The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Health Insurance Brokers Aren’t Travel Agents

Posted by Alan on August 18, 2009

There was a time when most travel, whether a short hop or a complicated itinerary, was handled by travel agents. Then came the Internet and sites like Expedia, Travelocity and the rest. There are a lot fewer people making a living selling airline tickets now days.

While it’s not clear yet what kind of health insurance exchange will emerge from the current health care reform debate, that whatever legislation passes will include such an animal is a certainty. The concept of  “an Expedia for health insurance,” as some have described these Exchanges, has broad bi-partisan support.

Does this mean health insurance agents are likely to go the way of travel agents, relegated to only the most complex situations and, if compensated at all for more routine situations, paid barely enough to pay the phone bill let alone Errors & Omissions insurance premiums?

Some comments to my previous post seem to think so, but I say, “probably not.”

The legislative process is a lot like a jury trial: any outcome is possible. The likely outcome, however, is that brokers will continue to be part of whatever new health care system emerges. 

When I look a the impact of the Internet on distribution systems, a handful of factors seem to determine if the web will eliminate middle men. Let’s call this Katz’s Theory of Disintermediation.

The Theory holds that whether the Internet will eliminate distribution intermediaries depends on the interplay of six factors of the product or service being sold,  specifically how:

  1. complex the product or service is to consumers
  2. frequently the product or service is purchased
  3. personal and critical the product or service is to consumers
  4. expensive is the product or service
  5. much on-site service is required to install or use the product or service
  6. easily a description of the product or service can be digitized.

Here’s some examples of how the Theory works.

Books:  Books are pretty simple. Everyone knows what they are and how they work. Most people who buy books buy them on a regular basis. Books are rarely personal or critical (unless we’re talking about the final installment of Harry Potter) and they’re relatively inexpensive. Books aren’t “local,” but information about them is easily digitized. Given these factors one would expect online book sellers like Amazon to dominate the market and it does. The niche reserved for brick and mortar book sellers is where advice, impulse or convenience are involved (best provided locally).

Travel: Booking a direct trip from one city to another is pretty straightforward and most travelers are comfortable with their own expertise. Travel can be expensive and getting there can be important, but getting it wrong by, for example, overpaying, is rarely devastating from a financial perspective. And while the traveler pays more than she should she still gets where she’s going. Travel is not consumed or installed locally. So the Theory would expect routine travel to migrate online. Complex travel, however, is different. Multiple destination points or several hotels and rental cars to arrange and the incentive to work with an expert increases. When a family is planning it’s one big vacation the importance of getting it right increases. Not surprisingly, travel agents still are commonly  used for these complicated itineraries or critical travel events.

Health Insurance: Health insurance is extremely complicated. Just ask someone  to explain the meaning of “co-insurance” or “formulary.” People shop for coverage rarely — perhaps once a year or three times a decade. Health insurance is expensive and  it’s important to make the right decision. Your own health and financial security is at stake. If you’re an employer, you’re taking on the responsibility of making the right decision for your work force. At the same time, there’s no need to purchase health insurance locally and descriptions of rates and benefits are easily presented in a digital format. Given these factors one would expect consumers to seek expert advice — and they do. Yes, an increasing number of individual policies are being purchased online, but these buyers often consult a broker before making the final decision. And virtually all coverage purchased by small business owners is through a broker. Even if the Exchange presents information about policies in a standardized format, many if not most purchasers will seek guidance from a licensed and qualified counselor — in other words, from a broker. That’s what happened in California when the state created a purchasing pool. More than 65 percent of small business owners buying through the pool did so through brokers, even though it cost them more to do so.

Of course, there are some brokers who are simply sales mills, offering the same solution to every client. They add little value to the products they sell and offer no expertise. They can be, and should be, put out of business by the Internet.

This Theory of Disintermediation can’t predict what will happen to broker compensation. It may become fee based, it may be based on a per-capita fee, or it may stay premium based. But it does suggest that, unless lawmakers create artificial barriers, there will continue to be a role for brokers who deliver expertise to their clients.


