By Anne Freedman
The Patient Protection and Affordable Healthcare Act will not only transform medical care for employers and consumers, but may significantly affect brokerage operations as well.
The act's medical-loss ratio requirements may squeeze commissions and increase the administrative burdens of insurance and benefit brokers. The creation of health care exchanges may also dilute broker influence in the near-term -- and the long-term outlook looks even more uncertain.
But, at the same time, the complexity of the new and still evolving law may send more employers running to their brokers for explanations and compliance help.
And a combination of all of those factors may lead to a flurry of mergers and acquisitions activity, as smaller brokerages are acquired by larger organizations.
"The medical-loss ratio requirements will impact broker commissions," said Patrick J. Haraden, principal at Longfellow Benefits in Boston. "This limiting or reducing of broker commissions comes at a time in which brokers are being asked to do much more for employers and employees in terms of compliance, education and regulatory filings."
The medical-loss ratio rules limit insurers from spending more than 15 percent (for large carriers) or 20 percent (for small carriers) of insurance premiums on "nonmedical care," he said.
In the past, commissions were just included in the insurance rate provided to employers, but with MLR limiting the amount of money insurers can spend on administrative, marketing and other operations, carriers want to remove commissions from MLR calculations.
Some health insurers are billing clients separately for the brokerage fees, Haraden said, while some insurers are reducing or eliminating commissions altogether.
The impact will be greatest on the smaller to mid-size brokers, he said. And, ironically, the cuts are coming at a time when their administrative work is increasing, as they help their employer clients comply with the new law, Haraden said.
Brokers for larger employers that generally are self-insured, may see little or no impact, he said.
But, as with many other aspects of health care reform, the law may be evolving. In September, the U.S. House Energy and Commerce Subcommittee on Health voted to exclude broker commissions from the determination of the medical-loss ratio.
"The medical loss ratio requirements contained in the PPACA are having a devastating financial impact on the country's approximately half-million licensed professional health insurance agents and brokers, their employees and millions of their employer and individual clients," according to a statement issued by Janet Trautwein, CEO of the National Association of Health Underwriters, a Washington, D.C.-based trade group representing about 100,000 health insurance agents and brokers.
Bruce D. Benton, executive vice president of Genesis Financial & Insurance Services in Sherman Oaks, Calif., and president of NAHU, said he hopes the full House and Senate will approve the bill to exclude broker commissions from medical-loss ration calculations during the lame-duck session following the elections.
"There are a number of bills that Congress needs to act on, We are hopeful we are going to be able to attach our bill to one of the broader packages of bills," he said.
He said the medical-loss ratio has created "a pretty significant challenge in our industry. Of course, we are hopeful we can find some kind of a solution to continue to get compensation for the invaluable services we provide ... . At some level, everyone is taking a hit."
It's not just the MLR that may impact commissions, said Maria Harshbarger, senior vice president of Aon Consulting. Some employers may be unaware of just how much they are paying for brokerage services.
" ... I think it goes back to the, 'Am I getting the value from my broker partner consultants that I am paying them for?' " she said. "When you know what that amount truly is, you have a different take."
Some brokers "bury commissions in that 'administration' component," she said, noting that the new law makes that impossible.
For Aon, it's not an issue, Harshbarger said, "because we have been transparent for many years."
Mark Kessler, director of strategic initiatives at HealthPass New York, a health care exchange that offers 15 plans through four carriers and insures about 3,800 businesses, said insurers have been "talking about hammering down broker compensation way before the health care reform was passed and the MLR cap was imposed."
"It appears to me that they are going to go to flat rates," pointing to the "particularly drastic incident" of Empire Blue Cross Blue Shield in New York cutting broker commissions to a flat $5 per contract per month rate for small groups. Commission rates for large groups are not to exceed 4 percent of premium.
Empire BCBS' schedule also sets large group HMO products renewals, with effective dates before Jan. 1, 2012, at a per contract per month amount of $24, while new business -- initial contracts signed on or afterJan. 1, 2012 -- receive $5 per contract.
