Why Health Insurance Brokers Will Survive Reform

Economists call it “disintermediation.” Normal people call it “eliminating the middleman.” Whatever term used, there’s widespread concern among brokers that health care reform will push them out of business. As David Gonzalez wrote in his comment on a previous post, "It’s time to pack up now, at least until further notice. The days of the broker, much like travel agents, are now gone.” This belief, which other commentators share, rests on the assumption that the exchanges created by the Patient Protection and Affordable Care Act, the medical loss ratio minimums carriers must maintain as of 2011, the potential commoditizing of health plans and an array of other provisions in the new law will make brokers unnecessary and/or unaffordable. There’s a lot of open issues concerning health care reform, so those predicting doom for producers may be right. But I don’t think so.

As I wrote in my previous post, anyone making predictions about what will happen due to passage of the PPACA is making, at best, an educated guess. That post described my two Law on Laws, which, taken together, in essence holds that laws as passed by lawmakers are not the final word on a law. Yes, there will be exchanges, but there are also likely to be robust markets outside of these markets. And there could (and should) be room for brokers to help consumers inside exchanges. Will there be? We just don’t know yet.

Within this context of uncertainty, what we can address is whether health insurance is enough like basic travel arrangements to result in doing away with medical insurance producers. Are health insurance brokers about to become as extinct as travel agents supposedly are?

For the record, according to the American Society of Travel Agents there were more than 86,000 full time travel agents in the United States in 2008 with another 30,000 independent contractors (most likely part-timers). There were no doubt many more prior to the rise of Expedia, Travelocity and the like, but this is still a significant number. True, they no longer are spending as much time on simple travel needs as before, but are presumably helping consumers with more complicated arrangements.

However, not every product or service is as vulnerable to disintermediation as the sale of airline tickets and hotel rooms. A bit over a year ago I put forward in this blog Katz’ Theory of Disintermediation, an attempt to identify the factors that determine whether the Internet will eliminate the sales force in an industry. The theory holds that it is the interrelationship of six factors that provides the answer:

  1. Complexity (how well is the product or service understood – or able to be understood – by consumers?)
  2. Purchase Frequency (how often do consumers shop for the product or service?)
  3. Significance (how personal and critical is the product or service to consumers?)
  4. Cost (how expensive is the product or service?)
  5. Installation Requirements (how much on-site service is required to install or use the product or service?)
  6. Abstraction (how easily can a description of the product or service be digitized and posted online?)

Let’s see how this plays out with travel and health insurance. For travel we’re looking at a basic business trip from point A to point B with a hotel stay in between. Throw in a rental car if you like. For health insurance we’ll consider a straight-forward individual plan – no HSAs or other complications. We’ll score Basic Travel and Health Insurance on a scale of 1-to-10 with 1 being low concerning a factor (e.g., not complex at all) and 10 being high (e.g., really complicated).  The higher the score the less likely a sales force is to be disintermediated. (There’s nothing precise about my scoring. Please feel free to substitute your own. Or get really sophisticated and weight the various factors. What I’m trying to show the relative likelihood of travel agents and health insurance agents being disintermediated. Your calculations may vary).

Complexity: There’s no question what a seat on an airplane entails or what to expect in a hotel room. Some may have more or less features than others, but the basics are the same. Health insurance is a different matter. Many consumers don’t know the difference between HMOs or PPOs, co-insurance or deductibles. And don’t even mention formularies. Score: Basic Travel 2 / Health Insurance 8

Purchase Frequency: Many people travel several times a year. Few folks shop for health insurance more than once a year or three times a decade. Score: Basic Travel 3 / Health Insurance 8

Significance: When it’s your one vacation a year, your travel plans are pretty significant (and you’re more likely to employ a travel agent). But picking the right airline for a quick business trip from Chicago to New York and back isn’t all that important – the differences between one airline and another aren’t that substantial. Choose the wrong health plan, however, and the repercussions on a family’s health and financial security can be profound. Score: Basic Travel 3 / Health Insurance 9

Cost: Most travel is a few hundred dollars – not a rounding error, but not likely to send a families finances into a death spiral. In 2008 the average health insurance premium for family coverage was $13,770 in the United States. This cost has no doubt increased in the past two years. Score: Basic Travel 2 / Health Insurance 7.

Installation Requirements: Not really a factor for travel. You show up at the airport, go through security-line hell, sit in a too-small seat in a stuffy metal tube and the next thing you know you’re five miles high going 600 miles per hour. Installing health insurance can be a bit more involved (if less scenic). Consumers may need educating on what their plan does and does not cover. They may need to learn how to find an in-network doctor (and why), how to file a claim (which may be to a different place for medical care and prescriptions). Score: Basic Travel: 1 / Health Insurance: 6

Abstraction: Describing an airline seat or hotel room online is pretty simple. Same with describing a health insurance plan. (The terminology may be complex, but the information is easily presented). It’s not like there are tires to kick. Score: Basic Travel 1 / Health Insurance 1 

Totals: Basic Travel: 13. Health Insurance: 39

Based on this exercise (one admittedly reeking with false precision) one would predict that those selling basic travel are far more likely to be disintermediated than those selling medical insurance.

True, none of this means lawmakers and regulators won’t purposefully or inadvertently put health insurance brokers out of business, but they’d have to work at it. And I’m hopeful wiser heads (in legislatures and agencies as well as in the real world where employers and consumers live) will prevail and prevent that from happening.

I hope this will be the case because I strongly believe professional producers add substantial value to the health plans they sell. And it would be a real loss to consumers to lose that value.