Tracking Commission Changes

The Medical Loss Ratio requirements contained in the Patient Protection and Affordable Care Act take effect on January 1, 2011. Even though the Department of Health and Human Services has yet to certify the recommendation concerning how carriers should calculate the percentage of premium they pay toward medical care and health quality measures, the carriers have to be managing their businesses to hit the MLR targets on January 1st.

And to hit their MLR targets most carriers offering individual coverage — and many providing small group coverage — will need to adjust their commission schedules. As noted previously here, reducing broker commissions is compelled by the math of the MLR requirements. The PPACA requires carriers to spend 20 percent of the premiums they receive from individual and small group clients on medical care and health improvement efforts (the MLR target is 85 percent for larger groups). A carrier with a mature block of business need 7-to-9 percent to keep the lights on, the staff paid, and other administrative costs. They look for a margin of roughly 4-to-5 percent (they may not always get it, but that’s what they’ll likely aim for). The remaining 6-to-9 percent can be devoted to broker commissions. In some states this is roughly what insurers are paying their producers now; in other states, especially in the individual market, this represents a substantial pay cut.

None of this is pleasant, but math often isn’t. What remains to be seen is whether carriers will move to different kinds of payments (paying a fixed fee for each member insured, for example, rather than a percentage of the premium). While changes to individual commissions are likely to be significant in some states, adjustments to small group payments is likely to be more modest. Some insurers may, for example, simply reduce the percentage of premium paid to brokers to offset coming rate increases (consequently, keeping brokers whole from a revenue stream standpoint). Others may make no changes at all to their small group commission schedules yet.

Whatever they’re going to do, carriers will be notifying brokers of any compensation changes about … now. The insurers will want to apply the new commission schedules to policies sold with January 1st effective dates. Given the nature of the sales pipeline, that means the “Dear Broker” letters should be hitting mail boxes any day now – if they haven’t already.

While I’ve heard rumors of changes I haven’t seen details yet. As this blog has a large readership in the broker community I’m hoping you’ll take a few minutes to share what’s happening. Please leave a comment indicating:

1. Your state
2. What product segment the commission change applies to (individual, small group or large group)
3. What the old commission schedule was
4. What the new commission schedule is
5. Any other comments you might have (I’ll reserve the right to edit for civility and language)

Hang in there. Things could change as the National Association of Insurance Commissioners, HHS and carriers address the stark reality: brokers are needed for America’s health care system to function. So this is just a chapter in a long story – an unpleasant chapter, perhaps, but in the end, just a chapter.

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