Florida Governor Rick Scott has refused to take most health reform funding (J Pat Carter/AP)

At issue is a regulation requiring insurance companies to spend at least 80 percent of premiums on medical costs. Florida, a swing state with voters skeptical of the health-reform law, is pushing back. The state wants the Obama administration to waive the spending requirement for Florida insurers, a move that critics say would roll back a crucial consumer protection in the health-reform law.

Officials in Florida, where one in five people is uninsured, say the waiver is essential to keep insurers from packing up and moving their business out of state.

For many, the Florida waiver is a litmus test of how aggressively the Obama administration will implement the law, especially in a state that’s hostile to it. If the waiver is approved, “It says anything goes,” says Ethan Rome, director of advocacy group Health Care for America Now, which has called for a public hearing on Florida’s request.

Moments after Congress passed the health-reform law in March 2010, Florida established itself as chief objector. It is leading the 26-state lawsuit challenging the law, which the Supreme Court will hear in its coming term. Gov. Rick Scott (R) has refused to accept nearly all federal funds from the Obama administration’s signature achievement.

Florida voters overwhelmingly dislike the law. This is especially true for the key demographics that the Obama campaign will likely target come 2012: 65 percent of seniors and 62 percent of independents oppose the health overhaul, according to a Mason-Dixon poll last year.

“Until the election is over, the administration has really got to be cautious about confronting governors who don’t want to cooperate,” says Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public Health. “In Florida, you’re looking at a swing state where many seniors are concerned and the governor is strongly opposed.”

Florida’s latest push-back to health reform centers on a regulation on how insurers spend their money, called the medical loss ratio. Starting this year, at least 80 percent of premiums must go toward medical costs. The other 20 percent can go to administrative costs and profits. If insurance companies spend less on medical costs, the difference will go back to consumers as a rebate.

Insurance plans usually operate with a thin profit margin, hovering at 2 or 3 percent. Administrative costs, for advertising and billing, can add up: A 2009 report from the Commonwealth Fund found health plans spend between 15 and 40 percent of premiums just on administering the plan. Faced with the prospect of lower earnings, health plans are left weighing their options: Restructure their business plans or pull out of the market altogether and look for business in more lucrative lines of insurance such as life or property.

“Every meeting I’m in with insurance plans, they’re building scenarios and calculating their risks,” says Paul Keckley, director of the Deloitte Center on Health Solutions. “You look at their earning statements, and you understand why they’re saying ‘80 percent is a challenge for us.’ Unless forced, they may not play.”

Wall Street analysts estimate that the regulation could have a $2.4 billion impact on the nation’s top four health insurance plans alone. And a report from the Senate Commerce Committee found that, had the regulation been in place last year, consumers would have received nearly $2 billion in rebates.

But many companies see another option: Over the past year, the Obama administration has begun issuing waivers from the medical loss ratio requirement to lower the required medical spending. Seven states have successfully persuaded the Department of Health and Human Services that without regulatory reprieve, their insurance markets would be thrown into disarray.

“The waiver approach that the department has come up with is a way to solve this problem,” says Karen Ignagni, president of America’s Health Insurance Plans, which lobbies for the insurance industry.

In administering the new spending requirement, the Obama administration walks a tightrope: It seeks to drive down the cost of insurance but not to the point where it drives health plans out of business.

“We want consumers to get the benefit of the medical loss ratio and the value of their premium dollars,” says Steve Larsen, director of the Center for Consumer Information and Insurance Oversight, the office charged with implementing the health-reform law. “We also want to do it in a way that isn’t disruptive to states’ insurance markets.”

The administration has denied only one state’s application, from North Dakota, while nine others await decisions in coming months. Last week, Health and Human Services signed off on a waiver for Georgia, the largest state so far issued a regulatory reprieve.

Of all the pending applications, none has drawn as much heat as Florida. The state has staked out an aggressive political position against the health-reform law. It is the largest state to apply for a waiver and has the most competitive insurance market, with 21 companies selling on the individual market. The decision has big financial implications: If it is approved, numerous reports estimate that Florida insurers would avoid about $60 million in consumer rebates. “We doubt the waiver will be approved,” Citibank analyst Carl McDonald says of Florida’s request. “But if we’re wrong, it will drive earnings upside at several plans.”

Florida Insurance Commissioner Kevin McCarty argues that customers will suffer without the waiver. In public hearings, health plans testified that they would stop offering certain products. Others predicted that new carriers would be discouraged from entering the market.

“One of our largest carriers told us they would not be offering some of the products they do now,” McCarty says. “Having fewer options is disruptive to our consumers.”

Consumer advocates, however, contend the waiver is unnecessary: With 21 companies selling on the individual market, consumers have many options.

Groups have protested outside one insurance company’s office over the issue, inspired supportive newspaper editorials and submitted thousands of signatures to the Obama administration to petition against Florida’s waiver request.

“The law is very clear in its intent: This policy is meant to save policyholders money,” says Laura Goodhue, executive director of the Florida Community Health Action Information Network. “If the federal government approves this application, it sets a bad precedent for other states.”

For nine months, McCarty has gone back and forth with the federal government, responding to three requests for additional information. With the waiver application finally deemed complete in late October, a decision is due Thursday. All eyes are on Florida.

“We watch it as a test,” Keckley says. “It’s a test of the degree of flexibility that Health and Human Services is willing to give on this.”