By Tom Linn and Wayne A. Walkotten, MarshBerry

The general consensus in the broker community is that largegroup accounts (greater than 100 employees) are likely to retainthe status quo despite recent healthcare reform. The more difficultquestion regards the future of small group accounts (less than 50employees) and individual health accounts. What will be thebrokers' role for these accounts? Will there be any role at all? Orwill new opportunities abound?

Because each state will determine its role and the use ofexchanges, the following issues tend to reflect a national view.The timing and delivery of exchanges will vary by state.

The following is a list of the major issues that will affect thebroker of small group and individual accounts:

o Tax credits, effective 1/1/10: Smallemployers with no more than 25 employees and average annual wagesof less than $50,000 that purchase health insurance for theiremployees will receive a tax credit if they pay at least 50 percentof the employees' premium. For 2010-2013, the credit is a slidingscale with a maximum of 35 percent credit paid to employers withless than 10 employees with average compensation of less than$25,000. Agent/broker impact: Over the period of2010 to 2013, these credits should entice more small employers topurchase group coverage for their employees, expanding marketopportunities for brokers in that period.

o Medical loss ratio (MLR) rebates, effective1/1/11: To ensure premium dollars are spent primarily onhealthcare, the new law generally requires that at least 85 percentof all premium dollars collected by insurance companies for largeemployer plans are spent on health care services and health carequality improvement. For plans sold to individuals and smallemployers, at least 80 percent of the premium must be spent onbenefits and quality improvement. If insurers do not meet thesegoals because their administrative costs (including distributioncosts) or profits are too high, they must provide rebates toconsumers. Agent/broker impact: Althoughindividual and small group accounts do have a more lenient standardto meet (80 percent versus 85 percent), expense compression islikely for all aspects of health insurance, including brokers'commissions. Our research indicates that MLR requirements willleave carriers with about 8 percent of premium available for brokercommissions. Also, many companies may seek to control costs byutilizing general agents, thus converting fixed distribution coststo a variable cost structure.

Related: Read "Healthcare reform: What now?"

o Employer mandate, effective 1/1/14: Employerswith more than 50 employees that do not offer coverage or offercoverage that is less than the "minimum essential coverage" willpay a fine of $2,000 per employee if at least one employee receivesgovernment subsidized coverage through an insurance exchange.Penalties can increase to $3,000 per employee in certaincircumstances. For employers who already offer group healthcoverage, this will serve as encouragement to maintain theirexisting plan. The same is true for those who were seriouslyconsidering providing coverage to their employees for the firsttime. Agent/broker impact: Increased marketopportunities.

o Individual mandate, effective 1/1/14:Requires all citizens and legal residents to obtain insurancecoverage. Individuals who fail to purchase health coverage will berequired to pay a penalty of $695 per year by 2016. Penalties willphase in starting in 2014. Thus, individuals who choose to bypasspurchasing insurance will be subject to the penalty, and will notmaintain coverage. However, with the new guaranteed issuerequirements, non-insured individuals could purchase coverage oncethey have the need. For those individuals who already buy healthcoverage, this new law will serve as encouragement to maintaintheir existing policy. The same is true for those who wereseriously considering purchasing coverage for the first time.Agent/broker impact: Increased marketopportunities.

o Guaranteed issue of coverage, effective1/1/14: Starting in the middle of 2010, A Pre-ExistingCondition Insurance Plan will provide new coverage options toindividuals who have been uninsured for at least 6 months becauseof a pre-existing condition. This program serves as a bridge to2014, when all discrimination against pre-existing conditions willbe prohibited. If consumers no longer need to purchase insurance inadvance of a catastrophic health condition, many will opt to paythe penalty annually and only purchase insurance when a significanthealth issue arises. Agent/broker impact:Increased adverse selection, resulting in higher premiums, whichcould (1) result in higher commission amounts per insured, and (2)prompt more consumers to forego coverage and opt to pay therequired penalties.

Read related: "The new healthcare law: What it means to agents andbrokers."

o Expansion of tax credits, effective 1/1/14:In 2014, tax credits for small employers are increased to up to 50percent of the cost of health insurance. This is paid on a slidingscale with the maximum 50 percent paid to employers with less than10 employees with average compensation of less than $25,000. Thesecredits are only available to employers purchasing coverage via theexchanges and decline swiftly as average compensation and employeecounts increase. Thus, most of the current buyers of group coveragewill not see any benefit from the tax credit program. It is clearlyaimed at assisting the smallest firms with the lowest-paid workers.Agent/broker impact: These credits should enticemore small employers to purchase group coverage for theiremployees, thus expanding the market opportunities for brokers.

o Health Benefit Exchanges, Issue #1, effective1/1/14: Tax credits are available for people with incomesabove 133 percent and below 400 percent of poverty level (i.e.,$43,000 for an individual or $88,000 for a family of four in 2010)who are not eligible for an employer-sponsored plan or offeredother affordable coverage. These credits are only available toindividuals who purchase coverage through an exchange or meetcertain income and plan parameters. While lower-income individualsmay have an overwhelming incentive to use the exchanges and takeadvantage of the subsidies offered them exclusively through theexchanges, few of those individuals buy from brokers currently.Agent/broker impact: Negligible.

o Health Benefit Exchanges Operational, Issue #2,effective 1/1/14: It is almost certain that the exchangeswill include a mechanism to compensate brokers. What that mechanismwill be is uncertain and will be decided on a state-by-state basis.Agent/broker impact: Brokers will retain a role inthe small group and individual marketplace with those insureds whoopt to purchase from an exchange.

It is likely that the market opportunities for brokers of smallgroup accounts and individual accounts will remain healthy and evenimprove through 2013. In 2014, rich tax credits offered to smallbusinesses and tax penalties threatening larger employers shoulddrive even more employers to insurance brokers for advice regardingtheir health insurance purchase.

Read related: "What will healthcare reform do to independent agencies?"

The threat to this scenario lies in the real possibility thatincreased demand and adverse selection will drive premiums tounprecedented heights. Small businesses and individuals currentlybuying health insurance coverage may be forced into electing to paythe new penalties because they cannot afford the new, increasedcost of health insurance. Ironically, this is exactly the scenariothe new law seeks to avoid.

General agents in the benefits space are another likelybeneficiary of the new laws for two reasons. First, the additionalcomplexity generated by the new law will drive brokers with limitedbenefits expertise to use general agents that offer a high qualityturnkey capability. Second, many businesses may seek to controlcosts by utilizing general agents to convert fixed distributioncosts to a variable cost structure.

The challenge for brokers lies in optimizing their role withinthe new health benefit exchanges for individual accounts and smallgroup accounts starting in 2014, unless enacted sooner on astate-by-state basis.

The defense that brokers must employ is the same one they haveused to compete effectively for decades: They must offer betterservice, more consultation, more flexibility and more creativity toeffectively compete in this new environment. Those who are excitedabout innovation and change and embrace the new environment shouldcontinue to prosper and grow.

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Tom Linn is senior vice president of MarshBerry and hasbeen with the company since 1999. His consulting activities involveagency valuations, acquisitions and mergers, ownership perpetuationand strategic business planning. During the past four years, he hasacted as the intermediary and advisor on insurance agencytransactions totaling more than $500 million. He can be reached [email protected].

Wayne A. Walkotten is senior vice president of MarshBerry.He joined the company in 2001 and manages the company's Michiganoffice. His specialties include mergers and acquisitions, strategicsolutions, business planning and financial management. He can bereached at [email protected].