Broker Testimony Before NAIC Concerning MLR and Commissions

The National Association of Insurance Commissioners will be meeting in Austin, Texas this week to consider a number of issues related to the Patient Protection and Affordable Care Act. One topic will be how the medical loss ratio provisions of the health care reform bill impacts brokers and consumers. A coalition of broker organizations will be testifying this Sunday urging the NAIC to move forward with a proposal to exempt producer compensation from the MLR calculation.

The MLR targets (individual and small group carriers must spend 80% of premiums received on claims or health quality efforts; large group carriers must spend 85%) is a critical part of the PPACA’s scheme to “bend the cost curve” when it comes to premiums (never mind that the biggest driver of premium rates is the cost of medical care). Limiting the amount of premium dollars insurers can devote to administration and profit, supporters believe, will result in reduced insurance rates. Also, since the PPACA requires all consumers to obtain health insurance coverage the medical loss ratio rules are designed to prevent carriers from gaining an undeserved financial windfall.

Significantly, exempting broker commissions does not run contrary to either purpose. The legislation being considered by the NAIC will still limit the percentage of premiums carriers can spend on administration and profit – and to a greater degree than most state measures addressing MLR targets do today. In addition, carriers will still need to aware of the total cost of their policies – including broker compensation. From a consumer’s point of view, the total cost of coverage will be the carrier’s premium and the broker’s commission. Carriers will be unwilling to go to market with a total cost that is uncompetitive because of overly generous broker commissions. This is one, but not the only reason, broker commissions are unlikely to return to where they were before the passage of the PPACA even if broker compensation is removed from the MLR formula. That broker commissions should increase at the rate of medical inflation, as opposed to general inflation, for example, is hard to justify when medical inflation is increasing at twice the rate of increases to the Consumer Price Index. But this change will — and should — be driven by market forces, not arbitrary limits set by Congress.

The NAIC proposal is also consistent with the purpose of the PPACA’s approach to MLRs because, as I wrote last summer, exempting commissions from the medical loss ratio may actually reduce overall administrative costs in the system. Carriers today aggregate broker compensation from small groups and individuals then pass 100 percent of these dollars onto independent third parties, retaining none of it for themselves. This reduces paperwork costs for hundreds of thousands of brokers, businesses and families and is a cost-saving measure that should be encouraged by the PPACA.

Not everyone sees it this way, of course. The American Medical Association, consumer groups and some Democratic legislators have urged the NAIC to keep the medical loss ratio calculation put in place by the Department of Health and Human Services (with input from the NAIC) as is. On the other hand, a bipartisan group in the House of Representatives has introduced HR 1206 to remove broker compensation from the formula used to determine a carrier’s MLR.

The broker coalition, comprised of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, the Council of Insurance Agents & Brokers, and the Independent Insurance Agents and Brokers of America, was asked by the NAIC to present their views at Sunday’s hearing on the NAIC medical loss ratio proposal. Significantly, they were told there was no need to talk about the value brokers add to America’s health insurance system – this value was already recognized and appreciated by the Insurance Commissioners. Instead they were asked to focus on the economic impact of the MLR provisions as currently being implemented.

In a letter to NAIC from the Agent-Broker Alliance reports on a study that shows 25 percent of brokers surveyed are reporting business income reductions for individual and small group sales of 21-to-50 percent with another 25 percent describing losses at between 11 and 20 percent. The result is that brokers are leaving these markets, reducing the availability of their expertise to consumers just when the complexity of health care reform makes this expertise more critical than ever.

Past NAHU president Beth Ashmore will be providing testimony at the Sunday NAIC hearing. As a long-time Texas broker she will be able to provide Commissioners with a glimpse into how the “theory” of the PPACA is revealing itself in practical terms.

The NAIC has no vote in Congress, but they do have significant influence, especially to the extent the NAIC vote in favor of changing the MLR calculation is bipartisan. If they support exempting broker commissions it will give considerable momentum to efforts bills such as HR 1206. The legislative process takes time so there will be no quick fix. The key is to keep initiatives moving forward down the path. The NAIC meeting is a milestone along the way.

Bill to Exempt Broker Commissions from MLR Formula Introduced Today

A bit sooner than expected: Representatives Mike Rogers and John Barrow introduced legislation today to exempt broker compensation from the medical loss ratio calculations required by the Patient Protection and Affordable Care Act. Under the PPACA, health insurance carriers are obliged to spend 80 percent of the premiums they take in on policies sold to individuals and small group toward medical claims and health quality initiatives. For policies sold to larger groups this medical loss ratio target is 85 percent.

The purpose of the MLR requirement, in the words of Senator Jay Rockefeller, “is to encourage health insurance companies to deliver health care services to their customers in a more efficient and cost-effective way.” As a consequence of this provision, most health insurers have slashed broker commissions on policies sold to directly to individuals (as opposed to through an employer) and a significant number of carriers have made significant cuts to producer compensation for the sale and service of small group policies as well. This has forced many brokers are reconsidering the viability of continuing to service these market segments. Commissioners and others are concerned about

The National Association of Health Underwriters along with allied broker groups, specifically the National Association of Insurance and Financial Advisors and the Independent Insurance Agents and Brokers of America have been seeking to have broker commissions exempted from the MLR formula almost since the law passed. In October they won support from the majority of Insurance Commissioners at a meeting of the National Association of Insurance Commissioners to accomplish this, but at the last minute attorneys convinced the decided they lacked the power to make the change through regulation. Instead they would need to seek legislation to make this change. And they’re working on doing so.

