In the fluid and often chaotic healthcare insurance environment,producers are finding they can head in one of three directions.

In the year since the enactment of the Patient Protection andAffordable Care Act (PPACA), as uncertainty has mounted over howthe health insurance reform law will work and whether it eventuallywill even be the law of the land, producers are concluding they canonly keep up, team up or get out.

Related: Read “Top 5 changes to expect from healthcare reform.”

The first two avenues will mean modifying their businessmodel—becoming more of a consultant whose value will be measured byfees that clients are willing to pay, rather than commissions thatinsurers remunerate.

That's mostly because of the guidance that clients need tonegotiate the choppy waters of health insurance reform, learnedassistance that producers expect clients will require for sometime.

But the new model also will be driven by the anticipated move toa fee-based compensation system that producers say already isemerging to replace the current compensation model of insurer-paidcommissions. That development also is a product of the PPACA andnew regulations relating to which pots of funds health insurersmust tap to cover certain expenses, including producer compensation(see “Medicalloss ratio issues still up for grabs“).

The new business model almost certainly will trigger somefallout, mostly hitting small producers, observers said.

Some report that the level of advisory services that clientsneed will take a measure of resources that small producers will notbe able to muster. Those without adequate resources to keep abreastof quickly changing developments in the market will be forced tomerge with larger, more affluent agencies or exit the business,large producers anticipate.

Even smaller agents expect their numbers to shrink at leastsomewhat. However, they maintain that there will be plenty ofopportunity for hardworking and knowledgeable independent smallagencies.

A chaotic period

At no other time in recent history have health insurance buyersrelied more heavily on their agents and brokers for direction, asproducers and their clients have been whipsawed by developmentswith the PPACA since late 2010, industry observers say.

Two courts have upheld the law, another has struck down thelaw's individual coverage purchase mandate, and a fourth has ruledthat the entire law is unconstitutional. All of that sets up aprobable U.S. Supreme Court review of the law within a year or two,prompting insurance buyers to wonder what their compliancerequirements are.

Meanwhile, following the Florida federal court's ruling that the PPACA isunconstitutional, at least one of the 26 states involved inthat litigation has decided not to implement the law. InFlorida, Attorney General Pam Pondi interpreted the court's opinionas an injunction of the law, state lawmakers have no plans to passlegislation to implement it, and Gov. Rick Scott has said that nostate agency will work on it.

In Congress, Republicans attempted to repeal the PPACA. But Republicans havevowed to amend it significantly, and even President Obama has saidhe would not oppose changes, as long as they keep the essentialelements of the law intact.

By then, producers and their clients already had grownfrustrated by compliance regulations from the federal government.Many producers noted that after issuing difficult-to-meet healthplan non-discrimination rules last year, the government rescindedthem after many employers already had made plan decisions theywould not have chosen otherwise.

For example, under the regulations' grandfather provision,employers that remained with their incumbent insurers could retainhealth plans that failed to meet new non-discrimination ruleswithout paying a hefty $100 daily fine per discriminated-againstplan member. Some employers paid 20 percent higher premiums toremain with their insurers, and they did not have time to shoptheir accounts when the government pulled the regulations in lateDecember, said Scott Even, sales manager at the Tucson office ofgeneral agency Rogers Benefit Group.

Valued advisors

Given the fluid nature of the health insurance environment, anagent “has to be a strong intellectual, strategic partner to theclient,” said Christopher Nadeau, principal and employee benefitspractice leader at Boston-based William Gallagher Assocs. Insurance BrokersInc., a large independent agency.

“The broker and agent who can't walk a client through this is inserious jeopardy,” not only of losing clients but of also facingprofessional liability claims for providing inadequate or erroneousguidance, he said. In some cases, even the most sophisticatedclients don't know what they don't know about the law, Nadeau said.That could put clients at a competitive disadvantage in their ownindustries if their agents and brokers are not on top of the latestand sometimes cloudy developments with health coverage.

Agency executive Craig Hasday agreed that agents have to becomestrong partners with clients. “We have to maintain constant contactwith clients about the situation, because it's literally changingevery day,” said Hasday, chief operating officer of New York-basedFrenkel Benefits LLC, a unit of Frenkel &Co.

Agents and brokers have no other option if they want to remainindependent and stay in business, said agency owner Steven Spiro.“They're going to be left in the dark if they don't reinventthemselves to become advisors to clients in the future,” saidSpiro, owner of The Excelsior Group Inc. of Valley Stream, N.Y.

“And if agents haven't been an advisor or counselor for themalready, shame on them,” he said. “My philosophy has always been toget them on price and keep them on service or advice.”

But more than allowing an agency to survive, becoming a valuedadvisor will help it thrive, Even said.

“Knowledge is power—it's like an education race” amongproducers, with the losers leaving the market or getting swallowedup by the winners, said Even, noting that 2010 was one of his bestyears due to the chaotic health insurance environment.

Clients—from the most sophisticated businesses tomom-and-pops—not only want but genuinely need their agents to bestrong advisers who are on top of the latest developments, agentsand brokers are finding.

For example, a large private equity company that was developinga 5-year business plan last year as it prepared a project bid hadno idea it faced discrimination penalties if it did not modify itshealth plan within a few years to meet new PPACA requirements,Nadeau said. Gallagher Assocs. pointed out the issue after thecompany consulted the agency on another matter.

If the discrimination issue had gone undetected, the company'sbid would have been inadequate, Nadeau said. Now, the privateequity company is concerned that its competitors do not understandthe issue and will underprice their bids. The client is making sureits competitors understand the issue so all of the bidders will beplaying on a level field, Nadeau said.

