Governor Schwarzenegger Signs California Health Benefit Exchange Legislation

California became the first state to enact legislation creating an exchange under the Patient Protection and Affordable Care Act on September 30th when Governor Arnold Schwarzenegger signed into law AB 1602 (authored by Assembly Speaker John Perez) and SB 900 (by Senator Elaine Alquist). The two bills create the California Health benefit Exchange. In signing the bills Governor Schwarzenegger stated “Choice and competition have the power to improve health care quality and reduce health care costs for California consumers. With the California Health Benefit Exchange, we will be able to create a competitive marketplace where consumers can choose among qualified health plans – all without relying on the state’s General Fund.”

The five-person Board created by the legislation are tasked with creating an exchange to present health plan options to individuals and small businesses beginning January 1, 2014. Concurrent with Governor Schwarzenegger’s signing of the bills, the Obama Administration announced a $1 million grant to the state “to fund the costs of preliminary planning efforts related to the development of the Exchange.” Further federal funds are expected to become available to the California Health Benefit Exchange in 2011. After 2014 the Exchange is designed to be supported entirely from fees paid by health plans and insurers, meaning no general revenues will be allocated to the entity.

Some carriers supported the legislation; others urged the Governor to veto it. The concern of many opponents was the power given to the Exchange’s Board to exclude accept or exclude carriers from the Exchange. The fear, which is demonstrated on a weekly basis by local, state and federal agencies every day, is that the Board will use the carrot of being included in the Exchange as a lever to dictate what insurers do (and what plans they offer) outside the Exchange. Giving this power to an independent Board (one that is exempt from significant oversight by the legislative or executive branches of government) is seen as a threat to the private marketplace.

Supporters argue that this power is essential if the Exchange to going to fulfill the desired (and desirable) goal of negotiating lower health insurance premiums for consumers and businesses buying through the Exchange.

Brokers have had another concern about AB 1602 and SB 900. The federal health care reform envision exchanges that include “navigators” to help consumers and business owners explore their health insurance options. However, the PPACA leaves it to states to define the actual specifics of the navigator role. Will they simply be a “help desk” answering questions about how to use the exchanges or will they be actively engaged in providing advice and guidance on which plan a consumer or business should select? The California laws leaves these details to the Exchange Board. What’s of concern, however, is that language that would have required the California Exchange’s navigators to be licensed was removed from the now-signed legislation shortly before it was passed by the Legislature.

And there’s a sentence in Governor Schwarzenegger’s press release touting his signing of AB 1602 and SB 900 that is at both once reassuring and of great concern. “The Exchange will work in partnership with agents and brokers, community organizations and other “navigators” to help consumers make informed decisions based on the price, quality and value.” While it’s reassuring the Schwarzenegger Administration recognizes that agents and brokers need to be involved with the Exchange, it’s of concern that they consider licensed professionals to be on an equal footing with unlicensed community organizations and others.

What will be important for the California Association of Health Underwriters, the leading organization representing independent producers, and other agent groups to work through with the Legislature and the Exchange Board is that there is a difference between licensed, regulated brokers and others. Each can play a role. When it comes to publicizing the Exchange and providing general advice about how to use it, non-licensed individuals and entities can play an important and valuable role. Helping consumers select the health plan that best suits their unique needs and then providing ongoing service to purchasers once they’ve obtained coverage, however, is best performed by licensed and regulated professionals.

The statement in the Governor’s press release is consistent with this division of labor, but only because it lacks details. Follow-up legislation and explicit regulations will be needed to assure consumers have access to qualified professionals. The National Association of Insurance Commissioners sees a continued role for brokers as an essential consumer protection. In a resolution adopted during their August 2010 meeting, the NAIC noted that “employers and consumers will need professional guidance even more in the future” as a result of health care reform. 

While Governor Schwarzenegger’s signing of AB 1602 and SB 900 directly impacts only Californians, other states are likely to study these bills as they contemplate the design of their own exchanges – another reason why legislation to clarify brokers’ role in the state’s Exchange should be introduced and enacted quickly in the next legislative session. So this California development could have repercussions across the country.

In some of the comments posted on this blog, some have suggested that Democratic states are likely to create anti-broker exchanges while more Republican states will create broker-friendly ones. This view, however, ignores the facts that Republican’s health care reform proposals are as those of Democrats to increase health care costs while undermining brokers’ role in the system. Consider Republican support for mandating carriers to offer health insurance coverage to all applicants (“guarantee issue”) and their opposition to requiring all consumers to purchase coverage (an “individual mandate”)  No surer recipe for skyrocketing health insurance costs exists than imposing guarantee issue without an individual mandate. Assuming lawmakers will do the right thing just because of the political party they are in is naive. What’s required is a strong political and educational push by people who understand the current system, who sees its flaws, and have practical and meaningful ideas on how to fix it. Put another way, brokers must stay involved and engaged regardless of which political party holds the majority of seats in their state’s legislatures.

Fortunately, there’s still time (even in California) to make a difference. As noted, CAHU is already working on needed changes to AB 1602 and SB 900. Meanwhile, the National Association of Health Underwriters is deeply involved in working with state legislatures and insurance commissioners to help them develop exchanges that implement the letter and spirit of the Patient Protection and Affordable Care Act while preserving consumers’ access to qualified, professional producers.