In the meantime, Members of Congress are looking to change the health care reform law to accomplish the same goal – thus the bill introduced today, HR 1206. What’ impressive about the proposal (which will receive a bill number soon) is the bipartisan support it has received. The primary The lead sponsors are Republican Congressman Rogers and Democratic Congressman Barrow. They have been joined by 10 additional Republicans and 3 Democrats. Given the partisan divide prevailing in Congress, this is a remarkable coalition.

Better still, Jessica Waltman, Senior Vice President of Government Affairs at NAHU tells me that a bipartisan companion bill will be introduced in the Senate as early as next month.

Passage of the legislation is far from certain. Some Democratic lawmakers, several consumer groups and the American Medical Association oppose removing broker compensation from the medical loss ratio calculation. And some Republicans may be loath to improve legislation they are hoping to repeal.

Nor would exempting broker compensation result in a return to pre-PPACA commission schedules. While some of the more recently announced draconian cuts would no doubt be walked back. But as I mentioned in yesterday’s post, even if the PPACA were repealed, the way brokers are compensated was likely to change. The benefit of the Rogers/Barrow legislation is that these changes will reflect market forces, not an arbitrary spending target.

I’ll add a link to the press release from Representative Rogers when it’s available online, but here’s some of the key passages:

“’The nation’s 500,000 insurance agents and brokers help consumers find the right health care, advocate on their behalf, identify cost-savings opportunities and inform them of new products and changes in the industry,’ said Rogers, a senior member of the House Energy and Commerce Committee Subcommittee on Health. ‘A mandate in the new health care law severely restricts their ability to perform such services, meaning small businesses are losing jobs or shutting down completely and consumers are finding it harder to access their services.’”

“Insurance agents’ and brokers’ commissions are never part of an insurer’s actual revenue, and should never be counted as an insurer administrative expense, as confirmed by the National Association of Insurance Commissioners, the non-partisan experts on state insurance markets.”

“’Insurance agents and brokers serve as the voice of health insurance for millions of families and small businesses in rural communities,’ said Congressman Barrow. ‘These folks can help explain to consumers the many changes taking place in the healthcare world over the next few years, and so it’s important that our insurance agents are not hampered by provisions in the new healthcare law. This is another critical improvement that needs to be made to the healthcare law, and I’m hopeful that my colleagues on both sides of the aisle will work with Mike and me to see that this important improvement is implemented.’”

Edited March 18th to add bill number: HR 1206

Commissions, Medical Loss Ratio Targets, Brokers and Politics

Legislation to exempt broker commissions from the medical loss ratio provisions of the Patient Protection and Affordable Care Act is gaining bipartisan steam. Original sponsor Republican Representative Mike Rogers has been joined by Democratic Representative John Barrow. Other House Members from both sides of the aisle are expected to sign on before the legislation is formally introduced – perhaps as soon as next week.

Meanwhile, the National Association of Insurance Commissioner’s Professional Health Insurance Advisors Task Force has posted their draft of a bill to exempt broker commissions from the MLR (a copy of the proposed law is available at the end of this Employee Benefits Adviser’s BenefitNews article). The NAIC is seeking comments on the proposed legislation (which is very similar to that proposed by Representatives Rogers and Barrow) in that it simply removes compensation paid to independent brokers from the medical loss ratio calculation. A hearing on the draft bill will be held on March 27th during the NAIC’s quarterly meeting in Austin, Texas. (Those wishing to add their two cents to the conversation can submit an email to tmullen@naic.org by Monday, March 21st.

This legislation is a top priority of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, and the Independent Insurance Agents and Brokers of America. Florida Insurance Commissioner Kevin McCarty, president-elect of the NAIC, has led the organization’s effort to deal with the negative impacts the PPACA has had on brokers.

All this is pretty good news, right? In a few weeks there could bipartisan legislation backed by the NAIC as a whole and its leadership in particular and supported by the grassroots strength of agent organizations. There’s just two problems: opposition from Democratic liberals and political maneuvering from Republicans.

Senator Jay Rockefeller has sent a letter to the NAIC complaining that treating broker compensation as anything other than administrative costs “would allow agents, brokers, and health insurance companies to retain the estimated $1 billion in benefits that American consumers will receive next year thanks to the health care reform law.” Senator Rockefeller overstates his case ($1 billion just from the MLR provision?), but at least he attempts to marshal some arguments behind his concerns. However, in many of these arguments his reasoning is flawed.

He states, for example, that “the proposal would make it more difficult for consumers and small businesses to understand how their premium dollars are used ….” Why? The PPACA already exempts taxes from the MLR formula, yet no one has expressed concern that this will confuse anyone.

He also assumes that if broker compensation is removed from administrative costs that commissions will revert to what they were before the PPACA. He even quotes a statement from me published in Benefits Selling magazine to support this point. In that article I noted that brokers cost of doing business rises at closer to general inflation, not the rate that medical costs drive up insurance premiums. And I predict that commissions will eventually be decoupled from premiums. However, my belief that how broker compensation is calculated is unrelated to health care reform. I’ve been talking about this dynamic for years, long before the start of the Obama Administration. Even were the PPACA to be repealed I believe the method of determining commissions will change. It’s simply too hard to justify tying commissions to medical inflation.

