The dust may have settled on the Hill for now, but agents andcarriers alike can almost certainly expect more change. But wheredoes “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, healthreform's regulatory chaos has some analysts already discardinghealth insurance agents as the first casualty of health care reform. Rest in peace to those who find their faterelegated to the same career trash heap as travel agents, agratuitous intermediary likely facing a complete phase out.

If the gloomy undertone is getting to you, it might be becauseit's hard to ignore the death knells. Like the one from MerillMatthews, a Forbes contributor from the Institute forPolicy Innovation in Dallas: “I began to warn health insuranceagents in speeches and on conference calls that when Obama referredto administrative waste, he was talking about them.”

But the National Association of Health Underwriters is fightingfor agents. And they're but one of several influential playerstrying to score leeway with policy-makers. They've insisted it'salways been in consumers' best interest to keep agents and brokersan integral part of selecting health insurance — and to fairlycompensate them for the valuable service they provide.

The National Association of Insurance and Financial Advisorsalso has been lobbying hard, insists President Terry Headley. Andthat's no small potatoes — given the group's size and clout as boththe largest insurance-related trade association and one of thelargest PACs in any industry. As things grow increasingly morecomplicated, Headley explains, the agent's role becomes that muchmore crucial. But is it all really enough to convincelawmakers?

Reaching out directly to insurance commissioners, industryadvocates pushed to make a dent in federal policy these pastseveral months – particularly over one issue, which has rendereduncertainty of “gargantuan” proportions, according to Alan Katz,principal of the Alan Katz Group and a past president of both theNational and the California Associations of HealthUnderwriters.

The PPACA Actuarial Subgroup of the National Association ofInsurance Commissioners drafted the model regulation containing thedefinitions and methodologies for calculating medical lossratios (final guidelines are due by the end of this year).According to NAIC CEO Therese M. (Terri) Vaughan, “based on thelanguage of the legislation there is no provision specificallyaddressing agent commission.”

But the NAIC's MLR “blanks” proposal (adopted in August)limited the percentage of premiums carriers can spend onadministrative costs to 20 percent for individual and small grouppolicies, and 15 percent for large group contracts. And sincecommissions historically have fallen on the administrative side,this doesn't leave much room to compensate agents and brokers — atleast not to the tune to what they've been accustomed. Brokersservicing large employers tend to have commissions in the 2 percentto 3 percent range. Small group and middle-market brokers can earncommissions of up to 20 percent.

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

In the weeks since NAIC passed its resolution requestinglawmakers preserve the role of licensed producers in state-runhealth insurance exchanges, Katz – in his own blog – has seen agents,brokers and those associated with the industry intensely examinetheir own fate. There are those who reason it's simply a matter oftime before small-group and individual market agents and brokersbecome obsolete and those who maintain the complexity and nature ofhealth insurance is enough to keep licensed producers indemand.

Katz himself is not convinced the end is near.

“In uncertain times people are naturally going to grasp at anytrend, perspective or idea that gives them a sense of what'shappening around them. The truth is no one really knows what theimpact of health care reform will be on producers. And for betteror worse, there's plenty of information to keep optimists andpessimists spinning merrily along for some time to come.”

For now, Katz says, it's enough to quell some fear when the NAICclearly recognizes that brokers play a critical role in makinghealth reform work. “If brokers go away, all that expertise and allthat customer service falls on the shoulders of these insurancecommissioners,” Katz says. “Frankly, they can't handle theload.”

Diane Boyle, NAIFA's vice president of federal governmentrelations, told Benefits Selling in late September the MLR issue isa moving target, but “NAIFA members…are fearful that the new MLRrequirements will result in reduced compensation for theirservice.”

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

“NAIFA is hopeful regulators will allow for the MLR to be phasedin, avoiding major market disruption. We need to avoid unintendedconsequences like the one we now face with stand alone children'spolicies,” Boyle says, referring to some insurers' decisions tostop selling child-only policies on the individual market, beforereform mandates required all children under age 19 be coveredregardless of a pre-existing condition.

Then there was another disastrous precursor. McDonald'sreportedly warned that unless they received a waiver from newreform mandates restricting health plan annual limits, they mighthave to drop limited medical benefits or raise premiums for roughly30,000 part-time, hourly or seasonal workers. And though therestaurant chain denied the Wall Street Journal story, HHSproceeded to grant waivers to 30 groups sponsoring these plans.

A matter of convenience
Katz emphasizes broker and agent commissions have always been anadministrative convenience and a cost-saver, and as such should becounted in MLR calculations as a pass-through expense, similar tohow real estate agents are paid.

