Insurance Brokers: The First Victims of Healthcare Reform

Last Updated May 20, 2010 3:01 PM EDT

As a result of new government rules that limit how much health-insurance companies can spend on overhead and other areas unrelated to patient care, these firms are starting to cut insurance broker commissions for selling individual and small-group policies. While it's possible -- though unlikely -- that consumers themselves might have to pick up these commissions, the bigger question is whether agents will have to accept a much smaller role in the individual and small-group insurance markets as a result of healthcare reform. Agent commissions for these policies average 4 to 6 percent, although first-year fees can be considerably higher. Partly as a result, administrative costs for groups with five or fewer employees have historically ranged between 20 and 40 percent of premium costs. A recent Senate report found that the six largest health plans spent an average of only 74 percent of premiums on healthcare for individual and small-group members. That will have to rise to 80 percent on Jan. 1, 2011, under a provision of the Affordable Care Act. So agents expect to extract some of the difference from their fees.

Some insurance companies, including Independence Blue Cross of Philadelphia, are already paying brokers flat fees instead of commissions. Bigger players are also talking ominously about changes in broker payments. For example, Humana (HUM) is one of the biggest players in this market, with about a million small-business and individual policyholders. In delivering his first-quarter report to analysts, Humana CEO Michael McAllister said, "[T]here is going to be pressure on commissions; there is just no question about it."

WellPoint (WLP), which has an even greater stake in this market than Humana does, is also anticipating a crunch on commissions, according to WellPoint CFO Wayne DeVeydt. In his first-quarter conference call, he even suggested that insurance buyers, rather than health plans, should pay the brokers' fees. While DeVeydt is not the only one who has floated this idea, I suspect that any move by health plans to unload commissions on consumers, especially at a time when premiums are still rising at an ungodly rate, will bring the wrath of the public down on their heads yet again.

Assuming that the plans retreat from this stance -- not a given, considering their past tin-eared moves -- insurance agents will be in a pickle. In Idaho, for example, where insurers began paying flat fees a few years ago, one agent told the WSJ that he initially suffered an income drop of 20 percent. He eventually made this up by selling more policies to young folks, who paid less than his older customers and therefore generated more in flat fees than they would have in commissions. But not all brokers are in a position to follow his example.

What might happen is that more agents simply refer customers to self-service Web sites. Many people use these sites to shop among the few plans in their area that sell insurance to individuals and small firms. If people bought insurance off an agency Web site, the agency would still collect something from the plans.

Some brokers are looking forward to the expansion of coverage through the insurance exchanges, starting in 2014. Without a doubt, this will present an opportunity for brokers, even with reduced commissions. But meanwhile, they have another three-and-a-half difficult years to get through.

Image supplied courtesy of Speaker Pelosi at Flickr.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.