People don’t like uncertainty. In times of change, however, the unknown dominates the landscape. For health insurance brokers, the new health care reform legislation has created uncertainty of gargantuan proportions. Chief among the questions as yet unanswered:  will the medical loss ratio requirements contained in the Patient Protection and Affordable Care Act result in such severe reductions that brokers will need to leave the health insurance market?.

The import of this question is not a function of greed or avarice. Lots of people make a lot of money from health care. Mother Teresas are few and far between. America spends roughly $2.3 trillion on health care costs – roughly 16 percent of he nation’s GDP.  Hundreds of thousands of people put food on the their tables, roofs over their heads, and keep up with the Joneses by earning their share of these dollars. There’s nothing wrong with that. And there’s nothing wrong with professionals earning a living by helping consumers find the right health care plan, navigate the system, advocate on their behalf when problems arise, and keep them informed of new products and changes to the industry that may impact them.

After all, we’re not talking about selling iced coffee here. Health insurance is complicated, expensive, shopped for rarely and both personal and critical to a family’s health and financial wellbeing. When it comes to making decisions on products or services like health insurance, consumers – whether buying for themselves or for their company and its employees – want and need expertise. And that expertise is best delivered by professional, licensed health insurance brokers. (While there are legal differences among the terms “agent,” “broker” and “producer,” I am using them interchangeably here).

Don’t take my word for it. A lot of Insurance Commissioners agree. The National Association of Insurance Commissioners just passed a resolution calling on federal policymakers to “acknowledge the critical role of producers and to establish standards for the exchanges so that insurance professionals will continue to be adequately compensated for the services they provide.” (NAIC Resolution “To Protect the Ability of Licensed Insurance Professionals to Continue to Serve the Public,” adopted August 17, 2010). The Commissioners are concerned that the creation of “Navigators,” as called for in the PPACA, to help consumers use the new health insurance exchanges to be available by 2014 “could provide an avenue for untrained individuals to evade producer licensing requirements and expose consumers to harm.” But their appreciation of the role played by brokers goes beyond the context of exchanges. The NAIC is saying that consumers – and regulators – benefit from the involvement of professional brokers.

Which brings us to the medical loss ratio provisions of the new health care reform legislation. By limiting the percentage of premiums carriers can spend on administrative costs to 20 percent for individual and small group policies (and 15 percent for large group contracts) broker compensation will, by necessity be reduced. The math is simple, especially as it concerns individual health insurance policies. Carriers with a decent block of business need 7-to-9 percent of premium for administrative costs. They would like to make (but don’t usually) 4-to-5 percent on this business. That leaves 6-to-9 percent for distribution costs. Given that in some states the first year commission on individual policies is 20 percent declining to 5-to-10 percent for renewals, we’re talking about a significant pay cut here.

Maybe. Because an argument can be made that commissions shouldn’t even be part of the medical loss ratio calculation. Here’s the theory:

The intent of the MLR requirement is to reduce non-medically-related costs in the health care system and to prevent carriers from reaping windfall profits when consumers are required to obtain health insurance coverage. Fine, but as applied to broker commissions, the minimum medical loss ratio requirements may actually increase overall administrative costs. Commissions are paid by consumers (whether individuals or employers). Today carriers collect these funds and pass 100 percent of them along to an independent third-party – producers. Health insurance companies don’t benefit from these dollars. They are providing an administrative convenience to their members and to their distribution partners – a convenience that reduces overall cost in the system.

Instead of consumers and business owners having to prepare, mail and track separate checks to brokers, carriers do the work. (Similar to how carriers aggregate claims owed to a hospital into a single payment as opposed to requiring each consumer to pay 100 percent of their hospital bill and then get reimbursed by the insurance company). And because of their infrastructure, carriers can accomplish this task more cost effectively. Brokers meanwhile receive one check for multiple clients, another administrative savings.

Given that the health plans are not benefiting from the commissions, but that having them collect the funds reduces overall costs, one could argue that commissions should not be part of the MLR calculation at all. As with some taxes, commissions should simply be outside the medical loss ratio calculation. And that argument is being made – and heard.

Several carriers found this idea intriguing, but it is the National Association of Health Underwriters that has spearheaded the effort to bring this concept to the attention of the NAIC. (The NAIC is responsible for establishing uniform definitions and methodologies for determining how medical loss ratios are calculated). And they have succeeded. As noted in the New York Times, “Some insurance commissioners seem sympathetic to the insurers’ arguments, including on the subject of how to treat broker commissions, which have historically been part of premiums. The insurers would exclude them from premium dollars, making it easier to meet the 80-cent minimum. The new standards ‘could potentially disrupt the availability of private health insurance, and do not take into account the integral role of health insurance agents,’ Kevin McCarty, the insurance commissioner for Florida, said last week in a letter sent to regulators.”

