MLR Dramatically Impacting Commissions, Agents Tell Regulators

The impact of the medical loss ratio has been dramatic on the agents and brokers in this country and it was dramatic immediately.”

That’s a quote from Beth Ashmore, an independent insurance agency owner from Lubbock, Texas, and a health care insurance and employee benefits specialist.

Speaking at a hearing held by the National Association of Insurance Commissioners on the medical loss ratio (MLR) provision of the Affordable Care Act (ACA) passed by Congress, Ashmore said commissions for health insurance producers have dropped “as much as 50 percent, particularly on the individual side, and it is causing many, many producers to seriously reevaluate their participation” in the health insurance market.

Ashmore, a former president of the National Association of Health Underwriters (NAHU), testified alongside Terry Headley, an agency owner in Omaha, Neb., and current president of the National Association of Insurance and Financial Advisors (NAIFA), before a panel of insurance commissioners from across the country at the March 27 hearing in Austin, Texas.

The NAIC in October 2010 voted to back the MLR requirement that restricts the amount health insurance companies may spend on administrative costs versus health care services. Under the MLR provision, insurance providers must spend 80 to 85 cents of every premium dollar on health care services and only 15 to 25 cents on administrative costs, depending on whether they’re insuring individuals, small groups or large groups. Currently agent commissions are included in the percent allotted to administrative costs.

Agents began to see the dramatic drop in commission rates from health insurers as soon as the federal health insurance reform legislation was passed. If commission cuts continue, agents will be unable to provide the services after the sale of the policy that health plan consumers need, especially small businesses and individuals, Ashmore and Headley said.

“Agent-provided service to clients is not transactional. The service does not end after a policy is put in force. In fact that is just the beginning,” Headley said.

“I really want to drive home … the amount of time and energy that agents and brokers spend servicing the account after the sale,” Ashmore said. Those services include enrolling, implementing and installing the health plan, as well as counseling employers and employees.

Then there are claims. Headley said an agent can spend “countless hours, about 20 hours per week … mitigating and mediating claims between consumers, health care providers and companies.” He noted that an internal NAIFA survey revealed that its members collectively are involved in 180,000 claims annually, for an average of around 223 claims per agent.

In addition, he said, “many of our members often serve as the extended human resource department for smaller businesses.”

The reduced compensation that agents are experiencing as a result of the MLR requirement will hurt consumers, Headley said. “Licensed health insurance producers simply cannot continue to provide these consumer services without adequate compensation for their time, training and now, more than ever, compliance costs,” he said.

Headley and Ashmore urged commissioners to work with Congress to remove agent commissions from the MLR calculation.

“Our fears regarding the unintended consequences of the MLR requirements are now being realized. Prompt congressional action, encouraged and supported by the NAIC would restore adequate compensation for the services that licensed professionals provide to consumers,” Headley said.

“Finally, if the consumers cannot turn to agents, to whom will they turn? Will it be the state insurance departments? And are the resources available?”

Not So Fast, Consumer Advocates Say

Representatives from consumer advocacy groups told commissioners that removing the agent commissions from the MLR could actually increase health costs for consumers. According to Timothy Jost of Washington and Lee Law School, agent commissions contribute significantly to administrative expenses, particularly in the individual and small group market.

He testified that the removal of commissions would also remove insurer incentives to control those expenses to meet the MLR requirement. Consumers would end up paying higher non-commission costs as well as costs of “uncapped producer commissions.”

Lynn Quincy of the Consumers Union said NAIC consumer representatives are recommending that the MLR rules be kept intact for now, but added that more information is needed to craft a final solution. She said one possibility would be to adjust the MLR thresholds to allow for producer compensation.

Quincy asserted that if an alternative solution is adopted with the aim of protecting agent commissions, it should be “entirely transparent.” If producer compensation should lead to increased costs for consumers, that compensation must be clearly and separately identified so that consumers understand upfront how much they are paying for agent services, she said.

Fee-for-service was proposed as one possible alternative for replacing producers’ lost commission income. Headley said some agents that specialize in health insurance and employee benefits are exploring the possibility of charging a consulting fee for services that they were able to offer to clients for no cost under the traditional commission structure.

That alternative, however, is not without its problems, Headley said. For one, some “states expressly prohibit a fee to be collected when a commission has been paid. If additional fees are permitted, they will have an adverse impact particularly on the middle and lower income consumers who will struggle to pay extra fees on top of their premiums. Consumers are the losers and they are losing valuable services as agents and brokers attempt to maintain the same high level of service with half the compensation.”

Another concern, Headley said, is that a service fee model might actually contribute to a “race to the bottom,” with agents competing on the cost of such charges and compensating by offering a reduced level of service. Additionally, he said, such a model “is not going to diminish premium … whether it be individual market or small group or large group.”

Ashmore also expressed doubt about the service fee model. She said the traditional method of embedding the cost of the commission in the price of the policy is the most effective way to distribute the product and provide service to the customer.

“I work directly for my individual and employer clients. … I am paid via the carrier for services provided to the client,” she said.

Is the MLR the Problem?

Michael T. McRaith, currently insurance commissioner in Illinois and President Obama’s pick to head the Federal Insurance Office, questioned whether the MLR is the real culprit behind decreasing producer commissions or if insurance companies are using it as an excuse to increase profitability. He pointed out that the rate of commissions has been decreasing over the past decade, well before the advent of the ACA.

“I’m not sure the loss ratio is the problem,” McRaith said. “You started to see compression in [commission] rates as premiums were increasing in many states far beyond the medical inflation rate.”

Headley and Ashmore agreed that commissions have been trending downward for the past two decades. Still, both insisted that in the past six to nine months, the downward spiral in commission rates for health insurance producers has been “phenomenal.”

Ultimately the commissioners came to no conclusion as to whether to back removal of agent commissions from MLR calculations as proposed in the Access to Professional Health Insurance Advisors Act of 2011 (H.R. 1206), sponsored by Reps. Mike Rogers, R-Mich., and John Barrow, D-Ga. The commissioners did vote to seek an evidence-based solution to the problem.