Insurance brokers seek way out of rules squeeze

Health-insurance brokers, the conduits between medical insurers and the customers who seek coverage, are feeling a squeeze in the marketplace.

Whether that squeeze turns into a full throttle depends on whether brokers can successfully lobby in Washington for changes in new regulations related to the Patient Protection and Affordable Care Act, passed in March.

"We expect commissions to be cut in half," said broker John Zurbach, sales director at Kistler Tiffany Benefits Co., in Berwyn. "That's what we are seeing. We don't know what the final result of this thing is going to look like."

Late last month, Aetna Inc. sent letters to brokers saying it would be either cutting commissions or listing commissions as a separate item on the premium bill sent to employers who provide health benefits. In May, Independence Blue Cross, the region's largest insurer, told brokers it would no longer pay percentage-based commissions.

For employees who have health insurance at work, this is likely to have minimal impact. It could mean less help when they have questions or problems with their coverage, if brokers reduce their staffs. Or that added burden could fall on the human resources staffers at their workplace.

The biggest changes for brokers will occur in 2014, when consumers can bypass brokers to buy insurance directly through medical exchanges. But some smaller yet important changes will begin sooner due to new rules about how insurers classify expenses.

Those rules, known wonkishly as medical-loss ratios, kick in Jan. 1.

That's when insurers such as Aetna, Cigna Corp., and Independence Blue Cross must begin to prove they spend 80 to 85 cents of each premium dollar on medical expenses such as doctors and hospitals.

Or, to put it differently, insurers can only use 15 to 20 cents of the premium dollar on electricity, building supplies, executive salaries, wages for telephone operators, marketing costs, and profits.

If insurers end up spending more on overhead than the 15 to 20 cents, they have to rebate it to customers.

Seems simple enough - two categories, medical and everything else.

So where do brokers fit in? Clearly they aren't doctors or hospitals.

On Nov. 22, over the strong objections of brokers and many state insurance commissioners, including Delaware's, the U.S. Department of Health and Human Services decided that brokers are part of the overhead (the "everything else") because insurers pay them a sales commission.

So if the law requires insurers to limit overhead to 15 or 20 cents on the premium dollar, they are not going to want to pay the 5 percent or more commissions that have long been an industry tradition.

"I understand why [insurers] have no choice," said Vince Phillips, a lobbyist with the Pennsylvania Association of Health Underwriters. "They are between a rock and a hard place."

The brokers say they should not be classified in either the insurer's medical or the overhead category because their fees are really paid by companies that hire them to handle employee health benefits.

They would prefer to be a "pass-through," with employers paying their fees directly. To prepare for this possibility, insurers like Independence Blue Cross and Aetna have begun or will begin to list brokers' fees as a separate item.

"It's like the travel agent," said health economist Mark V. Pauly at the University of Pennsylvania's Wharton School. "Their commissions used to be included in the price of the ticket. Now it's billed separately - assuming there is a value of getting advice from brokers."

Brokers and the National Association of Insurance Commissioners, which helped draw up the regulations, agree that brokers do more than help companies and consumers buy insurance.

They also help navigate claims problems and explain the new regulations.

"I'm fearful that arbitrary and severe cuts in compensation are going to erode the agents' abilities to help their customers," said Phillips, the lobbyist.

The National Association of Insurance Underwriters is pushing to change the regulations or press Congress to amend the law. The National Association of Insurance Commissioners is weighing how to help the brokers and still preserve the insurers' ratio of medical expenses to overhead, said Illinois Insurance Commissioner Michael McRaith, an officer with the National Association of Insurance Commissioners.

Meanwhile, Independence Blue Cross is employing a variety of new compensation plans, including paying brokers based on a flat fee per each of their client companies' insured employees - a change it said it made apart from the new health law. Aetna's changes, which relate to the law, become effective Feb. 1.

"Part of what I see going on in the industry is that awareness is building that broker compensation should not just rise as premiums rise," said Jonathan Warner, of Warner Benefits in Wayne.

Warner said that when insurers list brokers' fees as a separate line on the premium bill, it will prompt employers to evaluate whether brokers' services are worth the money.

But, he said, that won't matter, "if you [the broker] are confident you are providing value."