And that’s what Senator Rockefeller is missing. Commissions are set by market dynamics. Carriers, consumers and business owners need independent producers and are willing to pay for the value brokers provide. In setting commissions carriers not only look at what competitors are offering, but at what brokers can earn selling other products like life or disability. In the end it comes down to an economic calculation: does the compensation justify the time and resources brokers commit to make sales and service their clients. Regardless of how it’s calculated, if the answer is yes, brokers will engage with the product; if the answer is no, they won’t.

The medical loss ratio provisions in the PPACA disrupts this formula. By imposing an arbitrary cap on administrative costs and including commissions within this cap, the law threatens to make remaining engaged in the sale of individual products uneconomical for too many brokers. The PPACA shifts the situation where compensation reflects the value brokers bring to consumers and carriers to a mathematical formula driven by the medical loss ratio calculation which ignores value, effort and resources.

Liberal Democrats, however, are not the only hurdle to making changes to the MLR formula. As noted in a thorough and illuminating examination of the issue by Sarah Kliff in Politico, political calculations by Republicans may doom the bill. Republicans, Ms. Kliff points out, “have little to no political incentive to improve” the PPACA. Improving the PPACA simply makes it more palatable and that, in turn, makes the law harder to repeal. Better to leave the legislation’s flaws in place, this reasoning goes, so as to strengthen calls to chuck the entire package. Or as one source cited in the Politico article says, “If it really became a bill with steam and the Republicans started hearing from all those brokers maybe the odds change.” But I can’t get myself past the ‘we aren’t fixing this bill’ hurdle.”

NAHU and its allies are pitching the MLR change as necessary to protect small businesses – specifically the many health insurance agencies around the country. They are gaining potent support. Yes, there is opposition, but still, if approached on the merits, I believe the Rogers/Barrow legislation could pass. The primary reason for this optimism is that exempting broker commissions from the MLR formula doesn’t undermine the purpose of the PPACA’s medical loss ratio provisions.

It would be a shame, but in today’s world not at all surprising, if this helpful fix were derailed because some lawmakers find a greater political advantage to preserving the flaws within the PPACA than fixing them.

Bill to Exempt Broker Commissions from MLR Formula Coming Soon

Supporters consider the medical loss ratio provisions in the Patient Protection and Affordable Care Act to be critical to the “affordable” part of the new health care reform law’s title. They also believe that requiring carriers to spend a specified percentage of premiums on medical claims and health quality improvement programs is necessary to prevent heath insurers from receiving an unwarranted windfall when all consumers are required to obtain health care coverage beginning in 2014.

As a direct result of this MLR provision carriers are slashing broker commissions. Cuts in broker commissions on individual health insurance policies of 35-to-40 percent are common, and some cuts exceed 50 percent. Few businesses can absorb a revenue reduction of this magnitude and insurance agencies are no exception. As a result, many brokers are considering abandoning the individual market altogether, an unfortunate outcome for both these producers and consumers in general. Consumers benefit greatly from the expertise of professional brokers not only when purchasing coverage, but when problems arise after the sale as well. Exchanges created by the PPACA cannot replace the value brokers deliver, a fact borne out by the experience of existing exchanges.

All this explains why, at their October meeting, the National Association of Insurance Commissioners was on the verge of recommending that commissions to brokers be removed from the formula used to calculate a carrier’s medical loss ratio. Their lawyers, however, convinced them that the PPACA denied the NAIC the authority to do so.

Carriers receive no benefit from the commissions they collect from policy holders and pass along to brokers. Insurers provide an administrative convenience (reducing system wide overhead), but pass through 100 percent of the commission. Consequently, including these dollars in the medical loss ratio calculation fails to further the purpose of this provision. However, to make this common sense adjustment to the PPACA will require legislation.

Enter Congressman Mike Rogers. Politico Pulse broke the news in their February 16th edition: “The Michigan rep will introduce legislation in the coming weeks to pull brokers’ fees out of the MLR formula, just as agents had lobbied the NAIC to do.” According to the Politico report, the bill’s language has been drafted and mirrors the NAIC proposal. The article goes on to cite an “industry source” as claiming “There’s been some surprising interest from moderate Senate Democrats.” As any changes to the PPACA will require bipartisan support, this is indeed good news. (Representative Rogers is a Republican).

And yes, this is something broker organizations led by the National Association of Health Underwriters (NAHU) along with the National Association of Insurance and Financial Advisors (NAIFA) and the Independent Insurance Agents & Brokers (the Big I) have worked hard to make happen. Getting a bill introduced is neither simple nor easy. Members of Congress are harangued by countless individuals and groups to put forward legislation. But throwing something in the hopper is serious business and not undertaken casually. That Representative Rogers, a member of the House Energy and Commerce Committee’s Subcommittee on Health, will be putting his legislative reputation behind this bill is very meaningful.

Introducing a bill is, of course, not the same as enacting a law. However, no law gets enacted unless someone first introduces a bill. Which makes this news, as the saying goes, a [very] big deal.

When Public Policy Meets Reality

A short (less humorous) version of an old joke goes: an engineer, a priest and an economist are stranded on a desert island with just a can of beans. They’ll starve if they can’t open the can. The engineer proposes a solution involving situating the can among rocks in such a way as to heat the can to the point of exploding. The priest suggests praying for divine intervention. The economist’s approach: “assume a can opener.”

