I have no idea how the L200 does what it does, but I'll tell you roughly how it operates in this circuit. Pin 5 provides the output power. All the current coming from there goes through R3. Pin 2 is an input to an internal voltmeter, which detects the voltage drop between Pins 5 and 2. If this voltage drop is greater than 0.45 V, then there too much current going out. Pin 4 is an input to another internal voltmeter, which detects the voltage drop between Pins 4 and gnd (Pin 3). The L200 sets the voltage on Pin 5 so that the voltage on Pin 4 is 2.77, assuming the current is lower than Imax. But if there too much current on the output, it drops the voltage on Pin 5 to keep the current in bounds. In this case you'll get less than your desired voltage on the output.