In any change of the consequence and complexity presented by health care reform there will be advances and setbacks. The nice thing about politics and legislation is there’s always another election and another legislative session coming up. The key is to avoid giving in to despair with each setback, but rather to persevere until one achieves the next advance.

MLR Rules Still in Play

The Patient Protection and Affordable Care Act requires carriers to spend a specified proportion of the premium dollars they take in on medical care and health quality efforts. That’s the law. As I’ve noted previously, legislation creates a framework. It’s the regulations and day-to-day interpretations of the law that determines its impact. There are lots of opportunity for regulators to soften the edges of the law or sharpen them up.

  • How should the law be applied to small or new carriers who may be subject to extreme fluctuations in their spending ratios that are beyond their control?
  • How should nurses hotlines be treated?
  • Should health quality efforts be considered non-administrative expenses only if they actually improve quality? And if so, what will that do to innovation?
  • How should commissions and other fees received by carriers but passed-through entirely to independent third-parties be treated?
  • At what level should carriers be required to meet the medical loss ratio requirements (i.e., state level? nationally?)

And the list goes on.

The National Association of Insurance Commissioners, working with the Department of Health and Human Services is tasked with resolving these issues. The NAIC provided some meaningful clarity last week when it published draft rules for how carriers were to calculate their medical loss ratios. But there are still many issues that are  far from being settled. The Hill reported that Brian Webb of the NAIC outlined a host of MLR-related regulations the Commissioners are still considering during a presentation he made to the Congressional health Care Caucus.

What’s significant about what Mr. Webb had to say is not just the long list of rules being modified at this late date (the MLR requirements take effect January 1, 2011, so settling on how this provision is to be interpreted is of urgent concern), but his description of how the process of resolving these issues will play out. He indicated that an NAIC panel is expected to adopt the draft regulations on Monday, October 4th. That will no doubt be widely reported. But what will be important for those concerned about the nitty-gritty of the MLR rules to remember is his prediction that the regulations are likely to change before the full NAIC adopts the them in mid-October.

And this vote by the NAIC is unlikely to be the last word. HHS Secretary Kathleen Sebelius has to “certify” the regulations, which gives the Obama Administration an opportunity to tweak elements. Then each state has to adopt its own regulations. And while the NAIC proposal will carry great weight, states will have flexibility to adjust elements of the MLR calculation to suit their own health insurance market — and political — environments.

The Hill also reports that the NAIC will urge Secretary Sebelius to allow, on a state-by-state basis, a transition period phasing in the medical loss ratio targets as it applies to plans sold to individuals and families (non-group plans). Such an exemption would not be automatic and states would need to demonstrate that applying the  80 percent MLR on individual plans in their jurisdiction, as is required by the PPACA, would “destabilize the state’s individual market.” According to Mr. Webb, a similar transition mechanism could be established for the small group market as well.

This ongoing uncertainty will have serious consequences. Carriers will make decisions based on the best guess each makes on where the regulations will wind up (and that best guess will no doubt assume the worst possible outcome). As the regulations get clarified the carriers may seek to adjust some of those decisions creating a ripple effect of change.  All of which means consumers, employer and the brokers who serve them are going to be kept busy adjusting to an evolving marketplace well beyond the effective date of the new health care reform’s medical loss ratio provisions.

NAIC Provides Some Clarity on Health Care Reform Law’s Medical Loss Ratio Requirements

Under the Patient Protection and Affordable Care Act, the National Association of Insurance Commissioners plays a pivotal role in determining how the legislation’s medical loss ratio requirements will be interpreted. The NAIC recently published a draft regulation and is seeing public comment before submitting their proposal to the Department of Health and Human Services. Overall the Insurance Commissioners’ approach to the medical loss ration rules provides carriers with some welcome flexibility.

The NAIC’s process began weeks ago. In August the Insurance Commissioners approved a form which will capture the data used to calculate a health carriers’ medical loss ratio (often referred to as the “blank form.”) Now the Commissioners have put forward how they think that data should be used to calculate a health plan’s medical loss ration.

The NAIC is proposing to take virtually all federal and state taxes from the calculation (the exception are taxes paid on investments and capital gains). This runs contrary to the wishes of the Democratic chairs of the Congressional committees through which the PPACA passed who wanted the tax exemption to be limited. As noted in a previous post, these legislative leaders may want health care reform interpreted in a given fashion, but they lack the authority to define legislative intent – that power is in the hands of regulators. And the regulators are saying the letter of the law is clear in this regard. The NAIC’s interpretation will provide carriers with a bit more room to manage their administrative costs than would the stated intent of the committee chairs. As Politico has reported, both sides agree carriers should be able to deduct taxes “that relate specifically to revenue derived from the provision of health insurance coverage.” The NAIC approach, however, allows insurers to remove payroll and income taxes from the MLR calculation – for most carriers these are substantial sums.

