This legal battle over insurance rate hikes in Massachusetts is important because it signals the potential benefits and challenges of federal reform to ensure affordable health insurance for all. The success of current federal reform efforts depends on insurance becoming more affordable for those in the individual and small group market, yet high profile rate increases in California and now Massachusetts lead some to question whether this is a realistic goal.

Massachusetts already has in place the kind of private insurance reform that we have just enacted at the federal level. Thus, federal and state policymakers, insurers, and consumer advocates are watching Massachusetts to learn from the successes and weaknesses of its system. One lesson from this latest battle seems to be that if we expect to achieve universal coverage by mandating people to purchase of insurance, state insurance commissions must use their regulatory power to control the rise of health care premiums.

The other lesson from this battle, however, is that doing this may not be as simple as it seems. This battle raises two critical questions that will likely come up once federal reform is implemented. One question is substantive: How do we determine whether premium increases are "excessive" and "unreasonable in relation to the benefits provided," as Massachusetts regulators are claiming, or whether they are reasonable based on future projections of rising medical costs, something insurers have been allowed to factor into their rate-setting process? In fact, there is no clear test or legally mandated method for determining rates.

The other question is procedural: What is the scope of power that state insurance agencies have to review and deny insurance rate hikes, and what kind of deference will courts give to their decisions? The fact that the state won the first round in this legal dispute is not surprising: Courts are very deferential to state agencies acting pursuant to the regulatory power granted to them by the state legislature. Here, the insurance commissioner has express authority to review rates, there is an important need for this kind of consumer protection in light of the individual mandate to purchase insurance, and courts often defer to agency's decisions on technical matters that involve special expertise and policy considerations.

There are important limits to regulators' power, however. State officials cannot wield their power in an arbitrary way or to score political points, and their actions must be consistent with state law. According to the Boston Globe, the insurers in Massachusets are alleging precisely these kinds of violations. For example, they claim that by denying the increases the state has failed to ensure that rates are high enough to maintain plan solvency, and they do not take into account prediction of future medical cost, something the law expressly allows. Apparently, these allegations were not enough to convince a court to allow the rate hikes to go forward. But as the appeals process unfolds, we'll get alot more information about the reasoning and factors used by both the state and insurance companies to support their respective positions.

Unless the insurers can prove that the state has failed to consider factors that the law has expressly required, violated express procedural requirements, or used a process that was arbitrary and irrational, insurers will have a difficult time getting a court to overturn the state's decision.