Replace “economist” with “public policy expert” and you get a nice metaphor for why any massive reform is an arena where unrealistic expectations intermingles with unintended consequence. This dynamic doesn’t mean big problems don’t require big solutions, but it does imply that the assumptions and predictions of “experts” – especially those detached from what would generally be regarded as the “real world” – are unlikely to work out as well as hoped.

The Patient Protection and Affordable Care Act is no exception to this phenomena. The health care reform law is chock full of the favorite “concepts” proposed by academics over the past few decades. Exchanges. Standardized plans. Modified community ratings. On-and-on. Some of these ideas were the favorite of Democrats; some were originally proposed by Republicans. Most all of them are based on theories about how the real world should work, with the emphasis on “should.”

A case in point. One of the better provisions of the PPACA is aimed at creating a standardized approach to presenting the benefits included – or excluded – by a medical insurance policy. Standard terms and descriptions must be used by carriers beginning in 2012 so consumers can easily make apple-to-apple comparisons between policies. The PPACA lays out the requirements of these Summary of Coverage forms (e.g., they can be no more than four pages long). Developing the template and permissible language, however, is left up to the Department of Health and Human Services in consultation with the National Association of Insurance Commissioners.

Ask most policy experts and they’ll argue that standardizing these benefits will empower consumers to make informed decisions concerning the appropriate health care coverage that best fit their needs. Some will even be willing to state that this provision is another reason why brokers will be less necessary in the future. By making it simple to understand and compare policies, the expertise brokers provide will be less necessary.

In theory.

The reality appears to be something else.

While finding that consumers considered the initial version to be appealing and well received, a study by Consumers Union showed the Summary of Benefits “could lead [consumers] to select a plan that was not in their best interest.” The reason is because of:

  • Significant participant difficulty with cost-sharing concepts (allowed amount, coinsurance, benefit limits, deductibles, etc.)
  • Significant participant difficulty with covered service definitions (understanding what was included in specific service categories, like preventive care)

In other words, while the information was presented clearly, consumers lacked the expertise to use this information effectively.

Consumers Union, which publishes Consumer Reports, used focus groups to explore the effectiveness of the draft version of the standardized summaries. One of the study’s observations is that “shopping for health insurance was an aversive task, fraught with anxiety for many respondents. They were afraid of making a costly mistake if they chose the wrong plan. Even respondents with good health insurance literacy skills lacked the confidence to choose a plan, reflecting a concern that it would expose them to potential financial liabilities.”

I made a similar point in yesterday’s post: “health insurance is complicated, expensive, rarely shopped for, very personal and extremely critical to one’s health and financial security. This is not a purchase to be made lightly. Consequently, consumers and small businesses want an expert to help them make the right choice.”  But it’s nice to have this observation borne out in independent research.

Providing information in a user-friendly, clear and understandable way is very hard. And I believe standardizing the presentation of policy information is a worthy goal.

Where I part company with some policy experts, however, is when they assume that consumers are likely to be able to use this information effectively. Some may, but many will not.

Nor is this likely to change by simply improving the form. People shop for health insurance coverage maybe once a year or three times a decade. They’re not going to get good at it. In the torrent of information we all face, for most people spending the time necessary to become savvy about the ins-and-outs of health insurance just doesn’t rank very high.

That’s one of the reasons why the academics who create what they view as a transparent and agent-free health insurance market are doomed to disappointment. In an ideal, hypothetical world you can assume full understanding of clearly set forth information – heck, you can assume a can opener on a desert island. But once that theory comes in contact with reality, consumers want, need and deserve independent expertise from qualified professionals both before and after the sale.

Assumptions are fine, but reality is what counts.

Understanding Broker Anger

Non-insurance brokers reading this blog may be wondering what the fuss is about. Yes, commissions are being reduced, especially in the individual market segment. Who didn’t see the writing on that wall? Given the Patient Protection and Affordable Care Act’s medical loss ratio provisions, a substantial cut in individual health insurance commissions was a mathematical certainty.

So why the anger, despair and sense of betrayal? Yes, fear that one won’t be able to make a living in one’s chosen profession has a tendency to make macro events very micro – and personal. This would explain the despair, but more is going on here than concern over a reduced revenue stream.

Most brokers reading this blog are far more engaged in insurance sales and service than I currently am and can express how brokers feel far better than me. (Hopefully they will – and will do so civilly). However, I’d like to offer some observations to non-broker readers to start the dialogue.

First, let’s get the obvious issue out-of-the-way. Yes, the money matters. Professional brokers add value to the products they sell and service. (The service aspect of what brokers do is too often overlooked, but it is a major part of the job). Brokers want to be fairly compensated for that value. There are bills to pay and other products to sell. Time and resources are being spent and commensurate compensation is deserved.

The commission cuts we’re seeing vary greatly from state-to-state, carrier-to-carrier and product segment-to-product segment. In the individual market (where consumers buy coverage without support of an employer) commission reductions of roughly 30-to-50 percent appear to be the norm.  Cuts of this magnitude would disrupt any enterprise. Imagine telling GM that their new $41,000 Volt must now be sold for $25,000. So much for paying back their government loans. Look at what happened in California when state revenues fell by roughly 20% from fiscal year 2007-08 to 2008-09. (For those not paying attention, the result has been a fiscal, policy and political nightmare).

Brokers recognize that during the Great Recession others have sustained even harsher financial hits. Yet when it’s your cash flow, company doesn’t reduce the misery. Yes, brokers are better off than the owner of a neighborhood business bracing for the arrival of a Wal-Mart in their neighborhood or of a worker watching her job shipped overseas. After all, when a business closes or a job ends, all compensation revenue and income ends, too.

