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Obamacare Health Exchanges Could Take a Big Bite Out of Broker Commissions

State-run health care exchanges could offer one-stop shopping experiences for small businesses, which usually pay more for insurance because they lack the buying power of bigger companies.

November 16, 2012

Jamie Schutzer has been a health insurance broker for years, but he recently became licensed to sell property and casualty coverage. His firm, meanwhile, has developed alliances with property and casualty brokers. The moves are hedges against the potential impact of Obamacare health exchanges that have put hundreds of millions of dollars in commissions at risk.

"Taking every penny out of our commissions is not going to solve the issue of the high cost of health insurance," said Schutzer, a vice president with J.D. Moschitto & Associates Inc. in White Plains, New York.

Brokers have traditionally played a big role in helping small businesses buy health insurance—88 percent of small group coverage in New York is purchased through brokers, who reap $693 million a year in commissions, according to a study by Boston's Wakely Consulting Group. But that could change. The state-run health care exchange could offer one-stop shopping experiences for small businesses, which usually pay more for insurance because they lack the buying power of bigger companies. The goal is to simplify and reduce the cost of buying health coverage by making it easy for them to compare insurance prices and services, forcing carriers to compete for their business.

Brokers may find themselves irrelevant if the exchanges that must be online by January 2014 succeed in making it easier and cheaper for employees to shop on their own. Small firms may simply offer employees cash to buy insurance on the exchange. Already concerned over dwindling commissions, brokers are fighting to retain their business.

"It will not be as lucrative for us," said Alex Miller of Millennium Medical Solutions Corp. in Armonk, New York. "We have to expand services and make up for it in volume. Longtime specialists will play a greater role and continue to add value, but it's naive to think it's going to be business as usual."

The exchange will feature an Internet portal where individuals and small businesses and their employees can buy health insurance from private carriers and, if consumers meet income tests, possibly sign up for Medicaid. The state is trying to work out the mechanics of the exchange, deciding not only how brokers fit in, but also who pays the commissions and how they will compare with those earned outside the exchange.

There is general agreement that small businesses rely on brokers for their help navigating the health insurance maze. Many also act like the human resources department most small businesses can't afford.

"We feel really strongly that brokers are a crucial connection to small business, and we ignore them at our peril," Troy Oechsner, deputy superintendent for health at the state Department of Financial Services, recently said at a public meeting discussing how the exchange might work.

Oechsner said the state wants carriers to continue to compensate brokers who help businesses evaluate their options so that the exchange won't need to add a layer of costs and administrative expenses to manage commissions. How that would be worked out remains unclear.

Commissions are already under pressure. The average payout runs about 3.5 percent of monthly premiums, down from about 6 percent in the 1990s, while commissions on HMO policies are capped by law at 4 percent. Under the Affordable Care Act, insurers can't spend more than 20 percent of premium dollars on administrative costs, an incentive to further lower commissions.

The steady growth of health insurance premiums—up 8 percent nationally for small businesses in 2012, according to the Kaiser Family Foundation—has been a reliable source of increasing income. But insurers have been putting on the squeeze. Empire BlueCross BlueShield last year reduced the number of small group plans it sells and slashed brokers' 4 percent sales commission—about $22 to $24 a month per enrollee—to $5 per member per month. Brokers say that doesn't compensate them for all the work they put in, from advising on policies to educating employees to running interference on claims.

"How can you give advice for $60 per employee a year?" asked Craig Hasday, COO of Manhattan-based Frenkel Benefits and a member of the legislative council of the National Association of Health Underwriters.

An even bigger threat to brokers may be the time and cost savings small businesses might reap with the debut of the exchange. Employers could simply give workers a fixed amount to buy insurance on the exchange and free themselves from the administrative costs and hassles of contracting and managing the coverage.

"If defined contribution catches on and the employer says, 'I'll give you $300 a month toward insurance,' what's the role of the broker in that situation? Sit down with each individual employee?" asked Peter Newell, insurance project director of the United Hospital Fund.

Insurers, so far, have yet to weigh in on questions of how and whether brokers would be paid for work in the exchange, at least not publicly. "We recognize the role brokers play in the marketplace, but we haven't really taken a position," said Leslie Moran, senior vice president of the New York Health Plan Association.

Then there's the role of the group mandated under Obamacare to guide consumers through the choices on the exchange. Exactly what so-called navigators will do is undefined. Professional associations, organizations that today help people enroll in Medicaid and even brokers are candidates for the role, but they can't be paid by insurance carriers. The law mandates that the exchange pay them with "grants" from its operating budget. Chances are they will work mostly with individuals, but some brokers worry that navigators' free advice will undercut their business.

"We already have a distribution system," said one broker. "Let's use it."

To compete, industry watchers say brokers need to figure out what else companies need, like administering employee benefits for small groups.

"To continue to thrive, brokers need to create value-added services," said attorney Sarah Delaney, a partner in Goldberg Segalla's insurance practice. "Service is going to be the way forward."

Some brokers are taking even bolder steps. In September, Manhattan-based insurance broker Hub International launched its own private exchange as an alternative to the state exchange.

"Ours is a budget-based model," said Joseph Torella, president of Hub International Northeast. "The client says, 'Here's what we have to spend, and we want you to build us a chassis that allows us to pick and choose medical and dental coverage.' "

Judith Messina writes for Crain's New York Business, a sister publication of Workforce Management. Comment below or email editors@workforce.com.

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