Another bit of flexibility: spending that Improving Health Care Quality Expenses” (which simply means spending that, because it is aimed at improving the health of members is considered to be medically related, not administrative costs) must be:

  • designed to improve health care quality and increase the likelihood of desired health outcomes
  • in ways that can be objectively measured
  • produce verifiable results and achievements
  • are directed toward individual enrollees or for the benefit of specified segments of enrollees (as opposed to general cost containment efforts)

This means costs related to nurse-lines, disease management, member health education, preventive and wellness efforts will be allocated to the “medical” side of the MLR calculation. Reuter’s quotes Ipsita Smolinski, a health care analyst at Capitol Street as describing this definition of carriers’ quality improvement spending as “a fairly generous definition.”

On the “wait and see” side of things, several Insurance Commissioners have been pushing the Obama Administration to phase in the medical loss ratio rules to enable carriers, consumers and state regulators to adapt to the new law (as opposed to being thrown into the deep end of this particular reg’s pool). Carriers are locked in to long term expenses (most especially, in many cases, vested broker commissions) that they contractually cannot reduce. Phasing in the MLR requirement would allow for a more orderly transition. The PPACA allows the Secretary of Health and Human Services to waive the health care reform law’s MLR requirements on a state-by-state basis. However, this could be a very awkward and time-consuming approach. Kansas Insurance Commissioner Sandy Praeger is asking the HHS to provide the states with blanket flexibility.

There’s other provisions of the proposed regulation that will take additional study (and, hopefully, clarification in the final version). For example, some are interpreting. For example, the definition of “earned premium” is defined as “the sum of all moneys paid by a policyholder as a condition of receiving coverage from a health insurer.” The examples given concern reinsurance and unearned premium reserves. But what about arrangements like California Choice in which several carriers charge the administrator a stripped-down premium and that administrator then adds fees for distribution, billing, and additional services like Section 125 administration. If employers purchasing through this kind of arrangement are obliged to pay the additional fees do they apply against the carriers’ medical loss ratio?

The regulations require rebates to be calculated at the “licensed entity level with a state.” In California, carriers often offer plans under a license with the Department of Insurance or the Department of Managed Health Care. The wording of the regulation seems to require carriers to calculate their DOI individual plans (for example) separately from their DMHC-regulated products. And while I read this as allowing carriers to calculate their MLR against all their benefit plans in a particular market segment, I understand some are interpreting this as requiring carriers to meet the MLR threshold with each of their various benefit plans. The latter would require a level of pricing precision that is beyond most human actuaries. Further clarification on these elements would be welcome.

The good news is that there will be additional clarification. It also means that carriers may have some additional breathing room than they’ve been assuming. However, the window for modifying their business plans (and, consequently, their commission schedules) is closing rapidly. The medical loss ratio requirement takes effect on January 11, 2011. Carriers will need to announce their new commission schedules in November to notify their brokers concerning what they’ll be paid on this business. And the NAIC’s final regulations won’t be submitted to HHS until October 21, 2010. And while The Hill reports President Barack Obama’s Administration doesn’t want to publicly override the commissioner’s MLR proposal, it will still take time for HHS to review the rules. That doesn’t leave a lot of time to resolve all the uncertainty out there (another reason to phase in the MLR requirement).

But at least the NAIC is providing some clarity on the MLR calculations. And at this point, any clarification is helpful.

California Exchange Legislation Greatly Flawed and Should be Vetoed

How states implement exchanges will have a tremendous impact on the efficacy of the Patient Protection and Affordable Care Act. States can create exchanges that educate consumers, bring them innovative products, increase choice in the marketplace and encourage competition. On the other hand exchanges can be designed to drive consumers to handpicked carriers, stifle innovation, strangle competition, and reduce choice. Fashioning smart exchanges (that would be the first type mentioned) won’t be easy. Fortunately, states have time to get it right.

Which makes the California Legislature’s decision to create an exchange that will do more harm than good even more dismaying. Governor Arnold Schwarzenegger will need to decide whether to sign into law AB 1602 and SB 900 or veto the bills by September 30th (they can become law without his signature if he takes no action by that date). He should veto the bills and require the legislature to start over. There’s time and the need for a more thoughtful approach to California’s health insurance exchange.

AB 1602, authored by Assembly Speaker John Perez and SB 900, authored by Elaine Alquist, invests in a five member board the authority to create and operate the California Health benefit Exchange. The legislation law was supported by a broad coalition including Health Access, AARP, Blue Shield of California, Kaiser Permanente, Consumer’s Union and the SEIU. As originally drafted the legislation raised concerns, but took a more reasonable approach.

They were amended, however, in the last days before the California Legislature adjourned, in ways that will ultimately harm California consumers. The exchange board was given broad authority to set its own budget, sign contracts and create rules and regulations behind closed doors and without oversight. These concerns that are front-and-center in the efforts of the California Association of Health Underwriter’s and others to persuade Governor Schwarzenegger to veto AB 1602 and SB 900.

Other problems with the legislation is the empowerment of Navigators to assist consumers enrolling through the exchange. These individuals could wield great influence on individual’s purchasing decisions, but they are not required to be licensed. In addition, many are concerned that the exchange board could prevent independent brokers from participating in the exchange. Changes made at the last minute changed the legislation in ways that seem to run counter to a resolution recently enacted by the National Association of Insurance Commissioners which which calls on policy makers to “acknowledge the critical role of producers” and to include a role for them within exchanges.