Brokers, however, still have strong relationships with their clients. There are other products to sell and service. Some producers no doubt have already calculated that the size of cuts to commission rates in many instances do not necessarily reflect commensurate cuts in actual compensation (in some circumstances, unfortunately, they do). Between 2004 and 2009 the average premium in the individual health insurance market segment increased by 31% for single coverage and 43% for family policies according to two reports published America’s Health Insurance Plans, a trade association for carriers. Premiums have no doubt increased in 2010 and will again in 2011 – the PPACA will see to that.

Still, given commission reductions of the magnitude being reported, the response of many brokers is neither surprising nor inappropriate – and it is intense and genuine. Because there is more involved here than the money.

Professionals who have devoted their careers to serving their clients and supporting their carriers are being told by those same companies that those services will no longer be worth tomorrow what they are today (in a monetary sense). At the same time, carriers are reminding brokers that their role in educating consumers has never been more important given the new health care reform law. How could anyone in this situation feel anything but devalued personally and professionally?

Intellectually most producers knew changes to the commission structure were inevitable even in the absence of reform. Tying broker compensation to the rate of medical inflation, which brokers know has greatly outpaced general inflation for years, was becoming increasingly difficult to justify. Knowing this, however, doesn’t make commission cuts any easier to accept. This is especially true when some carriers seem to be hiding behind health care reform to lower average commissions below what the math embedded in the PPACA’s medical loss ratio provisions seems to require (roughly to 7-to-8 percent of premium). Were these carriers to fully explain why they were reducing commissions significantly below their competitors, brokers might find the situation more easy to accept. Instead, brokers are being told “Here it is, take it or leave it.” A message that does nothing to address brokers concerns, but simply inflames their anger.

Worse, some carriers have apparently chosen to apply the compensation reductions to brokers’ existing block of business. This is a tactic brokers find unacceptable (and I feel for the sales executives of these carriers who have to explain and justify an approach they vehemently opposed).

Why are brokers concerned about retroactive commission cuts? For the same reason no health plan CFO would let their company offer a policy empowering subscribers to unilaterally lower premium payments simply by declaring that “household costs must be cut.” Yet these same CFOs are asking brokers to accept such an arrangement.

That even one carrier would attempt to take this approach undermines trust in all carriers. Brokers entrusted their clients and a portion of their livelihood to these insurers. Yes, there are contracts governing these arrangements, but there’s a large element of trust involved, too. Brokers rely on insurers to provide the coverage promised in their policies, to treat their clients fairly, and to be dependable business partners. Retroactively cutting commissions on existing business defies the definition of dependable.

My guess is that when their sales drop precipitously, as they inevitably will, these carriers will reconsider this approach. Insurers have, after all, retreated from similarly bad compensation ideas in the past (more on these examples in a future post). Even then, however, the sense of betrayal brokers feel today will linger.

Complicating brokers evolving view of their carriers is that while the commission cuts are obvious, other cost cutting measures insurers are taking are less apparent. The ranks of home office executives are being reduced at many companies, for example. but unless these terminated officers worked directly with brokers, their departure goes largely unnoticed. As a result many brokers feel, (in many cases wrongly) that carriers are not accepting their a share of the pain necessitated by the PPACA.

Brokers rightfully consider the services they provide their clients – and their carriers – to be valuable and important. And they are. Clients trust their brokers far more than their carriers. Consumers listen to their agents when it comes to choosing a health plan; I’ve never heard of a consumer listening to a carrier when it comes to choosing their agent. Most carriers seem to be making the cuts that the math requires of them. Brokers who expect that 20% commissions in an age of 80% medical loss ratios can continue are being unrealistic. And attacks on all carriers for unfair or inappropriate actions taken by a few insurers are unfair. Yet doing so is all too easy – and human.

Whether as a non-broker you believe producers have been overly compensated or not, the reality is that the imposition of commission cuts understates and undermines the perceived value of the profession. Brokers may have been reassured by the resolution passed by the National Association of Insurance Commissioners expressed their concern about the negative impact the PPACA could have brokers this past summer. They may be heartened to know that state regulators was calling on the Administration to “protect the ability of licensed insurance professionals to continue to service the public.” But outcomes trump good intentions. And while the position of the NAIC may impact the role of brokers in the future, what producers are seeing now is a devaluation of their work.

I believe that’s the greatest source of anger. Yes, selling and servicing individual health insurance will be less profitable next year than this year. Producers will determine on a broker-by-broker basis whether selling and servicing individual health insurance will be profitable enough to justify continuing to do so. What works for one broker may not for another.

The income being lost today will, I predict, be replaced through an influx of new customers and increases in the cost of coverage. What will be far harder to set right is the diminished trust between brokers and carriers. Loyalties and relationships have been strained and must be reforged. Harder still, however, will be restoring brokers’ sense that the value they provide is recognized and respected. Doing so will require carriers, lawmakers and regulators to treat brokers differently than has been too often the case to date.

Whether they are inclined to do so remains to be seen. Until they do, however, broker anger will continue, even when the lost income is replaced.

The Three Year Approximate Commission Calculation

Individual health insurance policies don’t stay on the books with a particular carrier for long. There’s a variety of reasons for this lack of persistency, but the most common reason for a policy lapsing is that the insured has been offered coverage through their job. Since employers usually subsidize at least half the the premium, dropping one’s own policy and taking the company’s is invariably a better value. Actuaries are pretty good at anticipating the lapse rate for a particular plan.

