After claims from insurance companies that they plan to dramatically increase premiums this year because of the Affordable Care Act, the White House fired off a threat to the industry’s main lobbying group today.

Writing to the head of America’s Health Insurance Plans, Health and Human Services Secretary Kathleen Sebelius said insurers that hike rates for consumer unjustifiably may be locked out from the state exchanges due to be set up by 2014. These exchanges will be the primary means by which small groups and individuals will purchase coverage. Being excluded from these marketplaces could be devastating to insurers. (full text of the letter after the jump)

The overt nature of Sebelius’s warning shot means a few things. It means that HHS knows that the industry’s support during the health care reform debate means little now. And it means that HHS is tough – ready and willing to use all means necessary to stop insurers from padding profits and using the Affordable Care Act as an excuse. It’s this second matter that’s worth more exploration.

For starters, how much power does HHS really have to control insurance companies? Despite Sebelius’s threat, it’s not clear to me that the federal government will have the authority to decide which insurers will be allowed into the exchanges, which will be run by states. (States that don’t set up their own exchanges will see their residents routed to a federal version, however.) Also, it’s still not clear whether insurance will be sold only via exchanges or whether policies could be marketed and sold independent of the exchanges. Some of these questions will be answered as HHS issues more regulations implementing the new law.

In her letter, Sebelius concedes that the Affordable Care Act will, by Sept. 23, 2010, require insurers to offer additional benefits. More benefits cost more. Says the letter:

Many of the legislation’s key protections take effect for plan or policy years beginning on or after September 23, 2010. All plans must comply with provisions such as no lifetime limits, no rescissions except in cases of fraud or intentional misrepresentation of material fact, and coverage of most adult children up to age 26. New plans must comply with additional provisions, such as coverage of preventive services with no cost sharing, access to OB / GYNs without referrals, restrictions on annual limits on coverage, a prohibition on pre-existing condition exclusions of children (which applies to all group health plans), access to out-of-network emergency room services, and a strengthened appeals process.

Sebelius goes on to say that these extra costs could be mitigated by the elimination of the “hidden” tax” now levied on those with insurance to make up for care provided to the uninsured. But major provisions to expand coverage – like new Medicaid eligibility rules and subsidies – won’t kick in until 2014. Until then….?

Sebelius also writes:

Any premium increases will be moderated by out-of-pocket savings resulting from the law.

This is certainly true – pay a little more each month, but pay nothing when you go for a checkup – but, if anything, it justifies charging higher premiums. The doctors’ visits won’t be free; they’ll be paid by insurers.

In her letter, Sebelius reveals what has really incensed her – independent analysts have said the Affordable Care Act should tack 1-2% to premiums, not 9% as some insurers are claiming. So insurance companies are just jacking prices because they have an easy scapegoat in the new law, right? Well, probably in some cases. Remember the Anthem case? But it’s worth noting that every plan and policy is unique.

A small group plan that happens to insure only people without children shouldn’t have to charge more to pay to treat children with pre-existing conditions. Likewise, a plan that caters to young adults shouldn’t have new expenses from young adults staying on their parents’ insurance policies. Individual plans, on the other hand, will still be allowed to charge enough to cover their costs. Sure, you can buy a policy for your child with a pre-existing condition now when you couldn’t get one before – but there’s nothing that says you won’t pay dearly for that plan. A plan whose business model rests on canceling policies of customers who get sick – in other words, the kind of bad behavior we’ve heard so much about – will have to raise rates dramatically when it becomes illegal to do that.

It may be convenient to talk about averages and baselines, but to know if a rate hike is justified, regulators need to examine a plan’s financials, practices and risk pool. This is a critical role, in particular, for states moving forward.

Here’s the Sebelius letter: