1 The medical loss ratio (MLR) refers to the level of payout in claims and quality improvement activities relative to premiums collected. An increase in the MLR leaves less room for administrative expenses. A decrease in the MLR leaves more room for administrative expenses.

2 See, e.g., Williamson Cnty. Reg’l Planning Comm’n v. Hamilton Bank of Johnson City, 473 U.S. 172, 190-91 (1985) (tying the reluctance to hear challenges prior to final decision to the use of constitutional balancing tests for regulatory takings); Hodel v. Va. Surface Mining & Reclamation Ass’n, 452 U.S. 264, 295 (1981) (“Because appellees’ taking claim arose in the context of a facial challenge, it presented no concrete controversy concerning either application of the Act to particular surface mining operations or its effect on specific parcels of land.”).

3 TCF Nat’l Bank v. Bernanke (TCF I), No. CIV 10-4149, 2011 U.S. Dist. LEXIS 45059, at *14 (D.S.D. Apr. 25, 2011), aff’d 643 F.3d 1158 (8th Cir. 2011).

4 Epstein, Richard A., The Constitutional Paradox of the Durbin Amendment: How Monopolies Are Offered Constitutional Protection Denied to Competitive Firms, 63 Fla. L. Rev. 1307 (2011)Google Scholar; Epstein, Richard A., Durbin's Folly: The Erratic Course of Debit Card Markets, 7 Competition Pol’Y Int’L 58 (2011)Google Scholar [hereinafter, Epstein, Durbin's Folly]. The arguments are developed in sufficient fullness that we shall not try to reproduce them here.

5 Yakus v. United States, 321 U.S. 414, 422-23 (1944).

6 Fed. Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591 (1944).

7 Id. at 603.

8 Id. at 601-02.

9 Jersey Cent. Power & Light Co. v. Fed. Energy Regulatory Comm’n, 810 F.2d 1168, 1179 (D.C. Cir. 1987) (“Hope Natural Gas talks not of an interest in avoiding bankruptcy, but an interest in maintaining access to capital markets, the ability to pay dividends, and general financial integrity.”); CalFarm Ins. v. Deukmejian, 771 P.2d 1247, 1253 n.9 (Cal. 1989) (“[I]f ‘insolvency’ is defined as ‘bankruptcy,’ it is clear that rate relief cannot be confined to companies threatened with insolvency.”).

10 See, e.g., Guar. Nat’l Ins. Co. v. Gates, 916 F.2d 508 (9th Cir. 1990) (striking down insurance rates for insufficiency in guaranteeing a rate of return); Mich. Bell Tel. Co. v. Engler, 257 F.3d 587 (6th Cir. 2001) (setting aside a rate that did not allow the telephone company to obtain a positive rate of return).

11 Located in Title I of the ACA, these provisions have varying effective dates, including upon enactment, or for plan/policy years beginning on or after September 23, 2010, January 1, 2012, or January 1, 2014. See generally Patient Protection and Affordable Care Act, Pub. L. No. 111-148, Part I, 124 Stat. 119, 130-271 (2010) (codified primarily in scattered sections of 42 U.S.C.A.).

12 On the rule of law implications of this practice, see Epstein, Richard A., Government by Waiver, 7 Nat’L Aff. 39 (2011)Google Scholar, available at http://www.nationalaffairs.com/publications/detail/government-by-waiver.

13 45 C.F.R. § 154.210 (2011).

14 The Federal Reserve's Final Regulations took effect on October 1, 2011. See Press Release, Bd. of Governors of the Fed. Reserve Sys. (June 29, 2011), available at http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm. The regulations were supposed to go into effect on July 21, 2011, the first year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Pub. L. No. 111-203, § 1075(9), 124 Stat. 1376 (2010) (amending Electronic Fund Tranfer Act § 920(a)(9), 15 U.S.C. § 1693 (2010)) (“(9) EFFECTIVE DATE.—This subsection shall take effect at the end of the 12-month period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010.”). That date was July 21, 2010.

