Health Care Reform: (No Doubt Inaccurate) Predictions

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.

  1. Mature, large carriers are likely to need to spend approximately 7-to-8 percent of premium for administration their individual plans.
  2. 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.
  3. 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.

17 thoughts on “Health Care Reform: (No Doubt Inaccurate) Predictions

  1. Alan,

    Just discovered your site today. Wealth of information and intelligence. Thank you!

    I’m trying to figure out how various carriers are adjusting their broker commission / compensation structure for individual plans, across a dozen different states. Do you know a source?

    Scott

  2. Alan, this is a great site and I review it often, however, I have a question on this blog. I am doing the math and as I add up the CBO projections of people under ER plans, non-group plans, uninsured and finally exchanges I find the following: 2010 the universe seems to be 227 million. In 2016 where 5 without HR the total jumps to 242 million, but with HR the number comes back to 228 million. Where am I making my mistake? What count am I missing?
    Where you discuss the possible impacts to commission I agree with you that your guess is as good as another. Needless to say there will be much to do for the NAHU staff going forward to impact this issue. For now we will just sit next to you and review the tea leaves.

    • Thanks for the kind words, Todd. I’m glad you like the blog.

      The CBO table is pretty confusing. OK, it’s very confusing. It took me awhile to figure it out, but here’s how work out the numbers the Congressional Budget Office came up with. (All these figures come from Table 4 in the CBO letter I link to in the original post). All the figures below refer to people under the age of 65:

      In 2010, there are estimated to be 217 million people with health care coverage in the United States and 50 million uninsured for a total of 267 million.

      In 2015, if health care reform had not passed, the CBO estimates there would be 225 million people with health care coverage and 51 million uninsured for a total of 276 million.

      In 2015 with health care reform in place, the CBO estimates there will be 251 million people with health care coverage and 26 million uninsured for a total of 276 million.

      The way I got to this was to take the 276 million total in the “current law” section and subtract out the 51 million uninsured for a net of 225 million. Then, from the “change” section of the table I added in: a) the 15 million additional people the CBO expects to enroll in Medicaid and CHIP; b) the 1 million additional insureds expected to be covered by employees, and c) the 13 million expected to enroll in the exchange. I then subtracted from this sum the 3 million reduction in the “non-group” category. So, 225+15+1+13-3=251. Add in the 26 million uninsured noted in the “Post-Policy” section and it adds back up to 276 million.

      Whew! This is why I chose not to become an accountant.

  3. Alan et al,

    Thanks for you ongoing stream of information, it’s great. Is there any truth to the rumor though that people with individual plans can keep them but if they go to an exchange plan, they can’t go back? And if this is true, what is the likelihood that this will be challenged?

    • Hello Colleen. We don’t really know how the exchanges will work yet, and probably won’t for two or three years. But I think what you’re referring to concerns grandfathered plans. Individuals with “grandfathered” coverage can keep those plans moving forward. However, if they leave the grandfathered health plan and buy a new, post-reform plan (whether the new plan is in the exchange or not), they can’t then choose to go back to their old plan. This is unlikely to be challenged. The choice to go to a new plan is voluntary.

      If the rumor you’re hearing is that once someone enrolls in a plan offered through the exchange they can’t then move to a plan outside the exchange, that won’t happen. I’ve heard no one suggest that consumers would be locked into the exchange in some way. And any rule which prevented an exchange member from moving to a health plan offered outside the exchange would be challenged and certainly be overturned.

      • “Hello Colleen. We don’t really know how the exchanges will work yet, and probably won’t for two or three years. But I think what you’re referring to concerns grandfathered plans. Individuals with “grandfathered” coverage can keep those plans moving forward. However, if they leave the grandfathered health plan and buy a new, post-reform plan (whether the new plan is in the exchange or not), they can’t then choose to go back to their old plan. This is unlikely to be challenged. The choice to go to a new plan is voluntary.”

        Alan, a couple of questions:

        1. Why don’t we know how the exchanges will work yet? Shouldn’t that have been examined and an answer given before this legislation passed into law?

        2. What constitutes “grandfathered”? It may be voluntary, but the rules aren’t yet known. If the Feds don’t yet know “The rules” how can they expect the electorate to understand (nevermind, rhetorical).

        3. You said that, “If the rumor you’re hearing is that once someone enrolls in a plan offered through the exchange they can’t then move to a plan outside the exchange, that won’t happen…any rule which prevented an exchange member from moving to a health plan offered outside the exchange would be challenged and certainly be overturned.” Perhaps I’m misunderstanding (not unusual for me) but that seems to contradict your comment in the first paragraph.

        I’m disturbed that this massive overhaul in HCR has been passed into law and so little is really known about how we, the citizenry, will be affected, and what the “Rules of engagement” are. Not that this is unusual in the nasty world of politics, but one wold think that with such a massive law changing what was working for 85% of the country, Congress and the Administration could have done just a wee bit better in putting these “dreams” into law. We, in the Agent/Broker Community would never have been allowed these “Omissions/Commissions” in not giving our clients “Full Disclosure”, in my opinion, and at the least would have found our licenses to be in serious jeopardy.

