In an environment where jobs are hard to find, the Obama administration has thrown more than 100,000 health insurance agents and brokers under the bus and given them the gift of an unemployment line just before the holidays.
To make matters worse, a large number of insurance agents, known in the trade as producers, are self-employed and under the prevailing laws may have difficulty receiving unemployment insurance.
It all stems from the Patient Protection and Affordable Care Act (PPACA), known colloquially as Obamacare. PPACA dictates that health insurers must spend at least $0.80 of every $1.00 in premiums collected on health care in the individual and small group markets, and $0.85 in the large group market.
Insurance agents were recently able to get backing from National Association of Insurance Commissioners (NAIC) to exclude their commissions from this medical loss ratio calculation (MLR), which refers to the percentage of premium dollars spent on medical claims. For example, if an insurance company received $100 in premiums and spent $80 on medical claims, its MLR would be 80%.
Starting January 1, 2011, PPACA required health insurance companies to provide an annual rebate to the insured if MLR was less than 80% in the individual and small group markets and 85% in the large group market. The point of the law is to reduce selling, general and administrative expenses of the insurance companies.
In 2008, insurance companies spent 2.02% of the premiums on selling commissions. Commissions ranked just behind staff compensation among the expense categories of SG & A, representing 17.43% of the administrative expense.
The insurance companies have been cutting back on commissions to comply with the law. There are a lot of statistics floating around, but perhaps most instructive is the following paragraph from a United States Government Accountability Office (GAO) report:
Almost all of the insurers we interviewed were reducing brokers’ commissions and making adjustments to premiums in response to the PPACA MLR requirements. These insurers said that they have decreased or plan to decrease commissions to brokers in an effort to increase their MLRs. One insurer said they started making reductions to their brokers’ commissions in the fourth quarter of 2010 for their individual and small group plans to increase their 2011 PPACA MLRs in these markets and, as a result, premiums were not as high as they otherwise would have been. This insurer said these reductions will take effect gradually because they are only being applied to new sales or when groups renew annually. Another insurer lowered commissions to their brokers in the individual market in the first quarter of 2011, such that premiums were increased less than they otherwise would have been, which they expect to result in an increase in their PPACA MLRs for 2011.
Since the MLR regulations became effective, insurance agents have seen commissions decline by as much as 50%. It appears that all major insurance companies such as WellPoint (WLP), United Health (UNH), Aetna (AET), Humana (HUM), and Cigna (CI) have been cutting commissions.
Led by National Association of Health Underwriters (NAHU), which claims to represent 100,000 health insurance agents, brokers, and related professionals, the Obama administration was lobbied hard to provide relief to insurance agents. The hope of the insurance agents had risen because of the recent backing by the National Association of Insurance Commissioners.
In a recent ruling, the Department of Health and Human Services dashed all hopes.
Now the only hope left is H.R.1206, the Professional Health Insurance Advisors Act, a pending bill in Congress that would exclude compensation paid to independent insurance producers for the purposes of MLR. By allowing the argument to be framed as it has been done, insurance agents have now fostered a powerful coalition, including the AFL-CIO against them.
About Me: I am an engineer and nuclear physicist by background, have founded two Inc. 500 fastest growing companies and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report which publishes four newsletters to help investors profit from change.
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