15 Patient Protection and Affordable Care Act § 1332(a)(1), (b)(1)(A).

16 See infra at Part A.1.

17 See Patient Protection and Affordable Care Act § 1251(b)-(c).

18 Id. § 1251(a)(4)(A)(iv), (B)(ii).

19 Id. § 1251(a)(4)(B)(i)-(ii).

20 Id. § 1251(a)(4)(A)(iii).

21 Id. § 1251(a)(4)(A)(ii), (B)(i).

22 Id. § 1251(a)(3).

23 See 45 C.F.R. § 147.140 (2011).

24 Public Health Service Act § 2707(a), 42 U.S.C.A. § 300gg-6 (West 2012), amended by Patient Protection and Affordable Care Act § 1201 (an “essential health benefits package” is defined by HHS under ACA section 1302(a)). Although large group plans and issuers are not required to provide the essential health benefits, to the extent that such plans provide them, they cannot impose lifetime or annual limits on such benefits. See infra Part A.III. Furthermore, to the extent that, after 2016, states elect to permit sellers of large group plans on their exchanges, such large group plans offered on the exchanges (but not those offered outside of the exchanges) have to offer the essential health benefits package.

25 Patient Protection and Affordable Care Act § 1302(b)(1).

26 Id. § 1302(b)(4).

27 Id. § 1301(a)(1)(B).

28 Id. § 1302(b)(2).

29 CTR. FOR CONSUMER INFO. & INS. OVERSIGHT, CTRS. FOR MEDICARE & MEDICAID SERVS., ESSENTIAL HEALTH BENEFITS BULLETIN 8 (2011), available at http://cciio.cms.gov/resources/files/Files2/12162011/essential_health_benefits_bulletin.pdf.

30 Id. at 9.

31 Id. HHS intends to assess the benchmark process for 2016 and beyond based on evaluation and feedback.

32 Patient Protection and Affordable Care Act § 1302(d). The ACA permits issuers to offer a catastrophic plan only in the individual market to individuals who are less than thirty years of age, or those exempt from the requirements to maintain “minimum essential coverage” pursuant to provisions relating to individuals without affordable coverage options or with hardship exemptions. Id. § 1302(e).

33 Id. § 1302(c)(1), (4); I.R.C. § 223(c)(2)(A)(ii) (West 2012).

34 Patient Protection and Affordable Care Act § 1302(c)(2), (4).

35 Id. § 1402.

36 Public Health Service Act § 2711(a)(2), 42 U.S.C.A. 300gg-11 (West 2012), amended by Patient Protection and Affordable Care Act § 1001. This limit is $750,000, $1.25 million, and $2 million, respectively, for plan years starting between September 23, 2010, and September 22, 2011; September 23, 2011, and September 22, 2012; and September 23, 2012, and January 1, 2014. 45 C.F.R. § 147.126(d) (2010). HHS provided a process for limited benefit, or mini-med, plans to obtain a waiver of these limits, to permit such coverages to continue to have lower annual limits for essential health benefits, id. § 147.126(d)(3), but has ceased accepting applications for such waivers. The provision applies to grandfathered plans and coverages, except that annual limits do not apply to grandfathered individual health insurance coverages.

37 Public Health Service Act § 2711; 45 C.F.R. § 147.126(b)(1). Prior to the issuance of regulations defining essential health benefits, the enforcing agencies will accept good faith efforts to comply with a reasonable interpretation of the term, as long as the plan or issuer applies the definition consistently. See Patient Protection and Affordable Care Act: Preexisting Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections, 75 Fed. Reg. 37188, 37191 (June 28, 2010).

38 See Public Health Service Act § 2713. The ACA identifies the categories of services considered to be “preventive.” See id. § 2713(a). Plans are not required to cover out-of-network preventive services and may impose cost-sharing requirements with respect to such services. 45 C.F.R. § 147.130(a)(3).

39 Public Health Service Act § 2714. This requirement applies to grandfathered plans; prior to 2014, such plans are not required to make dependent coverage available for adult children who can enroll in their employer's health plan.