        I apologize to all if my attempt to use a “block quote” fails. Unfortunately, there’s no way to know before I post. 🙁

        • Spence: Congress defined the purpose and general powers of exchanges. They intentionally determined that the states would have the flexibility to create exchanges suitable to each state’s circumstances and needs. It also gave the Department of Health and Human Services a role in making the exchanges operational. All of this is totally appropriate. I don’t think anyone would suggest that Congress should define the specific operations of the exchanges — that’s a level of specificity better left to managers and regulators than to legislators.

          “Grandfathered health plans” are defined in the legislation (check out section 1251). The term refers to current health plans that consumers decide to keep instead of moving into “post-reform” health plans. Congress was pretty clear about what was intended: if people want to keep their current individual plans, they can so long as the carrier continues to offer the coverage. If employers want to keep their current group plans, they can so long as the carrier continues to offer the coverage. There will no doubt be regulations promulgated dealing with these grandfathered plans, for instance, how much can benefits be modified before they’re no longer eligible to be grandfathered. But the law is pretty clear about what’s intended here.

          And I don’t think my comment that preventing enrollees from leaving the exchange and purchasing private coverage would certainly be overturned. First, I sincerely doubt any regulator would seek to restrain consumers in this way. Second, if they did, as I mentioned, a court would likely strike down this regulation. We may not know how the exchanges will operate in great detail, but there are certain fears and rumors concerning how the exchanges will work that they can be put to rest now.

          As for not having the details in place on health care reform, this has nothing to do with the “nasty world of politics.” This is a sane approach to law making. The law is very clear on what is to happen. But as you know (we did, after all, serve together on NAHU’s legislative council for a few years) no legislation is passed with the level of specificity you’re talking about. Nor should it. People complain about the law because it was long. Well, it was long because the law sought to make clear Congress’ intent on what the end result was to be concerning an issue that touches 17% percent of the nation’s economy. But Congress is not the correct forum for making the law operational. That’s why there’s an executive branch. Congress did what it was supposed to do: debate and legislate. The public had lots of information concerning what was being considered — and exerted substantial influence. Remember when the public option was all but a certainty to be in the bill?

          I still have lots of concerns and objections over what Congress produced, but what they produced is pretty clear. The devil is in the details, however, and there’s more details yet to come. That’s to be expected.

        • Alan, thank you for an excellent response. I will check out section 1251.

          You’re right. After spending several years working with you on the Leg. Committee, and many other years in the “Beltway” representing NAHU on a number of health care related issues, I should by now realize that “specificity” is not Congress’ strong point.

          Your response doesn’t necessarily clear up some confusing areas, but is “On point”.

          Spence

        • Re: Grandfathered Plans

          Alan

          If I recall, probably from one of your posts, the Grandfathered Plans are those plans that will not meet the Minimum Creditable Coverage guidelines for the healthcare exchanges and when the exchanges are activated the uninsured must obtain their coverage through the exchange. Only those who participate in these plans will be allowed to keep this coverage but the Plans will be not be allowed to add new customers. If the grandfathered plans wish to remain viable the only modification that will ensure this is to upgrade their coverage to meet the MCC requirements.

  4. Breaking news from HHS:

    “But the analysis also found that the law falls short of the president’s twin goal of controlling runaway costs, raising projected spending by about 1 percent over 10 years. That increase could get bigger, since Medicare cuts in the law may be unrealistic and unsustainable, the report warned…” Economic experts at the Health and Human Services Department concluded in a report issued Thursday… http://news.yahoo.com/s/ap/20100423/ap_on_bi_ge/us_health_care_law_costs

    As said Gomer Pyle, Surprise, surprise…”

    What will Monday bring (?)…that’s rhetorical.

  5. Alan, I’m sorry I missed connecting with you at the LAAHU event this week. It was an interesting though ultimately unsatisfying day filled with vague optimism without offering any real clarification on what will be happening.

    Anyway, I feel your points are spot on going forward regarding agent commissions. However, what do you foresee in your crystal ball will be happening to the inforce books of individual business? Will there be a tremendous migration to the foreboding EXCHANGE? Will carriers use the new limits on admin fees to retroactively cut commissions on in force business?

    As an agent/broker building my books for the past 15 years, I can swallow the new limits on commissions going forward, but if I have to virtually start over again under this new system as my clients disappear into the EXCHANGE, with or without my help, I don’t know if I can survive that.

    • George:

      You raise an issue that neither I, nor I’d wager, many have considered until now. There seem to be so many unknowns, including, as I just head on the news anyway, some loopholes not “tightened” as a result of the Hurry, Hurry, Rush, Rush to pass the HCR Bill, that a woman who has been covered under Wellpoint for many years, and has Breast Cancer, may now find her policy rescinded ( http://www.mpbn.net/News/MaineNewsArchive/tabid/181/ctl/ViewItem/mid/3475/ItemId/11894/Default.aspx. ). This is still breaking news; nonetheless, it is clear that there are many unknowns yet to be revealed.

