Health Care Reform Means Changes for Brokers, Not Elimination

There’s a big difference between bending and breaking; between change and destruction. This is especially important to keep in mind when talking about the impact health care reform will have on insurance brokers. Some commentators, like John Goodman, president of the National Center for Policy Analysis, are quite emphatic in their doom and gloom. In an interview published in HIU magazine, Dr. Goodman states “Under any sort of exchange that’s being envisioned by Congress or the White House, there will be no broker.”

I disagree. As I wrote several months ago, my take is that “brokers will continue to be a part of whatever new health care system emerges.” My confidence rests partly on the herculean efforts made by the National Association of Health Underwriters and other broker organizations to include specific language in several of the bills moving through Congress that explicitly permit brokers to sell products offered in an exchange. But more importantly, I believe that even after the exchanges are up and running (probably in 2013) individuals and small business owners will still need the services of independent brokers.

Whether this need for brokers will survive health care reform will be determined to a large degree by two factors: the nature of the exchange(s) created; and the viability of the individual market. While it’s (unfortunately) easy to imagine an exchange that eliminates the need for brokers, the exchanges most like to emerge from the debate in Congress are widely expected to be much more benign. In my previous post I articulated a “Theory of Disintermediation.” This theory hold that “whether the Internet will eliminate distribution intermediaries depends on the interplay of six factors of the product or service being sold, specifically how:

  1. complex the product or service is to consumers
  2. frequently the product or service is purchased
  3. personal and critical the product or service is to consumers
  4. expensive is the product or service
  5. much on-site service is required to install or use the product or service
  6. easily a description of the product or service can be digitized.”

Exchanges are likely to simplify health insurance policies and bring some standardization to marketing material and the like. However, consumers are still going to have to make a decision concerning an expensive, complex product they infrequently purchase which is critical to their health and financial security. For small business owners the need for independent expertise will be even greater: they are making a decision that effects not only their own families, but those of their workers. That’s a responsibility most employers will feel reluctant to make without expert support.

Whether individual coverage remains viable is still uncertain. The danger is that while Congress will require carriers to sell coverage to all applicants, they won’t require all Americans to purchase coverage. The result is the equivalent of allowing motorists to buy auto insurance after they’ve had an accident. Few consumers would voluntarily buy such coverage until they need it. The result would be price increases previously only experienced in states like New York where this dynamic has resulted in a costly health insurance surcharge.

This may be naive and wishful thinking, but I do think there’s enough common sense in Congress to recognize the need to require all residents to obtain coverage before they show up at the doctors office or hospital. The American people seem to recognize this. A recent ABC/Washington Post public opinion poll shows a majority of those surveyed support requiring everyone to buy health insurance. Indeed, if subsidies are offered to low-income households, support for an individual mandate rises to 71 percent. So the political wind is there to help Congress create a fair and workable approach to this issue. And that, in turn, would go a long way to keeping the individual market viable.

So if brokers are likely to be part of the new world of health insurance does that mean it will be business as usual for us?

No.

The value brokers bring to the products we sell is likely to evolve. So will the way we’re paid. For example, helping consumers find the plans that best fit their unique needs will remain at the forefront of what we do. The reforms will make that part of the job easier. The reforms will make after sale service a bit more complicated as a new layer or two of bureaucracy gets added to the mix. (Only someone working in Washington DC will claim that adding a government agency, like an exchange, to the mix will reduce problems or make resolving them easier).

These are mere tweaks in the average broker’s day. The biggest, most fundamental change brokers will face is how they are compensated. First, brokers will likely be paid less per sale. Requiring everyone to purchase coverage is a two-edged sword. It dramatically increases the number of consumers buying health insurance. It also creates tremendous pressure to keep premiums low. Distribution costs are generally the second largest budget line for carriers trailing only claims costs. With everyone having to buy, reducing broker compensation for each sale is all but inevitable. This doesn’t mean producers won’t be able to do well under the new system. They’ll just have to do more. Given that 30 percent or more of the individual cases they work on today are rejected by carriers, reforms which assure all applicants are accepted will go a long way to offsetting this per sale reduction.

