Industry Wrestles With Just What MLR Changes Mean to Commissions

To Earl Dworkin, an insurance broker in Palo Alto, Calif. who has been in the industry for 53 years, the Patient Protection and Affordable Care Act’s medical loss ratio requirement represents the perfect excuse for health insurance carriers to slash the commissions they pay him for producing customers.

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The MLR requirement mandates that 80% of revenues generated by individual and small group premiums go to covering the cost of medical care. The figure goes up to 85% for large group premiums.

Dworkin said in the year since the ACA passed, his commissions have been reduced by an average of 45% from where they were before the law went into effect.

One policy he sold for an insurer he declined to name generated $978 in premiums for the company. Dworkin said he made $12 on the deal.

“This is the worst I have ever seen in my career. These companies are forcing you to sell twice as much to make the same amount of money because commissions are being cut by more than 50%. And with the high deductibles in many plans, they’re making a killing on premiums,” Dworkin said. “Where is the exposure?”

Dworkin is hardly alone. The list of those who have voiced criticism about the MLR includes regulators, insurers and legislators.

Health insurance producers across the country told BestWeek they have had to significantly alter their business in order to compensate for falling commissions.

Jim Bowman, a Plano, Texas-based insurance broker, said he has seen his commissions on individual policies drop by 60%. He and his wife, who both run Bowman & Bowman Consultants Inc., said they have decided to shift the focus of their business to Medicare supplements, life and long-term care policies. “It’s just not worth it to sell an individual policy and make 4% to 8%, depending on the carrier, and even less on renewals,” Bowman said.

According to a survey of members of the National Association of Insurance and Financial Advisors, approximately 75% of surveyed health insurance producers have seen reduced commissions since the Jan. 1 implementation date, and another 13% said insurance companies they do business with have told them to expect lower commissions in the future (BestWire, April 29, 2011).

But some agents and brokers in other parts of the country said they have seen little effect on their business.

Sharon Yates, an insurance agent in Warner Robins, Ga., said she hasn’t noticed an impact on her commissions, but she is worried about the future. “It will be coming,” Yates said.

The mixed impact of the MLR requirement is borne out by data collected by the National Association of Insurance Commissioners for a closely watched report on the MLR issue. Data on producer commissions collected from large health insurers by two outside organizations do not show a clear trend that agent and broker commissions have been reduced prior to 2011, according to the draft report.

However, data provided by 11 states that already had MLR requirement statutes on the books prior to the passage of health reform shows that in some states, producer commissions have been reduced in recent years.

“In 2011, a significant number of companies have reduced commission levels, particularly in the individual market. However, a significant number of companies have not reduced commissions in 2011, at least not yet,” the report said. The report also notes the states with higher MLR requirements have not observed any problems with consumer access to insurance or producers (BestWire, May 24, 2011).

The data in the report also show that proposed changes to the MLR requirement, such as the one included in a recently introduced federal bill would exempt producer commissions from the MLR calculation, would slash rebates paid to consumers by more than $1 billion.

To date, 12 states have requested exemptions from the MLR requirement, arguing it could cause severe disruptions in the health insurance marketplace.

Some insurers have cited the requirement as part of the reason for frequent rate increase requests.

In a letter submitted to the California Department of Managed Health Care, Blue Shield of California, said the requirement forced the company to make adjustments to how its HMO and PPO plans operated (BestWire, May 10, 2011).

That argument isn’t finding much traction with some regulators who argue that insurers have used the MLR requirement as an excuse to slash commissions while they can.

California Insurance Commissioner Dave Jones said insurers in his state have requested double-digit rate increases year-over-year in the individual and small-group market well before the MLR requirement went into effect.

“I don’t think the medical loss ratios are the drivers here. I think we have just had a consistent trend in California of health insurers and managed care plans driving up the price in search of greater and greater returns,” Jones said. “The Affordable Care Act and medical loss ratios are being scapegoated.”

Illinois Insurance Director Michael McRaith recently said it is the insurers themselves who should engage in better practices that protect commissions. He said his state’s top five health insurers have $28 billion in surplus capital (BestWire, April 14, 2011).

And with the coming implementation of health insurance exchanges in 2014, Dworkin said he doesn’t expect to see any real improvement in his business for quite some time.

“The next three years will be the end of my business as I know it,” Dworkin said. “The saddest thing is going to be the effect on young agents and brokers. If they don’t have a parent or someone who is willing to pass their business along, there’s not going to be much of a business for them to go out and get.”

To hear the interview with California Insurance Commissioner Dave Jones, go to: http://www3.ambest.com/ambv/displaycontent/MediaArchive.aspx?RC=186556

(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)