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Under the health reform law, every insurance plan will be required to cover a set of “essential health benefits.” The Affordable Care Act defines 10 broad categories that must be included, such as “professional services of physicians and other health professionals” and “hospitalizations.” What fits within those categories is up to the Obama administration. Any plan that wants to sell on the new insurance marketplace will have to cover the benefits. Any patient advocacy group has a one-time shot at ensuring that every health plan in the nation be required to cover treatments related to a particular condition.

It’s a monumental decision — and, in guidance today, one the federal government has made a politically astute decision to punt on.

For months now, the health policy world has waited for the Obama administration to lay out a framework for what counts as essential. Most did not expect a bullet point list: That would become too cumbersome and difficult to update as medical treatments constantly change. Instead, there was a general expectation that HHS would fill in more details on those 10 categories written into law.

It’s hard to underscore what this regulation will mean for health policy. “It’s a very important part of the regulatory picture,” Karen Ignagni, president of America’s Health Insurance Plans, told me when we discussed the issue in October. “It’s a fundamental part of the affordability calculus, whether or not health insurance will be affordable.”

As Ignagni notes, the big challenge in deciding what counts as “essential” is making a benefit package that is both comprehensive and affordable. Make the benefit package relatively sparse, and it won’t provide the robust coverage that health reform envisions — meanwhile angering any patient group whose benefits get left on the cutting room floor. But make the benefit package totally comprehensive, covering any medical treatment out there, and it becomes prohibitively expensive.

You could require health plans to cover infertility treatment, as 15 states currently do. That makes coverage more comprehensive, but also more expensive: The average cost of in-vitro fertilization treatment is $12,400. The medical bills for that treatment get spread across the whole pool of insurance subscribers, making the plan cost more.

But what Health and Human Services created today wasn’t really an essential health benefits package at all. Instead, the department announced that every state will have the option to determine essential health benefits themselves, by using standards that already exist in their states. “The state is always in control of what the essential health benefit plan is in that particular state,” Steve Larsen, director of the Center for Consumer Information and Insurance Oversight, told reporters this afternoon.

States will still have to make sure that their health insurance plans cover all 10 categories mandated in the Affordable Care Act. But they’ll get more flexibility to decide at what level. They’d be allowed, according to the 15-page guidance, to tell insurance companies to cover whatever one of their larger, small group insurance plans in the state covers. Or, they could benchmark their plan to cover the benefits that state employees get.

“They’ve punted to the states,” says Ian Spatz, a health policy adviser at Manatt, who has tracked the issue closely. “It was good politics. Deciding themselves would have created clear winners and losers. We would have definitely heard the ‘rationing’ term” for any benefits that didn’t get covered.”

Insurance companies will probably be happy with the new guidance, which allows states to benchmark to what they cover right now. States, too, are likely to be ecstatic: The guidance both allows them to define their own benefits and, for any benefits they mandate above-and-beyond their benchmark, the federal government will pick up the tab.

But consumer groups may be a bit tepid over what Steve Finan with the American Cancer Society describes as “a move that exempts the administration from building an essential benefits package.” Now, they will find themselves fighting 50 battles in 50 states to shape how insurance plans cover benefits. The idea of a national standard of coverage looks to disappear, and there’s already worry among health-care advocates about whether states will get enough oversight as they determine their own benefit packages.

“We understand the inclination to balance flexibility, comprehensiveness of coverage and cost in developing the Essential Benefits standard,” says Ron Pollack, director of consumer advocacy group Families USA. “However, flexibility must yield to reliable, comprehensive coverage of benefits for consumers guaranteed by the Affordable Care Act.”

Politically, the administration might have made the right move. But what it means in terms of policy is less clear. The whole idea of an “essential health benefits” package was meant to standardize the health benefits Americans receive. The guidance issued today indicates that we’ll see a lot of variation between states in terms of what insurance companies are required to cover — the exact opposite of what we were supposed to see under this regulation.