As noted in yesterday’s post, the NAIC has included broker commissions in the administrative cost section of the form they promulgated that will be used to capture the information used in calculating carriers’ spending on claims, health quality and administrative expenses. At first blush this would indicate that the NAIC has declined to exclude commissions from the medical loss ratio calculation. However, I’m told by people involved in the negotiations that the idea remains alive and could be included in future communications from the NAIC to the Secretary of Health and Human Services (who has to certify the NAIC’s medical loss ratio calculation proposal) when the NAIC provides the actual formula to be used.

Excluding commissions from the MLR calculation remains a long shot. That NAHU has pushed the idea as far along as it has is testimony to the respect with which the organization is held by Insurance Commissioners – and NAHU’s commitment to its membership. What’s significant, however, is that the idea has gained traction. As well it should. Because if commissions are cut too deeply, brokers will either abandon the market or negotiate separate compensation arrangements with their clients. Abandoning the market, as the NAIC resolution highlights, is not in the interest of consumers. And arranging for the payment of separate fees will result in greater administrative cost and more inconvenience for consumers. Far better, to simply remove producer compensation (which all the funds are paid to an entity completely independent from the carrier) from the MLR formula altogether.

Filed under: Health Care Reform, Healthcare Reform, Insurance Agents Tagged: Kevin McCarty, Medical Loss Ratio, NAHU, National Association of Health Underwriters, National Association of Insurance Commissioners
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One of the most far-reaching elements of the Patient Protection and Affordable Care Act concern the requirement that carriers spend a specified percentage of premium on medical expenses and health quality improvement (large group carriers must spend 85 percent of premium while individual and small group carriers have an 80 percent medical loss ratio target). If carriers spend less than required on medical care it must refund a portion of the premiums collected to its policyholders. Which means what gets defined as medical and quality improvement, as opposed to being considered administrative expense, has a cascading impact on everything from premiums to commissions to innovation to technology adoption and so on.

The PPACA directs the National Association of Insurance Commissions to establish uniform definitions and methodologies for determining how medical loss ratios will be calculated. (Whether the Secretary of Health and Human Services has the authority to reject or modify the NAIC determinations is the subject of some debate, but it appears the only role of the HHS Secretary is to certify the NAIC’s decisions.) And during their meeting this week, the Commissioners took an important step toward providing much needed clarity on the issue.

The Commissioners approved a form (called a “blank”) that specifies the types of expenses, activities, fees, etc. that will be used in the calculation. The blank form has generated both praise and criticism, but the fact that it was approved by the NAIC on a unanimous vote from Commissioners across the partisan spectrum demonstrates the political strength of the decision. Additionally, the NAIC deliberations were long, open and inclusive, lending them enhanced credibility. This doesn’t mean they are non-controversial, however. America’s Health Insurance Plan, the carriers’ trade association, has criticized the financial template for failing to treat fraud prevention and detection as a claims-related expense, among other concerns. Their concern is that by treating such expenses as administrative costs, hamstrings carriers’ ability to control costs.

While the blank form is an important step, it’s important not to put too much weight on its impact. It is a first, critical step to bringing the health care reform legislation’s medical loss ratio provisions to life. Next comes determining further clarification the NAIC is expected to provide in the next two weeks (give or take). Among the issues expected to be clarified at that time: whether broker commissions will be considered in calculating the MLR and which taxes will be excluded from the calculations.

The tax issue is interesting, but for many readers of this blog the treatment of commissions takes a bit of precedence. Which is why my next post will focus on that issue.

Uncertainty surrounding how medical loss ratios will be calculated under the PPACA has been painful for a lot of folks. The rules take effect in 2011, which means decisions concerning premiums, commissions, and benefits are being made now. Without clarity carriers are making decisions with only partial information. Which, given the gravity of those decisions, means they are assuming the worst. The results: premiums may be set higher, and commissions set lower, than will be needed once the definitions surrounding MLR calculations are finalized. 

By bringing clarity to this situation, the NAIC’s action this week are an important accomplishment. Their thorough review of the issue and successful consensus building is also to be commended. But 2011 is right around the corner. Now, the need to finish the process – and quickly – is paramount.

Filed under: Health Care Reform, Healthcare Reform, Insurance Agents Tagged: Medical Loss Ratio, National Association of Insurance Commissioners, Patient Protection and Affordable Care Act, PPACA
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The meaning and intent of legislation is often in the eye of the beholder. That’s why they invented courts. And the courts are where the interpretation of the medical loss ratio provisions in the Patient Protection and Affordable Care Act are likely to wind up. What will make such suits especially interesting is that the new health care reform bill wasn’t passed by Congress in the usual way. As a result, statements of legislative intent are lacking.