The second impact of reform is likely to be the end of the commission system. At the risk of being flamed by brokers reading this blog, paying us a percentage of premiums makes little sense now and will make even less sense going forward. The reality is that the cost and rewards associated with making a sale don’t relate to the premiums paid by the consumer. The biggest driver of health insurance premiums is the underlying cost of medical care and these cost increase far faster than general inflation. It’s not uncommon for medical trend increase at twice the rate of rent, supplies, phones, and other costs associated with running an agency. Linking broker pay increases to medical trend is a historical, but no longer logical, practice.

No one likes to talk about how they’re paid and the public policy issues involved. When’s the last time you heard a doctor publicly criticize the fee-for-service model – you know, the one that rewards them for maximizing the number of tests and treatments a patient receives without regard for the outcomes of those treatments? But to think that policymakers and carriers aren’t aware of this disconnect between how broker compensation is calculated and their actual costs.

Yet broker cannot work for free – nor should they. In the current system, carriers charge consumers for the brokers compensation and pass this revenue through to to the broker. It’s an efficient method and is likely to continue, but instead of commissions, brokers are likely to receive a flat fee per month per member. There may be regular adjustments made to the level of this fee to account for inflation, but it will be independent of the underlying premium.

Additionally, we’re likely to see the emergence of consultants in the individual and small group market segments. Instead of being paid through the carrier, these entrepreneurs will charge consumers directly. This is a less efficient method –- and is currently illegal in many states. But laws can be changed and the context for a new approach to producer compensation will be strong. We shouldn’t be surprised if new systems emerge.

And many consumers may find this pay for services system appealing. When California ran a health plan in the 1990s it imposed on a five percent of premium surcharge on small business owners wanting to work with a broker. Over 65 percent of the employers enrolling in the state plan paid the surcharge.

I believe Dr. Goodman’s warning that health care reform will do away with brokers is overstated.  And brokers need to remember, just because someone – even someone as bright and respected as Dr. Goodman – claims the sky is falling, doesn’t mean it is falling. It could just be changing.

18 thoughts on “Health Care Reform Means Changes for Brokers, Not Elimination

  1. I just found this site and am astonished to find an even handed sight that discusses the health reform issues in a straight forward and unbiased manner in terms that professionals in the business can understand.

    I would be interested in hearing more thoughts on how the changing landscape will affect brokers and how brokers should respond. Since the Massachusetts exchange has been up and running, intelligence on how brokers are responding and how it is working up there would be useful.

  2. Well it is clear now, where there is change there is opportunity. However, after way too much wasted time spent reading about reform it is clear to me that commissions will mimic medicare advantage. It is clear that HHS runs the show…it is “weed out” time for brokers…more compliance….more certification…more licensing fees…LESS MONEY FOR BROKERS. Brokers will need to learn to sell CI to protect their clients health from the delay in health care treatment. There is only one way to get to the front of the line….CASH from CRITICAL ILLNESS INSURANCE. CI is the #1 seller in countries with government health care.

  3. I am a finacial strategist that offers health insurance consultancy to my clients. I agree with much of what you wrote and found, further, that as a consultant I can extract a much higher return on the services I provide regarding health care — whether it’s educating, advocating or implementing a policy. I believe, however, that this is a cost that many in Washington (surprise) do not foresee. And, similar to many social welfare efforts passed by the government (i.e. social security), will end up making government’s end goal more elusive and expensive. While the insurance industry is a mess to begin with, in this case, I find the proposed solutions to be worse than the problem.

    Consider, if you will, the version just passed in the House v the Senate idea. To cover an extra 2% of the population (or 60,000 people), the House bill costs over $155 billion more than the Senate version. Each person covered by the House bill that is not covered by the Senate version costs nearly $2.6 million to insure. Is there anyone in America that can’t get quality healthcare for less than $2.6 million??

    I agree that the climate is changing. Personally, I think we’ll finally be adequately compensated for dealing with this stupid morass known as health insurance.

  4. What you see on television or in the news right now is a play by play account of the legislative process. When each new amendment is added or a bill from one committee is merged with another, its “Breaking News”. In reality, its not really breaking news. There is a long road ahead.

    As of this writing there are two bills in the Senate and one merged bill from the three committees in the House of Representatives. There is a long way to go before these bills make their way through debate, are merged yet again and a bill makes its way to the President to be signed into law.