Lapse rates are highest during the first year a policy is in-force. This reflects the loss of consumers who purchased coverage while between jobs or the like. As a result, it’s not uncommon for one-third of individual and family medical plans to terminate in their first year. It takes roughly two years, however, for the next one-third to lapse. Put another way: sell 100 individual policies on January 2011 and you can expect to have 67 still on the books come January 2012 and 33 remaining on January 1, 2014. These are estimates and averages applied over large numbers. Your results may vary.

It’s also important to note that carriers and brokers have different experiences with lapses. A broker moving a client from Carrier A to Carrier B represents a lost case to Carrier A, but not to the broker.

How does all this tie into commissions? Because persistency is an integral part of the very idiosyncratic way I compare different commission schedules. And given the changes going on with broker commissions in light of the Patient Protection and Affordable Care Act’s medical loss ratio provisions, comparing commission schedules has become, by necessity, an obsession of most brokers.

The method I use to evaluate the commissions is what I call the Three Year Approximate Commission Calculation. Here’s the “thinking” behind it:

  1. According to the lapse rates by actuary friends have shared over the years, a typical individual health insurance sale remains is on the books for approximately three years. Some never make it that far; others stay far longer, but three years is a good rule of thumb.
  2. Broker compensation is usually (but not always) based on a percentage of the premiums paid by the consumer. Which means one way to compare broker compensation resulting from any particular sale is to add up the commission percentages paid each year and apply it to the first year’s premium. This is, admittedly, just one way and would, no doubt, make my actuary buddies cringe). Using this approach, a commission schedule that pays a flat 10% commission each year over three years is paying out roughly 30% of the first year’s commission over that period. A schedule that pays commissions of 15% first year and 7.5% on renewals is also paying out roughly 30% of the first year’s commissions.
  3. Yes, this fails to take into account the impact of rate increases, but I’m not claiming to offer a precise way of determining commission equivalence. This is a way to approximate the value of a commission schedule on the fly – no spreadsheet software or calculators required. There’s a reason “Approximate” is in the name of this calculation.Besides, guessing at the net impact of future rate increases is just that, a guess.

The result is the Three Year Approximate Commission (or TYAC). While it was developed for comparing individual medical plan commissions it can be used on small group health insurance commissions, too, which also are likely to remain with a carrier for roughly three years on average.

The Three Year Approximate Commission Calculation is especially useful in comparing the “before and after” of commission schedules being announced by carriers seemingly on a daily basis. As I’ve written before, the math imbedded in the Patient Protection and Affordable Care Act demands broker compensation be cut (absent regulatory or legislative relief). Put simply, carriers will have 7-to-8 percent of individual and small group premium available for broker distribution after allowing for administrative costs and margins. This works out to a Three Year Approximate Commission of 21-to-24%.

Which is pretty close to what brokers are reporting in the Tracking Commission Changes post (please note: these are reported commission schedules and have not been independently verified – if anyone has corrections, please send them along).

In Arizona, Cigna is reducing individual plan commission from a Three Year Approximate Commission of 30% to one of 22% – a roughly 27% cut.

In California, Anthem Blue Cross’ 40% TYAC is dropping to 28% for the top tier – a 30% reduction. Their lowest tier pays has a TYAC of 21% – a reduction of 47.5%.

In Georgia, Humana is going from a Three Year Approximate Commission of 33% to one of 25% – a 24% drop.

Illinois BCBS’s TYAC is moving from 30% to 23% for top producers – a change of roughly 23%. For those selling less than 25 cases the TYAC is dropping from 25% to 20% – a decline of 20%.

You’ll note some carriers have tiered commission schedules paying more to larger producers at the expense of those writing just a few cases. While you may disagree with this approach, it is “broker-friendly.” A producer writes less than, say, 10 cases a year isn’t really in the business of selling individual major medical plans. Such producers earn the bulk of their income from other product lines. Selling an individual policy is often done as a convenience to an existing customer. The amount they are paid on these sales is secondary to the income they receive from clients on other lines of business.

A broker selling dozens or even hundreds of individual health insurance plans a year, however, is relying on this line of business for the bulk of their income. That carriers would want to soften the impact of commission cuts on these produces is reasonable and, for these large producers welcome.

Still, commission cuts of 20%-30% or more in one year are life changing. Name a city or state who who could withstand a 30% decrease in tax revenues in one year? A CEO announcing a 25% drop in revenue would not be CEO for long. And the resulting cutbacks in service, layoffs and closures would be a devastating on citizens and employees.

That impact – how big it is, what it means and what brokers can do about – will be the topic of upcoming posts. For today I just wanted to introduce the Three Year Approximate Commission Calculation so we’d have a common way of describing differing commission schedules.

Why Brokers Will Survive Health Care Reform’s MLR Provisions

Yesterday I wrote about the National Association of Insurance Commissioner’s decision not to exclude broker commissions from the calculations carriers will use to determine their medical loss ratio as required by the Patient Protection and Affordable Care Act. Some brokers have indicated, on this blog and elsewhere, that this result spells certain doom for brokers.

