Commission Exemption Not in NAIC’s MLR Rules, But Issue is Still Open
Posted by Alan on October 21, 2010
The National Association of Insurance Commissioners approved rules defining how carriers will calculate their medical loss ratios as is required by the Patient Protection and Affordable Care Act. The NAIC’s proposal will now be considered by the Department of Health and Human Services which is expected to finish its review of the regulations in a few weeks. Which is a good thing considering the PPACA requires carrier to begin meeting the medical loss ratio targets established by the health care reform law (80 percent for individual and small group plans; 85 percent on coverage for groups of 100+) beginning January 1, 2011.
In approving the MLR regulations the NAIC rejected or tabled amendments put forward by insurers and brokers. One change some insurers sought was to allow carriers to calculate their medical loss ratios based on national business (the Commissioners are requiring the calculations to be based on a state-by-state spending). Another would change the “credibility adjustment” formula used in the calculation. Apparently this would have made it easier for smaller carriers to meet the MLR target.
The amendment put forward by brokers to exclude commissions from medical loss ratio calculations was withdrawn and the issue was referred to a working group of the NAIC’s executive committee. While some interpret this as ending the issue, that is far from clear.
The National Association of Health Underwriters along with the National Association of Insurance and Financial Planners and the Independent Insurance Agents and Brokers of America were the advocates of the broker commission amendment. I attended a conference today at which NAHU’s CEO, Janet Trautwein spoke. I’ll do my best to summarize my understanding of the situation based on her talk bolstered with reporting by National Underwriter.
Apparently there were enough votes among Commissioners to pass the broker commission amendment. However, NAIC lawyers questioned the authority of the organization to promulgate such a rule and warned that it conflicted with other proposals submitted to HHS by the NAIC. This led to a concern that including the broker commission exemption would lead to HHS rejecting the NAIC rules altogether. At the very least, HHS was likely to strike the commission exemption.
To avoid this result a compromise was brokered between HHS staff and supportive Insurance Commissioners. A joint NAIC executive committee/HHS working group will be created to address broker compensation and the medical loss ratio provisions of the health care reform law. The MLR amendment advocated by the agent associations will be the “starting point” for the working group’s deliberations. Aware of the need to resolve this issue quickly, the NAIC committed to convening the working group immediately (which, I assume, means in in a few weeks). The goal of the commissioners supporting this approach is to work with HHS to fashion a regulatory solution that ensures equitable compensation for brokers.
Ms. Trautwein noted the possibility that the working group approach could result in a better outcome for all parties (regulators, carriers and brokers) than if the amendment had been adopted by the NAIC. This would certainly be the case if exempting commissions was deemed, as the NAIC lawyers warned, to exceed the NAIC’s authority.
NAHU and its allies have certainly built a great deal of political support among Insurance Commissioners (both Democrats and Republicans) behind the need to preserve a role for professional brokers in the new health care reform system being created as a result of passage of the PPACA. They recognize the value brokers bring to the products they sell and, as importantly, service well beyond the initial purchase. They also recognize the heavy service load underfunded and ill-prepared state agencies would need to take on if producers are removed from the health insurance marketplace.
There are some, including commentators on this blog, who believe without the commission exemption brokers will be put out of business. I disagree and will explain why in a future post. What’s significant to note now is that the treatment of broker compensation under health care reform has yet to been finally resolved. And there are individuals of good faith from both parties seeking a workable solution. That doesn’t guarantee a positive result, but it certainly creates the possibility for one.
3 Responses to “Commission Exemption Not in NAIC’s MLR Rules, But Issue is Still Open”
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Meg McComb said
Following up on Alan’s comments, I want to thank CEO Janet Trautwein and NAHU’s tireless staff for representing brokers at every phase of the health care reform debate. Please log onto http://www.nahu.org for valuable health insurance resources, and to find the link to join NAHU. To read–or contribute your story–about the valuable role brokers play in America’s health care delivery system, please log onto http://www.brokersmakingadifference.
