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:
- Mature, large carriers need roughly 7-to-8 percent of premium to cover their administrative costs
- Carriers look for profits of about 4-to-5 percent of premium (non-profits categorize this as “retained earnings”)
- Carriers must spend 80 percent of premium on claims and health care quality expenses or return to premium payers the difference.
- 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.