I respectfully disagree. And I had started to draft a post explaining why. The post was going to revisit an explanation I offered once of the math that will drive broker calculations. Then I was going to note that many carriers offering small group and individual coverage were already fairly close to meeting the PPACA’s medical loss ratio requirement. And finally I was going to highlight the expenses currently treated as “administrative” by carriers that will now be either excluded from the calculations (e.e., many taxes) or that will now be reclassified to the “claims” side of the calculation (e.g., quality improvement and disease management programs).

But then I read a comment to yesterday’s post submitted by Ann H. setting out her perspective on the impact of the NAIC’s decision on brokers. Knowing that not everyone visiting this blog reads the comments I wanted to give her statement the prominence it deserves. That this spares you from wading through my math calculations is an added benefit.

So here’s Ann’s comment. Other than correcting a spelling error or two, it’s presented as she wrote it.

I didn’t know about these facts, Alan, and thank-you for telling us. But even before I read this, I can tell you that I wasn’t overwhelmingly disappointed that broker commissions were not removed from the MLR.

I guess there are 2 reasons. First, I expected it, so I’ve already crossed the bridge of disappointment and even fear. On 3/23/2010 when President Obama signed the law, I realized that my commission would be squeezed, and my business would suffer in other ways including a reduction in the number of carriers, frustration of my clients, higher premiums that puts further pressure on my book of business and so forth. I guess I’ve already dealt with this emotionally and logically.

The second reason today’s news about broker commissions didn’t affect me much is because there are other factors involved. One of my carrier reps said this to me several months ago — he said, “Half of the commission rate on double the premium is still the same amount of income.” He also said, “half the commission rate on twice the clientele with half the work due to guaranteed issue is still the same income.” And he also told me that the insurance company he works for was planning to keep premiums and expenses at much the same rate as they had done before anyway. He said that once 2011 is over and the accounting is done, if they find that they must make rebates to customers, then they will rebate. But they aren’t going to freak out now.

I think, “don’t freak out yet” is a good idea. Another of my carriers told me that they aren’t going to make major changes in business practices until the election is over, and they’ve analyzed the result. And even then, they expect more modifications to the rules on the national and state level. They don’t want to make drastic changes now that affect their position in the market, their position with brokers, and their public relations. They said 90% of their business is driven by brokers, and they can’t afford to replace the workload brokers provide for that 90%. They would actually survive better by paying a rebate than by manning and maintaining workers to replace brokers, then watching their backside for loss of sales due to the deletion of sales brokers.

Cutting broker’s commissions is a balance walk. If one carrier cuts deeper than others, sales may severely diminish for that carrier. Carriers can’t afford to lose fresh input of new customers and be left with an aging risk pool!! I’m not saying broker commissions won’t suffer. They will. But to what extent they suffer is an important issue. And how long the commissions will be at the floor before economic realities make them rise is another issue. I remember when group commissions were cut from 10% level to the 4-6% they are now. It came at the same time as the HIPAA laws with Portability and Guaranteed Issue for groups. Premiums spiked, commission percentages decreased, but after the initial drastic dip it all equalized to be the same amount of income.

There are other balance walks insurers must make. If brokers go out of business, who will service the client? Some NAIC commissioners said they expect their consumer complaint departments to have triple the amount of work if brokers aren’t fielding questions and finding resolutions. That’s what the States think. How about insurers? What strain will there be on insurance company customer service departments if brokers leave the business? How will insurers pay for the administrative expense of those customer service departments when they must meet 80% MLR? Isn’t a larger customer service department just as expensive as broker commissions, and don’t they both affect the MLR? Another thing to think about is quality of service. If an insurer cannot compete based on underwriting, or creative benefit structures, or even premium outside a specified range controlled by the government, then competition on the basis of quality of service is paramount. The amount of money an insurer has to spend on it’s administration and customer service departments is squeezed by the MLR. Will our insurers’ service departments be manned in India or the Philippines? The need for brokers is actually larger now than ever. Maintaining Service Departments is a fixed expense of wages, benefits, office space, overhead and taxes. If insurers were able to replace us with in-house service departments they would have done it a long time ago, trust me. We are less expensive.

Granted, not every broker can survive the dip that will come until things equalize again. The dip may be drastic, especially in some markets. But if you can see past the temporary into the inevitable, you can see light. Some of the things in the PPACA are just not functionally possible. It’s inevitable that the functionally impossible will fail and a solution will rise.

My thanks to Ann H. for sharing her perspective and insight on this issue with readers of this blog.

Commission Exemption Not in NAIC’s MLR Rules, But Issue is Still Open

The National Association of Insurance Commissioners approved rules defining how carriers will calculate their medical loss ratios as is required by the Patient Protection and Affordable Care Act. The NAIC’s proposal will now be considered by the Department of Health and Human Services which is expected to finish its review of the regulations in a few weeks. Which is a good thing considering the PPACA requires carrier to begin meeting the medical loss ratio targets established by the health care reform law (80 percent for individual and small group plans; 85 percent on coverage for groups of 100+) beginning January 1, 2011.

In approving the MLR regulations the NAIC rejected or tabled amendments put forward by insurers and brokers. One change some insurers sought was to allow carriers to calculate their medical loss ratios based on national business (the Commissioners are requiring the calculations to be based on a state-by-state spending). Another would change the “credibility adjustment” formula used in the calculation.  Apparently this would have made it easier for smaller carriers to meet the MLR target.

The amendment put forward by brokers to exclude commissions from medical loss ratio calculations was withdrawn and the issue was referred to a working group of the NAIC’s executive committee. While some interpret this as ending the issue, that is far from clear.

