From the November 2010 issue of Benefits Selling Magazine •Subscribe!

Can brokers survive health reform?

The dust may have settled on the Hill for now, but agents and carriers alike can almost certainly expect more change. But where does "reform" leave health agents and benefits brokers right now? Is it time to get out, or get ahead?

By the time you read this, it could all change. Yet, health reform's regulatory chaos has some analysts already discarding health insurance agents as the first casualty of health care reform. Rest in peace to those who find their fate relegated to the same career trash heap as travel agents, a gratuitous intermediary likely facing a complete phase out.

If the gloomy undertone is getting to you, it might be because it's hard to ignore the death knells. Like the one from Merill Matthews, a Forbes contributor from the Institute for Policy Innovation in Dallas: "I began to warn health insurance agents in speeches and on conference calls that when Obama referred to administrative waste, he was talking about them."

But the National Association of Health Underwriters is fighting for agents. And they're but one of several influential players trying to score leeway with policy-makers. They've insisted it's always been in consumers' best interest to keep agents and brokers an integral part of selecting health insurance -- and to fairly compensate them for the valuable service they provide.

The National Association of Insurance and Financial Advisors also has been lobbying hard, insists President Terry Headley. And that's no small potatoes -- given the group's size and clout as both the largest insurance-related trade association and one of the largest PACs in any industry. As things grow increasingly more complicated, Headley explains, the agent's role becomes that much more crucial. But is it all really enough to convince lawmakers?

Reaching out directly to insurance commissioners, industry advocates pushed to make a dent in federal policy these past several months - particularly over one issue, which has rendered uncertainty of "gargantuan" proportions, according to Alan Katz, principal of the Alan Katz Group and a past president of both the National and the California Associations of Health Underwriters.

The PPACA Actuarial Subgroup of the National Association of Insurance Commissioners drafted the model regulation containing the definitions and methodologies for calculating medical loss ratios (final guidelines are due by the end of this year). According to NAIC CEO Therese M. (Terri) Vaughan, "based on the language of the legislation there is no provision specifically addressing agent commission."

But the NAIC's MLR "blanks" proposal (adopted in August) limited the percentage of premiums carriers can spend on administrative costs to 20 percent for individual and small group policies, and 15 percent for large group contracts. And since commissions historically have fallen on the administrative side, this doesn't leave much room to compensate agents and brokers -- at least not to the tune to what they've been accustomed. Brokers servicing large employers tend to have commissions in the 2 percent to 3 percent range. Small group and middle-market brokers can earn commissions of up to 20 percent.

"A mature carrier needs, call it 8 percent, to run their business," Katz explains about individual coverage. "They are looking for 4 percent or 5 percent return, whether they're for profit, or if they're nonprofit, they still need a margin to ensure they can handle the ups and downs. So that leaves roughly 7 percent, maybe 8 percent per year for commissions. You'll see carriers paying more first year, less second year, or paying more for larger producers than they do smaller producers, but when the day is done, those carriers are going to congregate at paying commissions somewhere between 5 percent and 8 percent. You're going to see brokers taking a haircut on their compensation for selling individual policies. It doesn't mean they'll stop selling it, it just means they have to replace that income."

In the weeks since NAIC passed its resolution requesting lawmakers preserve the role of licensed producers in state-run health insurance exchanges, Katz - in his own blog - has seen agents, brokers and those associated with the industry intensely examine their own fate. There are those who reason it's simply a matter of time before small-group and individual market agents and brokers become obsolete and those who maintain the complexity and nature of health insurance is enough to keep licensed producers in demand.

Katz himself is not convinced the end is near.

"In uncertain times people are naturally going to grasp at any trend, perspective or idea that gives them a sense of what's happening around them. The truth is no one really knows what the impact of health care reform will be on producers. And for better or worse, there's plenty of information to keep optimists and pessimists spinning merrily along for some time to come."

For now, Katz says, it's enough to quell some fear when the NAIC clearly recognizes that brokers play a critical role in making health reform work. "If brokers go away, all that expertise and all that customer service falls on the shoulders of these insurance commissioners," Katz says. "Frankly, they can't handle the load."

Diane Boyle, NAIFA's vice president of federal government relations, told Benefits Selling in late September the MLR issue is a moving target, but "NAIFA members...are fearful that the new MLR requirements will result in reduced compensation for their service."

At press time, MLR standards had not been formally resolved, and final drafts are due to Health and Human Services Secretary Kathleen Sebelius for certification. New provisions are set to take effect Jan. 1, but many insurance commissioners have requested to slow down the phase-in of the MLR rules to let carriers, consumers and state regulators prepare because, among other reasons, they're locked into long-term expenses such as broker commissions.

"NAIFA is hopeful regulators will allow for the MLR to be phased in, avoiding major market disruption. We need to avoid unintended consequences like the one we now face with stand alone children's policies," Boyle says, referring to some insurers' decisions to stop selling child-only policies on the individual market, before reform mandates required all children under age 19 be covered regardless of a pre-existing condition.

