Does Utah Show the Future of Broker Commissions?

With carrier scurrying around trying to figure out how they’ll meet the Medical Loss Ratio (“MLR”) requirements in the new health care reform, brokers are, not surprisingly, wondering what the impact will be on their commissions. Under the Patient Protection and Affordable Care Act, carriers in the individual and small group markets (small groups are considered to be businesses with up to 100 employees) must spend 80 percent of the premiums they collect on claims and health care quality expenses. (The MLR target is 85 percent for larger group policies). Since selling costs are considered administrative costs, producers are quite naturally concerned about what the impact of the MLR requirement will be on their incomes.

In a previous post, I walked through the math defining the future of commissions in the individual market. To expand on the calculations presented there:

  1. Mature, large carriers need roughly 7-to-8 percent of premium to cover their administrative costs
  2. Carriers look for profits of about 4-to-5 percent of premium (non-profits categorize this as “retained earnings”)
  3. Carriers must spend 80 percent of premium on claims and health care quality expenses or return to premium payers the difference.
  4. What’s left for broker commissions? Let’s call it 8 percent. Carriers can pay more than that the first year (to help compensate brokers for their acquisition costs) and less on renewals or they can pay a flat commission. But over the life of the policy carriers can afford to spend roughly 8 percent of premium on broker compensation costs.

Today, premiums are tied to the premiums paid by the client. Those premiums are increasing at a rate far exceeding general inflation due to skyrocketing medical costs driving up insurance premiums.  Given the pressure to reduce costs, this structure is going to change. In the individual market, carriers will likely tie broker compensation to either the premium in-force at the time of the sale or a flat fee per subscriber or member. Smarter carriers will include cost of living increases in their compensation arrangements. Otherwise the compensation will, over time, become increasingly less competitive. In the small group market tying commission to the original premium is a bit more problematic as employees come and go over time. (While the pressure to mess with broker commissions is far less in the small business market segment than it is for individual plans, eventually those carriers will need and/or want to tie commissions to something other than medical inflation).

A flat per subscriber or member fee is in many ways easier for everyone to understand. However, not every carrier’s commission systems can make these calculations so some health plans will use the initial premium. The question is, can these commission schedules be designed in a way that fairly compensates brokers for the work they do? The answer depends, of course, on what level the per capita fee is set and whether it is limited to one initial payment or continues while the client is insured by the carrier.

State regulators of exchanges will have a large say in broker commissions. They could let the market decide producer fees or simply impose commission schedules. Even if they take the latter approach, all is not doom and gloom for brokers. Enlightened regulators recognize the value brokers add to the system and have demonstrated a willingness to fairly compensate producers. Less informed regulators seem to come up with arbitrary levels that completely ignore the ongoing work brokers do for their clients — and the carriers they represent. As the number of insureds dramatically increase those states that underestimate brokers’ contributions — and underpay them — will see brokers migrate to non-medical products, leaving state bureaucrats to deal with millions of (rightfully) demanding and impatient consumers.

Of course, there will be markets outside the state exchanges. So carriers will also be making producer compensation decisions, too. These carriers can offer exchange regulators a benchmark when it comes to establishing commissions within the state-run marketplaces.

Utah already has a health insurance exchange. What they’ve done with broker compensation is instructive. According to Health Plan Week, the Utah exchange is relatively new and bugs are still being worked out. The exchange has had difficulty pricing their offerings competitively, resulting in only a handful of employers enrolling.  But changes to the Utah law are underway and membership is expected to increase dramatically.

As reported by Health Plan Week, the Utah exchange today pays brokers $37 per employee per month. This is a level that most brokers will find acceptable. And the simplicity of the Utah exchange model, compared to the Connector established in Massachusetts, may make it an attractive model for other states to emulate.

The Massachusetts Connector) has had problems of its own, but insures far more consumers. First, that exchange is targeted at individuals, not small groups as the Utah exchange is. They also pay about 75 percent less than the Utah exchange, a level that many producers will find makes selling and servicing medical insurance unprofitable.

The state exchanges will arrive on the scene in 2014 — plenty of time for brokers to educate regulators about their value and work toward reasonable and responsible compensation formulas. On the other hand, the MLR requirements take effect in 2011. Consequently, carriers must announce their new compensation schedules in the next few months — and certainly no later than the end of October (Halloween, how appropriate). What carriers do concerning broker compensation, and how they go about doing it, will have a significant impact on how exchanges pay producers.

Change is coming. But as Utah demonstrates, change doesn’t have to be fatal.

More Health Care Reform Catch-up

Yesterday I began the process of catching up with various odds-and-ends related to health care reform. Here’s some more items worth noting.