Malcolm Cutler said
Ann H,
Thank you for your comment. I think as brokers we have seen lots of changes made, and once the changes are made, the realities of “all” of the changes often times actually create more opportunity than downfall. I think your comment, hopefully reflects the result we will see, especially if the value of the services the broker brings to the marketplace is allowed to be recognized.
Thanks.
Ann H. said
I didn’t know about these facts, Alan, and thank-you for telling us. But even before I read this, I can tell you that I wasn’t overwhelmingly disappointed that broker commissions were not removed from the MLR.
I guess there are 2 reasons. First, I expected it, so I’ve already crossed the bridge of disappointment and even fear. On 3/23/2010 when President Obama signed the law, I realized that my commission would be squeezed, and my business would suffer in other ways including a reduction in the number of carriers, frustration of my clients, higher premiums that puts further pressure on my book of business and so forth. I guess I’ve already dealt with this emotionally and logically.
The second reason today’s news about broker commissions didn’t affect me much is because there are other factors involved. One of my carrier reps said this to me several months ago — he said, “Half of the commission rate on double the premium is still the same amount of income.” He also said, “half the commission rate on twice the clientelle with half the work due to guaranteed issue is still the same income.” And he also told me that the insurance company he works for was planning to keep premiums and expenses at much the same rate as they had done before anyway. He said that once 2011 is over and the accounting is done, if they find that they must make rebates to customers, then they will rebate. But they aren’t going to freak out now.
I think, “don’t freak out yet” is a good idea. Another of my carriers told me that they aren’t going to make major changes in business practices until the election is over, and they’ve analyzed the result. And even then, they expect more modifications to the rules on the national and state level. They don’t want to make drastic changes now that affect their position in the market, their position with brokers, and their public relations. They said 90% of their business is driven by brokers, and they can’t afford to replace the workload brokers provide for that 90%. They would actually survive better by paying a rebate than by manning and maintaining workers to replace brokers, then watching their backside for loss of sales due to the deletion of sales brokers.
Cutting broker’s commissions is a balance walk. If one carrier cuts deeper than others, sales may severely diminish for that carrier. Carriers can’t afford to lose fresh input of new customers and be left with an aging risk pool!! I’m not saying broker commissions won’t suffer. They will. But to what extent they suffer is an important issue. And how long the commissions will be at the floor before economic realities make them rise is another issue. I remember when group commissions were cut from 10% level to the 4-6% they are now. It came at the same time as the HIPAA laws with Portability and Guaranteed Issue for groups. Premiums spiked, commission percentages decreased, but after the initial drastic dip it all equalized to be the same amount of income.
There are other balance walks insurers must make. If brokers go out of business, who will service the client? Some NAIC commissioners said they expect their consumer complaint departments to have triple the amount of work if brokers aren’t fielding questions and finding resolutions. That’s what the States think. How about insurers? What strain will there be on insurance company customer service departments if brokers leave the business? How will insurers pay for the administrative expense of those customer service departments when they must meet 80% MLR? Isn’t a larger customer service department just as expensive as broker commissions, and don’t they both affect the MLR? Another thing to think about is quality of service. If an insurer cannot compete based on underwriting, or creative benefit structures, or even premium outside a specified range controlled by the govt., then competition on the basis of quality of service is paramount. The amount of money an insurer has to spend on it’s administration and customer service departments is squeezed by the MLR. Will our insurers’ service departments be manned in India or the Phillipines? The need for brokers is actually larger now than ever. Maintaining Service Departments is a fixed expense of wages, benefits, office space, overhead and taxes. If insurers were able to replace us with in-house service departments they would have done it a long time ago, trust me. We are less expensive.
Granted, not every broker can survive the dip that will come until things equalize again. The dip may be drastic, especially in some markets. But if you can see past the temporary into the inevitable, you can see light. Some of the things in the PPACA are just not functionally possible. It’s inevitable that the functionally impossible will fail and a solution will rise.