Then there was another disastrous precursor. McDonald's reportedly warned that unless they received a waiver from new reform mandates restricting health plan annual limits, they might have to drop limited medical benefits or raise premiums for roughly 30,000 part-time, hourly or seasonal workers. And though the restaurant chain denied the Wall Street Journal story, HHS proceeded to grant waivers to 30 groups sponsoring these plans.

A matter of convenience
Katz emphasizes broker and agent commissions have always been an administrative convenience and a cost-saver, and as such should be counted in MLR calculations as a pass-through expense, similar to how real estate agents are paid.

"The focus of the MLR is to reduce the overall administrative costs involved in health insurance. One step that accomplishes that today is carriers accepting commissions from the client on behalf of the broker and passing 100 percent of that through," Katz says. "It's not like the carrier profits in any way from collecting that commission and paying that to the broker.

It's an administrative convenience, which reduces the overall costs in the system to both clients and brokers as opposed to the employer writing two checks -- one to the carrier, one to the broker. The commission is being passed through to an independent third party, so it should be considered outside the MLR calculation."

Which is exactly what NAHU wants the NAIC to acknowledge, says Jessica Waltman, NAHU's senior vice president of government affairs. "It was never our goal to have health insurance agent commissions included as a medical expense because that would be ridiculous," Waltman says. But in essence, "The consumer or the employer is interacting with the broker and selecting them as an independent agent to look at a wide variety of health care products, and the agent is appointed with the carrier with which it does business, but the consumer can pick from a wide variety of products that the agent offers and places them with. Really it's the consumer hiring the agent or the broker."

Line 10.2 on the NAIC blanks form lists agent and broker commissions and fees as general and administrative expenses. Waltman says it's what NAHU anticipated but, "we are hoping the model and the instructions on the blanks form would give commissioners the flexibility to treat those commissions as a pass-through expense when calculating the overall ratio. It's not really part of the carrier's expense. It's a pass-through and folded into the premium as a matter of convenience to the consumer."

Brokers and exchanges
An aim of health insurance exchanges -- to be operational by 2014 -- is to help with some difficulties small businesses historically have had with buying group health coverage. Namely, exchanges are intended to alleviate administrative costs and boost the bargaining power to negotiate benefit designs and premiums. Small businesses will benefit from aggregating employees into a single risk pool by allowing small companies to participate in purchasing pools.

But where will brokers fit in? If California -- the first state to move forward with its exchange -- sets the bar for exchange laws, there won't be any clear definition. A statement from the governor's office says the exchange will work "in partnership" with agents and brokers. And there's nothing to say exchange "navigators" have to be licensed.

But that doesn't mean exchanges won't still be viable markets for brokers, Waltman says. "As for continuing to provide service to clients who purchase coverage through exchanges, since it is the professional role of agents and brokers to provide consumers with accurate information about their health coverage options, exchange participation is a natural fit.

"A number of states already have set up task forces to get their exchanges under way," she continues. "Agents and brokers are a huge part of the existing health insurance exchanges in both the Massachusetts Connector and the small group portal in Utah. Both of them, especially in Utah, have a huge agent/broker focus. Health insurance exchanges are essentially a variation of a purchasing cooperative, which many states have tried in the past.

There aren't really any successful [large scale] public purchasing cooperatives. There are some private ones, and all the private ones are agent/broker driven or involved. All the public ones in the past included agents and brokers, and those that didn't almost immediately opened them up and involved agents and brokers because they weren't successful otherwise."

Add to that the promise of the individual mandate, which, according to Katz, could be upwards of an additional 30 million or more insured."The volume of business available will increase and you'll make less on more sales is the way to look at it," Katz says.

"Based on what insurance commissioners and others are saying, there's likely to be a robust role for brokers in most exchanges. What's more appropriate now is for brokers to educate decision-makers and lawmakers on the role they play so that the exchanges are designed from the get go to include a role for brokers to provide that service."

Doing More for less
Clearly agents and brokers are feeling the squeeze already. "Insurance companies have already started paying flat fees instead of commissions and many large insurance companies as recently as, for example, Humana and WellPoint have mentioned pressures on their commissions during their earnings call," says Ron Agypt, vice president of broker sales at Aflac. "[Brokers are] getting pressure by both the medical carriers and by the employer who's really saying to them, 'We need more for less.' Just like we're asking our people to do."

HealthPlan Services, an outsourcing solutions firm for insurers in the individual, small business, association and union trust markets, recently polled operational executives for 26 health plans with a commercial product line and at least 50,000 members enrolled in individual/small group products. Their survey showed 58 percent of respondents are still examining the impact reform will have on agent commissions; 27 percent already have decided to reduce commissions to meet the MLR floor.

Michael Gomes, executive vice president of market operations at BenefitMall, says the commission issue, as far as what he's seen, is not creating animosity between carriers and brokers. In fact, the brokers his company deals with "are using [BenefitMall] as an opportunity to have conversations with carriers. What can we help you do? How can we help lower your overall operating expenses? We're beginning to see carriers looking at the efficiencies of the distribution channels and saying, 'We're going to reward the most efficient.' The relationship between the broker and carrier is stronger than ever because both parties need to help their clients through all of these changes."

