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.

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.

    Medical Loss Ratios and Commissions

    People don’t like uncertainty. In times of change, however, the unknown dominates the landscape. For health insurance brokers, the new health care reform legislation has created uncertainty of gargantuan proportions. Chief among the questions as yet unanswered:  will the medical loss ratio requirements contained in the Patient Protection and Affordable Care Act result in such severe reductions that brokers will need to leave the health insurance market?.

    The import of this question is not a function of greed or avarice. Lots of people make a lot of money from health care. Mother Teresas are few and far between. America spends roughly $2.3 trillion on health care costs – roughly 16 percent of he nation’s GDP.  Hundreds of thousands of people put food on the their tables, roofs over their heads, and keep up with the Joneses by earning their share of these dollars. There’s nothing wrong with that. And there’s nothing wrong with professionals earning a living by helping consumers find the right health care plan, navigate the system, advocate on their behalf when problems arise, and keep them informed of new products and changes to the industry that may impact them.

    After all, we’re not talking about selling iced coffee here. Health insurance is complicated, expensive, shopped for rarely and both personal and critical to a family’s health and financial wellbeing. When it comes to making decisions on products or services like health insurance, consumers – whether buying for themselves or for their company and its employees – want and need expertise. And that expertise is best delivered by professional, licensed health insurance brokers. (While there are legal differences among the terms “agent,” “broker” and “producer,” I am using them interchangeably here).

    Don’t take my word for it. A lot of Insurance Commissioners agree. The National Association of Insurance Commissioners just passed a resolution calling on federal policymakers to “acknowledge the critical role of producers and to establish standards for the exchanges so that insurance professionals will continue to be adequately compensated for the services they provide.” (NAIC Resolution “To Protect the Ability of Licensed Insurance Professionals to Continue to Serve the Public,” adopted August 17, 2010). The Commissioners are concerned that the creation of “Navigators,” as called for in the PPACA, to help consumers use the new health insurance exchanges to be available by 2014 “could provide an avenue for untrained individuals to evade producer licensing requirements and expose consumers to harm.” But their appreciation of the role played by brokers goes beyond the context of exchanges. The NAIC is saying that consumers – and regulators – benefit from the involvement of professional brokers.

    Which brings us to the medical loss ratio provisions of the new health care reform legislation. By limiting the percentage of premiums carriers can spend on administrative costs to 20 percent for individual and small group policies (and 15 percent for large group contracts) broker compensation will, by necessity be reduced. The math is simple, especially as it concerns individual health insurance policies. Carriers with a decent block of business need 7-to-9 percent of premium for administrative costs. They would like to make (but don’t usually) 4-to-5 percent on this business. That leaves 6-to-9 percent for distribution costs. Given that in some states the first year commission on individual policies is 20 percent declining to 5-to-10 percent for renewals, we’re talking about a significant pay cut here.

    Maybe. Because an argument can be made that commissions shouldn’t even be part of the medical loss ratio calculation. Here’s the theory:

    The intent of the MLR requirement is to reduce non-medically-related costs in the health care system and to prevent carriers from reaping windfall profits when consumers are required to obtain health insurance coverage. Fine, but as applied to broker commissions, the minimum medical loss ratio requirements may actually increase overall administrative costs. Commissions are paid by consumers (whether individuals or employers). Today carriers collect these funds and pass 100 percent of them along to an independent third-party – producers. Health insurance companies don’t benefit from these dollars. They are providing an administrative convenience to their members and to their distribution partners – a convenience that reduces overall cost in the system.

    Instead of consumers and business owners having to prepare, mail and track separate checks to brokers, carriers do the work. (Similar to how carriers aggregate claims owed to a hospital into a single payment as opposed to requiring each consumer to pay 100 percent of their hospital bill and then get reimbursed by the insurance company). And because of their infrastructure, carriers can accomplish this task more cost effectively. Brokers meanwhile receive one check for multiple clients, another administrative savings.

    Given that the health plans are not benefiting from the commissions, but that having them collect the funds reduces overall costs, one could argue that commissions should not be part of the MLR calculation at all. As with some taxes, commissions should simply be outside the medical loss ratio calculation. And that argument is being made – and heard.

    Several carriers found this idea intriguing, but it is the National Association of Health Underwriters that has spearheaded the effort to bring this concept to the attention of the NAIC. (The NAIC is responsible for establishing uniform definitions and methodologies for determining how medical loss ratios are calculated). And they have succeeded. As noted in the New York Times, “Some insurance commissioners seem sympathetic to the insurers’ arguments, including on the subject of how to treat broker commissions, which have historically been part of premiums. The insurers would exclude them from premium dollars, making it easier to meet the 80-cent minimum. The new standards ‘could potentially disrupt the availability of private health insurance, and do not take into account the integral role of health insurance agents,’ Kevin McCarty, the insurance commissioner for Florida, said last week in a letter sent to regulators.”