40 Id. § 2719A(a), (c); 45 C.F.R. § 147.138(a)(1)-(2).

41 Public Health Service Act § 2719A(d); 45 C.F.R. § 147.138(a)(3). Regulations promulgated under the PHS Act section 2719A require that applicable plans provide notice of these rights to each participant. 45 C.F.R. § 147.138(a)(4).

42 Public Health Service Act § 2719A(b); 45 C.F.R. § 147.138(b).

43 Public Health Service Act § 2709(b).

44 Id. § 2709(d) (generally limited to clinical trials relating to the prevention, detection or treatment of cancer or other life-threatening diseases or conditions, and approval or funding by certain federal agencies or a study/investigation conducted under an Investigational New Drug (IND) application reviewed by the Food and Drug Administration or exempted from an IND application).

45 Id.

46 Id. § 2704(a).

47 Defined as “a limitation or exclusion of benefits relating to a condition based on the fact that the condition was present before the date of enrollment for such coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before such date.” Id. § 2704(b)(1)(A).

48 Id. § 2704. The provision applies to enrollees under the age of nineteen for plan or policy years beginning on or after September 23, 2010, and to all others for plan or policy years beginning on or after January 1, 2014. Id. § 1255. The prohibition on pre-existing condition exclusion also applies to grandfathered plans that are group health plans. Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 1251 (2010) (codified as amended at 42 U.S.C.A. § 18011 (West 2012)).

49 Prior to the ACA, under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. No. 104-191, pre-existing condition exclusion rules applied only to group health plans and group health insurance coverage, and permitted exclusions of coverage based on preexisting conditions under certain circumstances. Compare Public Health Service Act § 2701(b)(1), 42 U.S.C. § 300gg (2006), amended by Patient Protection and Affordable Care Act § 1201, with Public Health Service Act § 2704(b)-(g), 42 U.S.C.A. § 300gg-3 (West 2012). Where an individual had eighteen months of “creditable coverage” and had previously been covered by one of several types of plans, individual market insurers were barred from imposing a pre-existing condition exclusion, unless the state provided an alternative mechanism by which to cover such individual. Patient Protection and Affordable Care Act § 2741(a)(1)(B), (b).

50 Patient Protection and Affordable Care Act § 1251(a)(4)(b)(i).

51 Public Health Service Act § 2708. A “waiting period” is “the period that must pass with respect to the individual before the individual is eligible to be covered for benefits under the terms of the plan.” Id. § 2704(b)(4).

52 Id. § 1251(a)(4)(a)(i).

53 Id. § 2705(a).

54 Id. § 2705(b)(1). Prior to the ACA, HIPAA and the Genetic Information Nondiscrimination Act of 2008 barred group health plans and issuers from establishing eligibility rules for individuals, or requiring individuals to pay premiums or contributions greater than such premiums or contributions paid by other individuals in the plan, based on certain health-status-related factors (including genetic information). Public Health Service Act § 2702, 42 U.S.C. § 300gg-1 (2006), amended by Patient Protection and Affordable Care Act § 1201(3)(A). However, with the exception of genetic information, PHS Act section 2753, such limitations did not apply in the individual health insurance market. Public Health Service Act § 2753.

55 Public Health Service Act § 2705(b)(2)(B), (j).

56 “Guaranteed issuance” is the requirement that the health insurance issuer accept every applicant for health coverage, as long as the applicant agrees to the terms and conditions of the insurance offer (premiums, out-of-pocket costs, and coverage limitations). “Guaranteed renewability” is the requirement on a plan or health insurance issuer to renew group or individual coverage at the option of the plan sponsor or policyholder, respectively.

57 Id. § 2702(a). The provision is based on a similar pre-ACA provision that was applicable only to the small group market. See Public Health Service Act § 2711, 42 U.S.C. § 300gg-11, amended by Patient Protection and Affordable Care Act § 1001(3). In limited circumstances, where individuals had eighteen months of creditable coverage, individual market insurers were required to guarantee issue policies. See Public Health Service Act § 2741(a)(1)(B), (b).