Lawmakers need to determine the role of exchanges and strike a careful balance. Exchanges are generally regarded as a tool for simplifying the health insurance market. But simplify too much and through bureaucratic fiat as opposed to market demand, and the result will inevitably stifle innovation, depriving consumers of access to new and better plan designs.

Consider what would have happened had a five member board been empowered to determine product designs 10 years ago. Would they have created HSAs, one of today’s fastest growing types of health plans? Doubtful. And if they even considered the concept the decision would probably have been made on political grounds as much as economic ones. Would they have introduced value-based plans that reward consumers for visiting their doctors and taking healthy actions? Highly unlikely. (Full disclosure here, one of my consulting clients is SeeChange Health, a new insurance company that recently began offering just such value-based plans in parts of California).

AB 1602 and SB 900 empower the board of the Health Benefit Exchange a great deal of power to determine not just the types of plans offered within the exchange and which carriers can offer them, but also a tremendous amount of influence over what happens outside the exchange. One tremendous lever they’ll have to do so is their ability to determine, without public scrutiny or review, which insurers may participate in the exchange. They also have the ability to adopt major changes governing insurance coverage without public comment or legislative oversight.

Much has been written about how signing AB 1602 and SB 900 could be an an important part of Governor Schwarzenegger’s his legacy. Much has been written about how vetoing the exchange bills would reflect far better on the Governor’s service. Given his desire to fix what he frequently called “California’s broken health care system” the Governor no doubt would like to sign the legislation. And there’s nothing inherently wrong in giving the exchange board the ability to negotiate with carriers on behalf of those enrolling for coverage through the exchange. But those powers must be delegated in an appropriate way with an eye enhancing choice and innovation. AB 1602 and SB 900 fail to accomplish this.

All states need to be moving forward with creating their exchanges soon. It will take time to establish these operations, staff them and get them ready for business. However, lawmakers should also take the time necessary to get the legislation right. California lawmakers, in accepting last minute changes without public hearings, failed to do so. Starting over in January will still give them plenty of time to develop an exchange for the nation’s largest state that not only accomplishes the goals of such exchanges, but does so in a way that will nurture innovation over time.

Sixth Month Anniversary of Health Care Reform Law Highlights Role of Brokers

For brokers, regardless of their opinion on health care reform, a question they need to answer is, “Who will explain health care reform to my clients – the government,  the press, my competitors  or me? Because regardless of a broker’s feelings about health care reform, the fact is the law is the law, clients will be impacted, and someone needs to help them navigate the new world.

Today, September 23rd, several key (and popular) components of the Patient Protection and Affordable Care Act take effect for plans sold or renewing as of this, the sixth month anniversary of President Barack Obama’s signing the PPACA into law:

  • specified preventive care must be available to insureds with no cost sharing
  • carriers ability to rescind coverage is limited to cases involving fraud or intentional misrepresentations of material fact
  • annual benefit limits on “essential” benefits are limited to $750,000
  • lifetime benefit limits are no longer permitted
  • dependents may stay on their parents’ plans up to age 26 (most carriers already implemented this change, but now all carriers must do so)
  • pre-existing conditions must be covered for children up to age 19.
  • While the law doesn’t require carriers to accept children for coverage on a guarantee issue basis, regulators have determined that this will be required. Whether health plans must guarantee issue children-only policies year-round or only during a limited times (e.g., a group’s open enrollment period or the child’s birth month) is an open question. As a result many carriers have decided to stop offering children-only medical policies)
  • Rules concerning discrimination in favor of highly compensated individuals now applies to health insurance coverage
  • Emergency room treatment must be covered at in-network levels regardless of whether the provider is actually in the network
  • Carriers must have in place a coverage appeals process
  • Plans with gatekeepers must allow enrollees to designate any in-network doctor as their primary care physician (including OB/GYNs and pediatricians)
  • There are other provisions that have already taken effect (e.g., small group tax credits, rebates to help offset the Medicare Par D “Donut Hole” concerning prescription drugs) and some will take place in the very near future (e.g., grants for small employer-based wellness programs).

    The White House has begun touting these provisions of the new health care reform legislation. The media is highlighting them as well. As a result, employers and consumers are likely to have lots of questions. There are lots of sources for information. The Obama Administration has posted a wealth of health care reform information online. While an attempt has been made to make the information accessible, comprehensible, and comprehensive, no one web site can fully realize those goals. And let’s just say the site puts a positive spin on each and every provision. Carriers are sending out (digital) wheelbarrows of information to employers, members and their brokers. The National Association of Health Underwriters offers its members a tremendous amount of valuable information (health insurance brokers who are not members of NAHU are making a huge mistake – they’re failing to support an organization that fights hard to have the voice of their profession heard by policy makers and they are missing out on a treasure trove of critical information). And, of course, there are plenty of producers out there calling on clients (their own and others) offering to help them understand the new health care law.

    So there’s no dearth of sources consumers have for learning about the PPACA. The question is whether brokers are appropriately establishing themselves as the primary resource for their clients. Doing so is, after all, an important part of brokers’ responsibility to their clients. It also makes business sense.

