Healthcare Reform's Impact on Insurance Agents
For the most part, brokers believe that their large group business will remain intact, regardless of healthcare reform. However, the uncertainty lies in the future of individual & family business, and small group business.
While each individual state will ultimately determine their own use of the medical insurance exchanges, the issues discussed below are primarily from a national point of view.
Here's a rundown of the major factors that will affect brokers' individual/family and small group business:
- Tax credits: Beginning on January 1, 2010, companies with less than 25 workers and annual salaries of under $50,000 on average who buy medical insurance for their workers will get a tax credit if the employer is paying 50% or more of the worker's premium. From now until 2013, the tax credit follows a sliding scale, with the most of 35% tax credit paid to companies with under 10 workers with average wages of under $25,000.
- Impact to Agents & Brokers: From now until 2013, the tax credits are anticipated to encourage more small companies to buy group medical insurance coverage for their workers, which will increase opportunities for agents & brokers
- Individual mandate: Beginning on January 1, 2014, all legal residents of the U.S. and U.S. citizens will be required to carry medical insurance. People who do not buy medical insurance will have a penalty imposed on them of $695 per year by the year 2016. These penalties will begin in 2014. Therefore, people who decide to not purchase medical insurance will be faced with a penalty and will not carry medical insurance. Yet, with the guaranteed issue provision going into effect, people who have decided to not purchase medical insurance could wait to purchase their coverage once they have a need. For people who already have medical insurance, this new provision will encourage them to keep their current policy. This is also the case for those people who were seriously contemplating buying medical insurance for their very first time.
- Impact to Agents & Brokers: More opportunities in the market.
- Employer Mandate: Beginning on January 1, 2014, companies with over 50 workers that don't offer medical insurance or offer medical coverage that's less than what's considered to be "minimum essential" coverage, will be imposed a fine of $2,000 per worker if 1 or more employees receive a government subsidy via an insurance exchange. These fines can go as high as $3,000 per worker in particular circumstances. For companies that currently offer their workers a group medical plan, this will encourage them to keep their medical plan. This is also the case for those employers that were seriously contemplating offering medical coverage for their workers for the very first time.
- Impact to Agents & Brokers: More opportunities in the market
- Medical Loss Ratio Rebates:Beginning on January 1, 2011, this new provision states that 85% or more of all medical premiums that are collected by insurance companies for large companies must be utilized for healthcare quality improvements or healthcare services. For medical insurance plans bought by small employers and individuals, 80% or more of all medical premiums that are collected by insurance companies must be utilized for healthcare quality improvements or healthcare services. If insurance companies don't meet these medical loss ratios, then they have to provide a rebate to each customer.
- Impact to Agents & Brokers: Even though the individual and small group market will face a lower medical loss ratio, it is expected that all components of medical insurance will be affected, including agent and broker commissions. It is anticipated that the medical loss ratio requirements will leave insurers with approximately 8% of medical premiums to go towards broker & agent commissions. In addition, numerous insurers may look to control costs by using general agencies, thereby changing stable distribution costs to more of a variable cost structure.
- Guaranteed Issue Coverage: Beginning on January 1, 2014, insurers will not be allowed to decline coverage or rate up coverage to individuals because they have a pre-existing condition. In mid-2010, individuals who have pre-existing conditions who haven't had insurance in the last 6 months can qualify for a Pre-Existing Condition Insurance Plan, which is meant to be a bridge to January 1, 2014, when all individuals will be accepted by insurers. If individuals don't need to buy medical insurance before a major health condition presents itself, then many individuals will decide to pay the annual fine instead and only buy medical insurance when a catastrophic medical condition presents itself.
- Impact to Agents & Brokers: Higher premiums could be the result of higher adverse selection. This could potentially result in being paid higher commission rates per insured and could encourage more individuals to opt out of purchasing medical insurance and decide to pay the penalties instead
- Tax Credit Expansion: Beginning in 2014, the tax credits issued to small employers will be raised to up to 50% of the cost of medical insurance. It's going to be paid on a scale that's sliding, with the most of 50% paid to companies with under 10 workers with average annual wages of under $25,000. These tax credits will only be available to companies that purchase medical insurance through the exchange, and will quickly decline, as the average wages and employee counts go up. Therefore, many employers that currently purchase group medical insurance won't see any benefit from this tax credit. It's primarily designed to help the smallest employers that have the lowest paid employees.
- Impact to Agents & Brokers: More employers will be encouraged to buy group medical insurance for their workers, thereby presenting more opportunities in this market.
- Medical Insurance Exchanges: Part 1: Beginning on January 1, 2014, tax credits will be available for individuals who have an income that's above 133% and below 400% of the poverty level. (In 2010, this would translate to $88,000 for a family of four, or $43,000 for an individual). These credits will only be available to individuals who buy medical insurance through an exchange or qualify for certain plan or income parameters. While individuals who have lower incomes will have a huge incentive to go to the exchange and take advantage of the subsidies that will be offered to them exclusively through the exchanges only, not many of those lower income individuals purchase insurance through brokers or agents currently.
- Impact to Agents & Brokers: insignificant
- Medical Insurance Exchanges, Part 2: Beginning on January 1, 2014, it's nearly for sure that these exchanges will include a compensation mechanism for brokers. It's uncertain what this mechanism will be, and each state will individually decide.
- Impact to Agents & Brokers: Brokers & agents will keep a role in the individual and small group market for those insureds who decide to buy medical insurance from an exchange.
In summary, it's probable that the opportunities within the market for agents of individual and small group accounts will stay healthy, and perhaps even improve through the year 2013. Then, in 2014, when the tax credits that will be offered to small employers and the tax penalties which will threaten large businesses go into effect, employers will need their brokers to guide them and give them advice regarding their medical insurance purchase.
The downside lies in the very real scenario of premiums being driven to heights never seen before due to the increase in demand, and the adverse selection. Individuals and small businesses that are purchasing medical insurance may be forced to paying the new penalties because the new, higher cost of medical insurance will become unaffordable for them to maintain. Ironically, this scenario is precisely what the new healthcare reform law seeks to avoid.
General Agencies may benefit from the new healthcare reform laws. The added complexities caused by the new healthcare reform law will encourage agents who have a limited amount of expertise pertaining to benefits to utilize general agencies, who provide high quality capabilities. Also, many employers may try to control costs by using general agencies to shift fixed distribution costs to more of a variable cost structure.
For brokers and agents, the challenge lies in making the most out of their role among the new medical insurance exchanges for small group and individual accounts beginning in 2014, unless it's enacted prior to that on a state by state basis.
For agents and brokers to compete effectively in this new environment, they must use the tools that they have relied on for decades: better service, more flexibility, more creativity and more consultation. Those agents and brokers that are excited about change and innovation and accept this new environment can expect to continue to grow and prosper.