Agent Health Insurance Commissions After Health Care Reform
With health insurance companies frantically trying to figure out how to satisfy the Medical Loss Ratio (“MLR”) required by the health care reform bill, insurance brokers are, not surprisingly, trying to figure out if their health insurance business has a future at all.
While no one know exactly how the next few years are going to impact health insurance agents, we can estimate the impact on earnings for health insurance agents.
The Patient Protection and Affordable Care Act requires that insurance carriers maintain an 80% MLR for individual and small group business. The requirement is 85% for large group business.
- The most established large health insurance carriers need approximately 7 – 8% of premium to cover their administration costs.
- Health insurance carriers need profits of about 4 – 5% of premium.
- The health insurance carriers must spend 80 % of premium on claims.
- That means that there is about 8% left for agent commissions. The insurers could choose to pay more than 8% for the first year, to compensate the agents for their acquisition costs, and less on renewals or they could choose to pay a flat rate to the agent for each application submitted. But 8% is probably the most that insurers could afford to pay over the life of the health insurance policy.
A flat fee per insured is in many ways easier for everyone to understand. However, not all insurers' systems can make these calculations, so some health insurance carriers will use the initial premium to calculate the compensation for the agent. We do not know if the fee will be limited to one initial payment or if it will continue while the carrier insures the member. State regulators of exchanges will have a large say in broker commissions. There will be markets outside of the state exchanges. The insurance companies will have to decide what they will pay insurance agents and maybe the state exchanges will look to the carriers for guidance on commission levels.
If Utah’s health insurance exchange is the model that other states will follow, then agents will probably be happier than if states follow the health exchange system in Massachusetts.
The health insurance exchange in Utah pays brokers $37 per employee per month. Also, the simplicity of the Utah exchange model, compared to the Connector established in Massachusetts, may make it an attractive model for other states to emulate.
The Massachusetts Connector insures far more consumers. But it is really designed for individuals, rather than the small group market as the exchange in Utah is. The Massachusetts system pays about 75% less than the system in Utah, meaning that health insurance sales would not be profitable for most insurance agents.