    Even after that happens, which is currently forecast for sometime after the spring of 2010, most of the provisions of all the proposed bills don’t take effect until 2013. That is a long way off.

    While certain provisions are assumed to be a part of any legislation passed, like exchanges to purchase health care coverage and eliminating pre-existing conditions from the underwriting process, there is still quite a bit of debate ahead on what will be in the final bill that gets signed.

    While many agents are worried that reform will put them out of a job, I don’t think that will be the case.

    First, I am an agent located in California. We have seen exchanges and co-ops fail miserably in this State. People still want the personal interaction with an agent when picking an insurance policy. It is an important decision and one many, many people choose not to take on by themselves.

    Right now, anyone can go to a centralized “exchange” by going online and shopping for insurance right from the privacy of their own home. There are several major online sites that have instructions on how to apply and a link to all the plans offered by all the carriers in their State. Yet, individuals and families seek out and purchase insurance from agents everyday.

    In California, virtually any business with 2 or more employees can purchase insurance that does not have pre-existing exclusions (also known as guaranteed issue). Yet, agents continue to play a major role in the Group Health market.

    So, many of the measures that reform intends to accomplish are already happening now. In light of this, people still seek out and purchase insurance from agents and brokers everyday.

    This is because agents and brokers provide personal and professional service to make such an important decision easier for their clients. The burden of these decisions are transferred from the client to the agent because agents are educated and licensed in an industry that is a mystery to most people.

    As licensed professionals, agents should not worry about being legislated out of a job. As long as they continue to provide professional advice and counsel in matters of insurance to their clients, they will continue to be an important part of this industry.

    Yes, compensation will change, it would have to if everyone who applies for insurance is accepted. At a recent trade meeting I attended in Los Angeles last week, a top executive from one of the big three carriers stated that compensation should be expected to change and that agents should diversify. Good advice.

    Diversifying is good advice even outside of this legislative environment. And, diversify does not mean throw in the towel. As plans change and agent compensation changes as a result, new opportunities will present themselves. Gaps in coverage will be created or new products will be invented to supplement the market much the way Medicare Supplement plans were created. There is an entire market in Medicare Supplement plans built around an existing government health care option that is guaranteed issue.

    Think about that if you are an agent reading this and worrying about your future.

    So, change is on the way. It will effect agents, but there is no way of telling right now just how much or what that change will be. But, regardless of that change, markets will be created as a result of health care reform. New opportunities and products will rise out of reform in the private market. It will be the agents that can adapt to the new landscape that will thrive.

    …and to those who think the private market will disappear as a result of health care reform…I ask you to give the industry that represents 1/6 of the U.S. economy a little credit. Whatever reforms are enacted, there will be new products created to counterbalance and meet the demands of a new system. Its the way business works.

  5. Alan,

    I would like to get your thoughts on health care reform and how it will impact the Medicare market. Obviously, there are proposed cut backs to Medicare that are on the table and we do know the President wants to do away with Medicare Advantage. The two basic questions I have is: 1) How do you see reform effecting Medicare beneficiaries both with Medicare Advantage and those on Medigap plans? 2) How do you see it impacting agent/broker compensation as it relates to Medicare products (considering that it is heavily regulated to begin with)?

    • My apologies, Larry, but the impact of health care reform on Medicare plans isn’t really my area of expertise. If anyone out there has any insights on the subject, please share them here. I’m curious about the answers to Larry’s questions, and I’m sure others are, too.

  6. Hi Alan, pretty scary post re: individual sales. I’m in California and have gotten heavily involved in individual health sales to compensate for large losses on the P&C side. While it has been a tremendous success, do you feel it is still worth the large investment in marketing in order to write the business, if the future of individual policies is so uncertain?

    • Hi Scott. I do think there’s a future for brokers in individual sales. I’m not 100% sure what it looks like, but as I said in the post, brokers are facing change, not elimination. Also, keep in mind: we’re still a couple of months away from knowing what the final bill will look like and most of its provisions take effect in 2013. There’ll be plenty of time left to determine a course of action. For now, I suggest just keep on doing what you’re doing until we know more with more certainty.

        • My guess is the legislation will hold-up regardless of election results in 2010 or 2012. A lot of the claims being leveled against today’s health care reform are similar to those aimed at Medicare in the 1960’s. President Johnson’s proposal was attacked as socialism, placing the government between patients and their doctors, etc. Yet when the GOP took over in 1969 no one suggested doing away with Medicare. In fact, Republicans are now trying to cast themselves as the great defenders of Medicare.