58 Public Health Service Act § 2702(b)-(d). In the latter two circumstances, the issuer may be required to demonstrate to the applicable state authority that it is applying the restriction uniformly to all employers and individuals, without regard to the claims experience of the individuals, employers and employees, and their dependents, or to any health-status-related factor. Id.

59 Id. § 2702(c)(2), (d)(2).

60 See id. § 2703 (requiring renewal or continuation of coverage except for non-payment of premium, fraud, violation of participation or contribution rates, termination of coverage, movement outside the service area, cession of association membership, and providing for uniform modification of coverage), amended by Patient Protection and Affordable Care Act § 1201; see also id. § 2742.

61 Id. § 2712.

62 Id.

63 45 C.F.R. § 147.128(a)(1) (2010).

64 Id. § 147.128(c).

65 Public Health Service Act § 2701(a)(1).

66 Id. § 2701(a)(5). Large group employers would be permitted to access the health insurance exchanges under ACA section 1312(f)(2)(B).exchanges under ACA section 1312(f)(2)(B).

67 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 1341 (2010), 124 Stat. 119, 208-11 (codified as amended at 42 U.S.C.A § 18061 (West 2012)).

68 Id.

69 Id. § 1342(a).

70 Id. § 1342.

71 Id. § 1343(a)(1).

72 Id. § 1343(a)(2).

73 Id. § 1343(b).

74 Public Health Service Act § 2719(a), 42 U.S.C. § 300gg-1 (2006), amended by Patient Protection and Affordable Care Act § 10101(g), 42 U.S.C.A. § 300gg-19 (West 2012).

75 Patient Protection and Affordable Care Act § 1103(a); 45 C.F.R. § 159.100 (2010).

76 Public Health Service Act § 2715.

77 Id. § 2715A.

78 Id. § 2717.

79 Id. § 2794(a).

80 Id. § 2794(b).

81 Id. § 2794.

82 Id. § 2794(a)(1).

83 Id. § 2794(a)(2).

84 Id.

85 45 C.F.R. §§ 154.200(a), 154.215(a)-(g) (2011).

86 Id. As of September 1, 2012, the ten percent threshold may be replaced by a state-specific threshold determined by HHS. Id. § 154.200(a)(2). The preliminary justification must include information and data on a number of issues, including a rate increase summary and a written description justifying the rate increase. Id. § 154.215(e). The written description has to include a narrative describing the data and assumptions used to develop the rate increase, an “[e]xplanation of the most significant factors causing the rate increase, including a brief description of the relevant claims and non-claims expense increases reported in the rate increase summary,” and a “[b]rief description of the overall experience of the policy, including historical and projected expenses, and loss ratios.” Id. § 154.215(f).

87 Id. § 154.215(i).

88 Id. § 154.210(a)-(b). The regulations set forth the factors that HHS will consider with respect to each insurance market in the state in determining whether a state has an effective rate review program. Id. § 154.301(a).

89 As of February 16, 2012, HHS will conduct some or all of the review in seven states and two territories as to the increases proposed for the small group and individual market, and in twenty-two states with respect to increases proposed for association products. Health Insurance Rate Reviews: Lowering Costs for American Consumers and Businesses, List of Effective Review Programs, CTR. FOR CONSUMER INFO. & INS. OVERSIGHT, CTRS. FOR MEDICARE & MEDICAID SERVS., http://cciio.cms.gov/resources/factsheets/rate_review_fact_sheet.html (updated Feb. 16, 2012).

90 A rate increase is excessive if it “causes the premium charged for the health insurance coverage to be unreasonably high in relation to the benefits provided under the coverage,” based on (1) whether it results in an MLR below the Federal MLR standard in the relevant market; (2) whether any assumptions are not supported by substantial evidence; and (3) whether the choice or combination of assumptions on which the rate increase is based is unreasonable. 45 C.F.R. § 154.205(b).