  1. One of the items in the previous post considered whether the phrase “Medical Loss Ratio” is appropriate. Paying claims is, after all, the purpose of health insurance. So maybe such spending should be renamed “Wellness Investments.” But whether you call it Medical Loss Ratio or Wellness Investment (as the Venture, the fact is the MLR requirement contained in the new health care reform law is going to impact the way carriers and brokers do business. The Wall Street Journal notes that “the first to feel the effects of the nation’s health care system overhaul are insurance salespeople.” (A subscription is required to read the entire article). The gist of their point is that with only 20% of premium dollars to spend on all administrative costs, profits and commissions, today’s commission schedules in the individual and small group markets simply aren’t sustainable. My take is that a lot will depend on what state one works in. The differences in commission schedules from state-to-state are quite striking. In California it’s not uncommon for brokers to receive 20% of the first year commission on an individual sale. In states such as Texas and Georgia I’ve heard first year commissions top out at 10%. The transition to post-health care reform commissions in Texas and Georgia will be a lot less painful than in California. Whatever carriers are going to do about commissions they’ll have to announce sooner than later. The Medical Loss Ratio provisions of the new health care reform law take effect in 2011. So commission changes will need to be announced sometime in the Fall.
  2. As I’ve written before, I don’t think commissions are going away. And in the small group market, where commission levels are lower than for individual sales, the need for major change to compensation schedules is relatively less critical. What will change, in both the individual and small group markets, is tying broker compensation to medical cost trends, which is what happens when renewals are linked to the then current premium paid by the group). Instead, carriers are likely to experiment broker compensation based on a flat fee per subscriber and/or dependent or tie the commission to the premium in-force at the time of the original sale (either of these formulas should be, and probably will be, subject to cost-of-living adjustments). Neither approach will be comfortable for brokers. During a webinar I participated in for Norvax, a poll of the 400+ brokers was taken: two-thirds supported keeping commission structures as is. Understandable, but not likely.
  3. Brokers aren’t the only ones having to deal with new financial realities. The Motley Fool financial site shows the hit pharmaceutical companies will take as a result of the reforms. The amounts are large (for most drug companies $200-$400 million in 2010) although as a percentage of their 2009 revenue they seem slightly less severe (from 1.6%-to-5.6%). Not that this is an insignificant hit to a company’s bottom line, but it’s hard to feel too bad for these enterprises given the high prices Americans pay for the same pills sold for far less elsewhere.
  4. A few weeks ago I ran a poll asking readers to predict whether health care reform would move consumers from small group to individual medical coverage, move them from individual to small group health plans or have no effect on either market. Over 100 readers took the time to respond and there’s a definite consensus: 69% predict health care reform will move consumers who currently are covered by their employers into the individual market. Only 17% expect the new law to have no effect, and 14% see the legislation to spark a migration from individual to small group coverage.
  5. Reader Malcom Cutler posted an interesting question the other day about how the small business tax credit the Patient Protection and Affordable Care Act (“PPACA”) impacts the deductibility of premiums paid by small businesses. My thanks to reader Michael B who found the answer. Michael noted that in the IRS guidelines concerning the health insurance premium tax credit, it states that ” In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.”  The IRS recently mailed out over four million postcards to small businesses about the health insurance tax credits. Brokers — and others — will want to stay up-to-date with the resources available to answer the inevitable questions coming their way. (For those interested, here’s a copy of the postcard).
  6. Of course, the tax credit goes away if the health care reform package were to be repealed. The chances of that are slim. It will take a two-thirds vote of both chambers of  Congress to repeal health care reform while President Barack Obama occupies the White House. And even if a Republican were to take his place in 2013, 60 votes would be needed in the Senate to overcome a filibuster. In other words, repeal is unlikely. But it is, apparently, popular. According to a recent poll by Rasmussen Reports, 56 percent of respondents favored repealing the new health care reform law, while 39 percent opposed repeal. This percentage has been fairly consistent since passage of the bill. Of course, when people agree with the polls, they argue Congress should listen to the will of the people; when they don’t like the survey results they tend to praise those who stand on principle instead of basing their positions on, well, polls. So what one thinks Congress should do about this poll results depends a great deal on where you stand on the reform package. The reality, as noted above, however, is that the law is unlikely to be repealed. The reform legislation will evolve, even as it is implemented, but change is coming. The key is to prepare for it.
  7. Preparing for reform is what the California Medical Association is doing. You may remember an earlier post on this blog about the CMA’s efforts to elect the former chair of its legislative committee to the California legislature. The theory is sound: there’s no better place to have a lobbyist than sitting inside the majority caucus. Especially with so many health care reform issues required to be made at the state level.  How much does it cost to buy an assembly seat?  The CMA and its allies have poured more than $200,000 into the race — including an independent expenditure committee set up by the CMA with an initial investment of $106,000 and not counting at least three “off-the-campaign book mailings. This investment is necessary because the CMA’s candidate, Richard Pan has been singularly unsuccessful in raising much in the way of campaign dollars from within the district. Obviously the CMA doesn’t care about the interests of the residents of the Fifth Assembly District. The job of the CMA is to look out for the financial interests of their members. And they’re certainly doing that. For all their dollars, however, the CMA is having trouble with their acquisition plans. They spent plenty trying to buy the official Democratic Party endorsement, but were blocked by supporters of a community-based candidate for the seat, Larry Miles. Their spending did, however, garner support from most of the Capitol establishment. But Mr. Miles is running a strong, grass-roots campaign and, from all accounts I’ve heard, the race remains extremely close. (By the way, I’ve known Larry since we were roommates in college — many, many years ago. Not surprisingly, then, I’ve contributed to his campaign. If you want to help Larry stand up to the CMA, or are simply interested in helping elect a qualified, thoughtful leader to the California legislature, I encourage you to  do the same).

