The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Bill to Exempt Broker Commissions from MLR Formula Coming Soon

Posted by Alan on February 17, 2011

Supporters consider the medical loss ratio provisions in the Patient Protection and Affordable Care Act to be critical to the “affordable” part of the new health care reform law’s title. They also believe that requiring carriers to spend a specified percentage of premiums on medical claims and health quality improvement programs is necessary to prevent heath insurers from receiving an unwarranted windfall when all consumers are required to obtain health care coverage beginning in 2014.

As a direct result of this MLR provision carriers are slashing broker commissions. Cuts in broker commissions on individual health insurance policies of 35-to-40 percent are common, and some cuts exceed 50 percent. Few businesses can absorb a revenue reduction of this magnitude and insurance agencies are no exception. As a result, many brokers are considering abandoning the individual market altogether, an unfortunate outcome for both these producers and consumers in general. Consumers benefit greatly from the expertise of professional brokers not only when purchasing coverage, but when problems arise after the sale as well. Exchanges created by the PPACA cannot replace the value brokers deliver, a fact borne out by the experience of existing exchanges.

All this explains why, at their October meeting, the National Association of Insurance Commissioners was on the verge of recommending that commissions to brokers be removed from the formula used to calculate a carrier’s medical loss ratio. Their lawyers, however, convinced them that the PPACA denied the NAIC the authority to do so.

Carriers receive no benefit from the commissions they collect from policy holders and pass along to brokers. Insurers provide an administrative convenience (reducing system wide overhead), but pass through 100 percent of the commission. Consequently, including these dollars in the medical loss ratio calculation fails to further the purpose of this provision. However, to make this common sense adjustment to the PPACA will require legislation.

Enter Congressman Mike Rogers. Politico Pulse broke the news in their February 16th edition: “The Michigan rep will introduce legislation in the coming weeks to pull brokers’ fees out of the MLR formula, just as agents had lobbied the NAIC to do.” According to the Politico report, the bill’s language has been drafted and mirrors the NAIC proposal. The article goes on to cite an “industry source” as claiming “There’s been some surprising interest from moderate Senate Democrats.” As any changes to the PPACA will require bipartisan support, this is indeed good news. (Representative Rogers is a Republican).

And yes, this is something broker organizations led by the National Association of Health Underwriters (NAHU) along with the National Association of Insurance and Financial Advisors (NAIFA) and the Independent Insurance Agents & Brokers (the Big I) have worked hard to make happen. Getting a bill introduced is neither simple nor easy. Members of Congress are harangued by countless individuals and groups to put forward legislation. But throwing something in the hopper is serious business and not undertaken casually. That Representative Rogers, a member of the House Energy and Commerce Committee’s Subcommittee on Health, will be putting his legislative reputation behind this bill is very meaningful.

Introducing a bill is, of course, not the same as enacting a law. However, no law gets enacted unless someone first introduces a bill. Which makes this news, as the saying goes, a [very] big deal.


17 Responses to “Bill to Exempt Broker Commissions from MLR Formula Coming Soon”

  1. “…the National Association of Insurance Commissioners was on the verge of recommending that commissions to brokers be removed from the formula used to calculate a carrier’s medical loss ratio. Their lawyers, however, convinced them that the PPACA denied the NAIC the authority to do so.”

    It appears that the NAIC’s Professional Health Insurance Advisors Task Force has released for comment draft legislation that proposes removal of agent commissions from the MLR calculation. A public hearing will be held at the NAIC spring meeting on March 27th to discuss their proposal.

  2. What about the several middle-men who get a piece of the commission. FMOs,GA’s …why do they get money for shuffling papers? They provide no value, while agents/brokers are on the front lines providing a real service. Why hasn’t there been talk of cutting out these middle-men?

  3. Curt Cella said

    When is enough enough?

