Medical loss ratio issues still up for grabs

Under the regulations the HHS unveiled last November, insurers writing groups of fewer than 100 must meet 80 percent MLR. Insurers writing larger groups face a more restrictive 85 percent MLR.

The problem for producers is that, over objections from health insurance producers and insurers, it did not allow insurers to include producer commissions as a pass-through expense in calculating their MLRs. As a result, beginning Jan. 1, insurers began paying commissions out of the 15 percent to 20 percent of revenues the PPACA allows them to retain to cover non-medical expenses and as profit.

Producers immediately felt the impact on their compensation, with many reporting reductions of up to 50 percent.

In the first 24 hours of a membership survey that the Arlington, Va.- based National Assn. of Health Underwriters conducted in early February, 2,000 respondents reported commission reductions of 30 percent to 50 percent for producers placing individual and small group business.

The new MLR calculations are especially problematical for producers placing small group and individual coverages, said Jessica Waltman, senior vice president of government affairs for the National Assn. of Health Underwriters. Before PPACA, some states had established MLRs as low as 55 percent, so the new 80 percent MLR is "too large a jump," she said.

Because of the volume of their business, large-group insurers can more easily deal with the 85 percent MLR, Waltman said. "But that doesn't mean there won't be an impact. It's just not as dramatic."

Industry groups are concerned that the compensation reduction that insurers will have to impose on producers will drive many out of the market, creating market disruptions.

NAHU also is concerned that the fee-based system could require different licensing in about a dozen states, which would complicate the regulation of producers.

Those states require different licenses for brokers earning compensation under a fee-based system than those compensated by insurer-paid commissions because they prefer the relative ease of keeping track of rates under the commission-based system.

The commission-based system "is a tested practice over 100 years of state regulation," Waltman said.

Health plans and states can seek waivers from the MLR calculations, but a Council of Insurance Agents & Brokers official is not optimistic that many waivers will be granted.

"I don't think the administration is being particularly flexible," said Joel Wood, senior vice president of government affairs for CIAB in Washington. "We got health insurance reform, not healthcare reform."

There is a chance, however, that the PPACA's negative impact on producer compensation will be relatively short-lived, said Waltman and John Prible, the Washington-based vice president of government affairs for the Independent Insurance Agents & Brokers of America.

Both said that while HHS representatives have listened to their concerns but won't budge on the commission issue, some Republican and Democratic members of the U.S. House and Senate have shown interest during preliminary discussions. Both Waltman and Prible are hopeful that legislation would be introduced this year to allow insurers to include producer commissions as a pass-through expense in calculating their MLRs.

Still, Prible, said, "This is going to be an uphill battle." While the industry has generated some support among Democrats who strongly supported the PPACA, "some members are so wedded to the original litigation and the idea of making the MLRs as draconian as possible that they're unwilling to make any changes" to the law.

Meanwhile, producers expect their compensation model to soon move to a client-fee-paid system.

Hartford, Conn.-based Aetna Inc. already has taken steps in that direction, and producers say they expect that other health insurers eventually will copy it.

Beginning Feb. 1, Aetna stopped paying commissions to producers placing business for groups of 50 and larger. Instead, those producers must negotiate a separate fee with those groups. The policyholder either can remit the fee to Aetna to pass along to the producer or pay the producer directly.

An Aetna spokesman said the insurer has no plans to implement the change on coverage placed for smaller groups due to "a number of factors," including competitive reasons and because many agents writing large groups already have fee arrangements with their clients.

"A lot of health plans are looking at how that works" and how agents and brokers react to it, Wood said.

Meanwhile, producers are looking to an additional source of business: supplemental insurance.

"As more employers go to no-frills policies just to comply with the law (while minimizing costs), there's an opportunity for supplemental coverage," said Steven Spiro, owner of The Excelsior Group Inc., a small agency in Valley Stream, N.Y. Spiro envisions a growing demand for catastrophic coverage from participants in employer plans.

Small agency executive Bob Bramlett foresees supplemental insurance as an increasing important revenue stream. The Bramlett Agency Inc., Ardmore, Okla., has offered supplemental coverage "on a limited basis for a dozen years," said Bramlett, president and chief executive officer.

"We expect to double that in the next couple years, after tripling it in the last 5 years," he said.

Voluntary benefits insurer AFLAC, which is not bound by the MLR calculations because its products are supplemental, expects that both producers and health plan participants will be demanding its products.

"Unless there's some relief from the commission problem, brokers are going to have to look to other relief to supplement their income," said David Pringle, senior vice president of federal relations in Washington.

Pringle also expects that employers will scale back their health plans to reduce costs. As a result, "more people will be needing to supplement the coverage they have," he said, "so AFLAC fills the gap" in both cases.

AFLAC, which traditionally grew its business through direct sales, has made a concerted effort recently to support independent agents. Its broker sales have increased approximately 20 percent in the past year, according to a spokeswoman.