    As noted in yesterday’s post, the NAIC has included broker commissions in the administrative cost section of the form they promulgated that will be used to capture the information used in calculating carriers’ spending on claims, health quality and administrative expenses. At first blush this would indicate that the NAIC has declined to exclude commissions from the medical loss ratio calculation. However, I’m told by people involved in the negotiations that the idea remains alive and could be included in future communications from the NAIC to the Secretary of Health and Human Services (who has to certify the NAIC’s medical loss ratio calculation proposal) when the NAIC provides the actual formula to be used.

    Excluding commissions from the MLR calculation remains a long shot. That NAHU has pushed the idea as far along as it has is testimony to the respect with which the organization is held by Insurance Commissioners – and NAHU’s commitment to its membership. What’s significant, however, is that the idea has gained traction. As well it should. Because if commissions are cut too deeply, brokers will either abandon the market or negotiate separate compensation arrangements with their clients. Abandoning the market, as the NAIC resolution highlights, is not in the interest of consumers. And arranging for the payment of separate fees will result in greater administrative cost and more inconvenience for consumers. Far better, to simply remove producer compensation (which all the funds are paid to an entity completely independent from the carrier) from the MLR formula altogether.

    NAIC Starts to Clarify Medical Loss Ratio Calculations

    One of the most far-reaching elements of the Patient Protection and Affordable Care Act concern the requirement that carriers spend a specified percentage of premium on medical expenses and health quality improvement (large group carriers must spend 85 percent of premium while individual and small group carriers have an 80 percent medical loss ratio target). If carriers spend less than required on medical care it must refund a portion of the premiums collected to its policyholders. Which means what gets defined as medical and quality improvement, as opposed to being considered administrative expense, has a cascading impact on everything from premiums to commissions to innovation to technology adoption and so on.

    The PPACA directs the National Association of Insurance Commissions to establish uniform definitions and methodologies for determining how medical loss ratios will be calculated. (Whether the Secretary of Health and Human Services has the authority to reject or modify the NAIC determinations is the subject of some debate, but it appears the only role of the HHS Secretary is to certify the NAIC’s decisions.) And during their meeting this week, the Commissioners took an important step toward providing much needed clarity on the issue.

    The Commissioners approved a form (called a “blank”) that specifies the types of expenses, activities, fees, etc. that will be used in the calculation. The blank form has generated both praise and criticism, but the fact that it was approved by the NAIC on a unanimous vote from Commissioners across the partisan spectrum demonstrates the political strength of the decision. Additionally, the NAIC deliberations were long, open and inclusive, lending them enhanced credibility. This doesn’t mean they are non-controversial, however. America’s Health Insurance Plan, the carriers’ trade association, has criticized the financial template for failing to treat fraud prevention and detection as a claims-related expense, among other concerns. Their concern is that by treating such expenses as administrative costs, hamstrings carriers’ ability to control costs.

    While the blank form is an important step, it’s important not to put too much weight on its impact. It is a first, critical step to bringing the health care reform legislation’s medical loss ratio provisions to life. Next comes determining further clarification the NAIC is expected to provide in the next two weeks (give or take). Among the issues expected to be clarified at that time: whether broker commissions will be considered in calculating the MLR and which taxes will be excluded from the calculations.

    The tax issue is interesting, but for many readers of this blog the treatment of commissions takes a bit of precedence. Which is why my next post will focus on that issue.

    Uncertainty surrounding how medical loss ratios will be calculated under the PPACA has been painful for a lot of folks. The rules take effect in 2011, which means decisions concerning premiums, commissions, and benefits are being made now. Without clarity carriers are making decisions with only partial information. Which, given the gravity of those decisions, means they are assuming the worst. The results: premiums may be set higher, and commissions set lower, than will be needed once the definitions surrounding MLR calculations are finalized. 

    By bringing clarity to this situation, the NAIC’s action this week are an important accomplishment. Their thorough review of the issue and successful consensus building is also to be commended. But 2011 is right around the corner. Now, the need to finish the process – and quickly – is paramount.

    Grandfathered Health Plans and Dealing With Reform

    Brokers are quite naturally concerned about their future under health care reform. Times of change are always unsettling and the new legislation is change of a grand magnitude. Everything from plan design to compensation to distribution mechanisms are undergoing a transformation. What makes things worse is the uncertainty. While the broad outlines of health care reform are pretty clear, in reality there’s more unknown about the details than known. Not only will regulators at the state and federal level interpret the law, but so will carriers, employers and others who need to comply with those regulations. Then there are the inevitable bills Congress will consider to tweak this or that in the legislation (some of which has begun – more about that in a future post).

