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I’ve often said that the Affordable Care Act is the end of the beginning of health reform. It addresses many problems associated with health insurance, but more must be done to control costs and access real universal coverage. And flaws in the law need to be fixed.

However, the reform law will end some of the most abusive insurance industry practices, such as blackballing folks with pre-existing conditions and cancelling policyholders’ coverage when they get sick.

And health insurance companies now have to spend at least 80 percent of our premiums on actual health care. If they devote more than 20 percent to administrative overhead and profits, they are supposed to send rebate checks to their policyholders. Since that 80/20 rule went into effect last year, consumers have saved almost $1.5 billion, mostly in the form of those rebates, according to a new study by the Commonwealth Fund.

The rule has also resulted in lower premiums for many and elimination of hundreds of millions of dollars in administrative waste. That’s the good news. The no-so-good news is that because the reform law does not give the federal government the authority to regulate rates, many health plans used their administrative savings to boost profits instead of reducing premiums.

That situation reflects not only a flaw in the federal reform law, but also the ineffectiveness of health insurance rate regulation at the state level. In only a few states do insurance commissioners have the authority to reject unwarranted rate increases, and even in the states that do, many health plans are exempt from state regulatory oversight.

Researchers for the Commonwealth Fund found that during 2011, the first year of the 80/20 rule, administrative costs fell by more than $785 million in the large-group market, a segment that comprises almost all large employers, but the cash was pocketed rather than shared with consumers. Because large employers typically self-insure—meaning they, not insurance companies, assume the risk for medical claims—they are not subject to regulation by state insurance commissioners. This is despite the fact that self-insured employers contract with insurance companies to administer their employee health care benefits.

Big employers were exempted from state regulation by a 1974 federal law intended to protect workers’ pension plans by bringing employee benefits under the regulation of the U.S. Department of Labor. Over the years, however, courts have ruled that this law, the Employee Retirement Income Security Act (ERISA), also applies to health benefit plans.

Members of Congress had no reason to believe that they would be undermining state regulation of health plans when they passed ERISA. Nevertheless, because of ERISA, most of us who are covered under an employer or union-sponsored group plan can get no help from state regulators when we have a problem with health benefits.

Allowing companies to increase profits instead of passing savings along to policyholders was likewise an unintended consequence of Obamacare. The reason for the 80/20 rule in the first place was to keep insurers from wasting our money on unnecessary overhead and diverting more and more premium money to reward shareholders and corporate executives.

Those of us who buy coverage on our own directly from insurance companies benefited much more from the 80/20 rule than people who are covered through an employer. The Commonwealth Fund researchers found that, unlike the group market, insurance firms passed the savings they realized from reducing administrative expenses along to consumers in the form of lower premiums.

The researchers suggested that “stronger measures,” including rate regulation, “may be needed if consumers are to benefit from reduced overhead in the group insurance markets.”

That point of view was echoed by the Los Angeles-based Consumer Watchdog, which has been leading an effort in California to give the state’s insurance commissioner the authority to reject unjustified rate increases.

“Absent rate regulation, health insurers are gaming the health reform law to keep premiums high and increase profits, said Carmen Balber, director Consumer Watchdog’s Washington office. “Health insurers should be required to open their books and justify their changes—including why they haven’t passed on to consumers nearly one billion dollars in savings.”

Consumer Watchdog anticipated this flaw back in 2010 as the 80/20 rule regulations were being written. In a letter to Health and Human Services Secretary Kathleen Sebelius in May 2010, Balber wrote, “In the same way that a Hollywood agent who gets a 20 percent cut of an actor’s salary has an incentive to seek the highest salary, insurers will have incentive to increase health care costs and raise premiums so that their…cut is a larger dollar amount.”

Both Congress and state lawmakers have roles to play in fixing this unintended consequence of the reform law. Congress should give the HHS Secretary the ability to reject unjustified rate increases from ERISA-protected group plans, and state lawmakers should give the same authority to state commissioners in the individual market.

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