The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Health Insurance Exchanges Unlikely to Eliminate Brokers

Posted by Alan on July 14, 2009

The idea of connectors, exchanges, gateways and purchasing pools are far more than a fad, they’ve been around far too long. A purchasing pool was central to the Clinton Administration health care reform effort in the 1990s. They have been enacted in several states (although the California version, created in 1993, has since gone out-of-business). And they enjoy strong support across the political spectrum. That something akin to a connector, gateway, exchange or purchasing pool will be a part of whatever health care reform emerges from Congress this year is all but a certainty.

As with most concepts, the devil takes up residence in the details. Connectors, exchanges, gateways and purchasing pools are no exception. And it starts with what they’re called. There are technical differences among them, but for most purposes, especially political purposes, the distinctions are meaningless. So for simplicity sake, we’ll refer to all of them as exchanges.

What they are called, however, is unimportant. What matters is what they do and how they do it. I caused quite a few brokers some heart burn yesterday when, in passing, I wrote of exchanges “depending on how these are structured the only impact they may have is to crush innovation and eliminate brokers from the system.”  Insurance producers, quite reasonably, were concerned to read of this possibility.  So let me be clear: The bad news is that possibility is real. The good is that the possibility is far from certain.

Exchanges mean different things to different people. Some see them as replacing the chaos of an open marketplace with the structure of a regulator, controlled and confined market space. All health insurance products would be sold through the exchange. All health insurance carriers would be required to negotiate with the exchange concerning pricing and benefits. All information would be presented in a standard format with complete transparency being the ultimate goal. Carriers would compete solely on service and pricing. Consumers would come to the exchange to purchase their coverage. If they have questions they call or email an exchange employee. No independent brokers needed or wanted.

This kind of purchasing pool was central to the “managed competition” model of the Clinton Administration health care reforms. Fortunately for consumers and their brokers, this extreme exchange is unlikely to be a part of the final health care reform package.

At the other end of the spectrum is an exchange as an online information source. Think Orbitz, eHealth, Priceline or the like. The exchange does not negotiate with carriers nor does it set prices or benefits. It merely provides information about the benefit plans available in a region in simple, standard language. Consumers come to the site to research their options. If they have questions, and the sites online FAQs don’t suffice, the exchange lists resources local to the consumer – including and, maybe especially, independent brokers.

This kind of info-exchange is the least expensive for the government to maintain and the least disruptive of current distribution channels. There is a chance this is the kind of exchange will be a part of the final reform plan.

Odds are, however, what will be part of the final package will fall somewhere closer to the middle of the spectrum. The ultimate exchange will certainly provide side-by-side comparisons of various plans available in a local area. The insurance carriers have already expressed interest in establishing standard terminology and even common enrollment forms so this function will likely be non-controversial. The broad consensus seems to be that health plans should be available to consumers and employers outside of the exchange so there will be alternatives to the exchange. What’s not clear yet is whether the exchange will be given advantages. For example, Congress could decide premium subsidies will be available only to individuals buying coverage through the exchange.

Thanks in large part to the hard work of Janet Trautwein and her team at the National Association of Health Underwriters, brokers are highly likely to be explicitly permitted to sell products inside the exchange. The Senate Health, Education, Labor and Pensions Committee is refining their legislation which includes a “gateway.” This morning they accepted an amendment offered by Senator Orrin Hatch specifically identifying brokers as eligible to sell products within the gateway. Considering the Senate HELP Committee is staking out the most liberal position in the Senate, this is an important and significant development.

What has been most surprising – and disappointing – is the wide spread belief that the mere existence of an exchange will make it so easy for consumers to select the right health plan for their needs that anyone can assist them. Even conservative Republicans have put forward a proposal that would allow consumers to purchase coverage from their state’s Department of Motor Vehicles.  (The Hatch amendment does require entities selling within the exchange to be “licensed if appropriate.”) This reflects in part a political reality: if exchanges are to be worthwhile they need to reduce the cost of coverage somehow. One way to do that is to reduce the cost of distribution.

While it is true standardizing terminology will make health insurance coverage easier for consumers and employers to understand that doesn’t mean genuine expertise isn’t needed. We’re not talking about books sold on Amazon. You buy the wrong book and you’re out a few bucks and some time. Buy the wrong health insurance and your health and financial security is in jeopardy.

Even in Congress there is an understanding that one size does not fit all consumers. If your health insurance doesn’t fit you can’t take it to a tailor for adjustments. You live with your choices for some time. Orbitz may be a great way to compare the cost of air fare just as an exchange may make comparing the price of health plans easier. Data concerning health care is already easy to come by and an exchange may make it even more accessible. But data is not knowledge. That requires expertise and a deep understanding of the market. Which carrier is having service problems? What specifically does a particular consumer need from their coverage. What factors should be considered to assure the consumer is receiving the highest value for their premium dollars? The clerk at the DMV may be very bright and eager to help, but is unlikely to have the knowledge to provide meaningful advice. Qualified, licensed and professional brokers do.