    Brokers are responding to the coming changes and current uncertainty in several ways. Some remain angry that health care reform was passed at all. They rail against the law, call lawmakers names, predict the demise of various political careers, etc. etc. Venting feels good, but outside of the ballot box, it’s hard to argue venting accomplishes much.

    Then there’s brokers who ignore what’s happening around them. Today’s just another day and tomorrow will be more of the same. But ignoring reality – change is coming – is no more productive than raging against reality. It’s no doubt better for one’s blood pressure – and may even be kinder to those around you, but it doesn’t accomplish much.

    Another group of brokers are preparing for reform. They may be angry about the legislation, but they don’t let their emotions prevent them from dealing with the reality of it. They are examining their business practices, their revenue streams, their client base, their skill sets and they are thinking about the future. They are not making drastic changes right now, but they know they will have to modify, maybe even transform, their business over time.

    These brokers are focused on what needs doing now. They know the provisions of the Patient Protection and Affordable Care Act take effect over time, some in a few weeks and and others over several years. They may have hopes for changes to these provisions, but until they’re changed, these brokers know they have to deal with the cards as they’re dealt.

    And by doing so these brokers will not only be better positioned for what is to come, but they’ll be more successful in the near term providing them with the resources they’ll need in the future.

    Here’s an example of how. The PPACA imposes a host of requirements on individual and group health plans. However, plans can avoid some of these requirements if they meet certain conditions. Such plans are referred to in the law as “Grandfathered” plans because a key criteria is that they have been in-force prior to enactment of the new health care reform legislation (which occurred on March 23, 2010).  Interim Final Rules relating to Grandfathered Health Plans were promulgated by the Departments of Treasury, Labor and Health and Human Services in June 2010. (Comments on the interim rules are due August 16th. While the departments could modify the rules based on this input, they are not expected to be making substantial changes).

    There are a lot of resources for understanding the Grandfathered Plan regulations online from folks like Employee Benefit News, the Society for Human resource Management, and HHS’ at their HealthReform.Gov web site. But here’s the gist of what’s involved as I understand it:

    Grandfathered plans have to comply with some, but not all, of the Patient Protection and Affordable Care Act. Grandfathered plans can be fully-insured or self-insured, group or individual plans. They must have been in-force on March 23, 2010 and remain with the carrier providing the coverage at that time. While some changes to the plan are permissible, they cannot have significantly increased out-of-pocket costs or reduced benefits. For example, deductibles may and out-of-pocket maximums may increase by medical cost inflation plus 15 percentage points. Plans can voluntarily adopt some of the consumer protection rules contained in the PPACA without losing their status Grandfathered status, but they need to be careful about any significant changes other than complying with new laws or regulations. Significantly, premiums may be increased without jeopardizing a plan’s status. Grandfathered plans must also maintain certain records and there are exceptions for insured collective bargained plans.

    Grandfathered plans do not need to meet the minimum benefit requirements laid out in the new health care reform law nor do they need to provide 100 percent coverage for preventive care. They are also exempt from guarantee issue requirements and certain changes to the ways claims will be processed.

    However, even Grandfathered plans must comply with the Patient Protection and Affordable Care Act provisions related to pre-existing conditions, excessive waiting periods, the lifting of lifetime maximum benefits (and, for group plans, but not individual coverage, the eventual elimination of annual maximum benefits), and must extend coverage for dependents age 26.

    Whether seeking Grandfathered Plan status is in a client’s interest will depend on the specific circumstances for each client. And brokers should contact their carriers to learn more about how each of them are handling this issue.

    And that’s the key. Brokers need to be looking at their clients situation, talking to their carriers, and helping their clients navigate this change. Because once a group or individual loses Grandfathered status they cannot get it back. Even though most clients will likely conclude they don’t need to be Grandfathered, its asking the question that matters.

    One of the findings from the Trailblazed Sales Project Study I conducted is that High-Growth Producers communicate with their clients more often than do Low- and No-Growth Producers. Doing so results higher retention, more opportunities to meet the needs of those clients, and increases these brokers’ status as a trusted advisor. In short, communicating with clients other than at renewal time is good for your clients and for your business. This is especially so in times of change. If brokers are uncertain about health care reform, employers and individuals are even more adrift. Brokers proactively contacting them about issues like Grandfathered Plan status are demonstrating their value.

    There’s another reason why brokers need to be contacting all their clients about the Grandfathered plan issue sooner rather than later. What happens if they meet a competitor who asks that dreaded question, “You mean your current agent has told you about this? That’s just not right!”

    Put another way: Clients need help in understanding how the new health care reform law impacts them. Brokers preparing for the future are helping their own clients – and the clients of other brokers – understand these issues. Brokers who are blinded by their anger or who are in denial about reform are not.

    There are many ways to respond to health care reform. Some of those responses are just smarter than others.

    Does Utah Show the Future of Broker Commissions?

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

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

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

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

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

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

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

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

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

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

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

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