By ROBERT PEAR

The New York Times

August 2, 2010

WASHINGTON — In late March, after passage of the landmark health care legislation, the Obama administration sent a sternly worded notice to insurance companies, saying they must cover children, regardless of any pre-existing conditions.

Insurers acceded to the demand, and the White House declared victory. But it came at a price. Four months later some insurers said they would stop writing new coverage for children in the individual insurance market. If parents could buy "child only" policies at any time for any reason, they might wait until their children got sick, insurers said.

The White House backpedaled last week and issued a clarification to address such concerns. Insurers, it said, "may restrict enrollment of children under 19, whether in family or individual coverage, to specific open enrollment periods." For example, it said, an insurer could limit open enrollment to one month a year.

The tussle illustrates a larger point. Consumers and policy makers will be crossing treacherous terrain as they make the transition to a new health care system in the next three and a half years.

Until 2014, the purchase of insurance remains voluntary (except in Massachusetts), and insurers in most states are still free to charge higher premiums to people judged likely to need costly care.

The rules change in 2014. Most Americans will be required to have insurance. The government will offer subsidies to help defray the cost. And each state will have a centralized marketplace, or exchange, where people can shop for insurance.

But until then — in the absence of an individual mandate, subsidies and health insurance exchanges — the people most likely to buy individual insurance are those who need it most: the sick and the infirm.

Administration officials are eager to demonstrate and deliver what they see as the benefits of the new law. But they face a delicate task: they do not want to destabilize or disrupt the existing market in a way that makes insurance less available or more expensive to consumers.

The market for individually purchased insurance remains — in the words of Karen L. Pollitz, a senior federal health official — "a difficult place to buy coverage, especially for people who are in less-than-perfect health."

The new law is changing that. But the transition is full of risks and uncertainty for all involved:

Consumers could see higher premiums because of the additional benefits and protections they receive in the coming year. The new law prohibits lifetime limits on the dollar value of benefits, requires coverage of preventive services without co-payments, allows young adults to stay on their parents’ insurance and empowers consumers to appeal health plan decisions.

Insurers run a risk if they raise rates too much. Federal and state officials can require them to justify any "unreasonable premium increase." And if they show a pattern of excessive or unjustified rate increases in the next few years, they can be excluded from participation in the exchanges.

The new law requires insurers to spend at least 80 percent of every premium dollar on medical care and activities to improve its quality. This "medical loss ratio" could be a boon to consumers, as Congress intended. But some insurers may curtail sales to individuals or small businesses if they find the requirements too difficult to meet.

The insurance superintendent in Maine, Mila Kofman, cited that concern in asking the federal government for an exemption from the medical loss ratio requirement. "Absent a waiver, I believe that the federal standard may disrupt our individual health insurance market," said Ms. Kofman, a strong supporter of the new law.

Likewise, the American Academy of Actuaries said the requirement could "significantly disrupt the individual market" between now and 2014, and it warned of "increased volatility in premium rates."

Sabrina Corlette, a research professor at the Health Policy Institute of Georgetown University, said: "In 2014, we can say good riddance to bottom-feeder insurance plans, which have built a business around selling policies to healthy young people. They often provide inadequate coverage when people get sick. But if these plans pull out of the market before 2014, we want to be sure that viable alternatives are available."

The political risks are also significant. Politicians promised that the new law would rein in health costs, and voters may be irked if premiums continue to rise much faster than their earnings.

Lawmakers can deflect some of the criticism by blaming insurers. Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, said insurers like Aetna and UnitedHealth had a duty to hold down premiums in 2011 because they were racking up "huge profits."

Representative Pete Stark, Democrat of California and chairman of the Ways and Means Subcommittee on Health, said insurers should "return those windfalls to enrollees in the form of reduced premiums."

For the moment, President Obama has the upper hand. Congress gave him sweeping power to regulate the industry for the benefit of consumers. Administration officials said they would be tough on the industry, but, for the law to succeed, they need large numbers of insurance companies to compete in the new regulated marketplace.

The experience of Massachusetts illustrates the potential benefits and risks of the federal overhaul. Many people have gained insurance since the state expanded access to coverage under a 2006 law. But a recent study for the Massachusetts Division of Insurance found that significant numbers of people were buying insurance when they needed it, then dumping coverage after they had expensive medical procedures.

As a result, people who maintained their health insurance have paid higher prices, the report said.

Massachusetts officials are considering changes that would make it more difficult for people to jump in and out of coverage, and federal officials said they would tweak their rules too if they saw a need.