Brokers Object to Zenefits’ Comparison for Wrong Reason

Zenefits recently launched a new marketing campaign and some brokers are going ballistic. What’s interesting is that brokers are angry for the wrong reason.

Zenefits is not an innovative company. Take its sales proposition: make us your employee benefits broker of record and we’ll give you free HR software. Clearly the folks behind Zenefits eat a lot of Cracker Jack—a company that has been offering a prize in every box since 1912. Or maybe one of their parent’s got a free toaster for opening a checking account. Free toasters for consumers opening a checking account was considered cutting-edge marketing back in the day–the day being some time in the 1960s. That Zenefits has applied this technique to employee benefits is hardly the innovation their cheerleading investors claim.

No surprise then to see Zenefits reach back into the dusty advertising time capsule for another “new” idea. This time they emerged with the ageless and oft-seen “direct competitor comparison” technique. This is where one company compares their services against those of a particular rival. Car companies, satellite TV providers, car insurers, aspirin manufacturers and dozens of others have been doing this for years. Now Zenefits has jumped on board this ageless bandwagon. Again, not what I would call innovative. And in this case, not very effective, but, as we’ll see, clever.

Successful competitor comparisons depend on carefully selecting the comparison criteria. For example, Zenefits doesn’t compare themselves to community-based brokers based on knowledge of the local market or availability for face-to-face meetings (because Zenefits would look bad). Nor does Zenefits address obtaining an employer’s payroll company log-in information providing access to what your typical identity thief would sell a parental unit to see (hint: that would be Zenefits being creepy).

No, Zenefits stacked the comparison in their favor and some of those being compared are claiming foul. Yet, I believe they’re missing the point of what Zenefits is doing. In reality, I don’t think brokers have much to fear by Zenefits’ latest marketing scheme.

First, most consumers know these kinds of comparisons tilt in favor of the one doing the comparison. Shoppers will likely discount the credibility of what they see. Second, clients are not going to leave a particular broker because of a comparison buried deep inside Zenefits’ web site. If a broker loses a client because the employer miraculously stumbles across this comparison, that client was heading for the door anyway.

Zenefits knows this … and they don’t care. I don’t believe they created these hundreds of comparison pages (maybe thousands, I got tired of counting) to steal business away from these agencies. They created the comparison pages to improve their search results (known as search engine optimization or SEO).

The exact algorithms used by Google, Bing, Yahoo, DuckDuckGo and other search engines to determine the order in which sites appear on their results pages are secret, but the general ideas are well understood. One popular technique is to provide legitimate links to multiple sites all focusing on a relevant subject matter. When shoppers use key words associated with that subject matter the search engines associate the linking site and move them up the results page.

That’s why each Zenefits comparison page includes the web address of each compared agency. That’s hundreds (or thousands) of legitimate links to sites that address health insurance and other employee benefits. From an SEO-perspective, this a tsunami of positive associations.

An added benefit for Zenefits, although not nearly as significant, is that eventually they may appear on the first result page when shoppers search these agencies by name. Will shoppers see this link and choose Zenefits over the broker they were searching for? Not often, if ever, but it can’t hurt. And that this will royally piss-off (to use the technical marketing term) those brokers may warm the cockles of Zenefits’ management’s heart – a group who has demonstrated little respect for traditional brokers.

Some of the brokers on the Zenefits web site complain that the comparison is unfair and violates some code of ethics.True, the comparisons are blatantly unfair and cheesy, but seem within the bounds of generally accepted advertising techniques (or tricks, if you prefer).

Many of these complaining brokers are strong advocates for a free market. Zenefits’ management are capitalists taking advantage of that free market. Big deal. Even Zenefits probably doesn’t think this latest marketing ploy will take much business away from the agencies they’ve picked on. I believe its the improvement to their search results that made the effort involved worthwhile to them.

So what should independent brokers do? Offer your clients the kind of HR software Zenefits offers. (Full disclosure, my company, Take44, will be launching NextAgency soon – a platform that allows brokers to provide clients with free HR administration similar to what Zenefits does).

While waiting for NextAgency, fight fire with fire (or, in this case, unfair comparisons with unfair comparisons). Do your own competitive comparison and post it on your web site. This comparison should focus on your strengths and Zenefits’ many weaknesses. Remember, as Zenefits has demonstrated, a neutral comparison is optional. Posting this comparison will not only make you feel better, it will help your own search engine optimization.

You can help your SEO even more by publishing articles online that link back to your web sites. Or by creating an agency site on LinkedIn or the like. The more sites that link to your site, the less likely Zenefits will make an appearance on your results page.

In short, don’t get upset with Zenefits for playing an old-fashioned advertising card. Trump them with your own marketing. That, after all, is how free markets work.

HHS to Pay Brokers for Enrolling Consumers in Federal High Risk Pool

Should brokers be compensated for helping consumers to enroll in government programs like the Pre-Existing Condition Insurance Plan (PCIP) created by the new health care reform law? Until now, the federal government’s answer has been “no.” That changed today and a significant precedent is being set.

The National Association of Health Underwriters announced today that, beginning no later than October 1st, licensed agents and brokers will be paid a flat fee of $100 per enrolled applicant. (Payments could begin sooner if the changes to the application can be done more quickly).