The usual route of legislation is through a Congressional conference committee in which differences between the House and Senate versions of the bill are ironed out – and where formal statements of intent are drafted, debated and published. The path of health care reform was different. The legislation was headed for a conference committee when, in Senator Scott Brown, a Republican, was elected from Massachusetts. This gave the GOP caucus, if they stayed united, the votes needed to block any bill from coming to the floor. And on the PPACA, Republicans were united in their opposition. Democratic leaders worked around this legislative roadblock by having the Senate pass the House legislation (HR 3590) and then both chambers passing a reconciliation bill (HR 4872). This allowed Democrats to pass health care reform with a majority vote instead of the super-majority which would have been required had the legislation gone the more traditional route.

But now the Department of Health and Human Services has to promulgate regulations that implement the medical loss ratio provisions of the new health care reform law. These are the provisions that require individual and small group carriers to spend 80 percent of the premium they take in on claims and health quality expenditures (large group policies have to spend 85 percent of premium on these costs). What goes into the calculation of this percentage will determine the impact of this part of the law.

American Health Line is reporting that Democratic lawmakers are providing advice to the Secretary of HHS that, according to health plans, is reinterpreting the letter of the law. (The story was originally published by Politico). The issue is ostensibly about how certain taxes will be treated in calculating a carriers medical loss ratio. What’s interesting, however, is the attempt by the Congressional Democrats to provide legislative intent after the fact and outside the normal process for doing so.

What this points out is that unintended consequences occur not just in the content of the law, but from how the law is passed.

Filed under: Health Care Reform, Healthcare Reform, Politics Tagged: HR 3590, HR 4872, Patient Protection and Affordable Care Act, PPACA, Scott Brown
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As discussed in my previous post, while some brokers spend their time venting about health care reform and others expend their energy ignoring it, prepared brokers are busy talking with their clients (and the clients of those other brokers) about decisions, challenges, and opportunities that need to be addressed now. that post used as an example the need to discuss the Grandfathered plan provisions with both individual and group employers. There are other pressing issues to address, too. Here’s a few more:

Dependent Children to Age 26: Most people are aware that starting September 23, 2010 all health plans will need to cover dependent children up to age 26 (and that most carriers voluntarily began offering this coverage weeks ago). But as anyone whose ever actually read an underwriting guide, it’s not quite that simple. Which is why reviewing the FAQ posted by HHS concerning coverage for “young adults” is a worthwhile expenditure of time. There’s a few interesting nuances you’ll learn. For example, the coverage is available to the member’s child regardless of that child’s marital status, financial dependence on the parents, residency, or school enrollment status.  About the only circumstances which could result in excluding the young adult dependent is where a Grandfathered plan is involved and if the child has access to other employer-based coverage – and even this exemption expires for plan years beginning on or after January 1, 2014. Significantly, dependent coverage need only be extended to the child, not to the child’s dependents. So if the 24 year old son of a covered employee is married the parent’s carrier needs only cover the son, not the daughter-in-law.

Small Business Tax Credit: Help for some small businesses in paying health insurance premiums were among the first elements of the Patient Protection and Affordable Care Act to take effect. To qualify, firms must have no more than 25 full-time equivalents (which is a way of counting employees that takes into account part-time employees). As the IRS FAQ on the small business health care tax credit explains, the full benefit of the credit is available only to firms with up to 10 full-time equivalents. It’s also worth noting that the tax credit is calculated against the actual premiums paid for the small business’ coverage or the average small group premiums in the employer’s state, whichever is less. The IRS published a table indicating the average premium by state to be used for calculating this cap in 2010.

This table is interesting for answering other questions, too. For example, which state’s small businesses pay the highest average premiums? Alaska with an employee-only rate of $6,204 and Massachusetts with a family rate of $14,138 (which is enough to make one look forward to the 2012 candidate debates should both former Governor’s Mitch Romney and Sarah Palin both run for president).

Early Retiree Reinsurance Program: Much attention has been paid to the impact of the PPACA on individual and small group health insurance, but the legislation’s impact on larger groups shouldn’t be ignored. For example, the legislation sets aside $5 billion to help employers lower the cost of covering early retirees. Providing coverage for any retirees is rare in all but the largest groups, but for those enterprises that qualify this could mean a welcome reduction in health care costs. The reimbursements can be used to reduce the sponsor’s health benefit premiums or health benefit costs, the participants premium contributions or out-of-pocket costs, or a combination of the two. Eligibility and details surrounding how the early retiree reinsurance program works is available from the Department of Health and Human Services. Most importantly, for employers who qualify for the program, the reimbursements are available for claims dating back to June 1, 2010.

There are other provisions of the health care reform legislation taking effect in 2010. We’ll discuss them in future posts. But one takeaway should already be clear: there’s a lot to talk about with your clients. And the time to be talking with them is now.

Filed under: Health Care Reform, Healthcare Reform Tagged: Dependent Coverage, Mitch Romney, Patient Protection and Affordable Care Act, PPACA, Sarah Palin, small business tax credit, tax credit
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Brokers are quite naturally concerned about their future under health care reform. Times of change are always unsettling and the new legislation is change of a grand magnitude. Everything from plan design to compensation to distribution mechanisms are undergoing a transformation. What makes things worse is the uncertainty. While the broad outlines of health care reform are pretty clear, in reality there’s more unknown about the details than known. Not only will regulators at the state and federal level interpret the law, but so will carriers, employers and others who need to comply with those regulations. Then there are the inevitable bills Congress will consider to tweak this or that in the legislation (some of which has begun – more about that in a future post).