    As I’ve written about elsewhere (this would be a shameless plug for my book, Trailblazed: Proven Paths to Sales Success available over there on the right hand side of this page), brokers who contact their clients only on their annual renewal date are failing to provide the service those clients deserve. (They also risk being associated in a very Pavlovian way with bad news). Here is an opportunity to demonstrate to our clients – who also happen to be constituents of our elected official’s – the value brokers add to America’s health care system. This is good for brokers, but it’s even better for clients. When it comes to educating employers and consumers, no mass of news stories, media events, and web sites can match the reach and depth tens of thousands of professional brokers represent.

    Until its changed (somewhat likely in part) or repealed (don’t hold your breath) the Patient Protection and Affordable Care Act and the regulations its spawned are the law of the land. Brokers can wish it would go away. They can argue, complain and agitate about the PPACA. But we have an obligation to our clients to help them understand the law, avoid its pitfalls and seize its benefits. Brokers are providing this service every day. The sixth month anniversary of the Patient Protection and Affordable Care Act simply highlights this fact.

    The Need for Carriers to Explain Their Value

    When an industry is being remade, as is arguably happening with America’s health insurance system over the next four years thanks to the Patient Protection and Affordable Care Act, there comes a time when every participant in the current system needs to step back and ask “What’s my role? What value do I add?” Employers, carriers, brokers, government agencies, all need to examine their place in the system, both as it exists today and as it will exist in the future.

    There’s a sometimes heated discussion going on in the comment section of this blog concerning the future of brokers. In the past few posts we’ve seen some argue that the value brokers bring to the table will be ignored and the profession will disappear. There have been equally passionate comments explaining why brokers are likely to do well in the new world of health care coverage. (Readers of this blog know I believe professional health insurance brokers will play an important role in the post-health care reform world). 

    In his comment, reader Scott summarized the value of brokers and why the good ones will continue to play an important role in the future. “Agents and Brokers, please stop talking about how hard or easy it will be to buy health insurance once the exchanges come, because that is not what we do, and that is not what we get paid to do. If it was, we would get a one time fee for the sale and then we would disappear and move on to the next person. We get paid to service the group and to provide this service ongoing. If we don’t, we get replaced, by someone who will. That is what we do. I am not worried.”

    The debate over the value brokers add to the system and their chances of survival will continue. And brokers will need to work hard at both the state and national level to make sure decision makers understand this value. But they’re not the only players in the system who need to justify their existence. So do health insurance companies.

    Ask most insurance executives to list their contribution to America’s health care system and high somewhere in the top two or three will be “we lower the cost of health care in this country.” Then take a look at virtually every rate increase letter sent by carriers in this country. In justifying the premium hike they all cite skyrocketing health care costs. And they’re right. Medical inflation greatly outpaces general inflation. Over the past year the buying power of $1,000 in 2000 requires $1,285 in 2010. Except for medical care, what $1,000 purchased in 2000 now takes $1,500. That’s a 75 percent difference.

    But being right doesn’t clarify carriers’ value. Consumers, and the officials they elect are, are confused – and no wonder. If one of the key reasons insurers exist is to manage the cost of health care they’re not doing a very good job of it. (To be fair, medical costs would likely be significantly higher if health plans were not negotiating reductions. Compare the “allowed” charge on virtually any insurer’s explanation of benefit against the providers actual charges and you’ll see a huge discount – often more than 50%. Negotiating these price reductions lowers the cost of health care not just for that particular insured, but for the system as a whole – less the amount of the discount the provider shifts to other payers).

    This disconnect between what carriers claim to do and what they lament they cannot do is not the only problem health plans face in justifying their existence. They have also been subjected to a brutal, incessant pounding over the past several years by the press, Congress and state legislatures. Carriers have offered themselves up as easy targets. Their vilification over  rescission practices, patient dumping, outsized executive compensation, insensitivity to their members, denying needed coverage and a host of other practices and misdeeds was to be expected. Combine this bludgeoning of their reputation with ever increasing medical costs and it’s no surprise some question whether insurance companies are necessary at all.

    What makes this situation significant is that a poor reputation results in reduced credibility and diminished reputation lessens political clout, something carriers will need in great abundance in dealing with the implementation of health care reform over the next several years.

    Brokers have long had to justify their place in the health insurance market. For many years carriers got a free ride on the issue. Yes they suffered the slings and arrows of the press and politicians, but except for single payer advocates their value to the system was generally assumed (if unspoken). The accumulation of attacks, however, coupled with carriers own touting of their role in reducing health care costs while medical costs spiraled out of control, puts this assumption in jeopardy.

    As health plans develop their strategies for 2011 (and yes, they’ve started that process) near the top of the list should be asking – and answering – two very important questions: “What’s our role in America’s health care system? And what value do we add?” Then they need to share their answers, forcefully, fully and credibly, with the rest of the class.

    Why Health Insurance Brokers Will Survive Reform

    Economists call it “disintermediation.” Normal people call it “eliminating the middleman.” Whatever term used, there’s widespread concern among brokers that health care reform will push them out of business. As David Gonzalez wrote in his comment on a previous post, "It’s time to pack up now, at least until further notice. The days of the broker, much like travel agents, are now gone.” This belief, which other commentators share, rests on the assumption that the exchanges created by the Patient Protection and Affordable Care Act, the medical loss ratio minimums carriers must maintain as of 2011, the potential commoditizing of health plans and an array of other provisions in the new law will make brokers unnecessary and/or unaffordable. There’s a lot of open issues concerning health care reform, so those predicting doom for producers may be right. But I don’t think so.