This fee will only apply to the high risk pools set up by the federal government for the 23 states who declined or were unable to do so plus the District of Columbia. Many, if not most, state-run exchanges already pay brokers for assisting their citizens in enrolling in their pools. According to NAHU the average state-based fee is $85 per enrolled applicant.

In announcing the change, the Department of Health and Human Services noted the greater enrollment success achieved in states pools that compensate brokers for their work. As stated in the Department’s press release: “This step will help reach those who are eligible but un-enrolled. Several States have experimented with such payments with good success.,”

The decision to support and work with brokers is part of the Department’s efforts to increase enrollment in the PCIP high risk plans by removing administrative hurdles and lowering premiums. In fact,  in 18 of the states, premiums will be coming down as much as 40 percent according to a press release from HHS.

The PCIP was designed to provide coverage to individuals unable to obtain health insurance in the private market due to existing health conditions. 18,313 Americans have enrolled in the federal high risk pool through March 31st, a fraction of the 5 million consumers expected to enroll in the program (fraction as in “0.4%).

Progress usually comes in small steps, not giant leaps. The significance of HHS recognizing the value brokers bring to America’s health care system—and their willingness to pay for that value—should not be underestimated. For example, the House of Representatives will soon conduct a hearing on HR 1206, the legislation to remove broker compensation from the medical loss ratio calculations required by the Patient Protection and Affordable Care Act. Proponents of this law will be able to point to the recruitment efforts of HHS in support of the federal Pre-Existing Condition Insurance Plan to reinforce the need to keep brokers in their role as consumer counselors and advocates in the new health insurance world being created by the PPACA.

NAHU and other agent organizations worked hard to achieve this recognition. No doubt, however, some brokers will protest that the HHS program pays brokers only a one-time fee. This complaint is misplaced. Enrollment in the PCIP is fundamentally different than working with consumers shopping for coverage in the commercial market. The PCIP is, after all, a government health plan, more similar to Medicaid than to plans available on the open market. Further, enrollees in the high risk plan, by definition, cannot obtain traditional coverage. What’s significant is not the details of the compensation (although it is worth pointing out that HHS is setting the fee higher than the average paid by states), but the existence of compensation for enrolling Americans into a federal health plan.  When it comes to precedents, this is one that can aptly be described as “significant.”

Catching Up on Health Care Reform

Hello. It’s been awhile. Hope you’re all well. To all who have inquired, my thanks for your concern, but all’s good. Hectic, but good. Lot’s going on (more on that later) and an awful lot of travel. I’ve had a chance to meet and talk with brokers in various parts of the country, including a few places I’ve never been before or haven’t been to for years: Boise, Omaha, Denver, Nashville. It’s been a great time to learn, recharge and stay a bit too busy to write any meaningful posts. While staying busy appears to be the new constant, I’ll try to find something worthy to share on a more regular basis. For now, however, let’s play some catch-up:

We’ll start with some (relatively) good news. One of the more popular elements of the Patient Protection and Affordable Care Act is the ability for children up to age 26 to remain on their parents’ medical insurance. The Department of Health and Human Services estimated 1.2 million young adults would take advantage of this opportunity. A story at Kaiser Health News indicates the actual number may be much higher: at least 600,000 young adults have already obtained coverage under their parents’ health plans. While most of the growth has apparently been in self-insured groups, fully insured plans are experiencing the same upsurge in membership. WellPoint, for example, reports adding 280,000 young adult dependents nationwide and the federal government added a similar number (although the article didn’t state what percentage of these were in fully-insured plans).

Of course, when it comes to health care reform every silver cloud has a gray lining. The Kaiser Health News article quotes Helen Darling, CEO of the National Business Group on Health, as noting “I don’t think anyone is eager to spend more money. This is not something employers would have done on their own.” She further cites the unfairness of asking employers to cover adult children who may be employed elsewhere. And businesses (and their employees) will pay a bit more due to this expansion of coverage to young adults – about one percent more according to estimates. And while its unclear how many of these individuals would not be able to obtain coverage elsewhere, but the general thinking is that a large majority of these young adults would be uninsured or underinsured, but for this provision of the PPACA.

Next let’s pause to note how rate regulation can be big business for consumer groups. In some states, regulators must approve health plan rate increases before they take effect. In others carriers may need to file their rate changes with regulators, but so long as the rate increases are actuarially sound they move forward. California, where rate increases tend to generate national news, is in the latter camp. The state’s Insurance Commissioner, Dave Jones would like to change that. (Actually he’d like to put health insurance companies out-of-business by implementing a single-payer system, but that’s another matter). However, he and others are pushing to change that. Assembly Bill 52, authored by Assemblymen Mike Feuer and Jared Huffman. This legislation would give the Department of Insurance (which regulates insurers in the state) and the Department of Managed Care (which regulates HMOs) to reject rate or benefit changes the agencies determine to be “excessive, inadequate, or unfairly discriminatory.”

