The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Broker Testimony Before NAIC Concerning MLR and Commissions

Posted by Alan on March 23, 2011


The National Association of Insurance Commissioners will be meeting in Austin, Texas this week to consider a number of issues related to the Patient Protection and Affordable Care Act. One topic will be how the medical loss ratio provisions of the health care reform bill impacts brokers and consumers. A coalition of broker organizations will be testifying this Sunday urging the NAIC to move forward with a proposal to exempt producer compensation from the MLR calculation.

The MLR targets (individual and small group carriers must spend 80% of premiums received on claims or health quality efforts; large group carriers must spend 85%) is a critical part of the PPACA’s scheme to “bend the cost curve” when it comes to premiums (never mind that the biggest driver of premium rates is the cost of medical care). Limiting the amount of premium dollars insurers can devote to administration and profit, supporters believe, will result in reduced insurance rates. Also, since the PPACA requires all consumers to obtain health insurance coverage the medical loss ratio rules are designed to prevent carriers from gaining an undeserved financial windfall.

Significantly, exempting broker commissions does not run contrary to either purpose. The legislation being considered by the NAIC will still limit the percentage of premiums carriers can spend on administration and profit – and to a greater degree than most state measures addressing MLR targets do today. In addition, carriers will still need to aware of the total cost of their policies – including broker compensation. From a consumer’s point of view, the total cost of coverage will be the carrier’s premium and the broker’s commission. Carriers will be unwilling to go to market with a total cost that is uncompetitive because of overly generous broker commissions. This is one, but not the only reason, broker commissions are unlikely to return to where they were before the passage of the PPACA even if broker compensation is removed from the MLR formula. That broker commissions should increase at the rate of medical inflation, as opposed to general inflation, for example, is hard to justify when medical inflation is increasing at twice the rate of increases to the Consumer Price Index. But this change will — and should — be driven by market forces, not arbitrary limits set by Congress.

The NAIC proposal is also consistent with the purpose of the PPACA’s approach to MLRs because, as I wrote last summer, exempting commissions from the medical loss ratio may actually reduce overall administrative costs in the system. Carriers today aggregate broker compensation from small groups and individuals then pass 100 percent of these dollars onto independent third parties, retaining none of it for themselves. This reduces paperwork costs for hundreds of thousands of brokers, businesses and families and is a cost-saving measure that should be encouraged by the PPACA.

Not everyone sees it this way, of course. The American Medical Association, consumer groups and some Democratic legislators have urged the NAIC to keep the medical loss ratio calculation put in place by the Department of Health and Human Services (with input from the NAIC) as is. On the other hand, a bipartisan group in the House of Representatives has introduced HR 1206 to remove broker compensation from the formula used to determine a carrier’s MLR.

The broker coalition, comprised of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, the Council of Insurance Agents & Brokers, and the Independent Insurance Agents and Brokers of America, was asked by the NAIC to present their views at Sunday’s hearing on the NAIC medical loss ratio proposal. Significantly, they were told there was no need to talk about the value brokers add to America’s health insurance system – this value was already recognized and appreciated by the Insurance Commissioners. Instead they were asked to focus on the economic impact of the MLR provisions as currently being implemented.

In a letter to NAIC from the Agent-Broker Alliance reports on a study that shows 25 percent of brokers surveyed are reporting business income reductions for individual and small group sales of 21-to-50 percent with another 25 percent describing losses at between 11 and 20 percent. The result is that brokers are leaving these markets, reducing the availability of their expertise to consumers just when the complexity of health care reform makes this expertise more critical than ever.

Past NAHU president Beth Ashmore will be providing testimony at the Sunday NAIC hearing. As a long-time Texas broker she will be able to provide Commissioners with a glimpse into how the “theory” of the PPACA is revealing itself in practical terms.

The NAIC has no vote in Congress, but they do have significant influence, especially to the extent the NAIC vote in favor of changing the MLR calculation is bipartisan. If they support exempting broker commissions it will give considerable momentum to efforts bills such as HR 1206. The legislative process takes time so there will be no quick fix. The key is to keep initiatives moving forward down the path. The NAIC meeting is a milestone along the way.

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6 Responses to “Broker Testimony Before NAIC Concerning MLR and Commissions”

  1. Jim McGregor said

    As you all know by now the NAIC failed to agree on the MLR/Commission issue. That said it has been put off for another 4 weeks. It does not kill the bill, but it does slow things down if they do not support it. If commissions continue to be cut furhter; my advice is to refer those seeking help to the Consumer Watchdog group that thinks we should be a charity, and or government. They can’t expect us to help with this process at a loss. Alot of agencies are seking to drop health insurance in favor of diverting resources to more profitable lines of coverage. This too will translate into lost jobs. I sincerely hope there are enough Democrats in the Senate to support this legislation… In the 90’s when the indivudal market dried up as a result of legislation in Washington; I fought back by referrring those who inquired about coverage to our local state House and Senate representatives for a quote. For a time there was a moritorium on indivividual coverage, and this and other actions forced changes to the law.

  2. It bothers me that the AMA is so against agents & brokers. Agents & Brokers are NOT the reason for the high health care costs and make up such a small part of the entire premium. If they are so concerned about lowing the cost of health care, they need to look in the mirror. Agents & brokers are the reason 90% of Americans have health coverage!

  3. Bob McNett said

    It will be great if the NAIC does recommend that broker compensation is removed from the MLR. But I remember not too long ago that, during the NAIC’s meeting on PPACA, we heard a lot of verbal support amongst commissioners for agents. Then, when a vote was expected on removing commissions from MLR, the DHS apparently put their finger in, and suddenly the NAIC backed down and issued a statement that it did not have the “legal authority” to recommend this.

    I remember thinking that this seemed fishy at the time, and then some weeks later read that DHS had entered into the fray at the last minute and caused NAIC to back down.

    It’s hard to know the truth of this, or the whole story, but hopefully we don’t see the same result from NAIC this time.

    • Alan said

      Actually Bob, the support at the NAIC was more than just verbal. There was a majority of commissioners who supported removing broker commissions from the medical loss ratio formula. The problem was that their lawyers said they had no authority to make that recommendation since distribution costs are specifically cited in the PPACA as administrative expenses. That’s why legislation is needed — the PPACA needs to be amended for this change to take place.

  4. Cynthia Fichtner said

    If the commission is not part of the MLR, it will be shown separately. Insurance companies will then have two premium rates. One for those who use an agent and a lower one for direct sales. This will provide an incentive for the public to game the system by getting assistance from brokers. Then going online to sign up at the lower rate.

    • Alan said

      Cynthia, you may be right in predicting two different cost structures, but I don’t think carriers are likely to take that route. It’s far easier for all concerned to simply identify the amount designated as commission, but to charge the same fee regardless of sales channel.

      If they do go down your path, however, there’s reason to think that consumers will pay the extra amount for having independent brokers available to them (remember, our commissions are not just for selling products, but for servicing them, too). In California, a state program referred to as the HIPC did exactly what you described. Yet two-thirds of the small businesses enrolling in that purchasing pool chose to pay the extra five percent and bought coverage through a broker. The trend was so strong that the HIPC (or it’s successor, I forget the timing) eventually just built the commissions into the rate.

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