Brokers are responding to the coming changes and current uncertainty in several ways. Some remain angry that health care reform was passed at all. They rail against the law, call lawmakers names, predict the demise of various political careers, etc. etc. Venting feels good, but outside of the ballot box, it’s hard to argue venting accomplishes much.

Then there’s brokers who ignore what’s happening around them. Today’s just another day and tomorrow will be more of the same. But ignoring reality – change is coming – is no more productive than raging against reality. It’s no doubt better for one’s blood pressure – and may even be kinder to those around you, but it doesn’t accomplish much.

Another group of brokers are preparing for reform. They may be angry about the legislation, but they don’t let their emotions prevent them from dealing with the reality of it. They are examining their business practices, their revenue streams, their client base, their skill sets and they are thinking about the future. They are not making drastic changes right now, but they know they will have to modify, maybe even transform, their business over time.

These brokers are focused on what needs doing now. They know the provisions of the Patient Protection and Affordable Care Act take effect over time, some in a few weeks and and others over several years. They may have hopes for changes to these provisions, but until they’re changed, these brokers know they have to deal with the cards as they’re dealt.

And by doing so these brokers will not only be better positioned for what is to come, but they’ll be more successful in the near term providing them with the resources they’ll need in the future.

Here’s an example of how. The PPACA imposes a host of requirements on individual and group health plans. However, plans can avoid some of these requirements if they meet certain conditions. Such plans are referred to in the law as “Grandfathered” plans because a key criteria is that they have been in-force prior to enactment of the new health care reform legislation (which occurred on March 23, 2010).  Interim Final Rules relating to Grandfathered Health Plans were promulgated by the Departments of Treasury, Labor and Health and Human Services in June 2010. (Comments on the interim rules are due August 16th. While the departments could modify the rules based on this input, they are not expected to be making substantial changes).

There are a lot of resources for understanding the Grandfathered Plan regulations online from folks like Employee Benefit News, the Society for Human resource Management, and HHS’ at their HealthReform.Gov web site. But here’s the gist of what’s involved as I understand it:

Grandfathered plans have to comply with some, but not all, of the Patient Protection and Affordable Care Act. Grandfathered plans can be fully-insured or self-insured, group or individual plans. They must have been in-force on March 23, 2010 and remain with the carrier providing the coverage at that time. While some changes to the plan are permissible, they cannot have significantly increased out-of-pocket costs or reduced benefits. For example, deductibles may and out-of-pocket maximums may increase by medical cost inflation plus 15 percentage points. Plans can voluntarily adopt some of the consumer protection rules contained in the PPACA without losing their status Grandfathered status, but they need to be careful about any significant changes other than complying with new laws or regulations. Significantly, premiums may be increased without jeopardizing a plan’s status. Grandfathered plans must also maintain certain records and there are exceptions for insured collective bargained plans.

Grandfathered plans do not need to meet the minimum benefit requirements laid out in the new health care reform law nor do they need to provide 100 percent coverage for preventive care. They are also exempt from guarantee issue requirements and certain changes to the ways claims will be processed.

However, even Grandfathered plans must comply with the Patient Protection and Affordable Care Act provisions related to pre-existing conditions, excessive waiting periods, the lifting of lifetime maximum benefits (and, for group plans, but not individual coverage, the eventual elimination of annual maximum benefits), and must extend coverage for dependents age 26.

Whether seeking Grandfathered Plan status is in a client’s interest will depend on the specific circumstances for each client. And brokers should contact their carriers to learn more about how each of them are handling this issue.

And that’s the key. Brokers need to be looking at their clients situation, talking to their carriers, and helping their clients navigate this change. Because once a group or individual loses Grandfathered status they cannot get it back. Even though most clients will likely conclude they don’t need to be Grandfathered, its asking the question that matters.

One of the findings from the Trailblazed Sales Project Study I conducted is that High-Growth Producers communicate with their clients more often than do Low- and No-Growth Producers. Doing so results higher retention, more opportunities to meet the needs of those clients, and increases these brokers’ status as a trusted advisor. In short, communicating with clients other than at renewal time is good for your clients and for your business. This is especially so in times of change. If brokers are uncertain about health care reform, employers and individuals are even more adrift. Brokers proactively contacting them about issues like Grandfathered Plan status are demonstrating their value.

There’s another reason why brokers need to be contacting all their clients about the Grandfathered plan issue sooner rather than later. What happens if they meet a competitor who asks that dreaded question, “You mean your current agent has told you about this? That’s just not right!”

Put another way: Clients need help in understanding how the new health care reform law impacts them. Brokers preparing for the future are helping their own clients – and the clients of other brokers – understand these issues. Brokers who are blinded by their anger or who are in denial about reform are not.