In the findings section of the bill (which are the “whereas” clauses justifying the bill), the legislation cites rising premiums and the need for the state to “have the authority to minimize families’ loss of health insurance coverage as a result of steeply rising premiums costs” are among the problems the bill is intended to address. The solution: give politicians and bureaucrats the power to reject rate increases. No need, apparently, to address the underlying cost of medical care. The assumption seems to be that the way to reduce health care spending is to clamp down on premiums. This, of course, is like saying that the way to attack rising gas prices is to limit what gas stations can charge at the pump. One might conclude that, to be charitable, the legislation is addressing only a part of the problem.

Not only does AB 52 give medical care providers a free pass, it is likely to result in a windfall for the consumers groups supporting its passage. Politico Pulse notes that AB 52 requires insurance companies to pay for costs incurred by groups representing consumers at rate hearings. For groups like Consumer Watchdog this can represent a substantial amount of income. The Politico Pulse post reports that “Under a similar California provision for property and auto insurance, Consumer Watchdog has recouped approximately $7 million in legal fees since 2003”

Then there’s the 4th Circuit Court of Appeals hearing on two Virginia law suits seeking to have the Patient Protection and Affordable Care Act declared unconstitutional. A ruling from the three judge panel is expected in July. Much has been made of the fact that two of these three Appeals Court Judges were appointed by President Barack Obama – and the third by President Bill Clinton. While those so inclined are likely to consider this a conspiracy of cable news worthy dissection ad nauseum, it’s important not to make too big a deal about this.

First, courtrooms are not like the floor of Congress: partisan leanings have far less influence there. Second, as the Associated Press article points out, there are 14 judges on the court. Which of them hear a particular appeal is randomly determined by a computer program. There’s nothing sinister about the three judges selected for these appeals being appointed by Democrats, it’s just the way things turned out. No black helicopters are involved. Third, whatever this panel decides will be appealed by whichever side loses. The appeal could go to a hearing before all 14 Appeals Judges in the 4th Circuit or it could go straight to the Supreme Court. Finally, even if the appeals remain at the circuit level for another round, the final decision will be made by the Supreme Court. Everything going on in the lower courts (and there’s a lot of other suits out there needing to go through their appropriate Circuit Courts), is simply prelude. Yes, what the appeals court decide influences the Supreme Court Justices, but in a matter of this magnitude, far less than one might imagine. What happens at the District and Circuit levels is not unimportant, but it’s far from definitive.

While we’re playing catch-up: my previous post noted that Congress was likely to repeal the 1099 provision in the health care reform law. They did and the President Obama signed the law removing the tax reporting requirement from the PPACA. The PPACA no longer impacts 1099 reporting. I know you already knew that, but I wanted to close the loop on this issue. It’s now closed – and repealed.

Finally, a note about broker commissions and the medical loss ratio calculations required by the health care reform law. Where we last left our heroes, the National Association of Insurance Commissioners was debating whether to endorse bi-partisan legislation (HR 1206) that would remove broker compensation from the MLR formula used to determine a health plan’s spending on claims and health quality initiatives. The NAIC task force dealing with this issue wants time to review data being pulled together by the National Association of Health Underwriters, carrier filings and elsewhere.  Pulling together all this information, much of which has never been gathered before and is not maintained in a centralized data base, took a bit longer than initially anticipated. According to Politico Pulse, however,  the task force no”now believes it has all the data it will be able to get.” Which means the task force’s final report on broker commissions and the MLR calculation is now expected by May 27th.

Stay tuned.

And thanks again for staying tuned to this blog.  I look forward to continuing the dialogue with all of you.

NAIC to Study MLR Impact on Compensation and Consumers Before Voting on Changes

Brokers holding their breath to see if their compensation will be removed from the medical loss ratio formula required by the Patient Protection and Affordable Care Act will be turning a darker shade of blue. The hoped for support from the National Association of Insurance Commissioners, which was expected to result from a meeting of the NAIC’s Professional Health Insurance Advisors Task Force this past Sunday, has been delayed at least four weeks.

While there was widespread and strong support for removing independent broker compensation from the formula carriers are used to calculate their medical loss ratio under the PPACA, the Task Force opted to ask their staff to provide additional data before making a decision.

While disappointing the delay is not really surprising. A substantial of the commissioners are new, having just been elected or appointed as a result of the November 2010 election. As Jessica Waltman at the National Association of Health Underwriters put it in a message to NAHU’s leadership, “[I]t was clear as soon as we arrived in Austin that some of the new Commissioners (and there are quite a few of them) had reservations about moving that quickly since this is their first meeting…. some of the more senior Commissioners were very sympathetic to their concerns about rushing things through. The NAIC almost never endorses legislation, so this is a huge deal for them.“

In addition, the issue is controversial. Consumer groups and some liberal Democratic Senators have voiced opposition to changing the MLR formula.

The Agent-Broker Alliance leading the charge for this change to the health care reform law met with several supportive commissioners and the decision was made to delay the vote. This would allow time for information relevant to the issue, already requested of carriers, to be received and considered. This time will also be used by the Agent-Broker Alliance to gather and submit data on how independent brokers are able to save clients money and the post-sale service brokers provide their clients.