    Where is California going to find the money to create the most anti-insurance agent profession Exchange it can possibly create? Well here’s one guess: They will do what they usually do – create a whole bunch of phony projections and simply create funds where none exist and drive the state and its residents further into the financial abyss. Note I said ‘further into’ – folks we’re there: We are seeing financial mismanagement on a scale that borders on either grossly criminal or grossly stupid. We are in an abyss we’re not going to climb out of short of bankruptcy.
    You know: A better question is WHY are they creating an Exchange like the one they currently envision? As my post the other day pointed out, we already basically have an Exchange up and operating by virtue of the quote engines a vast quantity of agents already own and operate via their strategic partners Norvax and Quotit to name but two. Within each set of quote engine results a consumer will see a listing of plans available here in the state, a detailed description of same and a premium to accompany that information. IF they have a question, they can call an agent who is licensed by the state to transact business here in the state by the CDI. Agents offer their services for free. So we offer professional expertise at the bargain basement cost of….ZERO $$$!
    While I guess it could be argued that eliminating agent commissions does open up the possibility of SOME savings to the consumer by virtue of the commission’s absence from any calculation of operating cots the simple truth of the matter is that health insurance premiums are rising at such a rate any rational person would be hard pressed to make a case that our commissions are a part of that phenomenon. Which brings us to this: I don’t know about the rest of you but I am seeing rate increase notices at such a clip now that I can’t keep ’em all straight – and still the insurers say the indiv marketplace is a loser for them…I have thought about this backwards and forwards and I literally can’t see any way this trend doesn’t continue – despite the existence of an Exchange – simply because there has been no effort made to cap underlying health care costs. That being the case the future looks like this to me:

    * – Consumers will be caught in a legal vice that will mandate they buy health plan policies they simply won’t be able to afford but will not be legally able to avoid. That is one possible failure of PPACA – the other option is that folks simply won’t buy the stuff and pay The Man the (small) fine and go about their business as they do now (That will also mean PPACA is a failure at its core.).
    * – Health insurers will book record profits as revenues will continue to climb and they will have to do little or nothing in the way of sales and marketing. Whatever MLR ends up being, your % take of the action will mean constant year over year growth with zero downside. Hardly the stuff that inspires an ode to capitalism.
    * – The government will – each and every year – provide tax credits that will grow exponentially until our costs for subsidizing private health insurance will join the ranks of Medicare and Social Security as yet another massive drain on our budget and will increase the speed with which our country goes insolvent.


  4. vince phillips said

    Hopefully agents will see this as Job One and work hard on individual lawmakers to make it happen.

  5. Insurance Guy said

    This is the first bit of possible good news for health insurance agents I can recall in the last several years. Let’s hope it actually gets introduced, passes both houses, and get’s signed into law. Then we get to see how the carriers respond.

    However, on another note, I’ve been concerned that greater emphasis has been placed on each state having the power to shape how the exchanges function. Not good for those of us in California. Hopefully, legislation will pass allowing individuals and businesses to access the same benefits (subsidies, etc.) whether they buy through the exchanges or on the open market.

    Even more alarming is the possibility of the California OneCare Campaign succeeding – this is a single-payer initiative that has already passed both houses of the legislature twice, only to be vetoed both times by Governor Arnold. If the latest version of this bill passes, with Arnold gone and – I would think – Jerry Brown not inclined to exercise a veto, then the entire private health insurance industry in California might be obliterated. Alan – I’m interested in your take on the likelihood of this initiative becoming law.

  6. Individuals and small groups are shaping up to be the victims of health care reform (not to mention brokers). A parallel development exists in financial services, also in the name of “reform.” The crushing burden of securities regulations will break our backs unless we drop clients with low account values. Insurance brokers are commenting that they can no longer afford to service their small clients. Likewise, hardly a month passes where I don’t come across a financial periodical featuring some genius who increased his or her margins by “dumping those small clients!” [actual quote from recent article]. Okay, it’s an old story. But now it is becoming a necessity, as opposed to a simple act of greed.

  7. Alan, thanks for reporting the news about the legislative proposal to remove agent commissions from the MLR calculation. However, I don’t share your enthusiasm for the proposal and I urge NAHU to question this strategy.
    In the nearly 20 years that I have been selling individual and small group health insurance I have learned that health insurance, like other types of insurance, is mostly sold, not bought. Agents inform and assist clients in a very complicated and expensive purchase. Some clients are more knowledgeable than others. All clients appreciate the assistance of someone who is knowledgable and able to assist during the purchasing process. Once the process is complete and the client has decided – the value of an agent – and everyone one else who sells a product – diminishes greatly. Breaking out the agent commission means that the client must pay for the agent’s services as a separate item – each month. As the months go by and the time since the agent assisted with the complicated decision increases, the client values the agent less and less. Imagine if you had to pay your real estate agent’s commission each month as a separate item in your mortgage. After a few years you likely would have forgotten how much help the agent gave you. I submit that breaking out agent commissions on each monthly bill exposes health insurance agents to the likelihood that clients would seek to negotiate lower commissions, rebating, etc. This is a race to the bottom.

