The Institute of Medicine (IOM) has released its long-awaited report outlining criteria for the Obama administration to determine what medical services most health insurance policies will be required to cover starting in 2014.

Since the federal government is mandating that people purchase health insurance and will spend trillions of dollars in taxpayer subsidies, it therefore must define what qualifies as an acceptable policy. Deciding what will be in this “essential benefits package” is going to be a long, painful process that the political system is ill-equipped to handle.

The IOM advisory panel didn’t specify down to the level of which tests and procedures must be covered — HHS will do that. Instead, the IOM urged officials to use the benefits offered by a typical small employer plan as the basis for the government plan.

That sounds like a reasonable start, but this is only the first shoe to drop for this particular Obamacare centipede. The IOM recommended that the Obama administration detail by next May which specific benefits should be required in order to give health plans time to prepare for the major rollout of insurance coverage the following year.

This is very new territory in which the federal government — not employers or individuals — will decide what private health plans must cover. The IOM says the treatments should be cost-effective and also “demonstrate meaningful improvement” over current services and treatments — a very high bar. The IOM recommended that if the services don’t meet these and other criteria, they could be excluded from the benefits package. And that, of course, will lead to another level of government rules.

This is just what the American people feared. Of course cost-benefit analyses are important — employers and others buying health insurance make those judgments every time they purchase a policy. But how many of us want the government to decide?

The IOM report sets out utopian goals: “The [package] must be affordable, maximize the number of people with insurance, protect the most vulnerable individuals, promote better care, ensure stewardship of limited financial resources by focusing on high value services of proven effectiveness, promote shared responsibility for improving our health, and address the medical concerns of greatest importance to us all,” said the report. One wonders why the government doesn’t wave a magic wand over Medicare and Medicaid to do this.

Defining an affordable premium target became a “central tenet” of the IOM committee because, the committee concluded, if cost is not taken into account, the essential health-benefits package will become increasingly unaffordable for both individuals and small businesses.

Fair enough. But the big question most Americans are likely to ask is whether they want government to be making these decisions or whether they want to decide for themselves.