Most observers I talk with are optimistic the NAIC will eventually endorse this change in spite of hesitancy from some liberal commissioners. In this regard, Politico Pulse is reporting that “Liberal insurance commissioners got a little feisty (well, for insurance commissioners) … pushing back against the speedy, one-month time line for” considering the broker compensation exemption proposal. Politico quotes California Insurance Commissioner Dave Jones as saying “I’d hate to see haste impede us having the information in front of us to make a relevant decision.” And Washington state’s insurance commissioner Mike Kreidler as declaring “I hope what we produce as a work product we can stand behind and that we’re more interested in accuracy than speed.”

When politicians speak of the need to “study” and “consider” an issue it means 1) they sincerely want to learn more about the topic or 2) they want to defeat the proposal without having to go on the record voting against it. While I hope I’m wrong, given the opposition to the exemption from liberal consumer groups, I’m betting on the latter motivation in this case. (Time will tell as I’m inclined to believe the data will be very supportive of moving forward with the exemption). That the NAIC went ahead with just a four week delay in spite of calls from Commissioners Jones and Kreidler to slow down is a sign that while there will be debate, there’s a better than even chance the NAIC will indeed support legislation to make changes to the medical loss ratio provisions of the PPACA.

Ultimately whether broker compensation is included in medical loss ratio calculations will be determined by Congress and President Barack Obama – which means nothing is certain. While I believe taking this action furthers the intent and purpose of the health care reform bill, the proposal will not enjoy smooth and speedy sailing. The bipartisan legislation introduced by Representatives Mike Rogers and John Barrow, HR 1206, has been referred to the House Energy and Commerce Committee, but no date for a hearing has yet been set.

That the idea is still alive, however, is both remarkable and encouraging. But it’s still too early to start breathing again quite yet.

Broker Testimony Before NAIC Concerning MLR and Commissions

The National Association of Insurance Commissioners will be meeting in Austin, Texas this week to consider a number of issues related to the Patient Protection and Affordable Care Act. One topic will be how the medical loss ratio provisions of the health care reform bill impacts brokers and consumers. A coalition of broker organizations will be testifying this Sunday urging the NAIC to move forward with a proposal to exempt producer compensation from the MLR calculation.

The MLR targets (individual and small group carriers must spend 80% of premiums received on claims or health quality efforts; large group carriers must spend 85%) is a critical part of the PPACA’s scheme to “bend the cost curve” when it comes to premiums (never mind that the biggest driver of premium rates is the cost of medical care). Limiting the amount of premium dollars insurers can devote to administration and profit, supporters believe, will result in reduced insurance rates. Also, since the PPACA requires all consumers to obtain health insurance coverage the medical loss ratio rules are designed to prevent carriers from gaining an undeserved financial windfall.

Significantly, exempting broker commissions does not run contrary to either purpose. The legislation being considered by the NAIC will still limit the percentage of premiums carriers can spend on administration and profit – and to a greater degree than most state measures addressing MLR targets do today. In addition, carriers will still need to aware of the total cost of their policies – including broker compensation. From a consumer’s point of view, the total cost of coverage will be the carrier’s premium and the broker’s commission. Carriers will be unwilling to go to market with a total cost that is uncompetitive because of overly generous broker commissions. This is one, but not the only reason, broker commissions are unlikely to return to where they were before the passage of the PPACA even if broker compensation is removed from the MLR formula. That broker commissions should increase at the rate of medical inflation, as opposed to general inflation, for example, is hard to justify when medical inflation is increasing at twice the rate of increases to the Consumer Price Index. But this change will — and should — be driven by market forces, not arbitrary limits set by Congress.

The NAIC proposal is also consistent with the purpose of the PPACA’s approach to MLRs because, as I wrote last summer, exempting commissions from the medical loss ratio may actually reduce overall administrative costs in the system. Carriers today aggregate broker compensation from small groups and individuals then pass 100 percent of these dollars onto independent third parties, retaining none of it for themselves. This reduces paperwork costs for hundreds of thousands of brokers, businesses and families and is a cost-saving measure that should be encouraged by the PPACA.

Not everyone sees it this way, of course. The American Medical Association, consumer groups and some Democratic legislators have urged the NAIC to keep the medical loss ratio calculation put in place by the Department of Health and Human Services (with input from the NAIC) as is. On the other hand, a bipartisan group in the House of Representatives has introduced HR 1206 to remove broker compensation from the formula used to determine a carrier’s MLR.

The broker coalition, comprised of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, the Council of Insurance Agents & Brokers, and the Independent Insurance Agents and Brokers of America, was asked by the NAIC to present their views at Sunday’s hearing on the NAIC medical loss ratio proposal. Significantly, they were told there was no need to talk about the value brokers add to America’s health insurance system – this value was already recognized and appreciated by the Insurance Commissioners. Instead they were asked to focus on the economic impact of the MLR provisions as currently being implemented.

In a letter to NAIC from the Agent-Broker Alliance reports on a study that shows 25 percent of brokers surveyed are reporting business income reductions for individual and small group sales of 21-to-50 percent with another 25 percent describing losses at between 11 and 20 percent. The result is that brokers are leaving these markets, reducing the availability of their expertise to consumers just when the complexity of health care reform makes this expertise more critical than ever.

