NAIC: Producer Commission Bill Could Impact Consumer MLR Rebates

If a federal bill exempting all agent and broker commissions from the Affordable Care Act's medical loss ratio calculation were to pass, it could reduce the rebates paid back to U.S. consumers by more than $1 billion. And those exemptions may not be warranted, given it is difficult to determine whether the federal MLR requirement is having a broad impact on producer commissions, according to data collected by the National Association of Insurance Commissioners.

The data was collected as part of an NAIC study of the MLR issue and its impact on agent and broker commissions. The NAIC is weighing whether and how to weigh in on the bill, which was introduced in March (BestWire, March 18, 2011).

Since the passage of the Affordable Care Act, agents and brokers have criticized the MLR requirement as a driving force behind significantly reduced commissions, arguing they have seen their commissions cut by as much as 60%. Some insurers have cited the MLR requirement as the primary reason they have been slashing administrative costs, including the commissions paid to producers.

Under the ACA, health insurers are required to devote 80% of the revenue generated from its individual and small group businesses to paying for health care. The law requires that 85% of large group revenue go to health care coverage.

Insurance regulators have been sharply divided over what, if any, impact MLRs are having on producers and whether insurers are simply using them as an excuse to cut commissions (BestWire, March 29, 2011).

Jessica Waltman, senior vice president of government affairs for the National Association of Health Underwriters, said if the MLR requirement is not modified, it could have a "detrimental impact" on smaller companies and regional carriers who often depend on agents and brokers to provide guidance and customer service capabilities to health insurance customers. She said the impact would be especially hard on younger agents and brokers who are just starting out in the field.

"You would be sacrificing all of that for the potential of paying a couple of dollars more a month to health insurance customers," Waltman said.

Data on producer commissions collected from large health insurers by two outside organizations do not show a clear trend that agent and broker commissions have been reduced prior to 2011, according to the report, which is still in draft form and has yet to be finalized. However, data provided by 11 states that already had MLR requirement statutes on the books prior to the passage of health reform shows that in some states, producer commissions have been reduced in recent years.

"In 2011, a significant number of companies have reduced commission levels, particularly in the individual market. However, a significant number of companies have not reduced commissions in 2011, at least not yet," the report said. The report also notes the states with higher MLR requirements have not observed any problems with consumer access to insurance or producers.

If the MLR requirement were applied to 2010 data collected by the NAIC, insurers would have paid a total of $1.95 billion in rebates to individual, small group and large group customers, according to the report. But if agent and broker commissions and direct sales salaries are excluded from the rebate formula, as is proposed by the bill, those rebates drop to a total of $680 million -- a decrease of roughly $1.3 billion.

Timothy Jost, a professor at Washington and Lee University School of Law who serves as a consumer representative for the NAIC, said even if the rebate figures are viewed as simply rough estimates, "you're still talking about a lot of money."

"Exempting agent and broker commissions from the MLR calculation is a very, very radical solution to the problem," Jost said.

Waltman said another portion of the report notes the data collected for the 2011 fiscal year are expected to differ from the 2010 data because health insurance carriers will likely make changes in their operations as they implement and react to the various provisions of the Affordable Care Act, including making changes in commission scales.

NAHU was one of the outside organizations to collect data for the NAIC. The other was Connecture Inc., a software company that works with health insurance carriers and brokers.

"Even in the case of the NAHU and Connecture data, it's hard to determine whether there is a problem at all. Both say that some have seen significant cuts and some haven't," Jost said. "And the data from the states with existing MLR requirements says it isn't a problem at all."

The NAIC will be holding a conference call to discuss additional concerns about the draft report on May 26.

(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)