Think Tank

Where Do Brokers Fit in New Health Insurance Picture?

California’s health insurance regulations — aligned this year with federal guidelines — include a requirement that insurers spend at least 80% of their premium revenue on direct patient care. However, efforts to change provisions of the federal Patient Protection and Affordable Care Act could have an effect on how California insurers balance their books — and on how consumers pay for health coverage.

Previously operating on a 70-30 split, California adopted the 80-20 ratio in January to be in line with new federal guidelines. But precisely what is contained in the two portions is being contested. The 20% not used for direct medical care includes profit and administrative costs — including insurance broker fees.

The House is considering a bill (HR 1206) that would exempt insurance brokers’ fees from being classified as administrative costs. After it was introduced by Reps. Mike Rogers (R-Mich.) and John Barrow (D-Ga.), the bill attracted more than 50 co-sponsors.

Some consumer advocates argue that the ACA is already a boon to the insurance industry, bringing in millions of new policy buyers. They say not counting broker commissions as part of administrative costs in the medical loss ratio could take the financial teeth out of reform.


Even using the term “medical loss ratio” could be construed as an indication the ACA is written from an insurer’s — rather than a consumer’s — point of view, according to some. The term suggests that 80 cents of every dollar spent on medical care for a patient is considered a “loss” by the insurance industry.

The National Association of Insurance Commissioners voted to postpone taking a position on the bill. Some state commissioners support the bill, and some oppose it.

In California, a related effort is under way: AB 736, by Assembly member Chuck Calderon (D-Montebello), would allow health insurance agents to also be licensed health insurance brokers.

We asked experts and stake holders: How should Congress handle the issue? What is the potential effect on California if HR 1206 passes? What are the potential effects if HR 1206 fails?

We got responses from:

Broker, Agent Pay Should Stay in MLR

The Affordable Care Act aims to keep health insurers accountable by establishing a national “medical loss ratio” requiring them to spend at least 80% of the premiums they collect on patient medical care. Up to 20% can be used to cover administrative expenses, brokers’ and agents’ fees, and profits. Under the ACA, insurers that don’t spend at least 80% on medical care must provide rebates to consumers.

The California Department of Insurance adopted this federal standard earlier this year. A bill pending in the state Senate, SB 51, would apply it to plans licensed by the Department of Managed Health Care, too.

But now there’s a move afoot at the National Association of Insurance Commissioners and in Congress — HR 1206 — to water down the MLR standard by allowing insurers to take agent and broker commissions out of the equation. Doing so would make it appear that insurers are spending more on medical care than they actually are and would impede efforts to control administrative costs.

Since the early 1990s, insurers have spent a decreasing percentage of premiums on medical care. To improve value for consumers, several states, including California, had MLR regulations in place for many years. These states include broker and agent compensation in the calculation of administrative costs. They report that brokers and agents thrive under these regulations, casting doubt on claims that the MLR regulations will severely undermine brokers’ incomes and their ability to serve consumers.

Evidence shows that the new MLR rules are beginning to hold down premiums for consumers. Aetna, for example, is asking the Connecticut Insurance Department for permission to cut rates on nearly 10,000 existing individual health policies by an average of 10% in order to comply with the new MLR requirements.

Brokers and agents can provide a valuable service to many consumers and small-business owners. But the compensation they receive from insurers should be counted as part of the MLR, as our country struggles to address soaring health care costs. Otherwise, insurers will be able to get away with spending less than 80% of the premiums they collect on medical care.

Misguided War on Insurance Agents

Earlier this month, the federal government announced that unemployment has barely budged in the last two months. More than 13 million people remain out of work. And yet several consumer advocates are leading the charge in support of a provision of the federal health care law that could eliminate scores of jobs throughout the country.

At issue is the law’s “medical loss ratio,” which requires insurers to spend at least 80% to 85% of the premiums they take in on medical claims. Fortunately, several lawmakers and the National Association of Insurance Commissioners are considering a job-saving tweak to the health care law that would exclude brokers’ commissions when calculating the MLR.

Without the fix, thousands of insurance agents and those who work at their agencies would be consigned to the unemployment lines — thereby depriving consumers of valuable advocates in the health care marketplace.

The MLR requirement is deeply unpopular. Eight states have now requested waivers from the new rules; Maine just received one. All these states are concerned that the regulations will disrupt their insurance markets by driving small insurers that can’t afford to comply out of business.

In Maine, for instance, one of the state’s three active insurers threatened to pull out of the market unless the state received a waiver. Such a move would have left Maine residents with just two choices for insurance — and by reducing competition, would have driven up prices.