    As I wrote in my previous post, anyone making predictions about what will happen due to passage of the PPACA is making, at best, an educated guess. That post described my two Law on Laws, which, taken together, in essence holds that laws as passed by lawmakers are not the final word on a law. Yes, there will be exchanges, but there are also likely to be robust markets outside of these markets. And there could (and should) be room for brokers to help consumers inside exchanges. Will there be? We just don’t know yet.

    Within this context of uncertainty, what we can address is whether health insurance is enough like basic travel arrangements to result in doing away with medical insurance producers. Are health insurance brokers about to become as extinct as travel agents supposedly are?

    For the record, according to the American Society of Travel Agents there were more than 86,000 full time travel agents in the United States in 2008 with another 30,000 independent contractors (most likely part-timers). There were no doubt many more prior to the rise of Expedia, Travelocity and the like, but this is still a significant number. True, they no longer are spending as much time on simple travel needs as before, but are presumably helping consumers with more complicated arrangements.

    However, not every product or service is as vulnerable to disintermediation as the sale of airline tickets and hotel rooms. A bit over a year ago I put forward in this blog Katz’ Theory of Disintermediation, an attempt to identify the factors that determine whether the Internet will eliminate the sales force in an industry. The theory holds that it is the interrelationship of six factors that provides the answer:

    1. Complexity (how well is the product or service understood – or able to be understood – by consumers?)
    2. Purchase Frequency (how often do consumers shop for the product or service?)
    3. Significance (how personal and critical is the product or service to consumers?)
    4. Cost (how expensive is the product or service?)
    5. Installation Requirements (how much on-site service is required to install or use the product or service?)
    6. Abstraction (how easily can a description of the product or service be digitized and posted online?)

    Let’s see how this plays out with travel and health insurance. For travel we’re looking at a basic business trip from point A to point B with a hotel stay in between. Throw in a rental car if you like. For health insurance we’ll consider a straight-forward individual plan – no HSAs or other complications. We’ll score Basic Travel and Health Insurance on a scale of 1-to-10 with 1 being low concerning a factor (e.g., not complex at all) and 10 being high (e.g., really complicated).  The higher the score the less likely a sales force is to be disintermediated. (There’s nothing precise about my scoring. Please feel free to substitute your own. Or get really sophisticated and weight the various factors. What I’m trying to show the relative likelihood of travel agents and health insurance agents being disintermediated. Your calculations may vary).

    Complexity: There’s no question what a seat on an airplane entails or what to expect in a hotel room. Some may have more or less features than others, but the basics are the same. Health insurance is a different matter. Many consumers don’t know the difference between HMOs or PPOs, co-insurance or deductibles. And don’t even mention formularies. Score: Basic Travel 2 / Health Insurance 8

    Purchase Frequency: Many people travel several times a year. Few folks shop for health insurance more than once a year or three times a decade. Score: Basic Travel 3 / Health Insurance 8

    Significance: When it’s your one vacation a year, your travel plans are pretty significant (and you’re more likely to employ a travel agent). But picking the right airline for a quick business trip from Chicago to New York and back isn’t all that important – the differences between one airline and another aren’t that substantial. Choose the wrong health plan, however, and the repercussions on a family’s health and financial security can be profound. Score: Basic Travel 3 / Health Insurance 9

    Cost: Most travel is a few hundred dollars – not a rounding error, but not likely to send a families finances into a death spiral. In 2008 the average health insurance premium for family coverage was $13,770 in the United States. This cost has no doubt increased in the past two years. Score: Basic Travel 2 / Health Insurance 7.

    Installation Requirements: Not really a factor for travel. You show up at the airport, go through security-line hell, sit in a too-small seat in a stuffy metal tube and the next thing you know you’re five miles high going 600 miles per hour. Installing health insurance can be a bit more involved (if less scenic). Consumers may need educating on what their plan does and does not cover. They may need to learn how to find an in-network doctor (and why), how to file a claim (which may be to a different place for medical care and prescriptions). Score: Basic Travel: 1 / Health Insurance: 6

    Abstraction: Describing an airline seat or hotel room online is pretty simple. Same with describing a health insurance plan. (The terminology may be complex, but the information is easily presented). It’s not like there are tires to kick. Score: Basic Travel 1 / Health Insurance 1 

    Totals: Basic Travel: 13. Health Insurance: 39

    Based on this exercise (one admittedly reeking with false precision) one would predict that those selling basic travel are far more likely to be disintermediated than those selling medical insurance.

    True, none of this means lawmakers and regulators won’t purposefully or inadvertently put health insurance brokers out of business, but they’d have to work at it. And I’m hopeful wiser heads (in legislatures and agencies as well as in the real world where employers and consumers live) will prevail and prevent that from happening.

    I hope this will be the case because I strongly believe professional producers add substantial value to the health plans they sell. And it would be a real loss to consumers to lose that value.

    Change is Hard

    Change is hard. Change imposed is even harder. Change that is convoluted, inartful, at times misguided, uncertain, and coming fast is beyond hard. This kind  of change is disruptive, frightening and disheartening.