    Secondly, I fear for our general agent partners if the commissions are split from the MLR. I feel comfortable defending the work my firm does for our commission to clients. It will be more difficult for clients who see a 2% override on their bill each month when commissions are split out from the insurance cost. GAs do good work in my opinion. Currently there is no extra charge to the client when agents use GAs – the client gets better service, agents get assistance and the carrier gets clean apps. All win. Explaining this to clients may become as difficult as the nightmare of explaining “grandfathering” has become.

    Finally, Alan, you are wonderful. I really appreciate all that you do for our industry, but I strongly disagree with your statement: “Carriers receive no benefit from the commissions they collect from policy holders and pass along to brokers.” Carriers have a sales staff for which they pay nothing until an agent sells a product: they don’t pay agent employment taxes; they don’t pay agent pension expenses; they don’t pay my office rent, for my computers to get their quotes; they don’t pay for my health insurance nor that of my employees – they don’t pay anything until a highly trained, licensed professional shows their complicated product to a client who decides to purchase it. In the case of individual health insurance, the agent does all of the work educating, informing and enrolling people and frequently receives zero compensation when the carrier declines someone for health reasons.

    Agents provide carriers with a sales force that introduces new products to the market. I must tell you that none of my clients had ever heard of an HSA plan until I told them about them in 2004. Now, we’re comparing HSA compatible plans to high-deductible non-HSA plans. Believe me: this would cost carriers tons of money to educate the public without agents. Oh, by the way, carriers pay agents zero – nothing – nada – zip to learn about their new products. We only get paid when we educate ourselves and find people who want to purchase this product. How would a carrier introduce a new product without agents or an inside sales force?

    Clearly the insurance companies receive a huge value from agents – otherwise they wouldn’t pay us. Some carriers want to continue working with agents – others, as evidenced by their draconian commission cuts in the individual market do not want to work with agents. That’s their choice, as it is my choice to decide which carriers I want to work with. Again, I urge NAHU to rethink its strategy on this issue. If not, they may get what they wished for and discover that it is worse for agents than the now current status quo.

    • Curt Cella said

      Uhh unless I’m badly off track here that is not what Alan is saying. It’s simply a case of the agent’s compensation not being part of the MLR calculation. It’s not an actual publicly accessible figure the client can lay hands on like a real estate agent’s commission and which then becomes negotiable…

      But Bruce if you’ll read my book “How Exchanges will Destroy the Agent Profession” you’ll see this is all a moot point anyway… 🙂

      • Ann H. said

        I’m waiting for the movie, Curt!

      • Curt, you say “It’s simply a case of the agent’s compensation not being part of the MLR calculation. It’s not an actual publicly accessible figure the client can lay hands on like a real estate agent’s commission and which then becomes negotiable… ”

        To may way of thinking, a bill is a pretty “publicly accessible figure.” Have you seen how Aetna is breaking out broker commissions on groups 51+? They show the medical insurance premium, the broker compensation, then the total amount due. That is very publicly accessible. I hope other agents understand what “not being included in the MLR” means. It means the client is billed for the health insurance on top of which the agent compensation (and GA compensation) is added. It is not hidden in one number. Hiding agent compensation in the insurance premium would make it part of the MLR. What is being proposed is separating agent comp from insurance premium. The client’s got to see the number because he/she must write a check for the amount.

        • Alan said

          Bruce: There are a lot of different ways broker compensation could be handled, but I believe you’re right that it would wind up being disclosed on premium billing statements. There’s be one line for the premiums and another for the broker compensation. This is the way the HIPC handled billing in California. (The HIPC, for non-Golden Staters, was a purchasing pool that operated in the state for a few years. Employers could buy coverage directly or through a broker. Those using a broker paid an extra 5% of premium, an item that was disclosed on the bill. Roughly two-thirds of the groups enrolling in the HIPC used a broker.)

          Transparency is a reality of today’s world. The public’s knowledge of the cost of various procedures and how carriers spend their money is growing. Knowledge of the amount brokers are compensated will grow, too, even if the PPACA is repealed (which it won’t be). The argument that if our clients knew what they were paying us they wouldn’t want to pay us is a pretty damning outlook. If we can’t justify our commissions then there’s something wrong with our business models. I do agree that negotiating compensation levels on a case-by-case basis would be a heavy burden, administratively complicated, and uneconomical — for brokers, consumers and carriers. As a practical matter I expect that if broker compensation is removed from the MLR calculation there is a good chance they will be separately reported on premium bills, but that anti-rebating rules will result in the commission levels being set by carriers as they are today, not negotiated between broker and client.

