UPDATE: Broker Purge: My question was rhetorical, but the answer appears to be "Yes".

Two days ago I wrote about UnitedHealthcare telling their insurance broker network that they're slashing commission payments by up to 80% for exchange-based individual policy enrollments. Just a few hours later I wrote a similar story about another small insurer in Arizona, Phoenix Health Plans, telling their brokers to go pound sand completely with regard to exchange enrollees.

Given the one-two punch in the same 24-hour period, I titled the second entry "Has the Great Insurance Broker Purge begun?"

I was being partly tongue-in-cheek, but it appears that the answer to that question is, in fact, "Yep."

Insurance broker Josh Dickerson, who also gave me the heads up re. UnitedHealthcare and Phoenix, just forwarded a third "your services are no longer needed" letter from HealthSpan (an Ohio-based carrier) to their broker network...and this one has a slight twist:

Recently, health insurance providers have seen significant changes in the health insurance market. HealthSpan is continually evaluating all aspects of the evolving exchanges so that we can provide care and coverage options that best meet consumers' healthcare and financial needs of Ohioans.

After carefully assessing recent Individual Exchange Marketplace changes and its volatility, that are financially impacting virtually all health insurance carriers, including HealthSpan, we are adjusting broker commissions for 2016 Individual Plans On and Off Exchange policies.

Effective December 30, 2015, HealthSpan will no longer pay commissions for INDIVIDUAL policies for either On and Off Exchange new business and renewals. Pursuant to our broker agreement we are issuing the 30 day notice of change which becomes fully effective on Monday, December 30th and after.

Like Phoenix Health Plans, HealthSpan has a pretty small individual market membership--just 10,000 people out of nearly 400,000 statewide, according to their 2016 rate request filings. Also like Phoenix (and unlike UnitedHealthcare), HealthSpan isn't jerking their brokers around by "reducing" commissions 80% while simultaneously disabling the tools those brokers need; they're coming right out and saying "no more commissions at all going forward", which is at least more honest in my view.

However, there are two important differences between Phoenix and HealthSpan. Unlike Arizona, Ohio hasn't had their Co-Op go belly-up (at least as for now, anyway); InHealth Mutual, the Ohio Co-Op, may be under "enhanced oversight", but is still trudging along for the 2016 Open Enrollment Period. As of this moment, there's no reason to think that their current enrollees are in the process of moving elsewhere (at least not because they're being forced to do so, anyway).

The more significant difference, however, is that unlike United and Phoenix, HealthSpan is cutting off individual market broker commissions regardless of whether the enrollees sign up on or off of the ACA exchanges.

This puts a slightly different spin on the "brokers being broken" story. Instead of making this move as a way of distancing themselves from the ACA exchanges specifically (while still remaining on the exchanges), it sounds to me as though HealthSpan has decided that they don't even NEED brokers at all anymore.

From the carrier POV, having the ability to drop their commissioned brokers is obviously considered a good business move; a customer enrolling by themselves (either on or off the exchange) means that the insurance company doesn't have to pay a broker some percentage of the premiums. From the broker's POV, of course, this is a pretty bad thing, since that's a big chunk of their business.

More support for this theory can be found at this LinkedIn post by Steven Warwick, CEO of Health Decisions US, an insurance enrollment assistance organization:

  • Changing rates 17 days after open enrollment starts, with one day’s notice, implies that United must have seen some very, very disturbing trends. Likely they were seeing far many more enrollments than they expected, particularly through online channels that can do high volume with little or no agent interaction.
  • This signals that online enrollment through the healthcare.gov marketplace and the use of temporary, hourly employees for open enrollment customer service is how the individual healthplan market will be served in the future. This is far more profitable than maintaining an agent network and commission structure.

I believe "temporary, hourly employees" refers to the ACA Navigator network:

An individual or organization that's trained and able to help consumers, small businesses, and their employees as they look for health coverage options through the Marketplace, including completing eligibility and enrollment forms. These individuals and organizations are required to be unbiased. Their services are free to consumers.

ACA Navigators don't receive any commission, and are forbidden from recommending any particular insurance carrier over another; they're there to explain what all the lingo means, explain how different variables are likely to affect enrollees (higher deductibles vs. lower premiums; co-pays; out-of-network providers; etc etc) as well as explaining how the actual ACA exchanges work, how to go through the enrollment process, how the federal tax credits and Cost Sharing Reduction works and so forth.

  • Other large carriers are likely to do the same - as we watch a classic "race to the bottom" play itself out.
  • To the extent that direct agents stop selling United plans, this can be viewed as a method for United to back out of Obamacare without officially walking away and insulting the administration.

...which is exactly what I was theorizing about the other day.

  • It creates political pressure to pass legislation to decouple agent commissions from the 20% profit limit ( medical loss ratio ) that the carriers operate under. As a consumer, this would drive insurance prices up since the agent commission would be added to the 20% the carriers could charge.

Now this is an interesting angle I hadn't considered. The MLR rule means that insurance carriers have to spend at least 80% of your premiums (85% if you're in the small group market) on actual medical care, NOT on carrier overhead. In other words, if you pay $1,000 in premiums, the carrier has to spend at least $800 of that on your healthcare as opposed to CEO bonuses, company retreats, marble floors for their headquarters and so forth.