Ultimately, the hit on compensation has long been in the works. According to Katz, brokers are used to getting paid at a greater rate than general inflation. "Their rent is not going up as fast as health insurance premiums. Therefore, since their compensation is tied to the premiums, they're getting a cost of living increase that goes beyond the cost of living." But, he says, "that will come to an end. Which means that commissions will be disassociated from premiums and it will be a flat fee based on numbers of employees and dependents."

Right now, however, Katz says a lot of carriers aren't in the position to shift from a percentage of premiums to a capitation method. "Their systems are just incapable of doing the calculations." But by 2014, you might see a move in that direction.

In fact, a September report from the Commonwealth Fund by Timothy Stoltzfus Jost of Washington and Lee University School of Law suggests exchanges should limit commissions to a flat per-member, per-month dollar amount, as the Utah Health Exchange has done, and that agents and brokers receive similar commissions regardless of the insurer. Jost says percentage commissions create a "perverse" incentive for agents and brokers to try to sell more expensive policies.

Commissions also should be the same for renewals as new enrollments. This will ensure enrollees initially go with the most appropriate plan and then agents can provide service that keeps them satisfied with their plan. Finally, Jost recommends, agents and brokers should receive the same commission, both outside and inside the exchange.

Go deep or go home
As Katz puts it, commissions and what will happen to them is "just another dynamic that's going to impact producers and require them to either leave the market or dive deeper into it." Revenue issues aside, brokers have to step up to a more comprehensive role. In Agypt's opinion, clients going forward are looking for a more holistic approach and integration with benefits.

"Brokers and consultants are going have to provide more intellectual capital," says Agypt, and it could mean teaming up. "In 2014, the exchanges will be open only to accounts of 100 or less. How will brokers cope with that? How will it affect the broker who has a client over 100 and the one with under a 100? That broker-consultant has got to know both sides of that fence."

Increased client demand is nothing new, according to TJ Gibb, national practice leader of specialty benefits at Humana. "I've been hearing from brokers for the past five-plus years that clients expect more from them. [Brokers] need to have efficient pricing models and most importantly, they need to have a thoughtful strategy with their customers to say well, what does your budget look like for benefits?"

NAIFA's Boyle says "as members prepare for the likely reduction in compensation, some are looking at increasing their focus on compliance service, others are considering a greater emphasis on other product lines and many are looking at a combination."

Voluntary products - gaining traction with employees and employers alike - are a way to bolster broker revenue, says Brad Ridnour, regional sales vice president, voluntary benefits division, at Trustmark Voluntary Benefit Solutions. "There's a need for these products at the employer level and brokers and consultants are starting to realize it's a nice way to enhance their revenue while at the same time offering very good benefits to their clients."

And for Agypt, a 25-year industry veteran, there's never been a more engaged broker-consultant community in the voluntary business than what he's seen in the past 24 months. "Voluntary insurance has become an excellent opportunity for brokers and more importantly it's a solution for companies trying to balance their costs and the need to insure a protected healthy work force," he says.

But Paul Cantwell, president, HealthCorp Solutions, says mitigating employers' rising health costs is not a matter of merely matching the right products, but also consulting on overall risk management. A big part of that is by implementing strategic and effective health management programs.

"Being just a broker, to me, is not solving a problem," Cantwell says. "I don't call myself a broker. We do the brokerage function but at the end of the year we weren't just sitting back for 10 to 11 months and then saying 'Well it's time to go shop your renewal.' That has never solved a thing. Aside from whoever's going to provide medical service through whatever funding mechanism, doctors and hospitals will still be around whether it's private or public. Whatever the prices, the cost of doing it is a direct reflection of the risk inherit in the problem -- and that is still employees' and their family's health."

Katz's strategy for change looks at two approaches: "One is sort of a horizontal approach to change: diversifying your product portfolio so you are selling more products to the same client. But a second way of dealing with change is what I call a vertical approach, which is where you stay centered in your field -- which is basically employee benefits -- and then you move up and down the product spectrum.

"I think you'll see a lot of small group producers move to mid-size market segments and mid-size producers moving up to larger groups. I also think you'll see an opportunity for some producers who are focused on some relatively large groups to begin thinking about smaller and more individual market segments."

The reason, he says, is because when employees leave, they face either finding coverage on their own, purchasing through COBRA, or going without coverage. "Under health care reform, that third option goes away," Katz continues. "For group producers who can help those people either move into the exchange or find an individual product outside the exchange and can do that in an efficient and effective way, I think there's going to be a substantial reward."

In any market, Waltman says, "clients know good agents do not just sell health insurance. If anything, the employer and individual mandates, and compliance responsibilities this legislation imposes on health insurance consumers makes the need for an agent or broker's support and guidance even more pressing than before."

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