The MLR rules may disrupt state insurance markets in another way — by depriving consumers of access to licensed agents and brokers.

In order to abide by the rules, some insurers are paring back agents’ commissions. According to a recent survey, nearly three-quarters of agents have reported reductions in their business income because of the MLR. More than a fifth of brokers have eliminated jobs at their agencies as a result. A quarter have reduced services for their clients in order to make ends meet.

That’s bad news for small businesses, many of which depend on agents to take care of their health insurance needs. In fact, the nonpartisan Congressional Budget Office has reported that agents and brokers often “handle the responsibilities that larger firms generally delegate to their human resources departments — such as finding plans and negotiating premiums, providing information about the selected plans, and processing enrollees.”

Small firms also count on brokers to keep them in compliance with a veritable alphabet soup of state and federal laws — and informed of any opportunities to save money on their plans.

Individual consumers will also suffer if they lose access to agents. Most consumers are unfamiliar with the jargon that may dot their policies — and thus rely on their brokers to explain their benefits and serve as advocates on their behalf should problems arise.

Proponents of the reform law’s existing MLR rules argue that broker commissions should count as administrative costs because they are not medical spending. But the truth is far more complicated.

Broker commissions are actually separate from an individual’s or business’s insurance premium. They’re not revenue for an insurance company, as they simply pass through the insurer and go directly back to the agent. It’s a matter of convenience for consumers. Rather than writing two checks — one to the insurer for coverage and one to the agent for serving as an advocate — a person or firm writes just one.

Many lawmakers have recognized that the MLR rules must be fixed in order to preserve agents’ important role in the health care marketplace. Reps. John Barrow (D-Ga.) and Mike Rogers (R-Mich.) have introduced a bill in the House of Representatives that would fix the MLR rules to leave commissions out of the calculation. Their measure has attracted support from Republicans and Democrats alike.

The Obama administration has championed itself as a friend of small businesses, calling them “the backbone of our economy and the cornerstones of our communities.” But the MLR rules undermine that claim. By driving scores of insurance agencies to the brink of bankruptcy — and killing scores of small-business jobs in the process — the MLR rules are making the health insurance marketplace even less accessible for everyone else.

Congress Should Support Modest Consumer Protection

If the health insurance industry steamrolls HR 1206 through Congress, insurance brokers will get permanent income protection and a shield for their aging business model. Insurers will be freed of pressure from federal health reforms to operate efficiently or curb excessive profits. Consumers will be stuck with new premium increases and lose more than $1 billion in annual rebates.

The Affordable Care Act requires that insurance companies spend 80% to 85% of customers’ premiums on health care. It was a modest consumer protection to begin with. Most large-group policies already meet the 85% goal. Several states already require medical loss ratio requirements near the 80% level for small-business policies, with no ill effects on markets. The ACA was only copying the best practices of states.

Broker commissions have long been part of insurers’ marketing and administrative costs. HR 1206 would deduct broker commissions from insurer administrative costs for the purpose of measuring the medical loss ratio.  Insurers could then simply raise premiums to pay brokers and not worry about the 80% and 85% medical loss ratios.

Regulations adopted after passage of the ACA already allow insurers and HMOs to deduct federal and state taxes from administrative costs, as well as count other former administrative costs as medical care. An independent actuary’s report this February found that the concessions will give Anthem Blue Cross of California an extra 4% boost in its MLR. A 76% MLR will magically become 80% — a lot of slack not envisioned by Congress when it said insurers should spend at least 80 cents of every premium dollar on medical care.

If broker pay is also deducted from administrative costs, insurers will get another false boost in their MLR — about 5% to 6% in the individual and small-business markets, according to drafts of a study by the National Association of Insurance Commissioners. Consumers would lose most of the $1.4 billion insurers are expected to owe in rebates this year. The cost to taxpayers — because of federal subsidy requirements — is likely to be tens of billions of dollars.

Brokers complain that insurers are slashing their commissions because of the federal MLR requirement, and this will cause of shortage of brokers. However, Minnesota currently requires loss ratios of 82% or above in most of the small-business market, and it reports not a single complaint about scarcity of broker assistance. Kansas says in about two-thirds of its market, insurers already hit the 80% mark.

A requirement that, as of 2014, everyone must show proof of insurance will bring brokers millions of potential new customers. If they adapt to online markets and become more efficient, they can thrive without HR 1206. Keeping brokers prosperous is not consumers’ responsibility.

The bottom line: Congress has no business guaranteeing yesterday’s income to brokers and continued high profits to insurance companies out of the wallets of taxpayers and battered health care consumers.

