For those who have never interacted with a health insurance broker, they are also called agents or producers. Producers is a relatively new term that reminds me of farmer's markets but I guess that brokers thought it made them sound productive. They do pay attention to marketing as they also call their trade organization, the National Association of Health Underwriters, despite the fact that no health underwriters are actually members.
Besides coming up with clever names, brokers sell health insurance and are compensated by the insurance companies or health plans. The purchaser of the health insurance company does not pay brokers anything. Besides helping clients understand the insurance market, they do ensure that insurance companies receive the correct information about the groups or individuals and help enroll the client in the insurance company's system. This does save an employer group's human resource staff time. They will also advocate for clients who have difficulties with insurance companies. Brokers that work with very large employer groups call themselves consultants and can be paid by the client because they help them design their health insurance plans. For example, they might come up with a two for one colonoscopy provision to help encourage preventive services.
Why is the broker industry facing the wrath of the creative destruction of Romney and his merry band of private equity, hedge fund, and other exotic financiers? They don't charge clients for their services and keep insurance companies honest. The answer, as always, will appear as a series of bullet points:
- The Medical Loss Ratio requirement: Insurance companies now must pay 80%-85% of every dollar they receive on medical care. That leaves 15%-20% for profit and administration like paying brokers their approximately 8% commission. Broker commissions can be 10%-20% of the insurance company's administrative costs. It creates a very clear image of taking a dollar out of the insurance company's pocket and giving it to the broker. Now that administrative costs are a limited resource, insurance companies are starting to question their administrative expenses. Broker commissions are a large one. There was a movement in Congress to exempt broker commissions from the medical loss that is making slow progress through Congress. I assume that while brokers are good at coming up with creative and fun names, they must not have good as lobbyists as private equity firms. Well, their lobbyists are probably better than poor people who have the worst lobbyists.
- The Health Insurance Exchange: States are creating online websites called Exchanges that helps consumers by standardizing health plans to make comparison easier. In other words, they do the work of brokers. These Exchanges charge insurance companies a fee or commission to sell their plans on the Exchange just like brokers do. Are insurance companies going to pay two commissions to agents who are selling their plans? Probably not which is why brokers are rightfully concerned.
- Ability to act strategically: While the previous examples are external forces acting upon brokers, this 3rd point is self-inflicted. If brokers had an ability to act strategically, they could find a way to reposition their value proposition. Kind of like if Herman Cain could find a way to not act like a 70's porn star, he could have propositioned er I mean positioned himself differently. An example of my strategic thinking is that I make sure there is toilet paper in the bathroom before I position myself on the toilet seat. From talking with insurance brokers, I have learned that they are very tactical and tend not to think beyond the next sale. When a panel of insurance agents was asked about their approach to health reform, most talked about what they were going to do next week. When I ask brokers about advice for plan improvements, most say that if we added more features and lowered the price, they could sell more. When I press them and ask how much more they could sell, I realized they just mean it would be easier for them to sell our product if it sold itself.
- What's the value proposition? Is the broker profession doomed and going in the direction of mortgage brokers? No and yes. There will be less insurance brokers out there. However, a role can be carved out. Strategic insurance brokers (or brokers who make sure there is toilet paper in the bathroom) have changed their value proposition to demonstrate how they save health plans administrative costs. They can provide training to groups or other brokers on the impact of legislation so health plans don't have to. They answer questions to save time for health plan's customer service teams. They ensure the enrollment process is smooth to support health plan's billing and enrollment teams. Since their commission is paid out of the health plan's administrative budget, they are demonstrating their administrative savings. Strategic brokers are moving away from just being a distribution channel to an outsource customer service, training, and enrollment function.