          The public is confused about what health care reform will look like — and no wonder given all the various proposals being considered. When one bill emerges, however, Americans will have a chance to weigh the opportunity a specific package offers them versus the problems any comprehensive reform will inevitably create. As Americans are generally optimistic, I think they’ll hope for the best and look forward to the reforms’ implementation. Moving forward, lawmakers of both parties will tweak the reforms, but not reverse them.

          And Dave, Barack Obama is our President. I always referred to President Bush even though I have a feeling I viewed many of his policies the way you view President Obama’s. Let’s give the President — any President — the respect they and the office is due.

  7. You guys do have my sympathy and empathy. I work as a magazine journalist, and obviously my “industry” (I hate using this term here, but I suppose that’s what it is) is facing the same degree of upheaval as that which appears to be changing the status quo for insurance brokers. No matter what happens, I suspect that the skills that have made you successful under the old rules will transfer readily to whatever the new rules bring. Alan, you seem to me to have an obvious fall back position: an honest pundit whose fairness and even handedness about highly charged issues (like this one!) should land you on cable news as a lone voice of sanity in a world of bickerfests!

    Best of luck to you — all of us, actually– in the new world.

    • Thanks James. There are brokers who are full of integrity who have spent their careers really trying to be “of service” to people who struggle with health and finance related issues. They actually try to find what the individual needs and use their knowledge to help a person and that sometimes means picking the lesser of evils.

      I am more than willing to go with a reorganzation to be allowed to continue to do what I do. All I want is a way and I will do the hard work involved in complying and rebuilding.

  8. Alan, I’m still trying to get my mind around the Exchange. If brokers would be excluded how would a small business owner decide on a plan, implement it, and then explain to his employees? If the broker would be eliminated would this not mean he would be replaced by salaried employees with benefits? My many years in business has proven that paying someone on commission is an excellent arrangement for the employer. Commission compensation eliminates the employer’s concern of the employee being paid while idle, non-performing or just plain goofing off. Commission is the best way to make sure of an efficient operation. Would those forming the Exchange not realize what would be sacrificed by abandoning a commissioned sales force?

    • Rick: Good questions. I think all of us who have made a career in sales would agree with your statements, but assuming your questions were more than rhetorical, I’ll try to channel my inner bureaucrat (which I realize is a pejorative term these days, but shouldn’t be — government workers play important roles). Here’s how I think someone involved with an exchange might think:

      1. Commissions are for sales people. We’re not selling. People are coming to the exchange to learn about their health coverage options. We provide information through material and our web site. If someone asks questions we provide answers. Our role is not to persuade them to select a particular plan, but to help them make their decision. Once they have, we facilitate the enrollment process. No selling is involved, so no commission is involved.

      2. It’s cheaper to pay salaries and benefits than commissions. We’ll staff our call center so there’s no goofing off. This way we’ll have an efficient team and avoid paying enormous sums to our “agents.” Our workers may not do as well as outside sales people, but this is about helping people with their health care coverage decisions, not amassing wealth.

      My guess is Congress will permit each state (or region, such as New England) to create their own exchanges. Some may rely solely on outside agents, paying them for performance (as I said in the post, I think the days of percentage-based commissions are numbered). Others may discourage the use of outside brokers (but thanks to NAHU and others, they won’t be able to prevent consumers from using independent producers). If history is a guide, those exchanges who partner with brokers will do better than those who don’t.

      • Alan,

        Do you think that the carriers will sell products both inside and outside the exchange walls ? Would a consumer (a small business owner), and taking into account what we think an exchange might act like, have the ability to go through the exchange or go direct and work with a broker ?

        • Hi Alison: Good questions.

          1. I think carriers will sell product both inside and outside the exchange walls.
          2. I predict business owners will be able to continue to work with brokers both inside and outside the exchange. As I mentioned, I think how we’re paid will change (both inside and outside the exchange) but we’ll get compensated through both channels.
          3. I also think carriers are likely to beef up their direct sales operations, especially in the individual market. But brokers will still be an option and, given broker’s capacity to provide great service, should be able to do well.

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