16 Responses to “Health Insurance Brokers Aren’t Travel Agents”

  1. Joe said

    I find it laughable to hear the Democrats say they need an insurance exchange to ensure “competition” among insurers. I guess they must think insurance companies are all in some type of price fixing conspiracy with each other. From what I can see they are all trying to beat each other’s brains in.

    The major problem is American if fat, and getting fatter. Obesity is a major issue along with the terrible American diet.

    If there were no claims then the insurance could cost $10 per month, but obviously people do have claims. People’s bodies don’t care what kind of health plan they have either. If they are going to get cancer, or heart problems they will have that health issue whether they have an HMO or PPO.

    • President Obama made the point that relatively small numbers of insurers dominate in different regions of the country. I think he said that in Alabama, for instance, one insurer covered some very high percentage of everyone in the state–maybe upwards of 91 percent.

      I am sure there are areas where a multitude of well-established insurers jockey about for market share based on great service and low costs. My area in western PA is not one of these. Highmark BC/BS and UPMC dominate, and probably do compete with some rapacity for business markets, but as a self-employed individual, I see no evidence whatsoever that they are trying to woo my busines. Precisely the opposite. If you apply for coverage from one, and get turned down because of a pre-existing condition like statin use, and you fail to disclose this to the next company you apply to, it becomes grounds for recision.

      Obesity is a very complex problem with a myriad neurochemical and hormonal feedback loops that have evolved to keep our hominid ancestors alive during famines. Natural selection has not had time to weed out those who are poorly adapted to an altogether novel environmental danger: plentiful seductive foodstuffs that require virtually no physical work to secure.

      Like everything, I suppose, there is the easy answer that makes the ignorant blowhards of the world feel righteous (“Eat less, you fat pig!”) and there is the much more difficult answer that yields not quick solutions–i.e., we are designed to engorge ourselves when food is plentiful and take a nap, the exact opposite of the best current advice: exercise hard and restrict calories severely.

  2. People may not realize the value added by health insurance professionals until they are gone. Even though we run most of our business through the internet, very little insurance is purchased without our assistance first. Clients want to know what they are purchasing and many do not simply purchase the cheapest policy. That’s like buying a car with the fewest safety features. It’s just not a good idea. We are a valuable resource to our clients and do our very best to help our clients purchase insurance that will help them in the long run.

  3. Rick B said

    The idea of insurance company executives pulling the plug on Grandma is ridiculous. The consumer of health insurance is protected by a legal document called a policy, or contract. If the insurance company illegally breaks its contract and pulls the plug on Grandma it gets sued. Insurance companies always lose in those circumstances, and generally are villified by the media. It is bad business in the long run to break your promises, you lose customers.

    Speaking globally…free markets protect consumers in the long run. Insurance companies who don’t meet their obligations, or pay their executives excessive salaries eventually go out of business, or change their ways. The free market sees to it.

    On the other hand if the government is running health care who would then be the watch dog. We would have the fox running the hen house. If the government wants to change your health plan, they just vote in a new law. If they want to pay the doctors less, they just vote in lower fees. No legal contracts to bar them from doing anything they want once they have control.

    Those who state they want profits out of health care are simply repeating the democrats talking points. They are ill informed about market economies, and how they work. Can anyone give me one example of the government taking over something from the private sector and doing it better? Fannie Mae, Freddie Mac, Amtrak, Post office, Social Security, and Medicare are all billions in debt and would be out of business if it weren’t for the cost shifting to private business and tax payers.

    We need health care reform, but it needs to be market driven for a sustainable solution. Don’t take my word for it, or some politicians. As a people we need to start thinking for ourselves. We all enjoy a permanent 30% higher standard of living than Europeans for the simple reason we have a market based economy.

    • stevo said

      I am 99.9% sure that we cannot leave the future of healthcare up to private insurance companies or the agents who represent them. If you are in the decade club then please disregard my next statement. It is the drifting agent who before last week couldn’t spell insurance who is the detriment to good health care reform for the open market insurer.

      We are buying insurance from mostly fly by night agents who have no more training than the 5 day seminar they graduated from. This is the person who controls the decision of the insurance company and who presumes to represent our needs as the insured public. As an ex insurance executive I can tell you that this person will do anything for a commission, and most companies prey on that fact. They are trained in a way that uses their ignorance of the industry against the customer to optimize sales.