Past NAHU president Beth Ashmore will be providing testimony at the Sunday NAIC hearing. As a long-time Texas broker she will be able to provide Commissioners with a glimpse into how the “theory” of the PPACA is revealing itself in practical terms.

The NAIC has no vote in Congress, but they do have significant influence, especially to the extent the NAIC vote in favor of changing the MLR calculation is bipartisan. If they support exempting broker commissions it will give considerable momentum to efforts bills such as HR 1206. The legislative process takes time so there will be no quick fix. The key is to keep initiatives moving forward down the path. The NAIC meeting is a milestone along the way.

Bill to Exempt Broker Commissions from MLR Formula Introduced Today

A bit sooner than expected: Representatives Mike Rogers and John Barrow introduced legislation today to exempt broker compensation from the medical loss ratio calculations required by the Patient Protection and Affordable Care Act. Under the PPACA, health insurance carriers are obliged to spend 80 percent of the premiums they take in on policies sold to individuals and small group toward medical claims and health quality initiatives. For policies sold to larger groups this medical loss ratio target is 85 percent.

The purpose of the MLR requirement, in the words of Senator Jay Rockefeller, “is to encourage health insurance companies to deliver health care services to their customers in a more efficient and cost-effective way.” As a consequence of this provision, most health insurers have slashed broker commissions on policies sold to directly to individuals (as opposed to through an employer) and a significant number of carriers have made significant cuts to producer compensation for the sale and service of small group policies as well. This has forced many brokers are reconsidering the viability of continuing to service these market segments. Commissioners and others are concerned about

The National Association of Health Underwriters along with allied broker groups, specifically the National Association of Insurance and Financial Advisors and the Independent Insurance Agents and Brokers of America have been seeking to have broker commissions exempted from the MLR formula almost since the law passed. In October they won support from the majority of Insurance Commissioners at a meeting of the National Association of Insurance Commissioners to accomplish this, but at the last minute attorneys convinced the decided they lacked the power to make the change through regulation. Instead they would need to seek legislation to make this change. And they’re working on doing so.

In the meantime, Members of Congress are looking to change the health care reform law to accomplish the same goal – thus the bill introduced today, HR 1206. What’ impressive about the proposal (which will receive a bill number soon) is the bipartisan support it has received. The primary The lead sponsors are Republican Congressman Rogers and Democratic Congressman Barrow. They have been joined by 10 additional Republicans and 3 Democrats. Given the partisan divide prevailing in Congress, this is a remarkable coalition.

Better still, Jessica Waltman, Senior Vice President of Government Affairs at NAHU tells me that a bipartisan companion bill will be introduced in the Senate as early as next month.

Passage of the legislation is far from certain. Some Democratic lawmakers, several consumer groups and the American Medical Association oppose removing broker compensation from the medical loss ratio calculation. And some Republicans may be loath to improve legislation they are hoping to repeal.

Nor would exempting broker compensation result in a return to pre-PPACA commission schedules. While some of the more recently announced draconian cuts would no doubt be walked back. But as I mentioned in yesterday’s post, even if the PPACA were repealed, the way brokers are compensated was likely to change. The benefit of the Rogers/Barrow legislation is that these changes will reflect market forces, not an arbitrary spending target.

I’ll add a link to the press release from Representative Rogers when it’s available online, but here’s some of the key passages:

“’The nation’s 500,000 insurance agents and brokers help consumers find the right health care, advocate on their behalf, identify cost-savings opportunities and inform them of new products and changes in the industry,’ said Rogers, a senior member of the House Energy and Commerce Committee Subcommittee on Health. ‘A mandate in the new health care law severely restricts their ability to perform such services, meaning small businesses are losing jobs or shutting down completely and consumers are finding it harder to access their services.’”

“Insurance agents’ and brokers’ commissions are never part of an insurer’s actual revenue, and should never be counted as an insurer administrative expense, as confirmed by the National Association of Insurance Commissioners, the non-partisan experts on state insurance markets.”

“’Insurance agents and brokers serve as the voice of health insurance for millions of families and small businesses in rural communities,’ said Congressman Barrow. ‘These folks can help explain to consumers the many changes taking place in the healthcare world over the next few years, and so it’s important that our insurance agents are not hampered by provisions in the new healthcare law. This is another critical improvement that needs to be made to the healthcare law, and I’m hopeful that my colleagues on both sides of the aisle will work with Mike and me to see that this important improvement is implemented.’”

Edited March 18th to add bill number: HR 1206

Commissions, Medical Loss Ratio Targets, Brokers and Politics

Legislation to exempt broker commissions from the medical loss ratio provisions of the Patient Protection and Affordable Care Act is gaining bipartisan steam. Original sponsor Republican Representative Mike Rogers has been joined by Democratic Representative John Barrow. Other House Members from both sides of the aisle are expected to sign on before the legislation is formally introduced – perhaps as soon as next week.

