Bye, bye brokers?

In general I oppose the minimum Medical Loss Ratio (MLR) provision of the Affordable Care Act. If an insurer can help keep me healthy and out of the hospital and doctor’s office I’m happy to pay them to do so. But I have to admit I’m pleased that the new MLR rules are putting the squeeze on brokers. See Will health care law be a job-killer for insurance brokers?

Brokers usually serve smaller companies and individuals; they often receive 10 or 15 or even 30 percent of the premium as commission. The commissions are paid by health plans, which have relied on brokers to deliver the business and have been scared to alienate them. But those commissions are part of a plan’s administrative expense. When the going gets tough –for example as the total administrative cost is capped at 15 to 20 percent of premiums– plans decide they’d rather use those precious dollars to pay their employees, cover overhead costs and make profits rather than seeing cash flow out the door to brokers. Already commissions are being cut and brokers are starting to be forced to try to collect revenues from the companies that purchase health insurance rather than the health plans.

Although brokers claim to add a lot of value, in practice most have mainly just driven costs up. For example, it’s in most companies’ interests to stay with one health plan over a long period of time. It keeps transition costs low and makes longer-term interventions such as disease management pay off. But brokers tend to churn through plans. Switching plans frequently lets brokers earn more money: they can shop around for the plan that pays them the highest commission, and take advantage of the fact that commissions can be higher for new business than renewals. Switching plans also makes it look like they’re working hard, rather than being lazy by just recommending a renewal. Many small business owners have no clue how brokers operate and get taken advantage of as a result.

The coming health insurance exchanges and greater ability for small businesses and individuals to compare plans head to head will make it harder and harder for brokers to stay in business. Some really good brokers –and let me say clearly that there are some out there– can find a way to add value. But plans and purchasers are likely to be tougher customers in the future. That’s as it should be.

Repeal proponents have said the Affordable Care Act is “job-killing.” When it comes to brokers’ jobs they are likely right. I say Amen!

9 thoughts on “Bye, bye brokers?

  1. Robert Hawkes

    David,

    Brokers receive “10 or 15 or even 30 percent” commission… really? I’ve never heard or any group benefits broker receiving remotely close to ten percent, let alone to 30.

    It’s possible you may be referring to individual and family plans, which often pay a larger commission the first year (to compensate for the typically immense time commitment involved in that segment), followed up by dismally low renewal commissions.

    In either case, I find your broad statement more confusing to readers than helpful.

    Despite my displeasure with this article, I’m an avid reader. Keep up the good work, David.

    Best,
    Robert

    Reply
  2. DJK

    David,

    Interesting blog! I, too, am an avid reader.

    I work in the brokerage & consulting area and can only speak to the market in which I work (much larger than the small brokers referenced in your blog). The commission in this market is no where near what you quoted. Couple of points typically.

    Some smaller brokers (not unlike mortgage lenders, to some degree) were making money hand over fist for a long time. Some saw the writing on the wall and recently sold their books to larger firms. Those small brokers that remain will either go out of business as you describe, merge, or be bought by larger firms.

    I wonder if we’re going to see small brokers go the way of the dodo and then small companies (under 100 employees…probably closer to 50 orless) either drop coverage thus forcing individuals to buy from exchanges or not drop coverage and purchase directly from exchanges themselves.

    The larger employers (over 100) that are fully insured today will be pushed to control costs more and will look to self funding with stop loss policies…and brokers & consultants to help them through advanced informatics/reporting, wellness, HR consulting and communications.

    Just my two cents.

    Reply
  3. Patrick

    Mr. Williams,

    I am very surprised by your lack of factual information in this post. Not only have you inflated the average percentage of premium brokers and agents receive as compensation you also pile on and insult the true value we bring to the businesses we represent by dismissing us as a service provider. I take most offense to your insinuation that we are unethical. The statement about taking advantage of undereducated business owners is vicious, slanderous, and extremely unprofessional.

    I work in Ohio and challenge you to prove any of your points. Find an insurance agent contract that pays anywhere near the level you suggest. It simply doesn’t exist. As for churning, I can tell you that if a client whose increase is very minimal it is in all party’s interests to stay put. Moving carriers is painful for the business and it’s employees. You completely miss the boat on our most valuable service which is ongoing service. This would included claims management, plan design, wellness implementation, and many HR functions. The last point you make in regards to exchanges is spot on if you are in an industry that understands risk, medical benefits, and insurance contracts. Unfortunately most of us in this country don’t have the knowledge or time to learn and grasp the various intricacies involved in purchasing the most cost effective plan that meets our health needs.

    I believe you would have a better understanding of this if you had a stronger relationship with whoever you utilize as a broker/agent within your business.

    Reply
  4. David E. Williams of the Health business blog

    Ok, guys, thanks for the comments. Clearly I blew it on the commission rates by implying the small business rates are that high. They’re definitely lower.

    I relied on two sources for the 30 percent number: a Wall Street Journal blog post http://online.wsj.com/article/SB10001424052748703612804575222291352083452.html and an article from East Coast Health Insurance. http://echealthinsurance.com/health101/commissions/

    I know that some brokers and consultants earn their keep. Those that do should be able to adapt to the new environment as there is definitely a need for guidance and support.

    Reply
  5. Kevin Sullivan

    The moment Obama took office, I KNEW that my health insurance business would dry up due to regulation. What once was 80% of my revenue is now 10%, because you’re absolutely right. Brokers do churn, and most disappear once there’s a claim to be settled. But, hey, I hear that Used Car Dealerships are hiring!!! Or, maybe they can go to law school…

    Reply
  6. Bob McNett

    I agree with “Jeff.” This guy is a health business consultant and he talks about that the broker has an incentive to “churn” small group insurance to businesses because the broker makes a higher first-year commission? The fact is that almost all carriers pay a level commission, not higher in the first year for group insurance. I also find interesting the comments of “DJK” who is apparently involved in large-group health insurance brokering, I would bet as an employee of a large insurance firm. The fact is, DJK, you too show your ignorance based on your limted view and experience in the large-group market only. Most “small brokers,” as you call us, are small business owners ourselves, and experience the same challenges as our clients do, thereby putting us in a better position to work with the under-100 employee market. Plus, our clientele, unlike yours, do not have the resources to have an HR department to handle day-to-day problems with their group health plan. My office fields many phone calls and emails from our clients each day seeking our help with a myriad of questions and problems having to do with billing, claims and all kinds of issues. When I put a new client on the books, our job has just begun. I guess what amazes me is that people like David Williams and JDK feel themselves able to make comments when they do not have any concept of what the “small broker” does. Have David and JDK ever worked with a small business to install and service a group medical, life, DI, etc. plan? Hey, guys! Take the time to talk to 20 or so small business people about if they feel their insurance broker is a valuable resource. This is the reason that the Mass. Connector is having trouble making advancements in the small business market. They are trying to compete with brokers, thinking that all brokers do is sell insurance. The Connector can’t compete with the service the good broker provides! Quit belching out opinions that your limited backgrounds give you no knowledge to enable your opinions to be valuable.

    Reply
  7. Pingback: Apply for East Coast Health Insurance | Personal Publishing

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