Full- or Self-Service?

Is doomsday ahead? Really? It’s worth thinking about. There is plenty of concern about the potential impact of the Patient Protection & Affordable Care Act (PPACA) on broker compensation, given the law’s attempt to limit the impact of fees on premium costs and

and the creation of insurance exchanges in every state.

Will commissions suffer because the law’s medical loss ratio (MLR) provision requires carriers to spend at least 80% or 85% of premium dollars on medical care and lumps broker pay with “other non-claims costs” that could force carriers to pay rebates to subscribers? Will employers simply drop their health insurance plans, pay the required annual penalty of $2,000 per employee and send those workers off to the state-run insurance exchanges?

It’s possible that both scenarios could occur. And, of course, many brokers are concerned about the complexity of the exchanges, particularly for companies that provide services in multiple states.

But another school of thought says this: We’re a full-service firm that provides many value-added services to our clients, and we have no problem in validating our compensation requirements. We might need to reconsider the level of service we provide our small accounts, but our compensation is transparent. This could give us an advantage over smaller competitors that offer fewer and less sophisticated services and operate behind a veil of hidden fees.

That school of thought, advocated by Christopher Nadeau, principal and employee benefits practice leader at Boston-based William Gallagher Associates, suggests healthcare reform has added such complexity that full-service brokerage firms will be in greater demand.

“While the MLR will put pressure on compensation, more business will result for high-quality firms that provide those services,” Nadeau contends. “The broker will become even more crucial. Healthcare reform has made purchasing and delivering medical care for employers so complex that our role becomes more valuable than ever.”

Nevertheless, Dennis Donahue, former managing director, national practice leader for employee benefits at Wells Fargo Insurance Services USA, told the House Subcommittee on Health, Employment, Labor and Pensions last fall that the concern about the medical loss ratio’s impact on fees runs deep. Testifying on behalf of The Council, Donahue told the committee that some of his company’s employer clients are worried because the MLR is causing some carriers to leave specific markets, reducing competition.

“Under the law, carriers must calculate their MLR in each market in each state where they operate,” Donahue says. “Recent reports, including a U.S. Government Accountability Office (GAO) study…reveal that more carriers are pulling out of, or plan to pull out of, some markets because they cannot meet the MLR mandate in those locations.” Of course, he says, diminished compensation could lead to higher premium prices.

“We are seeing carriers cut commissions or try to move to models that shift some or all of the administrative cost directly to the policyholder so that these amounts do not get counted as administrative and distribution costs for the carrier.” This is especially true, Donahue says, for brokers servicing the individual and small-business markets.

What about the exchanges?

According to a study by Lockton Benefit Group, the healthcare law will create a financial incentive for some employers to terminate health benefit plans in 2014, when the new insurance exchanges take effect.

“Some employers will eliminate group health coverage and full-time jobs because of the law,” says Lockton Benefit Group president Mike Brewer.

The Lockton report says the vast majority of the company’s clients spend far more on health insurance than the nondeductible $2,000-per-employee penalty. In fact, Lockton says, in 2014 companies would save an average 44% of their projected 2014 health insurance costs by shifting workers to the exchanges.

Not so fast, warns Nadeau.

In Massachusetts, he notes, which has had a state-sponsored exchange since 2007, the penalty for not providing coverage was only $295 per year. “We did not have one client drop their group program and send their employees to the exchange,” he says. “We had zero slippage in our book of business.”

His company, Nadeau says, has “done the math” for its clients. For the majority of them, he says, it makes no sense to drop coverage and ship workers off to the exchange, particularly for higher-salaried employees. Companies have more benefits than just health insurance, he points out. “You are not going to fire your human relations department,” Nadeau says. “You still need to offer other benefits, and you will have the broker involved.”

Interestingly, the Republican candidates for president have criticized former Massachusetts Gov. Mitt Romney for signing the state’s healthcare reform law, on which the healthcare law was modeled. The Massachusetts law, which established a state exchange, may serve as a model for brokers to consider as they assess whether Doomsday is in fact on the horizon.