Meanwhile, the National Association of Insurance Commissioner’s Professional Health Insurance Advisors Task Force has posted their draft of a bill to exempt broker commissions from the MLR (a copy of the proposed law is available at the end of this Employee Benefits Adviser’s BenefitNews article). The NAIC is seeking comments on the proposed legislation (which is very similar to that proposed by Representatives Rogers and Barrow) in that it simply removes compensation paid to independent brokers from the medical loss ratio calculation. A hearing on the draft bill will be held on March 27th during the NAIC’s quarterly meeting in Austin, Texas. (Those wishing to add their two cents to the conversation can submit an email to by Monday, March 21st.

This legislation is a top priority of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, and the Independent Insurance Agents and Brokers of America. Florida Insurance Commissioner Kevin McCarty, president-elect of the NAIC, has led the organization’s effort to deal with the negative impacts the PPACA has had on brokers.

All this is pretty good news, right? In a few weeks there could bipartisan legislation backed by the NAIC as a whole and its leadership in particular and supported by the grassroots strength of agent organizations. There’s just two problems: opposition from Democratic liberals and political maneuvering from Republicans.

Senator Jay Rockefeller has sent a letter to the NAIC complaining that treating broker compensation as anything other than administrative costs “would allow agents, brokers, and health insurance companies to retain the estimated $1 billion in benefits that American consumers will receive next year thanks to the health care reform law.” Senator Rockefeller overstates his case ($1 billion just from the MLR provision?), but at least he attempts to marshal some arguments behind his concerns. However, in many of these arguments his reasoning is flawed.

He states, for example, that “the proposal would make it more difficult for consumers and small businesses to understand how their premium dollars are used ….” Why? The PPACA already exempts taxes from the MLR formula, yet no one has expressed concern that this will confuse anyone.

He also assumes that if broker compensation is removed from administrative costs that commissions will revert to what they were before the PPACA. He even quotes a statement from me published in Benefits Selling magazine to support this point. In that article I noted that brokers cost of doing business rises at closer to general inflation, not the rate that medical costs drive up insurance premiums. And I predict that commissions will eventually be decoupled from premiums. However, my belief that how broker compensation is calculated is unrelated to health care reform. I’ve been talking about this dynamic for years, long before the start of the Obama Administration. Even were the PPACA to be repealed I believe the method of determining commissions will change. It’s simply too hard to justify tying commissions to medical inflation.

And that’s what Senator Rockefeller is missing. Commissions are set by market dynamics. Carriers, consumers and business owners need independent producers and are willing to pay for the value brokers provide. In setting commissions carriers not only look at what competitors are offering, but at what brokers can earn selling other products like life or disability. In the end it comes down to an economic calculation: does the compensation justify the time and resources brokers commit to make sales and service their clients. Regardless of how it’s calculated, if the answer is yes, brokers will engage with the product; if the answer is no, they won’t.

The medical loss ratio provisions in the PPACA disrupts this formula. By imposing an arbitrary cap on administrative costs and including commissions within this cap, the law threatens to make remaining engaged in the sale of individual products uneconomical for too many brokers. The PPACA shifts the situation where compensation reflects the value brokers bring to consumers and carriers to a mathematical formula driven by the medical loss ratio calculation which ignores value, effort and resources.

Liberal Democrats, however, are not the only hurdle to making changes to the MLR formula. As noted in a thorough and illuminating examination of the issue by Sarah Kliff in Politico, political calculations by Republicans may doom the bill. Republicans, Ms. Kliff points out, “have little to no political incentive to improve” the PPACA. Improving the PPACA simply makes it more palatable and that, in turn, makes the law harder to repeal. Better to leave the legislation’s flaws in place, this reasoning goes, so as to strengthen calls to chuck the entire package. Or as one source cited in the Politico article says, “If it really became a bill with steam and the Republicans started hearing from all those brokers maybe the odds change.” But I can’t get myself past the ‘we aren’t fixing this bill’ hurdle.”

NAHU and its allies are pitching the MLR change as necessary to protect small businesses – specifically the many health insurance agencies around the country. They are gaining potent support. Yes, there is opposition, but still, if approached on the merits, I believe the Rogers/Barrow legislation could pass. The primary reason for this optimism is that exempting broker commissions from the MLR formula doesn’t undermine the purpose of the PPACA’s medical loss ratio provisions.

It would be a shame, but in today’s world not at all surprising, if this helpful fix were derailed because some lawmakers find a greater political advantage to preserving the flaws within the PPACA than fixing them.

Bill to Exempt Broker Commissions from MLR Formula Coming Soon

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.

When Public Policy Meets Reality

A short (less humorous) version of an old joke goes: an engineer, a priest and an economist are stranded on a desert island with just a can of beans. They’ll starve if they can’t open the can. The engineer proposes a solution involving situating the can among rocks in such a way as to heat the can to the point of exploding. The priest suggests praying for divine intervention. The economist’s approach: “assume a can opener.”

Replace “economist” with “public policy expert” and you get a nice metaphor for why any massive reform is an arena where unrealistic expectations intermingles with unintended consequence. This dynamic doesn’t mean big problems don’t require big solutions, but it does imply that the assumptions and predictions of “experts” – especially those detached from what would generally be regarded as the “real world” – are unlikely to work out as well as hoped.