    • Alan said

      Bruce, thanks for your kind words and contributing your thoughts on this. While you’re right that breaking out broker compensation on a premium bill would generate questions from clients about what their broker is doing to earn that compensation, I disagree that’s a bad thing. If we can’t justify what consumers are paying us then we need to rethink the business model and how we explain our value. If the only solution is to hide from our clients what we earn from them then we’ve got a serious problem.

      Having been a GA and having worked with them for decades I recognize the value they provide. I also think they’re mature enough organizations that if they are required to justify their value they’ll be able to do so. And again, if they can’t, then they’ve got a serious problem, too. As I mentioned in a response to another of your comments, increased transparency is a reality. Doctors, hospital, carriers and brokers will be required to more forcefully and clearly communicate their value.

      As for your third point, I think you misread what I was saying. I’ve always made clear carriers (and consumers) benefit from working with independent agents. And you did a great job of articulating some of the reasons. My point was (and is) that the dollars collected by carriers of which 100% are then passed along to brokers in the form of commissions do not go to paying claims or paying carrier overhead or contribute to their profits. If the premium on a policy is $100, 10% of which goes to the broker, then the carrier has only $90 to put towards its operations and claims. That’s the sense in which carriers earn no benefit from the $10. That carriers benefit from working with brokers is something you and I are in violent agreement about.

      Whether or not health care reform passed, broker compensation was going to be scrutinized. The PPACA defines the context of that dialogue and skews the results. I believe brokers add value to the products we sell and service. Carriers and consumers recognize that value. All things being equal, we would be fairly compensated for that value. The medical loss ratio provisions of the PPACA means that all things aren’t fair. By exempting broker compensation from the MLR calculation, the market will determine our compensation, not some forced mathematical formula.

  8. Curt Cella said

    Yes Alan – I guess that is good news. If your business is in Texas.

    Here’s a quote from a guy I admire a great deal. See if you can tell me who wrote this:

    Ultimately the states will determine what role brokers play in the exchanges – and results will vary. Some states, like California, have already taken steps that appear to be anti-agent. Both Democratic and Republican lawmakers around the country too often have express the belief that exchanges will be a panacea allowing consumers and small businesses to buy coverage simply and easily without an “intermediary” (or a counselor and advocate, as I would describe our role).

    Now Alan if you had told me that Rep Rogers was also pushing for the availability of tax credits for those consumers who buy outside the Exchange I’d say we have a fighting chance – I’d be happy to take my chances against a government-run operation staffed with hourly, unlicensed staff who only care how quickly quitting time gets here any day….

  9. In my opinion, the insurance companies were just wanting an excuse to slash agent’s commissions. Unless I agree to meet sales quotas my commissions were cut 70%. I would be happy if the cut was only 40%.

    As a result I have to agree with G. Cox. I feel sorry for people who have to make health insurance purchasing decisions without full knowledge of their options but like he, I am a business man. I cannot pay 100% of my overhead with 30% of my income. I have had to focus my marketing efforts more toward people on Medicare and other supplemental insurance products. In my opinion, there is no future for agents in the individual major medical market.

    Agent commissions may very well be removed from the MLR but that does not mean insurance companies will restore commissions to the level they were. Even if they would, which I doubt, it will take time but my bills continue.

    My decision has been to try to compromise. I will answer questions over the phone or by email, if I have the time but will not engage in lengthy conversations unless they hire me as a Licensed Insurance Counselor on a fee based situation and place their business through another insurance agent or they do their shopping and applying on line through my blog or web site. In neither case do I have to give significant time, talent, knowledge or experience away for free.

  10. Ann H. said

    Wonderful news. Thank-you to everyone who fought for this, including the NAHU. Let’s hope it passes, and if id doesn’t pass the first time, let’s hope it’s included in other bills to come soon.

  11. G Cox said

    I agree. It is great news. But the greatest thing is that, if passed, it benefits CONSUMERS. As an agent, I can’t afford to work for pay that doesn’t allow me to pay my overhead, and make a profit, and my clients would have suffered as a result. They need someone with expertise to help them through this maze of reform, strategy for savings, explaining coverage and providing service to their employees, etc. Letting me earn a FAIR wage for my time, allows me to serve clients who need someone to help them purchase the best fit of product/service for their employees. Letting agents continue to make a FAIR income, allows reform (in whatever final shape it takes on), to succeed. Without allowing agents to be a part, consumers would suffer. And, again, that’s the GREAT news, about excluding agents from the MLR.

  12. This is GREAT news. Let’s hope this comes to fruition. Agents- stay active, keep fighting, make your opinions known. Consumers need the value agents provide, and the PPACA does not change this.

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