      I know there are good agents who wish only the best for their clients but they are a dying breed who practices an unpopular method of producer growth best practices.

      What we need is an across the board Medicaid style health program run by each state but backed by the fed. It would allow each person based on income to qualify for a zero to fifty dollar per visit co-payment for no questions asked healthcare. No pre-existing conditions and no waiting periods. If you need to go to the doctor then go, pay your co-pay if applicable and then go home. I also add that all prescription drugs should be flat rated and free to the public. I think if you are given a prescription then the cost of the medication should be considered part of your doctor visit. I think that it would be beneficial to the patient if doctors and pharmacists were in close proximity and in the future I hope that they will share offices.

      This would eliminate the greed that now controls the healthcare market. Consumers have been suffering and require immediate relief. Bickering won’t solve this problem.

      • I just don’t think these guys want to hear anything that counters their pre-established views.

        Market-based economies can work well for some things, but they are far from ideal for every human need.

        If all of health care were like cosmetic surgery or Lasik vision correction, i.e., rarely if ever covered by insurance, then yes, the markets do drive down prices well. Patients desiring a boob job, for instance, have to balance what this is worth to them. Doctors have to balance how little they are willing to charge to make it worth doing. Eventually, you get boob job clinics that crank out perkiness like an assembly line, lowering unit costs per rack, allowing an enterprising boober to make up on sheer volume what he is lacking in price per procedure. Lower prices make boob jobs more enticing to more women. Pretty soon, the modern world has become a frotteur’s paradise.

        The market has worked well here.

        Now let us examine a couple whose child has leukemia. Are they going to price shop for the best deal? Are they going to decide that getting their kid treated is not worth it? Maybe wait till the price comes down and hope the kid is still alive when it does?

        Obviously not. Medicine is not always about buying boobs. It’s not always about making a rational decision for your own health. People in extremis are terrified and in no way able to act in the rational market consumer mode. To say that medicine is just another industry demeans not only doctors and nurses but people as well.

        Why must we be so bamboozled into believing only black and white answers are the way to go? We’ve tried unfettered market approaches before. It didn’t work with laissez faire capitalism; it didn’t work with Bush-Cheney; it will never work, except for the very top echelons, because greed concentrates itself, monopolies form, trade is restrained, and decisions are goaded by psychological forces that have nothing to do with pure economic self interest.

        If you believe this, why not open up kidney sales to the highest bidder? Why prevent reimportation of drugs from Canada and Mexico? Why even bother with an FDA?

        Stevo says he was in the health insurance industry and that he saw how the brokers, at least at his company, received minimal training and plenty of incentives to churn new policies out. Are you saying he is lying? That every broker out there has Alan’s expertise and ethical perspective?

        Nothing’s all good or all bad. Nothing!

        I can understand that you guys want to hang on to your jobs, and that the prospect of an exchange that would make health insurers use the same, understandable language to explain, not obfuscate, their contracts could possibly imperil one of the major goods you deliver. But for god’s sakes, step outside of yourselves for a second and realize that there are other jobs out there. But for people being f****d by the current system, and I am one of them, it’s just not working.

  4. joe said

    Here’s an article about Candians coming to the US for health care:

  5. besthealthcarerates said

    Good article, but I worry that on the far side of reform; the role of the broker cannot be justified, by using conditions that are present today. It is I believe more a battle for political dominance than anything else. The insurance industry is a very big contributor to the Republican Party; with that support greatly reduced the democrats win big!

    I do believe that there is a role for brokers, as in most industries; a distribution system that allows consumers to compare products side-by-side is needed. Buying health insurance is of course a critical decision whether buying family health insurance or group health insurance. But if the reform bill mandates that all health benefit plans offer the same basic benefits, then the role for the broker is reduced. The big players in the online medical insurance business will benefit, but I think we will see the demise of the small agencies.

    • JimK said

      I believe the current proposals call for minimum benefits, the Bills set a floor not a ceiling. I don’t think this would affect the basic business of an Insurance Broker, in fact with the current Bills calling for mandatory coverage I would think most Insurance Brokers would actually benefit.

