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.

10 thoughts on “Does Utah Show the Future of Broker Commissions?

  1. Each state may end up setting their own compensation amounts. $25-$37 is acceptable but there are a lot of numbers being thrown out there.

  2. Nice article, Alan.

    Here’s a point of interest. In Texas, up until a few years ago, every small group carrier doing business here was paying commissions as a percentage of premium except one. That carrier was at $20 PEPM. Some of us in the agent community made an argument to the Texas legislature that the only reason that this sole carrier was paying PEPM was to discourage agents from submitting substandard business to that carrier, and accordingly, it was a HIPAA violation. The state agreed, and now every carrier in Texas is required to pay commissions as a percentage of premium in small group.

    Not that this will last, of course…

    • Thanks for this information Stacey. It’s a great reminder of what an informed group can do — and of the importance of what happens at the state level.

  3. Spencer,

    I would look at this differently. You have used unrealistic figures and used the unrealistic figures to build your case to real time compensation. I would look at it this way. If we average an annual premium rate for any employee in my area of the world this would equate to about $6,000 per employee per year. At a 5% commission rate that means $300 annually and $25 monthly to make what you are normally making today if you accept 5% as a reasonable commission rate on an overall basis. If the Utah experience is a good indicator of the compensation to come this would be an incresase to 7.4%. the real key as I see it is to do all we can to create a good relationship with the DOI in your state. Make them understand and prove your worth as an agent.
    Alan, thank you for a great article. This one was an eye opener!

    • Todd,

      I am looking at this through the eyes of a specialist in Long Term Care insurance and Medicare Supplement insurance, Group and Individual, not Major Med, or Group Maj Med, even though my “Discipline” has been classified as Health Insurance. That said, I am compensated (paid commissions) for individual Maj Med at a 4% per month level commission by the Blues (Cross and Shield). It is ridiculously low for a product that requires far more education in time, than for which we are compensated. No, we do not sell much,(none), group health med, but do sell a lot of group LTCi (in fact, started the first group LTCi in the country, in 1981, for which we are paid low level commissions, and for a product that requires many hours of education…we still only have insured 10% of the market…the public simply will not buy that which they need…Medicaid and Elder Law Lawyers fill their bill too easily).

      I have yet to see how anything the Obama Scheme has to offer will do anything to help compensate properly the agents who work tirelessly to help the public.

      When might we see that happen?

  4. Alan,

    If I’m understanding the math correctly, and I may not be, an individual who works through an agent and buys a plan that has a $1,000 per year premium, will see that agent compensated at the rate of $80.00 per month.

    In the first month that agent may have invested six (6) hours in educating that client. That means that the agent will be compensated at the hourly rate of $13.33, a rate that the client would certainly not accept as appropriate pay. Further, whether by fee or commission, the agent may invest six hours of work (driving time, education time, time spent to gain the knowledge to properly educate the client) and end up with no client at all. Most definitely, the client will not work on the come. They work, they expect to be paid for their work, period.

    Whether Utah, Washington, California (probably the very most liberal of all states), or Tennessee, under the Obama plan the agent may invest a lot of time and not be paid at all. How does the agent have any motivation to stay in this business, how does the public have any guarantee that without an agent they will have any idea of what they are doing, and how does anyone win, except for Obama and Company (Democrats in Congress) who can claim that “They Did It!” (to all Americans)?

    • Spencer: Thanks for the comment. But let’s be realistic. There are some individual plans out there today in which the premium is less than $1,000 per year. And in some states some carriers would pay $100 the first year and $50 per year thereafter on this plan (plus rate increases, so let’s say $60 per year thereafter). Yet brokers still sell and service this business. But my guess is that the average premium is much higher than that, especially if families are involved. So the compensation is more realistically comparable to the work involved.

      And you’ve somehow concluded that the Obama plan will result in brokers doing work and not getting paid for it (if I’m reading you right). As you know, it’s not uncommon for brokers to spend a great deal of time with a prospect yet not make the sale. So even today this is a risk of doing business. And the new health care reform bill explicitly envisions brokers being involved. The key question, which is what I addressed in the post, is at what level will those brokers be compensated. That the Utah program seems to be paying a decent level of compensation and that most carriers will want to do the same I take as a good sign.

      If you take a look at the average small group premiu

      • Alan,

        Please see my response to Todd.

        One “Addendum” to that comment: If I am confused, and I’m not a novice when it comes to this business, imagine how confused the majority of agents might be.

        BTW, as a “side comment” to all on this blog; not all of us are “Brokers”, many of us are Licensed Agents. I’ve commented before using the phrase, “Brokers/Agents”, but that shouldn’t be necessary. Unless this blog is designed for use primarily by “Brokers”, how about some due respect for those of us who are Licensed Agents? Many of us operate as “Independent Agents”, using number of companies to properly represent our clients. We owe nothing to the companies, and everything to our clients. It is they who pay us, not the companies. It would be appreciated.

        • Good point on the agent/broker thing. In common parlance they’re used interchangably, but they do mean different things. Ironically, the term “agent” means the producer is acting on behalf of the carrier. The term “broker” technically means the producer is working to help both parties. The reality is that most producers, whether they are officially agents or brokers, consider their primary loyalty to be to their clients.

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