    That brokers feel the coming health care reform will shunt them aside, destroy their careers, and shutter their businesses is, consequently, neither surprising nor without basis. Add to the mix the fact that we’re still in the tea leaf reading stage of how health care reform will play out and the outcome can be a poisonous brew of anger, anxiety and paranoia.

    Given this reality recently posted comments are well considered, well reasoned and, to a greater extent than should be expected, objective. (My thanks to all for sharing their thoughts and insights with readers of this blog). That the expressed concerns and conclusions are rational and reasonable, however, does not mean they are accurate or certain. Indeed, I think they’re wrong and in the next few posts I’ll try to explain why.

    First a reality check: my perspectives on the impact of reform, how carriers, lawmakers, regulators and consumers will react, and what all this means for brokers is no better than anyone else’s opinions on these topics. As mentioned, all we have now are tea leaves. Yes, the law has been passed, but this only creates a framework for reform, not the details. Think of the Patient Protection and Affordable Care Act as a 2,000-page blueprint. Future legislation, regulations and the actions of real people dealing with it all represents the actual building process – the framing, laying pipes and wiring, painting and additional hard work required to actually create a usable building. The blueprint will give a good idea of what the structure is supposed to look like, but it’s what the carpenters, plumbers, electricians and others that determine what the structure will look like.

    Which leads us to Katz’s Two Laws on Laws. The first is the Law of Regulatory Change. It holds that “there is what the law says. Then there is what a regulator says the law says. And what the regulator says the law says is what the law says unless a judge says the laws says otherwise.”

    Take the issue of the provision of the health care reform law that prohibits carriers from applying pre-existing conditions on insured children. There’s nothing in the law that says carriers have to accept all children applying for coverage (what’s called “guarantee issue”), only that if a child is accepted for coverage excluding pre-existing conditions is not permitted. Yet President Barack Obama and others talked about the law as if insurers did have to cover children. And preventing exclusion off pre-existing conditions for children doesn’t accomplish much if carriers can simply deny kids insurance in the first place. So regulators (in this case the Department of Health and Human Services) simply declared that health plans did have to accept children on a guaranteed issue basis. And unless a judge says otherwise, that’s the way it is.

    The second Law on Laws is the Law of Implementation. This one holds that “there is what the law says and what regulators say the law says. Then there is what carriers say the law says. And what carriers say the law says is what the law says unless a judge or regulator say the law says otherwise” (other industries should feel free to replace “carrier” with a more appropriate implementer).

    HHS’s requirement put carriers in a bind. If they are required to guarantee issue coverage to children, what’s  to prevent parents from waiting until their kids are sick or injured before purchasing a policy? This is the functional equivalent of allowing folks to buy homeowners insurance from the firefighters dousing flames or to buy auto insurance from the driver towing their battered car away. The result of such an arrangement inevitably and substantially increases the cost of coverage. Some carriers (as noted by the commentators mentioned above) have responded by dropping children-only coverage. Others are deciding to guarantee issue coverage only on a plan’s anniversary date or during a child’s birth month. And until a judge or regulator says otherwise, that’s what they’re going to do.

    While we’re on the topic of laws on laws, here’s another for you, the Law of Unintended Consequences. My definition for this phenomena, which is as certain as the law of gravity, is that “a law may or may not do what it seeks to do, but it will always do some things it did not intend to do.” Congress did not intend to stop health insurance carriers from dropping children-only offerings, but that’s reportedly what’s happening. (And yes, an argument can be – and often is – made that the goal of the PPACA is to drive medical insurers out of business altogether, but that’s not what we’re discussing here. I raise the point here only as a no doubt vain attempt to forestall comments on this post from veering off in that direction).

    This examples of how the laws on laws plays out only deals with one small part of the health care reform legislation. It is and will be repeated on provision after provision after provision. Which brings us back to our reality check: predicting what the new law will mean for brokers (or insurers, consumers, businesses, medical professionals or anyone else) is a tricky and maybe futile endeavor.

    Then there’s the fact that while I’m a broker, my work day is, to say the least, diversified. Which makes my (relative) optimism (relatively) easier. On the other hand, when you’ve spent your career building financial security around a product that legislation might eliminate, seeing things through very dark colored glasses is more likely and understandable. My point is that one’s stake in the outcome doesn’t determine the validity of one’s predictions (another long shot attempt to keep comments on point).

    Because the pessimism of professionals facing this possibility is understandable does not make dour predictions right. It just makes them, well,  understandable.

    In future posts, as I’ve done in past writings, I’ll offer my thoughts on why health insurance brokers are unlikely to go the way of travel agents (of which, by the way, there are still tens of thousands in this country). And why I think brokers will need to adapt – and will be able to adapt – to a new reality.

    Even if I’m right (and I’m offering no guarantees, just educated guesses) this won’t make dealing with the changes to our industry and profession any easier, but it may mean making such changes is worthwhile.

    Changing Health Care Reform a Challenging Task

    Health care reform is one of those issues that are so contentious even when both parties agree a tweak to the Patient Protection and Affordable Care Act is needed, finding a way to actually make the changes is a Herculean task. Exhibit A: the provision in the PPACA requiring businesses, beginning in 2012, to file 1099s for every vendor to which they pay $600 or more for products or services. Today 1099s are required to be filed only for contract workers reaching this dollar threshold. The PPACA’s expansion of the 1099 requirements will result in millions of additional filings. Buy a couple of printers from Best Buy? Purchase paper from Staples? Send them a 1099. Hire a firm to clean your retail store? Or to maintain your servers? A 1099 is required. Arguably a sales person who drops off donuts at clients’ offices each week must send a 1099 to Winchell’s.

