Health Insurance Brokers May Ask Congress to Protect Commissions

November 22, 2010

As insurance brokers feared, the Obama Administration has not exempted broker commissions from the formula for the medical loss ratio that health insurers must adhere to beginning in 2011.

Brokers say they may ask Congress to intervene if the medical loss ratio (MLR) formula is not altered to protect their fees and commissions.

The MLR requirement is part of the Patient Protection and Affordable Care Act and requires health insurers to spend 80 to 85 percent of consumers’ premiums on direct care for patients. The intention is to limit the share of premiums that insurers spend on administrative costs and profits, including executive salaries, overhead and marketing.

The Department of Health and Human Services (HHS) has now decided what costs may be contained in the MLR calculation, adopting most of the recommendations from state insurance regulators as to what should be considered direct care claims costs that fall within the 80 to 85 percent ratio and what should be non-claims costs that fall outside the medical ratio.

HHS, following recommendations by the National Association of Insurance Commissioners (NAIC), classifies agent and broker fees and commissions as non-claims expenses “unless a specific position can be directly correlated with an activity that improves health care quality.”

In its regulation, HHS takes note that the NAIC raised concerns regarding the potential impact of this regulation on agents and brokers and that some insurers in some states may be particularly reliant on producers to distribute their products and perform other duties. It also acknowledges that the MLR standard may put pressure on providers that have longer term compensation arrangements with agents and brokers.

However, in the end, the HHS and the NAIC declined to either recognize agent/broker fees and expenses in the MLR calculations as direct claim costs or exempt them from the calculation altogether.

The regulation only says that the impact of the MLR standard on agents and brokers will be a factor in considering a state’s request for an adjustment for a particular individual market. HHS said that in such cases it will consider if issuers reduce compensation to agents or brokers to the point where they are not available to assist consumers in finding coverage.

HHS said it will seek further comment on the issues related to agents and brokers.

HHS will no doubt hear from agents and brokers, who fear being squeezed out by insurers working to stay within a formula that classifies sales commissions as non-claims costs. The brokers are disappointed and say they may try to have their commissions protected through federal legislation.

Robert Rusbuldt, president and CEO of the Independent Insurance Agents & Brokers of America (Big “I”), said his trade group is “extremely concerned that this rule will lead to severe market disruption, especially in the individual and small group markets.”

The Big “I” has argued that these agent commissions are “passed 100 percent to third parties” and that as pass-through payments they should not be affected by any MLR formula.

“The Big ‘I’ is very concerned that the MLR provision of the new health care reform law will have a devastating effect on the private marketplace and that consumers will be negatively impacted,” said Charles E. Symington Jr., senior vice president for government affairs. “After hearing from various interested parties, if HHS does not fix this language before the rule is final, we hope that Congress will step in and revise the MLR formula through the legislative process.”

Other MLR Provisions

The MLR formula excludes some costs insurers had wanted to count as direct costs including the amount they spend on curbing billing fraud and the start-up expenditures they will incur for implementing a new medical billing coding system.

HHS also rejected insurers’ recommendation that their spending ratios be calculated on a nationwide basis; HHS instead backed state regulators in ruling the ratios should be state-by-state calculations.

Medical insurers did win some concessions, however.

The HHS regulation allows any state to seek a three-year exemption for individual health insurance policies if the state concludes that adherence to the strict loss ratio would “destabilize” the market or cause insurers writing individual policies to stop doing so in the state.

Also, HHS has exempted so-called “expatriate” policies for Americans living abroad as well as “mini-med” plans — policies with very low annual dollar limits and low premiums — from the MLR requirement until at least 2014.

The HHS regulation also contains a provision for adjustments in the medical loss ratio for small insurers with fewer than 675,0000 customers and limited experience, as well as a provision allowing new insurers to delay reporting the MLR.

The regulation will allow insurers to deduct federal and state taxes that apply to health insurance coverage from an insurer’s premium revenue when calculating its medical loss ratio. Taxes assessed on investment income and capital gains will not be deducted from premium revenue. In the case of non-profit plans, assessments they are required to pay in lieu of taxes may be deducted.

Beginning in 2011, the law requires that insurance companies publicly report how they spend premium dollars for group and individual policies. They will be required to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs, starting in 2011.

Insurance companies that do not meet the medical loss ratio standard will be required to provide rebates to their consumers beginning in 2012. HHS said that next year as many as 9 million Americans could be eligible for rebates worth up to $1.4 billion.

According to HHS, more than 20 percent of consumers who purchase coverage in the individual market today are in plans that spend more than 30 cents of every premium dollar on administrative costs. An additional 25 percent of consumers in this market are in plans that spend between 25 and 30 cents of every premium dollar on administrative costs. In some extreme cases, insurance plans spend more than 50 percent of every premium dollar on administrative costs.

“Thanks to the Affordable Care Act, millions of Americans will get better value for their health insurance premium dollar,” said HHS Secretary Kathleen Sebelius. “These new rules are an important step to hold insurance companies accountable and increase value for consumers.”

Beyond Sales

The National Association of Health Underwriters (NAHU), which represents 100,000 health brokers, has also called for protection for commissions, arguing that agents play an important role after the sale by helping customers with claims, billing and compliance issues.

“In the midst of this massive health care overhaul, the agents’ role as advisor and educator is even more critical,” said NAHU CEO Janet Trautwein, commenting on a recent NAHU member survey on the services agents provide post-sale.

“As members of a profession that requires a license and has stringent educational requirements, agents and brokers serve more as advocates for clients than simply salespeople. Without the assistance of health insurance agents or brokers, health care consumers would be left alone to deal with the ever-changing landscape of our health care system,” Trautwein said.

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