Agents and brokers who sell health insurance to individuals and small businesses must start finding new ways now to replace lost commission income -- almost certain to occur as a result of the U.S. health care reform law, industry observers said.
The law will rewrite how agents and brokers survive in the insurance marketplace, said Mark C. Stephenson, a partner at Nelson Levine de Luca & Horst, whose practice focuses on employee benefits and insurance coverage.
The biggest impact near term will be for agents in the individual health insurance market, who may see a hit to their commissions, said Jason Beans, chief executive officer of Rising Medical Solutions, which provides medical cost-containment programs.
Under the law, individual and small group plans must spend at least 80% of premiums on medical care costs. Starting in 2011, insurers must annually report the share of premium dollars spent on medical care versus profit or administration and provide rebates to members when less than this percentage of dollars is spent on medical care.
This limits profits and administrative costs -- which covers sales commissions -- to a 20% maximum, Beans said. In 2009, the individual market had an average of 74% of its premium go toward medical costs, he said. Commissions will be an obvious area for insurers to cut costs, Beans said.
And as the state insurance exchanges come online starting in 2014, agents are concerned that insurers will look to the Internet as a major sales outlet for group and individual coverages, Stephenson said.
The exchanges are central shopping hubs where individuals and small businesses with 100 or fewer employees can buy standardized coverage.
Commissions to small-group brokers will be under pressure, said Nancy Chockley, president and chief executive officer of the National Institute for Health Care Management, as more small businesses turn to the exchanges.
Business owners could send employees to the exchanges -- essentially creating an individual market, Chockley said.
They will allow individuals and human resources departments to shop for insurance, "pulling some clients out of the market," said Beans, who noted they will be state-specific so the impact to agents and brokers "can vary dramatically."
The Massachusetts system, for example, is designed for individuals and "not very agent friendly," as fees are less than $10 per member per month on average, Beans said.
Beans said agents need to keep in mind that despite the growth of online trading, stockbrokers who add value to the process still are doing well.
It's a case where agents and small-group brokers must diversify beyond traditional health insurance to maintain the same income level, or perhaps, even survive.
Clients of small-group brokers generally have fully insured health plans, where brokers receive a commission but the brokers must introduce other insurance plans, such as voluntary benefits, said Joseph Berardo, chief executive officer of MagnaCare, a third-party administrator for self-insured companies in New York and New Jersey.
Already, heading into 2011, employers with a few as 100 employees are starting to explore self-insuring their health benefits, Berardo said.
Alan Katz, a consultant and former president of the National Association of Health Underwriters, said if the frequency and profitability of commissions decline, brokers could leverage their client relationships into offering a wider mix of policies, perhaps disability. "If you know your revenues are going to go down 20% to 50%, you want to replace that" (BestWire, Sept. 20, 2010).
Most brokers will look to voluntary work-site insurance as a way to replace the lost income, according to David Pringle, senior vice president of federal relations for supplemental insurer Aflac Inc. (NYSE: AFL).
Brokers have focused on group major medical but going forward they'll need to develop "a more holistic approach" to providing value to the customer and offer solutions to control employers' rising health insurance costs, he said, adding that voluntary supplemental insurance offered through the work site "fits the bill."
Voluntary policies such as accident, cancer and specified health event insurance pay benefits directly to the policyholder so the employee/policyholder can spend the cash however they want, Pringle said.
(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])