What does this mean for brokers? First, those who are simply pushing paper, who fail to listen to their clients and provide expertise, who are adding no value to the products they sell will be out of business sooner rather than later. The exchange will see to that.

For brokers who add value, however, there should be a bright future. Their compensation will change, especially if all Americans are required to have basic insurance coverage. Fees may supplant, or at least stand alongside, premium-based commissions. As long as there are real options available to consumers in a competitive market place, there will be a need for advisor, counselors and advocates. There will be a need for expertise. Brokers who play these roles and who perform the alchemy of turning data into knowledge will prosper, even if new distribution channels are created by reform.

The market pays for value. Brokers deliver value. The existence of a health insurance does not, of itself, change this legitimate dynamic. Nor should it. The key will be what kind of exchange is created. It doesn’t matter what it’s called. What matters is what it does – and how it does it.


14 Responses to “Health Insurance Exchanges Unlikely to Eliminate Brokers”

  1. don said

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  2. Basically, i think if the exchange helps reduce administration costs, it should be implimented. The goals should really be to reduce cost and improve coverage. If at the end of implimenting an exchange system, are problems are the same or other nature and the cost benefits are not attained, we might as well move on. Producers should not be too scared of the exchange system. Like it was said above in one of the comments, there will be huge market waiting to get insured once the public health care option is introduced.

  3. Hi Alan,
    I’m a 31 year veteran of the benefits industry. I have been reading through Chairman’s Mark (Baucus) proposal. My firm provides web based small group procurement and administration to 3500 small employers (2-50) in Pennsylvania and New York. Our patented application allows employers (or licensed producers) to obtain multiple group health, dental,vision, Flex, Life, Disability proposals/rates online in seconds. Our solution allows the user to shop multiple carriers and plans, complete group applications online, enroll new hires, make life event/ address changes and receive a consolidated, multiple carrier premium invoice. Single entry for multiple plans and secure employee data (EDI 834) carrier feeds. No paper whatsoever.I noticed on page 16 of the Chairman’s Mark proposal that Multiple Insurance Exchanges could be permitted to operate an independent “exchange”.
    How realistic is it to believe a firm such as ours could meet the Federal requirements to establish and operate an independent exchange?
    Thanks for the great info on your site….
    Roger Howell

  4. James Bertsch said

    It seems everyone is missing a very critical point. The exchange in-and-of-itself will not alter the problem that Obama keeps reiterating (i.e.,our health care system delivers quantity of care not quality of care). The exchange can be constructed to revolutionize health care or to simply maintain the status quo.

    When doctors get paid for treating patients and pharmaceutical companies get paid for every pill they produce, the doctors and pharmaceuticals will deliver quantity not quality. Doctors will deliver more tests and pharmaceuticals will deliver more medications without any associated health benefits. Our fee-for-service and pay-per-pill payment system can and must be changed in order for us to deliver on Obama’s promise of quality of care rather than quantity of care.

    Developing guidelines for best practices will be useful for delivering better care but it does not address the incentives which remain the same. Treat, treat and treat some more. The exchange can be set up to sell any health care product not just insurance. Brokers, health care providers and medication producers and equipment producers can all sell their products online. There is no reason why the exchange can’t be auction based like eBay.

    The buyer will have to abide by any laws that govern the transactions (e.g., prescriptions for medications), but otherwise he will be unqualified. Like eBay you have the money you get the product. The key is the product itself. No product on the exchange may ever sell based on quantity. Doctors could sell visiting rights for x years but not for x visits. Pharmaceuticals could sell medication licenses for x years but not x pills. Insurance products would be sold much the way they are today except there would never be a copay of any kind built-in to the product. Your insurance is a one-time purchase (it could have an expiration date), that could offer different payment options (like buying a car). You would still be able to get your insurance through your employer like you do today. The employer would purchase the insurance product on the exchange not the employee.

    If all health care products are sold through the exchange, then this payment structure is easily enforced. By eliminating fee-for-service and pay-per-pill the incentives shift to providing quality of care not quantity of care. Best practices become more than a good idea, they become a means to make more money.

  5. Bernard DiFiore said

    The key variable for a brokers’ survival is compensation. Current legisaltion caps exchange revenue at 4% of premium. If you use the Mass. model, which is what every one is using, there is no room for broker compensation. (and in fact the Mass. Connector is losing money at 4%.) So how does a broker survive if all subsidized plans are purchased through the state owned exchange and brokers are not adequately compensated for their work?

  6. Allen H said

    Alan-Great job-thanks. As a broker that speclializes in small group, individual as well as Med65 plans, I am quite scared what the future will hold for my business. We need the public plan to be crushed or watered down dramatically. Odds-50-50. We need to be able to sell in the exchange. Odds- 50-50. If these two situations occur, as brokers, we should be OK. Yes, our comp will be reduced by at least half. But we will also have a new pool of consumers that will now be required to purchased coverage.
    Agents that do small business/individual well, I see the following:
    50% chance business gets destroyed
    25% chance business suffers, but able to scratch out a living
    15% chance business is unaffected
    10% chance busniess will grow.
    In summary, we need some luck and if that occurs, I think we’ll end up being OK. Any thoughts??

