather than any time they pleased -- so freeloaders would know they might face months without coverage if they fell sick. But that will have to be covered in regulations yet to be written.

Despite these qualms, the impression one gets from a close reading of the new healthcare law is how much better it is than might have been expected from watching the sausage being made on Capitol Hill. If implemented properly, it will transform health insurance companies from profiteering enterprises to something resembling regulated utilities, as they should be.

We’ll know more about how our healthcare dollars are spent and have more assurance that they’re being spent mostly on medical services. Health coverage will no longer be dependent on luck, wealth, or the evanescent resources or goodwill of the community or one’s employer. Why would anyone want to repeal that?

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at www.latimes.com/hiltzik, and follow @latimeshiltzik on Twitter.