There are many ways to respond to health care reform. Some of those responses are just smarter than others.

Filed under: Health Care Reform, Healthcare Reform, Insurance Agents Tagged: Grandfathered Plans, Health and Human Services, HealthReform.Gov, Patient Protection and Affordable Care Act, PPACA
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The health care reform debate was anything but dull. Full of political maneuverings, hyperbolic rhetoric, good intentions, misguided policy, misplaced passion, serious concerns and a complex issue and played out across three 24-hour news stations, it’s hard to think of anything more dramatic and engrossing this side of Mad Men.

Until now, that is. Because now the real decisions are being made, the ones that will impact every employer, every carrier, every broker and every American in very direct ways. This is where the nitty gets gritty, the proverbial rubber is introduced to the road, and … well, jump right in with your own metaphor.

They say the legislative process is akin to the making of sausage. But when it comes to unpalatable activities, the implementation can be just as bad – if not worse. And it’s causing sleepless nights for employers, brokers, individuals and insurance executives.

Not that anyone should feel sorry for them, but just for fun, let’s walk a few steps in the shoes of those health insurance company executives. They have a lot of moving pieces to deal with. Consider, as of September 23rd: lifetime benefit caps go away; rescissions are greatly restricted; pre-existing conditions – for children under age 19 they are a thing of the past; specified preventive care services are paid at 100% – no cost sharing allowed; limits are imposed on out-of-network emergency room services; dependents up to age 26 must be covered (but not those dependent’s dependents); new criteria of acceptable appeals processes (for denied claims or treatment) take effect; and new rules concerning non-discrimination in favor of highly compensated individuals come into play.

And this list just describes the impact of the new health care reform bill. States are imposing new rules and regulations at the same time. And let’s not forget the federal mental health parity legislation that took effect July 1, 2010. Then, looming just down the road, there’s the new medical loss ratio requirement (which mandates carriers spend 80 percent of the individual or small group health care insurance premium they take in on medical claims and health quality initiatives beginning January 1, 2011 – 85 percent of large group premium must be spent on these purposes).

Now think about the answers those health insurance executives have to come up with. What specifically to these new rules require? Details on some are sketchy at best. And regulations, like legislation, is open to interpretation. How will state regulators interpret what these federal rules require? How will competitors implement them? Can our systems handle the new calculations, structures and rules without exploding? How do we explain how we’re interpreting the requirements to our customers, brokers and front-line employees? All this while the fallen economy and skyrocketing medical costs buffet their companies like Dorothy’s tornado.

Again, no need to feel sorry for them. This is, after all, what they signed up for. But it is fascinating to consider the complexity of their task. And to make their task all the more exciting, any missteps could put their company – and themselves – on the front page of their local newspaper. And trust me, that’s not where any executive wants to be for anything other than handing over a big check to the United Way.

Then there’s the reality that every decision matters. And with every decision the safety net gets smaller. When Congress passes a law, they have regulators as their safety net. Which is why most every major new law delegates a great deal of responsibilities to federal and state agencies. Those agencies , meanwhile, know that those they regulate will find a way to smooth the edges of the regulations they develop. But carriers – and employers, brokers and others who have to actually implement all this – have no safety net, no one accepting the buck they wish to pass. Lawmakers and regulators deal with what should happen. Employers, brokers, and carriers do things. They deal with what will happen. And if they’re wrong (meaning the regulators or lawmakers upstream think what they did is wrong) the consequences can be dire.

Which is all to say the summer hiatus is over. What I’ll try to bring to you in the weeks ahead is to provide readers with the information needed to track what’s happening now with health care reform, how it’s being interpreted by regulators and how it’s being implemented by health plans, employers, individuals and others. My goal is to provide links to the reports, resources, and articles you need to stay current. And I’ll do my best to provide additional insight and context to what’s happening, to the extent that’s possible.

Given the complexity of what’s involved with implementing health care reform, your help will is greatly needed. For example, a lot of the action takes place at the state level. Please feel free to leave comments with reports about what you’re seeing happening in your neck of the woods, wherever that may be.

There’s a lot happening and a lot to talk about. I hope you’ll be part of the conversation, because here we go. Again.

Filed under: Health Care Reform, Healthcare Reform
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Hello. Just wanted to let you know this blog will be reactived soon — I’m aiming for the first of July. After over two years, roughly 450 posts, and the long health care reform debate, it was time to take a short break. My thanks for the kind notes and inquiries and I look forward to resuming the dialogue in a few weeks.
Thanks,
Alan

Filed under: Uncategorized
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With carrier scurrying around trying to figure out how they’ll meet the Medical Loss Ratio (“MLR”) requirements in the new health care reform, brokers are, not surprisingly, wondering what the impact will be on their commissions. Under the Patient Protection and Affordable Care Act, carriers in the individual and small group markets (small groups are considered to be businesses with up to 100 employees) must spend 80 percent of the premiums they collect on claims and health care quality expenses. (The MLR target is 85 percent for larger group policies). Since selling costs are considered administrative costs, producers are quite naturally concerned about what the impact of the MLR requirement will be on their incomes.