The Patient Protection and Affordable Care Act is no exception to this phenomena. The health care reform law is chock full of the favorite “concepts” proposed by academics over the past few decades. Exchanges. Standardized plans. Modified community ratings. On-and-on. Some of these ideas were the favorite of Democrats; some were originally proposed by Republicans. Most all of them are based on theories about how the real world should work, with the emphasis on “should.”

A case in point. One of the better provisions of the PPACA is aimed at creating a standardized approach to presenting the benefits included – or excluded – by a medical insurance policy. Standard terms and descriptions must be used by carriers beginning in 2012 so consumers can easily make apple-to-apple comparisons between policies. The PPACA lays out the requirements of these Summary of Coverage forms (e.g., they can be no more than four pages long). Developing the template and permissible language, however, is left up to the Department of Health and Human Services in consultation with the National Association of Insurance Commissioners.

Ask most policy experts and they’ll argue that standardizing these benefits will empower consumers to make informed decisions concerning the appropriate health care coverage that best fit their needs. Some will even be willing to state that this provision is another reason why brokers will be less necessary in the future. By making it simple to understand and compare policies, the expertise brokers provide will be less necessary.

In theory.

The reality appears to be something else.

While finding that consumers considered the initial version to be appealing and well received, a study by Consumers Union showed the Summary of Benefits “could lead [consumers] to select a plan that was not in their best interest.” The reason is because of:

  • Significant participant difficulty with cost-sharing concepts (allowed amount, coinsurance, benefit limits, deductibles, etc.)
  • Significant participant difficulty with covered service definitions (understanding what was included in specific service categories, like preventive care)

In other words, while the information was presented clearly, consumers lacked the expertise to use this information effectively.

Consumers Union, which publishes Consumer Reports, used focus groups to explore the effectiveness of the draft version of the standardized summaries. One of the study’s observations is that “shopping for health insurance was an aversive task, fraught with anxiety for many respondents. They were afraid of making a costly mistake if they chose the wrong plan. Even respondents with good health insurance literacy skills lacked the confidence to choose a plan, reflecting a concern that it would expose them to potential financial liabilities.”

I made a similar point in yesterday’s post: “health insurance is complicated, expensive, rarely shopped for, very personal and extremely critical to one’s health and financial security. This is not a purchase to be made lightly. Consequently, consumers and small businesses want an expert to help them make the right choice.”  But it’s nice to have this observation borne out in independent research.

Providing information in a user-friendly, clear and understandable way is very hard. And I believe standardizing the presentation of policy information is a worthy goal.

Where I part company with some policy experts, however, is when they assume that consumers are likely to be able to use this information effectively. Some may, but many will not.

Nor is this likely to change by simply improving the form. People shop for health insurance coverage maybe once a year or three times a decade. They’re not going to get good at it. In the torrent of information we all face, for most people spending the time necessary to become savvy about the ins-and-outs of health insurance just doesn’t rank very high.

That’s one of the reasons why the academics who create what they view as a transparent and agent-free health insurance market are doomed to disappointment. In an ideal, hypothetical world you can assume full understanding of clearly set forth information – heck, you can assume a can opener on a desert island. But once that theory comes in contact with reality, consumers want, need and deserve independent expertise from qualified professionals both before and after the sale.

Assumptions are fine, but reality is what counts.

Understanding Broker Anger

Non-insurance brokers reading this blog may be wondering what the fuss is about. Yes, commissions are being reduced, especially in the individual market segment. Who didn’t see the writing on that wall? Given the Patient Protection and Affordable Care Act’s medical loss ratio provisions, a substantial cut in individual health insurance commissions was a mathematical certainty.

So why the anger, despair and sense of betrayal? Yes, fear that one won’t be able to make a living in one’s chosen profession has a tendency to make macro events very micro – and personal. This would explain the despair, but more is going on here than concern over a reduced revenue stream.

Most brokers reading this blog are far more engaged in insurance sales and service than I currently am and can express how brokers feel far better than me. (Hopefully they will – and will do so civilly). However, I’d like to offer some observations to non-broker readers to start the dialogue.

First, let’s get the obvious issue out-of-the-way. Yes, the money matters. Professional brokers add value to the products they sell and service. (The service aspect of what brokers do is too often overlooked, but it is a major part of the job). Brokers want to be fairly compensated for that value. There are bills to pay and other products to sell. Time and resources are being spent and commensurate compensation is deserved.

The commission cuts we’re seeing vary greatly from state-to-state, carrier-to-carrier and product segment-to-product segment. In the individual market (where consumers buy coverage without support of an employer) commission reductions of roughly 30-to-50 percent appear to be the norm.  Cuts of this magnitude would disrupt any enterprise. Imagine telling GM that their new $41,000 Volt must now be sold for $25,000. So much for paying back their government loans. Look at what happened in California when state revenues fell by roughly 20% from fiscal year 2007-08 to 2008-09. (For those not paying attention, the result has been a fiscal, policy and political nightmare).

Brokers recognize that during the Great Recession others have sustained even harsher financial hits. Yet when it’s your cash flow, company doesn’t reduce the misery. Yes, brokers are better off than the owner of a neighborhood business bracing for the arrival of a Wal-Mart in their neighborhood or of a worker watching her job shipped overseas. After all, when a business closes or a job ends, all compensation revenue and income ends, too.

