I’ve tried not to make too many predictions about the impact of health care reform. Not that readers – especially brokers – aren’t concerned about what the Patient Protection and Affordable Care Act will have on how and where people obtain health insurance coverage. I get questions all the time about whether employers will tend to drop coverage and send millions of consumers to the exchange or into the individual market? Or will Americans who currently purchase their own health insurance find new coverage opportunities in the group market? How big are the exchanges likely to get?
For brokers there’s an additional layer of concern: what’s likely to happen to commissions and will the migration of consumers from one market segment to another offset expected changes (i.e., reductions) to compensation?
The questions are appropriate – and numerous – but my hesitancy in offering answers is because no one really knows. Lots of people are willing to make lots of predictions. But the truth is reality has a way of throwing its weight around in unanticipated ways. We’re talking about a lot of regulations, court cases, and proposed amendments still to come. And since many of the provisions that will determine consumer choices don’t take effect until 2014, even educated guesses are more guess than educated.
But you’ve asked for tea leaves, so here’s some tea leaves. But be forewarned, predictions can cause more stress than insight. And if they’re wrong (as they’re likely to be) why worry about them? So the sane among you will stop reading now. For everyone else, just two requests: 1) don’t shoot the messenger; and 2) assume I’m wrong. With those ground rules, please feel free to read on.
Impact of Reform on Market Segment
Of all the folks making projections on how folks are likely to move between group and individual coverage and the exchanges, the Congressional Budget Office is probably one source with credible insight. Not just because their projections are what Congress relied upon in passing health care reform, but because they’ve spent considerable time and resources trying to model this out.
What’s well known is that the CBO estimated 32 million otherwise uninsured non-elderly Americans would obtain coverage under the original Senate health care reform bill and the clean-up legislation (HR 3590 and HR 4872, for those keeping score at home). What’s less well known is that the letter (on page 21) also estimated where non-elderly consumers would obtain their coverage (non-elderly is the focus because those age 65 are eligible for Medicare).
Unfortunately, the CBO didn’t break-out coverage between large and small employers, but their projections are interesting nonetheless.
In 2010, the CBO estimates 150 million non-elderly Americans have employer sponsored health insurance, 27 million have non-group coverage (which includes Medicare – the CBO estimates roughly half of this category are in the individual market, which tracks with the estimates I’ve seen that approximately 17 million Americans buy their own coverage), and 50 million are uninsured.
Without the health care reform bill, the CBO projected that by 2015 the group market would have grown to 162 million non-elderly Americans, the non-group market segment would grow to 29 million and the number of uninsured to 51 million.
With the reforms, however, the CBO is estimating that the number of Americans with group coverage in 2015 will be 163 million (an additional one million people), those with non-group coverage will number 26 million (three million less than without reform and one million less than today), 13 million Americans will obtain coverage through the Exchange and the number of uninsured will have fall to 26 million.
The important figure here is the loss of one million consumers buying non-group plans. Given that roughly one-half of these are in Medicare, that’s a loss of approximately 500,000 people in the individual market segment. If there are 17 million in today’s market, that’s a drop of about three percent.
Then there’s the eight million the CBO estimates will be in the exchanges. This population is around half of today’s individual market. To put this in context important to producers: if brokers are fairly compensated for helping even 10 percent of these enroll in the exchange they will have more than made up for shrinkage in the individual market projected by the CBO. If brokers are engaged in just 50 percent of these enrollments they will have increased their customer base over today’s number by over 20 percent
Commissions: The New Math
Commissions on individual coverage today vary considerably from state-to-state. As a result, changes to commissions resulting from health care reform are likely to be far more noticeable in high-commission states (think California) than lower commission states (for example, Texas). But the math remains the same. Here’s how I see the calculations working out. These assume that disease management, nursing call centers and the like are considered health related and not as administrative costs. It also assumes taxes and fees are taken out of the equation.
- Mature, large carriers are likely to need to spend approximately 7-to-8 percent of premium for administration their individual plans.
- Carriers need to achieve at least 4-to-5 percent of premium for profit (or for retained earnings for non-profits) from this market segment.
- Given that individual carriers must spend 80 percent of premium on claims and other activities that improve health care quality, that leaves roughly 8 percent for distribution costs.
Some other considerations: the days of tying broker compensation to medical inflation are likely coming to an end – and this is what happens when commissions are calculated as a percentage of the client’s current premium) are probably over. Instead, distribution compensation will likely be based on a per contract, per member or original premium basis.
If carriers use the same math I do, commissions in this range will be a modest change in some states. In others, this math leads to a far more dramatic result. Of course, the math, like most predictions you’ll hear today, is probably wrong.