In a previous post, I walked through the math defining the future of commissions in the individual market. To expand on the calculations presented there:

1. Mature, large carriers need roughly 7-to-8 percent of premium to cover their administrative costs
2. Carriers look for profits of about 4-to-5 percent of premium (non-profits categorize this as “retained earnings”)
3. Carriers must spend 80 percent of premium on claims and health care quality expenses or return to premium payers the difference.
4. What’s left for broker commissions? Let’s call it 8 percent. Carriers can pay more than that the first year (to help compensate brokers for their acquisition costs) and less on renewals or they can pay a flat commission. But over the life of the policy carriers can afford to spend roughly 8 percent of premium on broker compensation costs.

Today, premiums are tied to the premiums paid by the client. Those premiums are increasing at a rate far exceeding general inflation due to skyrocketing medical costs driving up insurance premiums.  Given the pressure to reduce costs, this structure is going to change. In the individual market, carriers will likely tie broker compensation to either the premium in-force at the time of the sale or a flat fee per subscriber or member. Smarter carriers will include cost of living increases in their compensation arrangements. Otherwise the compensation will, over time, become increasingly less competitive. In the small group market tying commission to the original premium is a bit more problematic as employees come and go over time. (While the pressure to mess with broker commissions is far less in the small business market segment than it is for individual plans, eventually those carriers will need and/or want to tie commissions to something other than medical inflation).

A flat per subscriber or member fee is in many ways easier for everyone to understand. However, not every carrier’s commission systems can make these calculations so some health plans will use the initial premium. The question is, can these commission schedules be designed in a way that fairly compensates brokers for the work they do? The answer depends, of course, on what level the per capita fee is set and whether it is limited to one initial payment or continues while the client is insured by the carrier.

State regulators of exchanges will have a large say in broker commissions. They could let the market decide producer fees or simply impose commission schedules. Even if they take the latter approach, all is not doom and gloom for brokers. Enlightened regulators recognize the value brokers add to the system and have demonstrated a willingness to fairly compensate producers. Less informed regulators seem to come up with arbitrary levels that completely ignore the ongoing work brokers do for their clients — and the carriers they represent. As the number of insureds dramatically increase those states that underestimate brokers’ contributions — and underpay them — will see brokers migrate to non-medical products, leaving state bureaucrats to deal with millions of (rightfully) demanding and impatient consumers.

Of course, there will be markets outside the state exchanges. So carriers will also be making producer compensation decisions, too. These carriers can offer exchange regulators a benchmark when it comes to establishing commissions within the state-run marketplaces.

Utah already has a health insurance exchange. What they’ve done with broker compensation is instructive. According to Health Plan Week, the Utah exchange is relatively new and bugs are still being worked out. The exchange has had difficulty pricing their offerings competitively, resulting in only a handful of employers enrolling.  But changes to the Utah law are underway and membership is expected to increase dramatically.

As reported by Health Plan Week, the Utah exchange today pays brokers $37 per employee per month. This is a level that most brokers will find acceptable. And the simplicity of the Utah exchange model, compared to the Connector established in Massachusetts, may make it an attractive model for other states to emulate.

The Massachusetts Connector) has had problems of its own, but insures far more consumers. First, that exchange is targeted at individuals, not small groups as the Utah exchange is. They also pay about 75 percent less than the Utah exchange, a level that many producers will find makes selling and servicing medical insurance unprofitable.

The state exchanges will arrive on the scene in 2014 — plenty of time for brokers to educate regulators about their value and work toward reasonable and responsible compensation formulas. On the other hand, the MLR requirements take effect in 2011. Consequently, carriers must announce their new compensation schedules in the next few months — and certainly no later than the end of October (Halloween, how appropriate). What carriers do concerning broker compensation, and how they go about doing it, will have a significant impact on how exchanges pay producers.

Change is coming. But as Utah demonstrates, change doesn’t have to be fatal.

Filed under: Health Care Reform, Healthcare Reform, Insurance Agents Tagged: Medical Loss Ratio, Patient Protection and Affordable Care Act
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Yesterday I began the process of catching up with various odds-and-ends related to health care reform. Here’s some more items worth noting.