Brokers, however, still have strong relationships with their clients. There are other products to sell and service. Some producers no doubt have already calculated that the size of cuts to commission rates in many instances do not necessarily reflect commensurate cuts in actual compensation (in some circumstances, unfortunately, they do). Between 2004 and 2009 the average premium in the individual health insurance market segment increased by 31% for single coverage and 43% for family policies according to two reports published America’s Health Insurance Plans, a trade association for carriers. Premiums have no doubt increased in 2010 and will again in 2011 – the PPACA will see to that.

Still, given commission reductions of the magnitude being reported, the response of many brokers is neither surprising nor inappropriate – and it is intense and genuine. Because there is more involved here than the money.

Professionals who have devoted their careers to serving their clients and supporting their carriers are being told by those same companies that those services will no longer be worth tomorrow what they are today (in a monetary sense). At the same time, carriers are reminding brokers that their role in educating consumers has never been more important given the new health care reform law. How could anyone in this situation feel anything but devalued personally and professionally?

Intellectually most producers knew changes to the commission structure were inevitable even in the absence of reform. Tying broker compensation to the rate of medical inflation, which brokers know has greatly outpaced general inflation for years, was becoming increasingly difficult to justify. Knowing this, however, doesn’t make commission cuts any easier to accept. This is especially true when some carriers seem to be hiding behind health care reform to lower average commissions below what the math embedded in the PPACA’s medical loss ratio provisions seems to require (roughly to 7-to-8 percent of premium). Were these carriers to fully explain why they were reducing commissions significantly below their competitors, brokers might find the situation more easy to accept. Instead, brokers are being told “Here it is, take it or leave it.” A message that does nothing to address brokers concerns, but simply inflames their anger.

Worse, some carriers have apparently chosen to apply the compensation reductions to brokers’ existing block of business. This is a tactic brokers find unacceptable (and I feel for the sales executives of these carriers who have to explain and justify an approach they vehemently opposed).

Why are brokers concerned about retroactive commission cuts? For the same reason no health plan CFO would let their company offer a policy empowering subscribers to unilaterally lower premium payments simply by declaring that “household costs must be cut.” Yet these same CFOs are asking brokers to accept such an arrangement.

That even one carrier would attempt to take this approach undermines trust in all carriers. Brokers entrusted their clients and a portion of their livelihood to these insurers. Yes, there are contracts governing these arrangements, but there’s a large element of trust involved, too. Brokers rely on insurers to provide the coverage promised in their policies, to treat their clients fairly, and to be dependable business partners. Retroactively cutting commissions on existing business defies the definition of dependable.

My guess is that when their sales drop precipitously, as they inevitably will, these carriers will reconsider this approach. Insurers have, after all, retreated from similarly bad compensation ideas in the past (more on these examples in a future post). Even then, however, the sense of betrayal brokers feel today will linger.

Complicating brokers evolving view of their carriers is that while the commission cuts are obvious, other cost cutting measures insurers are taking are less apparent. The ranks of home office executives are being reduced at many companies, for example. but unless these terminated officers worked directly with brokers, their departure goes largely unnoticed. As a result many brokers feel, (in many cases wrongly) that carriers are not accepting their a share of the pain necessitated by the PPACA.

Brokers rightfully consider the services they provide their clients – and their carriers – to be valuable and important. And they are. Clients trust their brokers far more than their carriers. Consumers listen to their agents when it comes to choosing a health plan; I’ve never heard of a consumer listening to a carrier when it comes to choosing their agent. Most carriers seem to be making the cuts that the math requires of them. Brokers who expect that 20% commissions in an age of 80% medical loss ratios can continue are being unrealistic. And attacks on all carriers for unfair or inappropriate actions taken by a few insurers are unfair. Yet doing so is all too easy – and human.

Whether as a non-broker you believe producers have been overly compensated or not, the reality is that the imposition of commission cuts understates and undermines the perceived value of the profession. Brokers may have been reassured by the resolution passed by the National Association of Insurance Commissioners expressed their concern about the negative impact the PPACA could have brokers this past summer. They may be heartened to know that state regulators was calling on the Administration to “protect the ability of licensed insurance professionals to continue to service the public.” But outcomes trump good intentions. And while the position of the NAIC may impact the role of brokers in the future, what producers are seeing now is a devaluation of their work.

I believe that’s the greatest source of anger. Yes, selling and servicing individual health insurance will be less profitable next year than this year. Producers will determine on a broker-by-broker basis whether selling and servicing individual health insurance will be profitable enough to justify continuing to do so. What works for one broker may not for another.

The income being lost today will, I predict, be replaced through an influx of new customers and increases in the cost of coverage. What will be far harder to set right is the diminished trust between brokers and carriers. Loyalties and relationships have been strained and must be reforged. Harder still, however, will be restoring brokers’ sense that the value they provide is recognized and respected. Doing so will require carriers, lawmakers and regulators to treat brokers differently than has been too often the case to date.

Whether they are inclined to do so remains to be seen. Until they do, however, broker anger will continue, even when the lost income is replaced.