    Why is this expansion of IRS filings contained in health care reform legislation? Because the additional information flowing into the IRS will help cover the cost of reforms. Expanding the 1099s filed with the IRS is expected to increase tax compliance to the tune of roughly $17-$19 billion — and perhaps more. The IRS estimates that the federal government loses $300 billion annually on unreported taxable income. Learning about some of these transactions through 1099s could help close that gap.

    Tax compliance is a good thing, but the burden on businesses, especially small businesses, will be substantial. Just think about the effort required to collect tax identification numbers from every hotel, restaurant, online store or establishment at which you spend $600 per year. Every freelancer will now need to track every expense to every vendor.  The coming administrative headache is leading some lawmakers and business groups to seek repeal of this provision of the new health care reform package. Even some of the reform legislation’s strongest supporters (think the White House) favor exempting firms of less than 25 employees and raising the reporting threshold from $600 to $5,000.

    Yet the Senate voted down attempts to repeal or tweak the PPACA’s 1099 requirements. The problem is that repealing a revenue source for health care reform requires either finding a new source for these dollars or reducing the cost of the reforms. So while there’s bipartisan support for fixing this problem in the PPACA, agreement on how to pay for the fix is lacking. Democrats voted down an outright appeal of the provision because the revenue was offset by exempting more Americans from the PPACA’s requirement to obtain health insurance coverage. Republicans voted against the more limited change to the 1099 requirement supported by President Barack Obama and others because the lost revenue was to be made up by repealing tax breaks for large oil-and-gas producers.

    Ultimately I believe Congress will find an acceptable way to pay for the fix. Given the state of the economy and the need to help small businesses, the political and ideological interests of both parties converge to find a solution. Of course, finding a fix in the run-up to November elections may be too much to expect. Fortunately, the 1099 changes don’t take effect until 2012 so there’s time to find a solution.

    But if it’s this challenging to fix something relatively tangential to health care reform, one shudders considering what it will take to fix something closer to the core of the Patient Protection and Affordable Care Act.

    Small Group Coverage Predicted to Increase Due to Health Care Reform

    Whether health care reform will result in a move from group coverage to individual health insurance plans is a critical question. For brokers, carriers and employers wanting to prepare for the future, the answer will determine where and how they spend their time, money and resources to negotiate a changing world.

    By a wide margin, readers of this blog who responded to an unscientific survey expressed the belief that health care reform is far more likely to result in consumers moving from small group to individual medical coverage than the other way around (70% versus 13% with 17% stating reform would have no effect on whether people obtain individual or group health insurance). They majority may be right. but a new study indicates it’s too soon to bet too much of the farm on this prediction.

    Using sophisticated modeling techniques, researchers at the RAND Corporation are predicting that the Patient Protection and Affordable Care Act will “result in a large net increase in employer-sponsored insurance offers.” The findings, published in the New England Journal of Medicine, are based on modeling using “RAND’s Comprehensive Assessment of Reform Efforts (COMPARE) microsimulation model.” Which is a fancy way of saying the researchers used a nifty tool that predicts the future by making informed assumptions on the probable impact of things like the establishment of exchanges, individual subsidies, employer penalties for failing to offer coverage, expansion of Medicaid, availability of spouse’s coverage, existing incentives for employers to offer coverage and other factors in a really sophisticated way. (The folks at Medpage Today offer a useful description of the RAND study predictions).

    The researchers (Christine Eibner, Ph.D., Peter S. Hussey, Ph.D., and Federico Girosi, Ph.D.) project the number of Americans obtaining coverage through their employers will increase from 115.1 million to nearly 129 million. Significantly, they predict that “the probability of being offered coverage increases proportionately more for workers at small firms than for large firms” – a surprising result given that small firms are not subject to the PPACA’s penalties imposed on employers failing to offer health insurance to their workers. Of the 13.6 million additional workers who they project will be offered coverage as a result of the new health care reform law, 10.4 are expected to be employed by small businesses (less than 100 employees).

    Driving this influx of small business employees into the group market are are “increased demand for coverage by workers due to individual penalties for being uninsured and the availability of new, often lower-cost insurance options.” These lower cost plans are expected to be offered through the exchange and result from administrative savings these new arrangements are expected to provide.

    Assuming exchanges will be able to provide coverage at a lower price point than equivalent plans sold in the open market is a big assumption. Based on the experience of purchasing pools in California and other states during the 1990s, this may be an unrealistic expectation. But the outcome of the model used by the RAND researchers is still worth considering.

    The truth is we won’t know whether consumers move from group to individual coverage or migrate in the other direction until the reforms are more fully implemented and consumers, employers, lawmakers, carriers and others make meaningful decisions. Predictions are nice, but it’s reality that pays the bills.

    In the meantime, however, all we can do is guess. And the RAND Corporation study offers projections that, while they should not be taken as a certainty, are certainly educated guesses.