Another client that sponsors a self-insured plan covering 300lives did not realize its benefits costs would nearly double toaround $4 million annually within the next few years as a result ofthe PPACA provision that eliminates lifetime health insurancecoverage caps, Nadeau said.

The client had counted on its medical stop-loss insurance tocontinue limiting its annual costs to $2 million annually. Thatcoverage is critical to the client, because a baby covered by theplan was born last year with hydrocephalus—water on the brain—andis incurring annual medical costs that exceed $2 million.

The client did not understand that, unlike with health coverage,the PPACA does not eliminate the lifetime limits cap that medicalstop-loss insurers impose, Nadeau said. The client's coverage isexpected to run out next year, he added.

The resulting doubling of benefits costs would bankrupt thecompany, which now is considering its options, Nadeau said. Onepossibility is cancelling its health plan and taking the muchsmaller federal annual penalty of $2,000 per covered life, or$600,000 in that client's case, he said.

Sweating the small stuff

There also are little-publicized provisions of the PPACA thatagents and brokers need to be expert on since clients won't be,said Henry Loubet, chief strategy officer at Torrance, Calif.-basedKeenan &Assocs. Keenan is among the nation's 20-largest brokers.

For example, the PPACA provides $5 billion of subsidies toemployers for use in funding the healthcare component of theirearly retiree programs. On a first-come first-served basis,employers can obtain an 80 percent subsidy in the form of areinsurance reimbursement of the medical claims of retirees 55 andolder who are ineligible for Medicare, as well as for theirspouses, surviving spouses and dependents. 

Loubet said that the agency already has helped 25 of its clientsobtain $10 million in subsidies. The application process for eachemployer is complicated, taking about 180 hours to complete, hesaid. “You do anything wrong, you have to apply again.”

In many cases, the clients were not aware the program existed.“One of our jobs is to look out for our clients and customers,”Loubet said.

Many observers do not anticipate agents' value as healthcareadvisors will diminish after helping clients clear the initialhurdles they face in complying with the PPACA.

For example, many producers note that plans meetingnon-discrimination criteria this year or next might fail governmenttests in subsequent years. Regulations as they are currentlywritten do not provide enough guidance to allow employers or agentsto make that determination, many producers say.

Another example is the help that some agents and brokers expectclients will seek in 2014, when the state insurance exchanges arescheduled to become operational. The exchanges are designed tocover individuals who do not have health insurance throughemployer-sponsored plans.

Noting the current difficulty that smaller groups andindividuals have in selecting health plans, Spiro said: “As smallergroups and individuals have exchanges made available to them,although they'll think it'll be easy selecting coverage, I thinkthey'll need more advice than before—especially if agents were notadvising them previously.”

Other services that aren't advisory in nature also will buoy anagent's value, Hasday said. Those could include processing planenrollment, handling plan communications and providing wellness andpayroll deduction services, he said.

Bigger and better?

Who will be capable of delivering such expertise, grounded in athorough understanding of evolving federal and state regulationsand legal developments?

Executives at large agencies say they have the resources thatsmaller producers do not to provide value to clients anddemonstrate it to prospects.

For example, William Gallagher Assocs. has created ahalf-dozen-member health reform advisory team that meets weekly todiscuss the latest developments in health insurance reform and blogabout it on an unlocked section of the agency's website. The agencyhas created various checklists for both small and large groups andprovides updates on rules and regulations, timelines andcalculators. It also has committed significant resources totraining its health insurance producers.

“From a marketing standpoint, this has been wonderful for us,”Nadeau said. “The small broker won't be able to keep up with that,”plus all of the “insane” amount of reporting requirements thathealth plan sponsors will be facing, he said.

Small agencies that cannot afford or do not want to invest inthe infrastructure needed to handle it all are “good acquisitiontargets for us,” Nadeau said.

But that scenario does not have to play out, said John Prible,the Washington-based vice president of government affairs for theIndependent Insurance Agents & Brokers of America, whose300,000 members have 9 employees on average.

“I don't' see a competitive advantage for these big guys at thisstage,” Prible said. Through the Big I and its state associations,smaller agents and brokers “have the same access to information aslarge brokers” that can be used to appropriately advise clients, hesaid.

The potential of inadequate compensation for agents and brokersas a result of the PPACA's and a new regulation's treatment ofhealth insurers' expenses is a greater threat to small producers,Prible said.

Small agency executive Bob Bramlett concursthat small producers can be valuable advisors to clients.

Bramlett, president and chief executive officer of The BramlettAgency Inc. in Ardmore, Okla., said he brings his staff of 16plenty of actionable information that he collects from the Big I,the organization's state association and health insurers.

Bramlett sits on Big I's executive committee and is active inthe state association, but he maintains that those positions do notgive him a leg up on other producers.

“Any member of their state association has access to any of thisinformation, because it comes from the national association,” hesaid.

“But a producer has to be willing to take that information andact.”

Spiro agreed. He also notes the wealth of resources available byaligning with a general agency. For now, drawing on those resourcesdo not cost small producers, since general agencies are compensatedby insurers through commission overrides.

That compensation model could change given the pressure thePPACA is placing on the existing compensation model, Spiroacknowledged. “But I don't expect this to happen for awhile.”

Neither Bramlett nor Spiro, however, are Pollyanna-ish.

“I can't say that a large agency with an entire departmentdevoted to benefits isn't going to have a leg up on an agency withonly three employees,” Bramlett said. “But smaller agencies canaggregate or cluster with others and work with associations.”

And there is no time like the present to start, if a smallagency hasn't already, agency executives say.

“It's a critical time—there's no doubt about it,” Bramlettsaid.