 Well, that’s enough catching up for now. Please leave a comment with your observations of some of the more interesting health care reform related developments of the past few weeks. Thanks.

Catching Up With Health Care Reform

I’ve taken a few weeks off from blogging, but health care reform sure hasn’t taken a break. There’s a lot going on, so let’s catch up with some interesting tidbits:

  1. In April the Internal Revenue Service issued guidelines concerning one of the more popular provisions of the new health care reform bill: the tax credit some small employers may use to offset the cost of their health insurance premiums. The credit is available to qualifying group of less than 25 employees, and there’s a cap: the average premium paid for coverage in the business’ state. In other words, the amount of premium paid above these average premiums is not eligible for the credit. The list of average premiums (published by the IRS, but created by the Department of Health and Human Services) is interesting in its own right. For example, employee-only coverage ranges from a low of $4,215 in Idaho to a high of $6,205 in Alaska. (In California, where I hang out, it’s $4,628). Idaho again has the lowest premium for family coverage $9,365), with Massachusetts having the highest family premium ($14,138).
  2. In addition to the original IRS guidelines, the Obama Administration has released additional guidance to the small business tax credit created in the Patient Protection and Affordable Care Act (“PPACA”). There’s some welcome news in the material: dental and vision coverage are eligible for the credit; employers can choose the method of determining hours worked by their employees in whatever way maximizes the tax credit; and the federal credit is in addition to any state health care tax credits or subsidies available to an employer. This document also lists other benefits health care reform delivers to small businesses: the ability to pool together in exchanges; elimination of pre-existing conditions, elimination of the “hidden tax” employers with coverage currently pay (see #5, below) of roughly $1,000 per policy.
  3. You might think all this would be music to ears of small businesses. If so, it’s not enough to satisfy the National Federation of Independent Businesses. The NFIB has signed onto the law suit filed by 20 state attorneys general and governors challenging the constitutionality of the Patient Protection and Affordable Care Act. The key argument of the suit is that the federal government has no power to regulate whether an individual to enter into an intrastate contract. According to the Associated Press article reporting the NFIB’s support of the suit, the government will argue that “a decision to opt out of health insurance is not merely a matter of personal choice. It has consequences for others, since uninsured people will get sick, or have accidents, and someone must pay for their care if they can’t afford it.  Individual decisions to forgo insurance coverage, in the aggregate, substantially affect interstate commerce by shifting costs to health care providers and the public.” Welcome to a gray area of constitutional law. Feel free to argue one side or the other all you want, but there are responsible arguments on both sides. And they’ll be argued before many courts over the next three or four years.
  4. Much of the health care reform debate focused on the pricing practices of health insurance carriers. Now focus is moving towards the pricing practices of medical providers. In Massachusetts, for example, the U.S. Department of Justice is investigating whether one of the state’s hospitals are guilty of violating antitrust laws. According to an editorial in the Boston Globe, the DOJ the inquiry was launched after it was shown that some hospitals are demanding “rates much higher than others … for identical procedures.”  Meanwhile, the same editorial cites a report by Massachusetts Attorney General Martha Coakley that showed that hospitals with “geographic monopolies” use their market clout to push rates up “and contributes to annual increases in insurance premiums that greatly exceed the cost-of-living index.” Nice of someone to notice, isn’t it?
  5. There tends to be a lot of two-sided coins when it comes to health care reform. Take the term “Medical Loss Ratio.” This refers to the percentage of premium dollars spent on medical care and health quality by health plans. The Venture Cyclist blog asked an interesting question, “Why do they call it Medical Loss Ratio? Why is looking after me (or you) called ‘Medical Loss’, when the whole point of a health care system is to look after me (or you)?” He’s got a point. Calling this expense “Wellness Investment” (as the Venture Cyclist suggests), would be as accurate. He goes further, suggesting that what’s not spent on looking after the health of premium payers be termed an “Administrative Loss Ratio.” It reminds me of when folks started referring to cost-shifting (which is the increased cost insured consumers pay to cover expenses incurred by their non-insured neighbors) a “hidden tax.” Words do matter.

Well, that’s enough catch-up for now, but there’s more to come.