"The saving grace for the broker," Kessler said, "is nobody wants to be first [to drastically cut commissions]. But, also, nobody wants to be last."
CONCERN ABOUT EXCHANGES
Kessler said consumer advocacy groups and some others behind the law's passage mistakenly thought insurance rates would decline if the commissions were included in the MLR. He also said the law left "a vagueness" about whether brokers would be able to participate in the health care exchanges.
"When brokers saw the bill, they said, 'We are out of business,' " Kessler said. "That's what I heard."
Fortunately, he said, the rules created by the U.S. Department of Health and Human Services did not pursue that avenue, instead offering "a clear indication they are using brokers and not only using them, but letting them put products on their websites. We have gone from eliminating them to seeing them as a valued asset."
Nevertheless, said Dr. Cynthia Ambres, a partner at KPMG Global Health Care Center of Excellence in Los Angeles, "Brokers are clearly expressing concern [about the exchanges]. Some of them are even feeling they are not going to survive."
She noted the exchanges will make it "significantly easier for individuals and small-employer groups to find and to ultimately compare and enroll in insurance policies so the need for brokers will be significantly less over time."
Look at what happened to travel agents, said Michael Owens, senior vice president of Chicago-based GoHealth, a health insurance distribution and technology company that acts as an intermediary between the agent and carrier. They lost most of their customers as the online travel sites proliferated.
While the "complex nature of health insurance" makes that a dicey analogy -- and he believes that brokers or agents are necessary to "navigate consumers through the exchanges" -- it would not be out of the realm of future possibility, as the pace of technological adoption continues to rapidly increase.
But, Longfellow's Haraden, who is based in Massachusetts, which has exchanges, said brokers are usually an important element in the process, helping with the administration as well as providing an employer's workers with information and customer service.
All of the law's complexities make it "a boom" for brokers, said J. Patrick Gallagher Jr., CEO of Arthur J. Gallagher & Co., following a presentation at the Keefe, Bruyette & Woods Conference earlier this fall in New York.
During the presentation, he noted that, "Right now, this new law is so complicated and so complex, we have invested literally millions in the capabilities to be able to help our clients sort through, not only the compliance, but the cost issues.
"It's a very onerous law and you can slip up on it very easily," Gallagher said. "Our clients need the help."
AN M&A FLURRY
Some brokers, he said, "simply cannot compete at that level. ... That small, independent broker out there is going to have a very, very difficult time helping those clients through this maze of this new law and it's generating tremendous interest in our capabilities."
It's also generating AJG's interest in acquiring some of those brokers, Gallagher said, noting his company has "probably done 20 benefits acquisitions in the year so far. ... They will look you right in the eye and say I needed a partner."
Ambres said some experts are predicting an "M&A flurry. ... I think we will start to see some confluence. Your small groups will be bought out by the larger groups."
NAHU's Benton is not convinced the law will result in more acquisitions, but, if so, he believes there will be geographic differences.
"In the large metropolitan areas, where you have the presence of the large regional and national consulting firms, it's going to be a little bit more difficult [for smaller brokers] to compete," he said. In more rural areas, there will continue to be "a remarkable opportunity for the small and midsize agencies to thrive in those communities."
Aon Consulting's Harshbarger also anticipates more partnering -- though with employer clients. As more business is done in the exchanges, she said, consultants will focus "on more aspects of the employee well-being and employee health," such as emphasizing positive wellness behavior changes and other elements that drive employee engagement.
"It's a shifting dynamic," she said.
"It's really going to be culturally different for us in the future and I think there's a real good opportunity to walk the walk and talk the talk [about the importance of health and wellness initiatives]," Harshbarger said. "This is a unique time in moving forward."
ANNE FREEDMAN is senior editor of Risk & Insurance®. She can be reached at firstname.lastname@example.org.
November 1, 2012
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