There was a time when most travel, whether a short hop or a complicated itinerary, was handled by travel agents. Then came the Internet and sites like Expedia, Travelocity and the rest. There are a lot fewer people making a living selling airline tickets now days.
While it’s not clear yet what kind of health insurance exchange will emerge from the current health care reform debate, that whatever legislation passes will include such an animal is a certainty. The concept of “an Expedia for health insurance,” as some have described these Exchanges, has broad bi-partisan support.
Does this mean health insurance agents are likely to go the way of travel agents, relegated to only the most complex situations and, if compensated at all for more routine situations, paid barely enough to pay the phone bill let alone Errors & Omissions insurance premiums?
Some comments to my previous post seem to think so, but I say, “probably not.”
The legislative process is a lot like a jury trial: any outcome is possible. The likely outcome, however, is that brokers will continue to be part of whatever new health care system emerges.
When I look a the impact of the Internet on distribution systems, a handful of factors seem to determine if the web will eliminate middle men. Let’s call this Katz’s Theory of Disintermediation.
The Theory holds that whether the Internet will eliminate distribution intermediaries depends on the interplay of six factors of the product or service being sold, specifically how:
- complex the product or service is to consumers
- frequently the product or service is purchased
- personal and critical the product or service is to consumers
- expensive is the product or service
- much on-site service is required to install or use the product or service
- easily a description of the product or service can be digitized.
Here’s some examples of how the Theory works.
Books: Books are pretty simple. Everyone knows what they are and how they work. Most people who buy books buy them on a regular basis. Books are rarely personal or critical (unless we’re talking about the final installment of Harry Potter) and they’re relatively inexpensive. Books aren’t “local,” but information about them is easily digitized. Given these factors one would expect online book sellers like Amazon to dominate the market and it does. The niche reserved for brick and mortar book sellers is where advice, impulse or convenience are involved (best provided locally).
Travel: Booking a direct trip from one city to another is pretty straightforward and most travelers are comfortable with their own expertise. Travel can be expensive and getting there can be important, but getting it wrong by, for example, overpaying, is rarely devastating from a financial perspective. And while the traveler pays more than she should she still gets where she’s going. Travel is not consumed or installed locally. So the Theory would expect routine travel to migrate online. Complex travel, however, is different. Multiple destination points or several hotels and rental cars to arrange and the incentive to work with an expert increases. When a family is planning it’s one big vacation the importance of getting it right increases. Not surprisingly, travel agents still are commonly used for these complicated itineraries or critical travel events.
Health Insurance: Health insurance is extremely complicated. Just ask someone to explain the meaning of “co-insurance” or “formulary.” People shop for coverage rarely — perhaps once a year or three times a decade. Health insurance is expensive and it’s important to make the right decision. Your own health and financial security is at stake. If you’re an employer, you’re taking on the responsibility of making the right decision for your work force. At the same time, there’s no need to purchase health insurance locally and descriptions of rates and benefits are easily presented in a digital format. Given these factors one would expect consumers to seek expert advice — and they do. Yes, an increasing number of individual policies are being purchased online, but these buyers often consult a broker before making the final decision. And virtually all coverage purchased by small business owners is through a broker. Even if the Exchange presents information about policies in a standardized format, many if not most purchasers will seek guidance from a licensed and qualified counselor — in other words, from a broker. That’s what happened in California when the state created a purchasing pool. More than 65 percent of small business owners buying through the pool did so through brokers, even though it cost them more to do so.
Of course, there are some brokers who are simply sales mills, offering the same solution to every client. They add little value to the products they sell and offer no expertise. They can be, and should be, put out of business by the Internet.
This Theory of Disintermediation can’t predict what will happen to broker compensation. It may become fee based, it may be based on a per-capita fee, or it may stay premium based. But it does suggest that, unless lawmakers create artificial barriers, there will continue to be a role for brokers who deliver expertise to their clients.