After a week of wrangling, the health insurance trade group AHIP announced that insurers would agree to covering all children regardless of pre-existing conditions, though they added in the same breath that they could have to increase rates to accommodate such a change. This exposes the poor drafting of this late-to-the-game regulation, because without some form of price rating health insurers can raise rates with virtual impunity, and may now feel they have an excuse to do so.

Health and Human Services Secretary Kathleen Sebelius sent a letter to AHIP yesterday, attacking them for trying to alter the regulations passed by Congress within days of the bill becoming law. “Now is not the time to search for non-existent loopholes that preserve a broken system,” she wrote in the letter.

After the few days of bad publicity, AHIP appeared to retract their interpretation of the statute.

AHIP said de-linking the requirement to insure sick children from the law’s mandate that everyone buy health-insurance coverage, which goes into effect in 2014, could drive up prices in the meantime. But the group said it would do whatever HHS tells it to do.

In a letter responding to Ms. Sebelius Monday, Ms. Ignagi said her members recognized the “significant hardship that a family faces when they are unable to obtain coverage for a child with a pre-existing condition,” and pledged to fully comply with the regulations HHS is developing. The group is analyzing how much it would cost to take all comers under 19 years old.

You can pretty much figure out AHIP’s game here. With no restrictions on cost until 2014, the industry can raise their premium prices almost at will. Even the bad publicity suffered from that 39% rate hike of Anthem Blue Cross plan has not stopped that scheduled increase from taking effect in May. And when outrage is expressed by families facing double-digit rate hikes, AHIP will clear their throats and blame the pre-existing condition exclusion for children, forcing the poor insurance companies to take on a sicker risk pool and raise prices to survive.

Except covering kids is fairly cheap to begin with. And the universe of kids with a pre-existing condition who aren’t covered through SCHIP, Medicaid, or an employer plan is extremely small. So by making a big issue of this, AHIP potentially sets up large rate hikes in the 2010-2014 period that aren’t at all justified.

Though sicker children incur more health expenditures, additional costs to the industry were likely to be minimal as the number of children who would be affected by the broadest interpretation of the law could be relatively small. The Children’s Health Insurance Program is credited with extending coverage to about eight million low-income children who are not poor enough for Medicaid.

Roughly eight million children remain uninsured, according to the Kaiser Family Foundation, but just 1% to 2%—or 80,000 to 160,000—have a health condition such as cystic fibrosis or cancer that would disqualify them from private insurance coverage, said Sara Rosenbaum, chairwoman of the health-policy department at George Washington University and a children’s health-care expert. Many of those children’s families were unaware they could qualify for Medicaid or CHIP assistance or enroll in an employer plan, she said.

They’re fighting this so hard to let everyone know that the rate hikes aren’t their fault. This has been their M.O. since February, since the Anthem Blue Cross mess. It hasn’t “worked” in the PR arena, but they’ve quietly gotten their rate hikes, and that’s really all that matters to them, I gather.