  7. Today, 1200 agents and brokers from 49 states descended upon The Hill with over 400 meetings with our legislators. I was part of a contingent of a half dozen colleagues. All day we met with aides to key players in the bill, including Speaker Pelosi’s staff.

    We echoed NAHU’s position, and most importantly the critical role the agent/broker plays in the delivery of health insurance.

    Call your State Representatives and Senators now and respectfully voice your position. Ask your clients to do the same.

    Then hope for the best, but as they say, plan for the worst.

  8. Rick said

    I can just see it now, as the electrical contractor with 6 employees takes his info to the DMV and enrolls his employees, then goes back and explains the coverage to those employees. Talk about increasing the cost of his health care! Think of what this would cost him due to his lost work time and loss of supervising his employees on the job.

    These Washington politicians, their staff and bureaucrats, are so insulated from the actual world it’s scary.

  9. Jill said

    Personally, I believe that President Obama should implement a “Health Stimulus Plan”. I am working on writing various legislative bodies, to raise awareness on workplace discrimination relative to weight/size. How does this tie into the Healthcare Reform?

    With obesity being on the rise from already epidemic proportions, something needs to be done that will assist insurance companies, employers and the general public. Weight is not a disability in itself but can lead to secondary conditions which may be lead to disability. Obviously, the current system is not working; instead of helping people work on weight issues, we are trying to tax them, pushing them farther behind the eight ball.

    This is a very tough predicament to be put in. Healthy foods do cost more than others, gym memberships and exercise classes also cost money. For those on very restricted budgets, these obstacles need be factored into the equation. Understanding that people want a “miracle pill” or cure, statistics show that the healthiest way to lose weight is with dedication to exercise and a good diet.

    My proposal: Why doesn’t the government develop a “Health Stimulus Plan”, that will give every household, or single person who files their taxes, a token amount which can only be used for gym memberships, exercise programs, or even towards a weight loss program such as Nutrisystem, Jennycraig, Weight Watchers, etc. This is not an impossible task; they could issue debit-style cards to ensure fund usage remains in line with the “Health Stimulus Plan” guidelines. Once the card has arrived, they could also track the success/fail rate, via registering a profile online; a diet diary of sorts. The site could have tips, recipes, all types of information to assist those working on their weight.

    To me, this beats any pill and dishing out billions of dollars to companies who in turn, do nothing to help the public. This type of stimulus would provide an opportunity to hundreds of thousands of Americans who may have always wanted to be able to participate in this type of weight loss program, but could otherwise not afford to.

    We, as a population that is suppose to lead the world, needs to do more than just blat about helping the obesity epidemic which costs the government and other associated industries an astronomical amount of money each year. Ultimately, the goal would be a win-win situation: it would stimulate the economy (increase gym memberships, fitness organizations, trainers, etc.), as well as reduce healthcare costs for those who struggle with a weight problem, and take the financial strain off of taxpayers, facilities, and healthcare providers, who have to carry the burden of unpaid medical bills.

    For more information, please feel free to visit my blog: I also have posted a three segment video on YouTube what I had experienced. To view the videos, visit YouTube and search for my channel: EnvisionRevision.

    • Mark Goodman said

      As a left leaning democrat I don’t expect Washington to do everything for everyone. Citizens have no incentive from what you described. Part of health care reform should deal with lifestyle issues such as obesity. Limiting treatment to those who have ignored the obvious is less costly to health care and may carry a stronger incentive.

      • Jill said

        Yes, incentive would be derived from the type of stimulus that I explained in the prior post. The problem is (something that I am trying to do), is to educate the public that obesity is not all behavioral (i.e. overeating, emotional eating, being lazy), a large part of the problem has to do with physical medical problems and medications.

        By opening doors to those who cannot afford exercise programs, gym memberships, (I know there are many via my research), etc., is a valuable tool to help this epidemic. Again, the point with my “Health Stimulus” is limiting what the funds can be used for by using something such as a debit card, instead of a sending a check. If it does not get used (i.e. deducted from that card), the government keeps the money. I am pretty confident that many would utilize this to better their overall health situation and to combat weight problems.

        • Dede K-S said

          As a broker concerned with the cost of insurance at the level of cause, I am focusing my energy on transitioning my clients from knowledge to action.

          There is a tremendous amount of information that is not being used by many who have the knowledge and financial ability. How many gym memberships never get used? How many recipes go unmade? How many portion control devices remain in the drawer? How many walks are never taken, or DVD’s popped into the player and exercises followed along with?

          So in the area of wellness, as I see it, it is a question of how do we get people out of inertia and into action? What motivates and creates action over the long term? It must contain both a carrot and a stick. I am seeking out what’s working so I can bring that to bear for my clients and myself.

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