“The focus of the MLR is to reduce the overall administrativecosts involved in health insurance. One step that accomplishes thattoday is carriers accepting commissions from the client on behalfof the broker and passing 100 percent of that through,” Katz says.“It's not like the carrier profits in any way from collecting thatcommission and paying that to the broker.

It's an administrative convenience, which reduces the overallcosts in the system to both clients and brokers as opposed to theemployer writing two checks — one to the carrier, one to thebroker. The commission is being passed through to an independentthird party, so it should be considered outside the MLRcalculation.”

Which is exactly what NAHU wants the NAIC to acknowledge, saysJessica Waltman, NAHU's senior vice president of governmentaffairs. “It was never our goal to have health insurance agentcommissions included as a medical expense because that would beridiculous,” Waltman says. But in essence, “The consumer or theemployer is interacting with the broker and selecting them as anindependent agent to look at a wide variety of health careproducts, and the agent is appointed with the carrier with which itdoes business, but the consumer can pick from a wide variety ofproducts that the agent offers and places them with. Really it'sthe consumer hiring the agent or the broker.”

Line 10.2 on the NAIC blanks form lists agent and brokercommissions and fees as general and administrative expenses.Waltman says it's what NAHU anticipated but, “we are hoping themodel and the instructions on the blanks form would givecommissioners the flexibility to treat those commissions as apass-through expense when calculating the overall ratio. It's notreally part of the carrier's expense. It's a pass-through andfolded into the premium as a matter of convenience to theconsumer.”

Brokers and exchanges
An aim of health insurance exchanges — to be operational by 2014 —is to help with some difficultiessmall businesses historically have had with buying group healthcoverage. Namely, exchanges are intended to alleviateadministrative costs and boost the bargaining power to negotiatebenefit designs and premiums. Small businesses will benefit fromaggregating employees into a single risk pool by allowing smallcompanies to participate in purchasing pools.

But where will brokers fit in? If California — the first stateto move forward with its exchange — sets the bar for exchange laws,there won't be any clear definition. A statement from thegovernor's office says the exchange will work “in partnership” withagents 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 marketsfor brokers, Waltman says. “As for continuing to provide service toclients who purchase coverage through exchanges, since it is theprofessional role of agents and brokers to provide consumers withaccurate information about their health coverage options, exchangeparticipation is a natural fit.

“A number of states already have set up task forces to get theirexchanges under way,” she continues. “Agents and brokers are a hugepart of the existing health insurance exchanges in both theMassachusetts Connector and the small group portal in Utah. Both ofthem, especially in Utah, have a huge agent/broker focus. Healthinsurance exchanges are essentially a variation of a purchasingcooperative, which many states have tried in the past.

There aren't really any successful [large scale] publicpurchasing cooperatives. There are some private ones, and all theprivate ones are agent/broker driven or involved. All the publicones in the past included agents and brokers, and those that didn'talmost immediately opened them up and involved agents and brokersbecause 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 ormore insured.”The volume of business available will increase andyou'll make less on more sales is the way to look at it,” Katzsays.

“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 educatedecision-makers and lawmakers on the role they play so that theexchanges are designed from the get go to include a role forbrokers 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 insteadof commissions and many large insurance companies as recently as,for example, Humana and WellPoint have mentioned pressures on theircommissions during their earnings call,” says Ron Agypt, vicepresident of broker sales at Aflac. “[Brokers are] getting pressureby both the medical carriers and by the employer who's reallysaying to them, 'We need more for less.' Just like we're asking ourpeople to do.”

HealthPlan Services, an outsourcing solutions firm for insurersin the individual, small business, association and union trustmarkets, recently polled operational executives for 26 health planswith a commercial product line and at least 50,000 members enrolledin individual/small group products. Their survey showed 58 percentof respondents are still examining the impact reform will have onagent commissions; 27 percent already have decided to reducecommissions to meet the MLR floor.

Michael Gomes, executive vice president of market operations atBenefitMall, 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 anopportunity to have conversations with carriers. What can we helpyou do? How can we help lower your overall operating expenses?We're beginning to see carriers looking at the efficiencies of thedistribution channels and saying, 'We're going to reward the mostefficient.' The relationship between the broker and carrier isstronger than ever because both parties need to help their clientsthrough 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 greaterrate than general inflation. “Their rent is not going up as fast ashealth insurance premiums. Therefore, since their compensation istied to the premiums, they're getting a cost of living increasethat goes beyond the cost of living.” But, he says, “that will cometo an end. Which means that commissions will be disassociated frompremiums and it will be a flat fee based on numbers of employeesand dependents.”