91 An increase is unjustified if the issuer provides data or documentation that is “incomplete, inadequate or otherwise does not provide a basis upon which the reasonableness of an increase may be determined.” Id. § 154.205(c).

92 An increase is unfairly discriminatory if it “results in premium differences between insureds within similar risk categories that: (1) Are not permissible under applicable State law; or (2) In the absence of an applicable State law, do not reasonably correspond to differences in expected costs.” Id. § 154.205(d).

93 Id. § 154.230(c).

94 News Release, Affordable Care Act Holding Insurers Accountable for Premium Hikes, Health & Human Servs. (Jan. 12, 2012), available at http://www.hhs.gov/news/press/2012pres/01/20120112a.html.

95 Public Health Service Act § 2794(b)(1), 42 U.S.C.A. § 300gg-94 (West 2012). Such commissioners are also required to provide information to HHS on trends in premium increases.

96 Id. § 2794(b)(2)(A).

97 Id. § 2794(b)(2)(B).

98 Id. § 2718.

99 Small and large group determinations are based on the number of employees—regardless of whether they are full-time or part-time—employed by the employer sponsor. The ACA increased the small group limit from fifty to 100 employees, see id. § 2794, but until 2016, states can elect to use fifty employees as the size limit for small group plans for purposes of the MLR. 45 C.F.R. § 158.103 (2010) (defining large employer).

100 Public Health Service Act § 2718(a).

101 Id. § 2718(a).

102 45 C.F.R. § 158.130.

103 This includes direct claims paid to providers, including under capitation arrangements, unpaid claim reserves associated with claims incurred during the MLR reporting year, the change in contract reserves, reserves for contingent benefits and the claim portion of lawsuits, and any experience rating refunds paid or received. Id. § 158.140(a) (defining “incurred claims”).

104 Under the regulations, an activity only constitutes a quality improvement activity if it falls into one of the categories in PHS Act section 2717 and meets four other requirements set forth in the regulation. Id. § 158.150(b). The regulations specifically identify certain activities that cannot be reported as quality improvement activities. See id. § 158.150(c). Only certain health information technology expenditures can be considered quality improvement activities. Id. § 158.151.

105 This includes expenses for administrative services, including cost-containment expenses that are not included as a quality improvement expenditure, loss adjustment expenses, salaries and benefits, agents’ and brokers’ fees and commissions, general and administrative expenses (including expenditures for regulatory compliance), and community benefit expenditures. Id. § 158.160(b)(2).

106 Id. §§ 158.161-.162. These provisions permit the exclusion of federal and state taxes and certain licensing and regulatory fees, but not of federal income taxes on investment income and capital gains. Id. § 158.161(a).

107 Id. § 158.120.

108 Public Health Service Act § 2718(b)(1)(A), amended by Patient Protection and Affordable Care Act § 10101(f), 124 Stat. 119, 885-91, 42 U.S.C.A. § 300gg-18 (West 2012). Starting in 2014, calculation of the MLR is to be based on the average of the premiums expensed on the costs and the total premium revenue for each of the previous three years for the plan. Id.; see also 45 C.F.R. § 158.221.

109 See id. § 158.211. In making such adjustments in the rebate requirement, the state is directed to “seek to ensure adequate participation by health insurance insurers, competition in the health insurance market in the State and value for consumers so that premiums are used for clinical services and quality improvements.” Public Health Service Act § 2718(b)(2).

110 See 45 C.F.R. § 158.301.

111 Public Health Service Act § 2718(d).

112 45 C.F.R. § 158.301.

113 See Medical Loss Ratio, CTR. FOR CONSUMER INFO. & INS. OVERSIGHT, CTRS. FOR MEDICARE & MEDICAID SERVS., http://cciio.cms.gov/programs/marketreforms/mlr/index.html (last visited Apr. 3, 2012).

114 Id.

115 45 C.F.R. § 158.221.

