The health care law tries to control premium costs and insurer profits in the period between now and 2014 in two big ways: 1) it requires insurers to spent a certain percentage of their dollars on medical care and 2) it allows the Department of Health and Human Services to work with the states to disqualify insurers with outrageous rate hikes from participating in the exchanges.

But many health care policy wonks have warned lawmakers that that law does not go far enough in actually enforcing these rules and they argue that insurers will likely game the system. Already, Aetna and Cigna have announced that they plan to jack up rates in the short term and now, Consumer Reports is calling for an investigation into WellPoint in light of an electronic message the company sent “to investors describing how it would simply re-label administrative costs as ‘medical care’ in response to the new health reform law.”

In the March 17th message, WellPoint — the nation’s largest insurance company — announced that it has reclassified some of its administrative costs as medical spending in order to increase its medical loss ratio (MLR, a techinical terms which measures how much insurers spend on administrative spending v claims). The ratio is closely monitored by Wall Street investors and the new health reform law “requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market.” Here is how WellPoint put it:

“WellPoint’s (WLP) medical cost ratio should rise and its overhead-expense ratio decline this year as the insurer reclassifies various types of costs. Disease management, medical management and a nurse hotline, for example, ‘are being reclassified because they represent additional benefits provided to our members,’ representative says. They’ll now be part of the medical cost ratio, the percentage of premium revenue used to pay members’ health-care costs. These are claims-related costs incurred to improve member health and medical outcomes, WLP says. Accounting rules allow the changes, which better align MCR with anticipated health reform guidelines, Stifel Nicolaus says.”

Wellpoint is heavily invested in the individual health insurance market and has been among the most aggressive in opposing reform and skirting state regulations. In fact, the company has paid millions in fines for canceling individual health policies of pregnant women and chronically ill patients, illegally rescinding policies, denying prescription drugs to the elderly, and committing “serious violations that completely undermine the public trust in our healthcare delivery system.” In the fourth quarter of this year, net profits jumped to $2.74 billion from $331.4 million — mostly because the company sold a subsidiary — and CEO Angela Barly admitted that the company dramatically increased rates in the California individual health insurance market to ensure adequate profits. Meanwhile, the percentage of revenue spent on providing medical care, or medical loss ratio, “dropped to 82.6% from last year’s 83.6%.”

So while, WellPoint’s desire to skirt regulations may not come as a surprise, the story highlights just how vulnerable the MLR metric is to manipulation. As I noted here, establishing a medical-loss ratio still allows insurers to shift a disproportionate amount of premium dollars into profits. If anything, plans could pay more for certain services (to meet the benchmark), exclude certain benefits from coverage (benefits which would attract a sicker risk pool), or in the case of WellPoint, reclassify some administrative services as medical care and still meet the mark without necessarily providing more care.

As James C. Robinson points out in this Health Affairs article, “High ratios can be achieved either through a large numerator (high medical expenditures) or through a small denominator (low insurance premiums).” In 2007, for instance, 6 of the 7 largest publicly-traded health insurers reported that their profits increased by 10%, while their medical loss ratios also went up.

All of this suggests that regulators are going to have to be careful in how they define medical expenses and will need to “review the math on insurer medical loss ratios and premium calculations.”

Over at the National Review, Stephen Spruiell takes issue with my claim that providing employers with a subsidy for offering prescription drug benefits to their retirees and allowing them to deduct the credit, amounts to one of the more egregious examples of corporate welfare. He rightly points to this study from the Employee Benefit Research Institute, which finds that “it is cheaper for the government to subsidize a private plan than to pay for a retiree’s prescription drugs through Medicare Part D — even with the tax deduction factored in”:

At least some corporations are now likely to drop their retiree drug benefits and dump their retirees into the public system. So, when someone such as Igor Volsky asks why fiscal conservatives are not outraged by this bit of corporate welfare, the simplest answer is that this bit of corporate welfare actually saves taxpayers’ money.

If you click on that report you’ll see that EBRI does find that “for each retiree who loses drug coverage through an employer and gains it through Medicare Part D, the additional cost to the government would amount to $544.” But the report does not argue that eliminating the deductibility will force employers to drop their coverage.

Remember, the health care law only prohibits employers from deducting the subsidy; they’ll still receive the 28% credit. Companies will be encouraged to continue their prescription drug coverage but they won’t be able to profit from it. And despite all the dramatic pronouncements, it’s unlikely that eliminating the deductibility alone would push employers to dump their retirees into Medicare Part D in significant numbers.

In fact, I suspect that since the Congressional Budget Office scored this as a savings, their models suggest that the subsidy will provide enough incentive for businesses to retain their retiree coverage. Government will be able to avoid the financial burden of covering more seniors in Medicare Part D without allowing businesses to deduct taxpayer dollars.

A growing number of corporations are complaining about a provision in the new health care law that preserves the subsidy employers receive for providing retirees with prescription drug coverage, but prevents companies from deducting it from their taxes. And now, Republicans are taking up their cause.

Framing the news as a harbinger of future tax increases and higher health care costs, Republicans will argue that if corporations aren’t allowed to write off the money they receive from taxpayers, thousands of Americans will lose their jobs. As the Daily Caller’s Jon Ward reports, the GOP is seizing on business opposition to the provision to move its health care message “away from trying to repealing the bill and toward focusing on the law’s impact on businesses and jobs.”

“House Energy and Commerce Committee Chairmen Henry Waxman, California Democrat, has expressed skepticism about the corporations announcements, summoning them to testify April 21 about their complaints. But Republicans have begun to pounce on the announcements, using them with increasing frequency to build a case that the health bill is bad for the economy“:

“The president’s new health care law is already hurting our economy,” read a release from the office of House Minority Leader John Boehner, Ohio Republican.

The release cited “a long list of employers including AT&T, AK Steel, 3M, Caterpillar, Deere and Valero Energy that have felt an immediate squeeze because of ObamaCare’s job-killing tax increases and health-care cost hikes.”

Shocked by the passage of health reform, the party is now throwing its repeal rhetoric at anything that sticks. This provision is the worst kind of waste of taxpayer dollars and the most egregious form of corporate welfare, yet Republicans are seizing on it as an opportunity to paint health care reform as failure. “I think you’ll see Republicans probably get Democratic support to try to repeal this unless they remain immune to the idea that taxing companies into the tune of billions of additional dollars isn’t a job killer,” Rep. John Shadegg (R-AZ) predicted this morning on Fox News.

But this sounds unlikely. After all, lawmakers had ample opportunity to tweak the measure in the Senate Finance Committee and on the Senate floor. They chose not to. Moreover, is disingenuous for companies to suddenly complain about the charges, considering the change was a part of the draft bill that passed the Senate Finance Committee last year and several buisiness groups complained about it in September. Finance Committee aides “were in close talks with employer groups” and it ultimately won approval from many, with the chairman of Business Roundtable saying “it’s very closely aligned to [our] principles.” “They would come to us with a construct and explain how the constraints drove the policy, and we would try to suggest better ways to approach it,” said Neil Trautwein, vice president with the National Retail Federation.

All this is a roundabout way of saying that this provision is just a small example of responsible governance. Democrats chose to finance parts of health care reform by reducing wasteful government spending and eliminating the deductibility of the retiree drug subsidy presented an easy target. Now, the party of fiscal responsibility is outraged.