The Broker (R)Evolution

Years ago, there was no Internet.

And there were travel agents.  People that could help you book a trip to your favorite get-away.

Then the Internet arrived (thank you, Al Gore).  Sites like Travelocity and Expedia helped make trip booking as easy as a click of a mouse.

Then there were no more travel agents.

Ok, so that’s not entirely true.  There are still travel agents, but the demand for them has shrunk significantly.  And those who use travel agents are typically those who want the all-inclusive trip with flight, hotel, car, tours, etc.  Those who have lesser needs utilize the Internet.

Thus, the travel agent hasn’t gone away.  They still exist.  In fact, travel agents use sites like Travelocity and Expedia to serve their customers.  The travel agent has embraced change and done what it needed to do to survive. The travel agent has evolved.

In the insurance world, there are insurance brokers.  Brokers are the people who help individuals and businesses buy insurance including health insurance, dental insurance, short-term/long-term disability, and life insurance to name a few.

Then the Patient Protection and Affordable Care Act (PPACA) came along.

Will there soon be no more brokers?

Of course not.  Similar to the travel agent, the brokers aren’t going anywhere. Some will go out of business. Some will be bought. Some will merge.  But they will still be around.

What you can count on is this: they will need to evolve.  In fact, some already have.

Just like the travel agents did when the Internet arrived, the brokers are in the process of evolving to assure that they will still be relevant and needed post PPACA.

Perhaps I’m unfairly tying the evolution of the broker to PPACA, but there is a lot in the healthcare reform bill that will impact brokers.

One of the biggest changes that will affect brokers is due to a trickle down piece of PPACA.  When the bill was passed there was a component in it stating that medical insurance companies need to have a medical loss ratio (MLR) of 85% for large group health plans and 80% for small group and individual plans.  This was to take effect in 2011.  If the insurer did not meet the MLR guidelines, the penalty was to provide rebates to the plan members.

For those of you who have health insurance through a not-for-profit health insurance carrier or have coverage through a large employer – guess what?  Your insurer likely has an MLR that meets the criteria or is pretty darn close to it.  (No rebates for you!)

However, many of the insurers our there, especially those serving the small group market, are going to feel this trickle down.

So what the heck is the importance/significance of MLR?  To put it simply: insurers allocate dollars towards the payment of claims – their medical loss ratio.  Anything else is typically considered “administrative”.  This includes administrative expenses, overhead and, of course, profit.  So if the MRL is 80%, then the idea is that 80% of every dollar goes to pay claims and the remaining 20% goes into the administrative bucket.

With PPACA limiting what insurance companies can put in the administrative bucket, it is cutting into their profit.

What is the impact on brokers?

Many brokers are paid a percentage of the medical premiums that their clients pay to the insurers.  This is generally in the low single digit percentage range though it fluctuates based on broker/agreement with employer.  Since medical insurance is typically the biggest line item on any employer’s budget, it is also the largest source of income for brokers.

Additionally, there is something known as contingent commissions or bonus that brokers are paid by insurers.  Many times this bonus is tied to volume, meaning if broker A sends xx number of new clients to insurer B, then insurer B will send an additional amount of compensation to broker A.

Aside from the conflict of interest that this poses (brokers being paid additional compensation tied to volume regardless if the health insurance plan isn’t the best choice for the broker’s client), this additional compensation has long been an accepted business practice.  Though it’s not shouted from the roof tops, it’s also not done behind closed doors and in back alleys. Many employers are aware that their broker is receiving additional compensation from their insurer and do not have an issue with it.

Regardless of how one feels about this practice, it is likely to change.

With the MLR rules affecting insurance company profits, insurers need to find a way to become more lean.  They can only pass along so many double-digit rate increases before an employer leaves them.

Since it makes sense for employers to stay with an insurer long-term so that insurer-sponsored disease management and wellness programs have time to take effect, insurers should be looking to retain customers rather than raise premiums and make up for the MLR loss elsewhere.

Where do you think the next cut will be?

Let’s just say that brokers can count on getting squeezed by medical insurers in the form of lower bonus and commission.

So now you have brokers being paid less.  And with state exchanges due to roll out in 2014, do you think brokers are going to be needed for those individuals and small groups that are most affected by the MLR change and most likely to be the biggest customers of these state exchanges?  Likely not.

Thus, we have the fixings for a broker (r)evolution. I  throw the “r” in there because some may revolt.  But the smart ones will evolve.  Here are a few ways that I believe they will evolve.

First, get into shape.  Similar to companies cutting costs prior to being acquired, brokers need to position themselves to succeed in a new market.  This may mean merging with other brokers, or selling their books of business and stepping out of the game to let those who are “in shape” take the lead.  Those who refuse to get in shape will likely go out of business. It may also mean discussing alternative payment models with their clients or perhaps adding additional services to their portfolio (maybe both!)

Since the creation of state exchanges are likely to make it pretty easy for individuals and small businesses to buy insurance, it is the broker serving individual and small markets that have the biggest need to evolve.

Second, brokers need to become more than just brokers.  If the single benefit a broker brings to the table is the ability to shop for insurance and then pound on the insurance vendors to get the lowest rate…sorry.  This is the basic broker transaction that every other broker brings to the table.

Brokers need to do more – they need to become extensions of their clients, helping with employee communications and education, introducing vendors who can help employers save money and cut costs, navigating the maze of healthcare reform so that their client partners in HR can focus on their employees.

This evolution is already occurring to some extent, but I believe there’s more work to be done.

I often wonder if the role of brokers will become more employee-facing rather than strictly a “Benefits Manager – Broker” relationship.

Think about it:  if a broker can take on a larger role in open enrollment communications and education…if they can conduct educational seminars on how employee decisions and lifestyle affect premium…if they can become more involved in promotion of wellness programs and become more involved in the creation of total rewards programs to increase employee engagement…isn’t this a natural progression for today’s broker?

Similar to the travel agent being the one-stop shop for all travel needs including being the first person called when the traveler loses his/her purse or wallet, the broker can evolve to be the first person a benefits manager calls when its time to educate their employees on the new Consumer Directed Health (CDH) plan with HSAs or discuss how more treatment doesn’t necessarily translate into better health.

Are we still a few years away from this model?  Definitely.

But it does appear to be the natural evolution of the broker…especially if survival is at stake.

Now if you’ll excuse me, I need to call my travel agent.  The picture of the hotel in the brochure looks nothing like the place I just checked into.

[Note: My thoughts and comments in this blog are my own and do not in any way represent my employer or my employer’s views.]

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