The National Association of Health Underwriters along with the National Association of Insurance and Financial Planners and the Independent Insurance Agents and Brokers of America were the advocates of the broker commission amendment. I attended a conference today at which NAHU’s CEO, Janet Trautwein spoke. I’ll do my best to summarize my understanding of the situation based on her talk bolstered with reporting by National Underwriter.

Apparently there were enough votes among Commissioners to pass the broker commission amendment. However, NAIC lawyers questioned the authority of the organization to promulgate such a rule and warned that it conflicted with other proposals submitted to HHS by the NAIC. This led to a concern that including the broker commission exemption would lead to HHS rejecting the NAIC rules altogether. At the very least, HHS was likely to strike the commission exemption.

To avoid this result  a compromise was brokered between HHS staff and supportive Insurance Commissioners. A joint NAIC executive committee/HHS working group will be created to address broker compensation and the medical loss ratio provisions of the health care reform law. The MLR amendment advocated by the agent associations will be the “starting point” for the working group’s deliberations. Aware of the need to resolve this issue quickly, the NAIC committed to convening the working group immediately (which, I assume, means in in a few weeks). The goal of the commissioners supporting this approach is to work with HHS to fashion a regulatory solution that ensures equitable compensation for brokers.

Ms. Trautwein noted the possibility that the working group approach could result in a better outcome for all parties (regulators, carriers and brokers) than if the amendment had been adopted by the NAIC. This would certainly be the case if exempting commissions was deemed, as the NAIC lawyers warned, to exceed the NAIC’s authority.

NAHU and its allies have certainly built a great deal of political support among Insurance Commissioners (both Democrats and Republicans) behind the need to preserve a role for professional brokers in the new health care reform system being created as a result of passage of the PPACA. They recognize the value brokers bring to the products they sell and, as importantly, service well beyond the initial purchase. They also recognize the heavy service load underfunded and ill-prepared state agencies would need to take on if producers are removed from the health insurance marketplace.

There are some, including commentators on this blog, who believe without the commission exemption brokers will be put out of business. I disagree and will explain why in a future post. What’s significant to note now is that the treatment of broker compensation under health care reform has yet to been finally resolved. And there are individuals of good faith from both parties seeking a workable solution. That doesn’t guarantee a positive result, but it certainly creates the possibility for one.

Commissions: In or Out of MLR Calculation?

The National Association of Insurance Commissioners is meeting with the intent of finalizing rules surrounding the medical loss ration requirements contained in the Patient Protection and Affordable Care Act. The impact of their decision will be profound on consumers, employers, carriers and brokers. A final vote is scheduled for tomorrow (October 21st) by the full membership on the rules – and on amendments to those rules – which have been worked on for hundreds of hours by NAIC committees. Whatever emerges from the NAIC plenary session will be forwarded on to the Department of Health and Human Services. The Department may make amendments to the NAIC proposal, but The Hill has reported that HHS is reluctant to “override” the commissioners on NAIC medical loss ratio rules.

What this means is that a lot of issues surrounding the MLR provisions of the new health care reform law – provisions which take effect on January 1, 2011 – will come into clearer focus tomorrow. Again, HHS may still modify these rules, so these won’t be the final rules. And states are given some flexibility in applying the medical loss ratio regulations on carriers doing business within their boundaries, but there will be far greater clarity tomorrow than there is today.

Some of the issues being hashed out are esoteric (not to actuaries, but to the rest of us). But one issue that is of great concern to brokers is how commissions will be used in calculating a carrier’s MLR. As noted previously in this blog, the National Association of Health Underwriters and other agent organizations have been working hard to have broker commissions be removed from the medical loss ratio formula. The logic behind this is that carriers collect broker commissions as an administrative convenience to producers and their clients, passing 100% of these dollars along to independent third-parties. The carriers receive no benefit from this process, but the cost to brokers and policy holders, in the aggregate, is greatly reduced, lowering overall administrative costs.

Exempting this pass-through of commissions from the medical loss ratio calculations is not currently a part of the NAIC MLR regulations. However, I’ve been told that at least 10 Insurance Commissioners are co-sponsoring an amendment to create this pass-through exemption in the rules sent to Health and Human Services. And supporters believe they are closing in on the majority of the Commissioners needed to adopt this amendment.

Politico is reporting on the upcoming commission amendment, too. They note that “This could be a tough one for many commissioners who say that if agents/brokers go out of business – because their commissions would decrease – they’re going to get flooded with consumer inquiries and requests for help.”

Inclusion of the pass-through provision in the NAIC’s medical loss ratio rules would certainly decrease the pressure on carriers to dramatically reduce commissions. However, pressure on commissions will still continue. Tying broker commissions to a percentage of premium – premiums that increase based on medical cost inflation, not general inflation – is still likely to fall as carriers’ commission systems are refined to accommodate different calculations. And broker commissions will need to be disclosed to employers and consumers (carriers will need to separate broker fees from premium). In some states this is likely to result in downward pressure on commissions. And the guarantee issue provisions taking effect in 2014 will also tend to lead to lower commissions. On the positive side, the Insurance Commissioners’ recognition that brokers play an important role after the sale in counseling and advocating for their clients will tend to assure that brokers are compensated fairly.

Of course, all of this is moot unless the NAIC approves the amendment, HHS concurs with this provision and states don’t enact laws or regulations that run counter to it. We’re about to get some clarity. Certainty, however, is still to come.