1. One of the items in the previous post considered whether the phrase “Medical Loss Ratio” is appropriate. Paying claims is, after all, the purpose of health insurance. So maybe such spending should be renamed “Wellness Investments.” But whether you call it Medical Loss Ratio or Wellness Investment (as the Venture, the fact is the MLR requirement contained in the new health care reform law is going to impact the way carriers and brokers do business. The Wall Street Journal notes that “the first to feel the effects of the nation’s health care system overhaul are insurance salespeople.” (A subscription is required to read the entire article). The gist of their point is that with only 20% of premium dollars to spend on all administrative costs, profits and commissions, today’s commission schedules in the individual and small group markets simply aren’t sustainable. My take is that a lot will depend on what state one works in. The differences in commission schedules from state-to-state are quite striking. In California it’s not uncommon for brokers to receive 20% of the first year commission on an individual sale. In states such as Texas and Georgia I’ve heard first year commissions top out at 10%. The transition to post-health care reform commissions in Texas and Georgia will be a lot less painful than in California. Whatever carriers are going to do about commissions they’ll have to announce sooner than later. The Medical Loss Ratio provisions of the new health care reform law take effect in 2011. So commission changes will need to be announced sometime in the Fall.
2. As I’ve written before, I don’t think commissions are going away. And in the small group market, where commission levels are lower than for individual sales, the need for major change to compensation schedules is relatively less critical. What will change, in both the individual and small group markets, is tying broker compensation to medical cost trends, which is what happens when renewals are linked to the then current premium paid by the group). Instead, carriers are likely to experiment broker compensation based on a flat fee per subscriber and/or dependent or tie the commission to the premium in-force at the time of the original sale (either of these formulas should be, and probably will be, subject to cost-of-living adjustments). Neither approach will be comfortable for brokers. During a webinar I participated in for Norvax, a poll of the 400+ brokers was taken: two-thirds supported keeping commission structures as is. Understandable, but not likely.
3. Brokers aren’t the only ones having to deal with new financial realities. The Motley Fool financial site shows the hit pharmaceutical companies will take as a result of the reforms. The amounts are large (for most drug companies $200-$400 million in 2010) although as a percentage of their 2009 revenue they seem slightly less severe (from 1.6%-to-5.6%). Not that this is an insignificant hit to a company’s bottom line, but it’s hard to feel too bad for these enterprises given the high prices Americans pay for the same pills sold for far less elsewhere.
4. A few weeks ago I ran a poll asking readers to predict whether health care reform would move consumers from small group to individual medical coverage, move them from individual to small group health plans or have no effect on either market. Over 100 readers took the time to respond and there’s a definite consensus: 69% predict health care reform will move consumers who currently are covered by their employers into the individual market. Only 17% expect the new law to have no effect, and 14% see the legislation to spark a migration from individual to small group coverage.
5. Reader Malcom Cutler posted an interesting question the other day about how the small business tax credit the Patient Protection and Affordable Care Act (“PPACA”) impacts the deductibility of premiums paid by small businesses. My thanks to reader Michael B who found the answer. Michael noted that in the IRS guidelines concerning the health insurance premium tax credit, it states that “ In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.”  The IRS recently mailed out over four million postcards to small businesses about the health insurance tax credits. Brokers — and others — will want to stay up-to-date with the resources available to answer the inevitable questions coming their way. (For those interested, here’s a copy of the postcard).
6. Of course, the tax credit goes away if the health care reform package were to be repealed. The chances of that are slim. It will take a two-thirds vote of both chambers of  Congress to repeal health care reform while President Barack Obama occupies the White House. And even if a Republican were to take his place in 2013, 60 votes would be needed in the Senate to overcome a filibuster. In other words, repeal is unlikely. But it is, apparently, popular. According to a recent poll by Rasmussen Reports, 56 percent of respondents favored repealing the new health care reform law, while 39 percent opposed repeal. This percentage has been fairly consistent since passage of the bill. Of course, when people agree with the polls, they argue Congress should listen to the will of the people; when they don’t like the survey results they tend to praise those who stand on principle instead of basing their positions on, well, polls. So what one thinks Congress should do about this poll results depends a great deal on where you stand on the reform package. The reality, as noted above, however, is that the law is unlikely to be repealed. The reform legislation will evolve, even as it is implemented, but change is coming. The key is to prepare for it.
7. Preparing for reform is what the California Medical Association is doing. You may remember an earlier post on this blog about the CMA’s efforts to elect the former chair of its legislative committee to the California legislature. The theory is sound: there’s no better place to have a lobbyist than sitting inside the majority caucus. Especially with so many health care reform issues required to be made at the state level.  How much does it cost to buy an assembly seat?  The CMA and its allies have poured more than $200,000 into the race — including an independent expenditure committee set up by the CMA with an initial investment of $106,000 and not counting at least three “off-the-campaign book mailings. This investment is necessary because the CMA’s candidate, Richard Pan has been singularly unsuccessful in raising much in the way of campaign dollars from within the district. Obviously the CMA doesn’t care about the interests of the residents of the Fifth Assembly District. The job of the CMA is to look out for the financial interests of their members. And they’re certainly doing that. For all their dollars, however, the CMA is having trouble with their acquisition plans. They spent plenty trying to buy the official Democratic Party endorsement, but were blocked by supporters of a community-based candidate for the seat, Larry Miles. Their spending did, however, garner support from most of the Capitol establishment. But Mr. Miles is running a strong, grass-roots campaign and, from all accounts I’ve heard, the race remains extremely close. (By the way, I’ve known Larry since we were roommates in college — many, many years ago. Not surprisingly, then, I’ve contributed to his campaign. If you want to help Larry stand up to the CMA, or are simply interested in helping elect a qualified, thoughtful leader to the California legislature, I encourage you to  do the same).