      Should what you are suggesting/asking be the case, a great deal of harm will befall many of us who have dedicated our lives to helping the consumer. We are all so often cautioned about not “firing” before we “aim”. That these questions seem to be rising with more frequency begs the question; did Obama and the Congress fire before aiming? Regardless of the outcome of this particular question, given the complexities of this new law, I have no doubt that they did. The cost for such folly, yet to be determined, will no doubt be great.

    • Hello George. Great question. And we’ll start seeing soon how carriers will address the commission issue going forward. The MLR requirements take effect January 1, 2011 (for carriers who use a calendar year calculation, which most do). So as a practical matter they’ll need to let their brokers know how commissions will be changing in the Fall. This will allow time for contracts to be signed and for brokers to absorb the changes.

      I would be surprised if any carriers use the changes to retroactively change the commission levels on existing business in existing plans. The broker reaction would be as fierce as it would be necessary. What I don’t know is what carriers will do as clients move from pre-reform plans to post-reform plans or to the Exchange. The impact on a broker’s revenue stream could be substantial if commissions change in this situation. For example, brokers earning 10 percent renewal commission on existing business could see their renewal revenue cut by 20% if and when their clients move to post-reform plans if the post-reform renewal commission is 8%. As for business that moves into the Exchange, it’s not clear to me yet how much control over the commission on this business carriers will have. And if they’ll be able to grandfather “old” commission schedules on these exchange products and still price them competitively. As mentioned in other posts, we won’t know much about the exchange for a couple of years.

      For brokers in some states, the impact of the MLR on commission will likely be negligible. For others, such as in California where commissions are higher than most other states, the impact is likely to be felt more severely. Sorry I don’t have better news for you George, but that’s what my crystal ball is showing me at this stage.

  6. Alan, you might be interested in a new study regarding hospitals also cost shifting their underpayments of public health insurance programs such as Medicare & Medicaid to automobile insurance companies. This of course hides the true cost of the public health plans into auto injury claim costs. Only government is allowed to operate in such a deceitful manner by hiding its true cost from the public and transferring it to the free market and having the free market take the heat.

  7. I find that (in most cases) even intelligent people just don’t want to take the time or make effort to get their heads around all the options. It all seems to make peoples eyes glaze over. The education process is far more cumbersome than completing the paperwork and brokers/agents need to be compensated fairly. If not… they will simply do something else to make a decent living. The new legislation has only made things more complicated and it’s too soon to tell what all the unintended side effects are going to be.
    MJB

    • MJB: Those of us who specialize in Medicare Supplements, Part D plans and Medicare Advantage, as well as Long Term Care insurance have been fighting that fight since 1969. When the Medicare Catastrophic Act of 1988 appeared on the scene, I had to not only educate my clients and the public at large, but the bureaucrats whose job it was to do just that, as well. Many just “didn’t get it”, knew that I did (I’ve always done a lot of public speaking) and would call on me to educate them all.

      Did you say that when educating to the degree that we do, spending hours on getting that education to stick, we should be fairly compensated? Compensated, period? It hasn’t happened in over 40 years. I can’t imagine it happening now. By holding seminars to educate the public, and having the guests (students) leave forms expressing their thoughts after the seminars, and asking for a personal call if they still found that they wanted a professional to help them weed through the maze it was considered that we had been compensated. Were we ever to actually figure out the total number of hours spent to secure that prospect, and them the hours spent in continuing the process of education in order to secure a purchase of a product and eventually be paid we would have all gone broke. There would be none of us out there. That is especially true in the early years of the implementation of Health Care Delivery and Funding Law, it goes more smoothly as the public starts to get “the hang of it”.

      Brokers/Agents who will be working in this market will be told by the companies that this offers a wonderful opportunity for the agents to develop large blocks of new business, the companies would pay us a dime in any form if they could get away with it and still get their product to market. Brokers can charge a fee, but how many will do that knowing that the consumer will know from the “get-go” just how much the Broker will make? Not that I think that they shouldn’t. We could “Offload” a lot of unethical Brokers and Agents if we had to perform true disclosure, including the exact percentages of the first year and renewal premiums that we are paid. Frankly, I’m all for it. I think that we truly EARN what we make, and the “mystery” of what our client is actually paying us that we always leave for them to ponder has always bothered me. That said, unless all BROKERS and AGENTS have to play by the same rules, in every state, under Federal Mandates, it won’t work. It requires a Level Playing field.

      Enough. I hope that my thoughts demonstrate exactly how deep, cumbersome, and convoluted this problem will be. You have raised, whether or not you realize it, a very large and important issue that hasn’t yet been addressed in our now “awakening” in a new era of Health Care.

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