If you enroll your family yourself via HealthCare.Gov or the state exchanges (or even off-exchange, but directly through the insurance company), the full $1,000 goes to the carrier. However, if you use a broker, then around $60 of that $1,000 goes to the broker commission, right?

It sounds like what Mr. Warwick is saying is that right now, that $60 commission is included in that 20%, so the carriers can only spend $140 on operational costs, which encourages them to drop brokers altogether. Warwick seems to be saying that there would be pressure on Congress to help out the broker community by allowing carriers to "split off" that 6% commission as a separate expense.

If that were to happen, then the total cost of a $1,000 premium would actually be $1,060: $800 on healthcare, $200 on operational cost, $60 on commissions, thus allowing the carriers to "get away" with bumping up the premiums by 6% (or whatever) without breaking the MLR rules in doing so.

  • It significantly impacts the revenue of major online web-brokers such as eHealth, as their revenue is primarily commission and "placement preference" based.

Yup. eHealth Insurance cannot be happy about this trend.

  • It may impact the government's thinking about the impending major insurer merger activity. Having the power to make these kinds of unilateral shifts in the structure of the market is exactly what anti-trust policy tries to prevent. This is actually really good for United – they are the largest, and would rather have smaller competitors.

Warwick also notes just what sort of money we're talking about here:

... It is worth reminding ourselves that insurance carriers transact at least $900 Billion of the $2.9 Trillion medical economy.

Assuming insurance commissions of around 6%, this represent a $54 Billion revenue stream. This is a huge market in commissions alone!

One could consider this an advertising / marketing expense, or one could look at this as a $54 Billion opportunity to reduce the cost of care in the USA. Right now, it is likely to be an opportunity for carrier profit.

Assuming this trend becomes the norm, it's obviously bad news for insurance brokers. Whether it's good or bad for the consumer remains to be seen.

While HC.gov and the other exchange sites are vastly improved over a couple of years ago, buying health insurance is still confusing for many people, and a lot of folks require hand-holding. The navigators are very helpful, but the brokers do serve a function as well, especially since many of them have years or decades of experience in the industry that some navigators just don't have. The Kaiser Family Foundation noted in a recent study that both navigators and brokers helped large numbers of enrollees the past two years, and that:

The need for in-person consumer assistance remains substantial. Website improvements notwithstanding, millions of consumers continue to need personalized help to apply for health coverage and subsidies. Seventy-nine percent of Assister Programs this year (and 80% last year) said most or nearly all consumers sought help because they lacked confidence to apply on their own; 82% of Programs this year (83% last year) said most or nearly all consumers needed help understanding their plan choices; 74% of Assister Programs (this year and last year) said most or nearly all consumers needed help understanding basic insurance terms, such as “deductible.” In addition, this year, like last year, most Assister Programs said it took one to two hours, on average, to help each consumer who was new to the Marketplace. Programs said it took somewhat less time, about an hour on average, to help consumers who were returning to renew Marketplace coverage and subsidies.

In other words, the websites are improving every year, and more and more people are becoming better educated about insurance in general and the enrollment process in particular, but there's still a huge need for experienced experts to help out. This may not be the case 5-10 years down the road, but for the moment it's still important.

Theoretically, if the MLR rules aren't changed, this should theoretically cut premium rates (or at least slow the rate of increase), since a 6% "middle man" will have been cut out of the loop for a large chunk of the individual market. However, as you can see, it's entirely possible that it'll just end up helping the carriers without anyone else seeing any benefit.

Anyway, it's an interesting development, and one worth keeping an eye on.

UPDATE: Thanks to commenter farmbellpsu for this link; apparently there are already very specific circumstances under which insurers are allowed to "decouple" broker commissions from their premiums for Medical Loss Ratio purposes:

In recognition of the fact that there may be instances where the policyholder does in fact retain the agent or broker and negotiate and pay the agent or broker’s fee or commission, CMS is issuing this guidance to clarify when it may be acceptable for an issuer to exclude agent or broker fees and commissions from premium for MLR reporting purposes. Accordingly, if all of the following seven conditions are met, an issuer may exclude these agent or broker fees and commissions from premium in the applicable state/market for MLR reporting purposes:

  • 1. The law of the state in which the policy is sitused does not deem the agent or broker to be a representative of the issuer;
  • 2. The policyholder is not required to utilize an agent or broker to purchase insurance and may purchase a policy directly from the issuer;
  • 3. The policyholder selects, retains, and contracts with the agent or broker on his or her own accord;
  • 4. The policyholder negotiates and is responsible for the fee or commission separate and apart from premium;
  • 5. The issuer does not include these agent or broker commissions and fees in rate filings submitted to the applicable regulatory agency;
  • 6. The policyholder voluntarily chooses to pass the fee or commission through the issuer and is not required to do so, or the policyholder pays the fees or commission directly to the agent or broker; and,
  • 7. The policyholder issues the 1099 to the agent or broker, if a 1099 is required.

If any condition in the above list is not met, then the issuer must include the agent or broker fees and commissions in earned premium for MLR reporting purposes. 

On the one hand, I'm going to assume that there are very few cases where all 7 of the above conditions are met. On the other hand, this does demonstrate that there is already some precedent for the "decoupling", and it would presumably only require the right amount of pressure/influence to scratch off one or two of those requirements...