California consumers may get a double whammy. Proposed state legislation, also sponsored by the brokers’ lobby — AB 736, by Assembly member Chuck Calderon (D-Montebello) – would eliminate broker premiums from insurer’s administrative costs and also cancel the requirement that brokers enter contracts with insurers they represent. Therefore, AB 736 would erase insurance companies’ accountability for errors or omissions by brokers who sell their policies. Insurers would have no reason to ensure that brokers selling their policies told the truth.

Goal Is To Spend Less on Bureaucracy, More on Care

As one of the dozen or so national consumer representatives chosen by the National Association of Insurance Commissioners to represent the consumers’ viewpoint, I was heavily involved in the complex negotiations with the industry and state regulators on the medical loss ratio. While we did not win every argument over the seven months and hundreds of hours of conference calls when this was under discussion in 2010, we believe NAIC achieved a good regulatory compromise through its open, transparent and participatory process.

However, currently agents and brokers object to their compensation being counted as an “administrative expense,” as Congress clearly saw it when drafting the Affordable Care Act. While the brokers and agents believe they provide a valuable service to purchasers, their principal argument is that it will result in a potential loss of income. And brokers and agents represent a potent political constituency in many states as is reflected in a bill, by Rep. Mike Rogers (R-Mich.), before Congress that would result in the exclusion of brokers’ and agents’ compensation from the MLR calculation altogether.

Some state insurance commissioners wanted NAIC to quickly endorse the bill to exclude the commissions. Other insurance commissioners, including California’s Dave Jones, urged caution and sought more information before amending the previous NAIC position on brokers’ compensation. We urged that NAIC establish an evidence-based re-examination of the effect of the change to the MLR on the costs and access to agents.

NAIC ultimately asked for more data from associations, insurers and state regulatory agencies that reflect similar changes, particularly in those states that had a similarly high MLR standard before the enactment of federal health reform. It is hard to maintain that the reason brokers’ and agents’ compensation has been declining for more than a decade is solely a reflection of the MLR regulation that went into effect in January 2011. NAIC is deferring a policy decision regarding the Rogers bill until that process is completed.

Consumer representatives believe that deleting brokers’ compensation from the MLR would dismantle a key consumer protection that allows patients to know their premiums are going to care, rather than administration and profit. These late attempts to amend the MLR would weaken the provisions that provide for greater efficiencies and cost containment included in the ACA.

The goal of the MLR requirement is to get insurers to spend less money on bureaucracy and more on health care. Consumers benefit if efficiently run small insurers stay in the market and if a variety of types of plans remain available, providing competition for the big plans and for national commercial insurers. The current MLR regulation, certified by HHS, recognizes and balances the claims of the various interests that fully participated in its drafting. We recommend it not be changed.

Agents, Brokers Offer Essential Services

If I remember correctly, the original goal of health care reform was to gain control of and lower the spiraling costs of health care. When momentum and support waned for the proposed health care reform bill, the Obama administration pivoted to health insurance reform.

By the time the Patient Protection and Affordable Care Act was passed and enacted, the provisions the administration had advocated to lower health care costs seemed to have vanished. What we are left with are provisions that attempt to hold down health care costs by enforcing rate/premium control.

One of these such provisions is the medical loss ratio, which says that insurers must spend 80% of premiums on medical care and are therefore allowed to spend only 20% on administrative costs. This provision no more addresses the underlying rising cost of health care than if Congress were to address rising gas prices by limiting gas stations on how much they can charge at the pump.

One of the costs within the administrative portion of premiums is compensation for agents and brokers. Through this provision, the professionals that employers count on each day as their “benefits” advisers are being squeezed, and it is affecting their ability to provide their service. Many employers reported that they use their agent/broker extensively. Many smaller employers say that they use their agent/broker to handle many functions for them that larger employers accomplish with an HR department, and that their agent/broker keeps them informed and in compliance on the many new provisions, as well as existing laws.

In California, an individual has more than 100 plans available to them, and small employers have more than 400 plans available. I have yet to find one employer or individual who would prefer to figure out on their own which plans fit their needs, the needs of their employees and the needs of their employees’ families. Agents and brokers also help the insured work through the complicated claims process.

Agents and brokers truly act as the consumer’s advocate each and every day to help their clients and the public find what plans fit their needs, provide education and assist with compliance, and act as the insured’s representative when issues arise, as they seem to do.

The House of Representatives is considering HR 1206, which would exempt agent/broker compensation from being included in the MLR provision. This proposed legislation has bipartisan support, and if enacted, would help to secure the essential services of agents/brokers for individuals and employers, their employees and families, as their advocates throughout California and America.