116 Id. §§ 158.230-.232. Any MLR based on experience from fewer than 1000 life-years is not credible and no rebates are owed for non-credible experience/plans. Credibility adjustments are permitted for MLRs based on experience of 1000 to 75,000 life-years, deemed “partially credible.” Id.

117 Id. §§ 158.240, 158.242-.244. Under the exception, which insurers may choose to employ, all de minimis rebates must be aggregated by market and distributed in equal amounts to all enrollees entitled to a rebate. Rebates can be paid to the group policyholder in the case of group health plans that are not subject to Employee Retirement Income Security Act and are not non-federal governmental plans only if the issuer receives written assurance that the rebates will be used to benefit enrollees. Id.

118 Id. §§ 158.260, 158.250.

119 Id. § 158.270(a).

120 Id. § 158.270(d).

121 See supra note 105 and citation therein.

122 See Demsetz, Harold, Why Regulate Public Utilities?, 11 U. Chi. J.L & Econ., 55, 55–65 (1968)CrossRefGoogle Scholar; Posner, Richard A., Natural Monopoly and Its Regulation, 21 Stan. L. Rev. 548, 548–643 (1969)CrossRefGoogle Scholar.

123 See sources cited supra note 122 for the sustained critiques.

124 Speaking generally, disclosure requirements work best in free, competitive markets, where the disclosure rectifies informational imbalance. In a highly regulated market, the benefit from information disclosure requirements may be marginal, given that other regulatory requirements may address the result of the informational imbalance (e.g., disclosure of prices/premium increases versus rate regulation).

125 For early statements of this position, see Richard A. Epstein, Impermissible Ratemaking in Health-Insurance Reform: Why the Reid Bill Is Unconstitutional, MED. PROGRESS TODAY (Dec. 18, 2009), http://www.medicalprogresstoday.com/enewsletters/mpt_ind.php?pid=1834&nid=250, for which Paula Stannard supplied extensive assistance, and the spin-off column, Richard A. Epstein, Harry Reid Turns Insurance Into a Public Utility, WALL ST. J. (Dec. 22, 2009), http://online.wsj.com/article/SB10001424052748704304504574610040924143158.html?mod=rss_opinion_main (“The health bill creates a massive cash crunch and then bankruptcies for many insurers.”).

126 See, e.g., Obama: Requiring Health Insurance Is Not a Tax Increase, CNN.COM (Sept. 20, 2009) (“For us to say you have to take responsibility to get health insurance is absolutely not a tax increase.”), http://articles.cnn.com/2009-09-20/politics/obama.health.care_1_health-insurancecoverage-mandate-medicare-advantage?_s=PM:POLITICS.

127 For discussion, see VICTORIA CRAIG BUNCE & JP WIESKE, COUNCIL FOR AFFORDABLE HEALTH INS., HEALTH INSURANCE MANDATES IN THE STATES 2008, at 2 (2008), available at http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/23616.pdf. For updates, see VICTORIA CRAIG BUNCE & JP WIESKE, COUNCIL FOR AFFORDABLE HEALTH INS., HEALTH INSURANCE MANDATES IN THE STATES 2010 (2010), available at http://cdm15029.contentdm.oclc.org/cdm/singleitem/collection/p266901coll4/id/3763/rec/1http://www.cahi.org/cahi_contents/resources/pdf/MandatesintheStates2010.pdf. Its report contained the warning that “more [mandates] are on their way.” Id. For the dislocations from mandates, see Epstein, Richard A., Bleak Prospects: How Health Care Reform Has Failed in the United States, 15 Tex. Rev. L. & Pol. 1 (2010)Google Scholar.

128 Prior limitations on the use of pre-existing condition exclusions were applicable where individuals had a certain amount of “creditable coverage”—that is, they had obtained insurance (even if not with the particular insurer) for a certain period of time. The purpose of this provision is to offer some assurance to insurers that the individuals had paid premiums to an insurer and were not engaging in strategic behavior. See supra at note 49.

129 For the particulars, see Epstein, Durbin's Folly, supra note 4, at 69.

130 See id. at 58-70.