Right now, however, Katz says a lot of carriers aren't in theposition to shift from a percentage of premiums to a capitationmethod. “Their systems are just incapable of doing thecalculations.” But by 2014, you might see a move in thatdirection.

In fact, a September report from the Commonwealth Fund byTimothy Stoltzfus Jost of Washington and Lee University School ofLaw suggests exchanges should limit commissions to a flatper-member, per-month dollar amount, as the Utah Health Exchangehas done, and that agents and brokers receive similar commissionsregardless of the insurer. Jost says percentage commissions createa “perverse” incentive for agents and brokers to try to sell moreexpensive policies.

Commissions also should be the same for renewals as newenrollments. This will ensure enrollees initially go with the mostappropriate plan and then agents can provide service that keepsthem satisfied with their plan. Finally, Jost recommends, agentsand brokers should receive the same commission, both outside andinside the exchange.

Go deep or go home
As Katz puts it, commissions and what will happen to them is “justanother dynamic that's going to impact producers and require themto either leave the market or dive deeper into it.” Revenue issuesaside, brokers have to step up to a more comprehensive role. InAgypt's opinion, clients going forward are looking for a moreholistic approach and integration with benefits.

“Brokers and consultants are going have to provide moreintellectual capital,” says Agypt, and it could mean teaming up.“In 2014, the exchanges will be open only to accounts of 100 orless. How will brokers cope with that? How will it affect thebroker who has a client over 100 and the one with under a 100? Thatbroker-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'vebeen hearing from brokers for the past five-plus years that clientsexpect more from them. [Brokers] need to have efficient pricingmodels and most importantly, they need to have a thoughtfulstrategy with their customers to say well, what does your budgetlook like for benefits?”

NAIFA's Boyle says “as members prepare for the likely reductionin compensation, some are looking at increasing their focus oncompliance service, others are considering a greater emphasis onother product lines and many are looking at a combination.”

Voluntary products – gaining traction with employees andemployers alike – are a way to bolster broker revenue, says BradRidnour, regional sales vice president, voluntary benefitsdivision, at Trustmark Voluntary Benefit Solutions. “There's a needfor these products at the employer level and brokers andconsultants are starting to realize it's a nice way to enhancetheir revenue while at the same time offering very good benefits totheir clients.”

And for Agypt, a 25-year industry veteran, there's never been amore engaged broker-consultant community in the voluntary businessthan what he's seen in the past 24 months. “Voluntary insurance hasbecome an excellent opportunity for brokers and more importantlyit's a solution for companies trying to balance their costs and theneed to insure a protected healthy work force,” he says.

But Paul Cantwell, president, HealthCorp Solutions, saysmitigating employers'rising health costs is not a matter of merely matching theright products, but also consulting on overall risk management. Abig part of that is by implementing strategic and effective healthmanagement programs.

“Being just a broker, to me, is not solving a problem,” Cantwellsays. “I don't call myself a broker. We do the brokerage functionbut at the end of the year we weren't just sitting back for 10 to11 months and then saying 'Well it's time to go shop your renewal.'That has never solved a thing. Aside from whoever's going toprovide medical service through whatever funding mechanism, doctorsand hospitals will still be around whether it's private or public.Whatever the prices, the cost of doing it is a direct reflection ofthe risk inherit in the problem — and that is still employees' andtheir family's health.”

Katz's strategy for change looks at two approaches: “One is sortof a horizontal approach to change: diversifying your productportfolio so you are selling more products to the same client. Buta second way of dealing with change is what I call a verticalapproach, which is where you stay centered in your field — which isbasically employee benefits — and then you move up and down theproduct spectrum.

“I think you'll see a lot of small group producers move tomid-size market segments and mid-size producers moving up to largergroups. I also think you'll see an opportunity for some producerswho are focused on some relatively large groups to begin thinkingabout smaller and more individual market segments.”

The reason, he says, is because when employees leave, they faceeither finding coverage on their own, purchasing through COBRA, orgoing without coverage. “Under health care reform, that thirdoption goes away,” Katz continues. “For group producers who canhelp those people either move into the exchange or find anindividual product outside the exchange and can do that in anefficient and effective way, I think there's going to be asubstantial reward.”

In any market, Waltman says, “clients know good agents do notjust sell health insurance. If anything, the employer andindividual mandates, and compliance responsibilities thislegislation imposes on health insurance consumers makes the needfor an agent or broker's support and guidance even more pressingthan before.”