 Well, that’s enough catching up for now. Please leave a comment with your observations of some of the more interesting health care reform related developments of the past few weeks. Thanks.

Filed under: Barack Obama, Health Care Reform, Healthcare Reform, Insurance Agents Tagged: California Fifth Assembly District, California Medical Association, Larry Miles, Medical Loss Ratio, pharmaceutical companies, Richard Pan, tax credit
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I’ve taken a few weeks off from blogging, but health care reform sure hasn’t taken a break. There’s a lot going on, so let’s catch up with some interesting tidbits:

1. In April the Internal Revenue Service issued guidelines concerning one of the more popular provisions of the new health care reform bill: the tax credit some small employers may use to offset the cost of their health insurance premiums. The credit is available to qualifying group so less than 50 employees, and there’s a cap: the average premium paid for coverage in the business’ state. In other words, the amount of premium paid above these average premiums is not eligible for the credit. The list of average premiums (published by the IRS, but created by the Department of Health and Human Services) is interesting in its own right. For example, employee-only coverage ranges from a low of $4,215 in Idaho to a high of $6,205 in Alaska. (In California, where I hang out, it’s $4,628). Idaho again has the lowest premium for family coverage $9,365), with Massachusetts having the highest family premium ($14,138).
2. In addition to the original IRS guidelines, the Obama Administration has released additional guidance to the small business tax credit created in the Patient Protection and Affordable Care Act (“PPACA”). There’s some welcome news in the material: dental and vision coverage are eligible for the credit; employers can choose the method of determining hours worked by their employees in whatever way maximizes the tax credit; and the federal credit is in addition to any state health care tax credits or subsidies available to an employer. This document also lists other benefits health care reform delivers to small businesses: the ability to pool together in exchanges; elimination of pre-existing conditions, elimination of the “hidden tax” employers with coverage currently pay (see #5, below) of roughly $1,000 per policy.
3. You might think all this would be music to ears of small businesses. If so, it’s not enough to satisfy the National Federation of Independent Businesses. The NFIB has signed onto the law suit filed by 20 state attorneys general and governors challenging the constitutionality of the Patient Protection and Affordable Care Act. The key argument of the suit is that the federal government has no power to regulate whether an individual to enter into an intrastate contract. According to the Associated Press article reporting the NFIB’s support of the suit, the government will argue that “a decision to opt out of health insurance is not merely a matter of personal choice. It has consequences for others, since uninsured people will get sick, or have accidents, and someone must pay for their care if they can’t afford it.  Individual decisions to forgo insurance coverage, in the aggregate, substantially affect interstate commerce by shifting costs to health care providers and the public.” Welcome to a gray area of constitutional law. Feel free to argue one side or the other all you want, but there are responsible arguments on both sides. And they’ll be argued before many courts over the next three or four years.
4. Much of the health care reform debate focused on the pricing practices of health insurance carriers. Now focus is moving towards the pricing practices of medical providers. In Massachusetts, for example, the U.S. Department of Justice is investigating whether one of the state’s hospitals are guilty of violating antitrust laws. According to an editorial in the Boston Globe, the DOJ the inquiry was launched after it was shown that some hospitals are demanding “rates much higher than others … for identical procedures.”  Meanwhile, the same editorial cites a report by Massachusetts Attorney General Martha Coakley that showed that hospitals with “geographic monopolies” use their market clout to push rates up “and contributes to annual increases in insurance premiums that greatly exceed the cost-of-living index.” Nice of someone to notice, isn’t it?
5. There tends to be a lot of two-sided coins when it comes to health care reform. Take the term “Medical Loss Ratio.” This refers to the percentage of premium dollars spent on medical care and health quality by health plans. The Venture Cyclist blog asked an interesting question, “Why do they call it Medical Loss Ratio? Why is looking after me (or you) called ‘Medical Loss’, when the whole point of a health care system is to look after me (or you)?” He’s got a point. Calling this expense “Wellness Investment” (as the Venture Cyclist suggests), would be as accurate. He goes further, suggesting that what’s not spent on looking after the health of premium payers be termed an “Administrative Loss Ratio.” It reminds me of when folks started referring to cost-shifting (which is the increased cost insured consumers pay to cover expenses incurred by their non-insured neighbors) a “hidden tax.” Words do matter.

Well, that’s enough catch-up for now, but there’s more to come.

Filed under: Health Care, Health Care Reform, Healthcare Reform Tagged: HHS, IRS, Medical Loss Ratio, National Federation of Independent Businesses, NFIB, Patient Protection and Affordable Care Act, tax credit
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