  6. Alison said

    Might I add that we actually negotiate the cost DOWN by presenting competitive data from many different sources. We also assist people in cutting through all of the difficulty involved in appealing procedures, getting claims paid, assisting with the correction of administration errors that have liability to the employer and could result in risk to both the employee and the employer that can be financially devastating. Perhaps a great example would be an employer that failed to add a child on with the correct paperwork in the given time frame. The child ended up having open heart surgery one week AFTER the paperwork was due and had 200,000 worth of bills. I am wondering who might call back from a 1-800 number to jump right on helping this employer/employee ? To have the desire to do whatever it takes to assist this person ?

  7. If you don’t think you need a broker then try buying health insurance on your own. My clients rely on me at the time of purchase and in acting as an intermediary for all client service issues like issuing a new card, dropping or adding someone to the policy, etc. My clients don’t have time to shop the internet. They trust me to give them the bottom line. I listen intently to what they are needing and then give them the options that fit their priorities. My clients make the buying decision but I facilitate the process to save them the time and headache of shopping. Brokers add value to the system because we save our clients money with a service that is free of charge.

    If there are underwriting concerns, as brokers, we have access to underwriting guidelines for the different health insurance companies. I met with a Congressman tonight who told me that Congress wants to point their finger at someone for blame- the insurance companies- the health insurance broker. As he put it, “the boogey man”. We are not the boogey man- we operate within the system to HELP our clients- We provide a free service to the public-even those who might not be shopping. I have spent hours on the phone educating clients on benefits even if they were not ready to buy.

    Who BETTER knows how the health insurance companies work and operate and underwrite than the health insurance broker? In my opinion, the independent health insurance broker is the most IMPORTANT commodity that our buying public has in purchasing health insurance and in finding the best deal. People complain about premiums going up – Call a health insurance broker- build a relationship with a licensed professional to do the leg work for you in presenting affordable options. Nothing is wrong with a marketplace built upon competition and free enterprise and with a free service that can provide guidance into something as IMPORTANT as protecting the health of your loved ones or in protecting your financial assets against the high cost of medical bills.

    If President Obama wants choice and competition- I ask you,
    “Do you have the time to study all of the plans, benefits, and options to make the best purchasing decision or would you rather work with a professional who will work as your advocate free of charge?

    • J Williams said

      It sounds like you don’t want competition at least in health care or YOUR industry.
      My guess is if we could go back and talk to a henchmen who pulled the lever on the guillotine during the French Revolution they could make some great arguments why wealthy aristocats should continue to go under the guillotine.
      I believe health care is a moral problem and life and death situations should not be for profit!

      • Alison said

        That is why when a husband failed to pay his life insurance bill for the company he owned I worked for three months to appeal an insurance company to pay the wife after he passed away suddenly. She lost everything in one day as he was the primary earner in the business. We succeeded in helping her and she was able to take care of her responsibilities and her children. It is also why we worked through several appeals to get an approval to help a seriously ill woman be seen at the MAYO clinic when it wasnt covered in her network. They were the only ones able to find a diagnosis and therefore treat her and therefore very likely saved her life.

        While grouping people together pls keep in mind there are people motivated by things other than “profit”.

      • Rick said

        “It sounds like you don’t want competition” = That’s not what I got out of the Alison post. Insurance brokers relish competition and have lots of it, but they do not want unfair competition like the government option would impose.

        “Life & death situations should not be for profit” = Sounds good but not practical. You might not be aware of the fact that non-profit health insurance companies, for profit insurance companies and mutual health insurance companies (co’s owned by their policyholders) now compete.

        • J Williams said

          Your obviously just way too smart for me!
          I don’t want anyone or company in the position of making the choice of pulling the plug on grandma from a profit or capitalistic point of view, while the CEO makes one hundred thousand dollars per hour, period!

        • Rick said

          The evil capitalist’s presently are NOT pulling the plug on grandma and that is one of the issues in Washington. I guess you don’t mind the government pulling the plug on grandma (rationing) to reduce the increasing cost of health care as proposed by the House bill.

          Does it make sense to radically change something that 80% of the people are satisfied with? You would think the smart thing to do would be “fine tune”.

Sorry, the comment form is closed at this time.

%d bloggers like this: