I’m not a broker. I’ve never personally sold a single dollar’s worth of insurance to anyone unless you want to count a condom I sold to a buddy for two beers back in grad school. The broker/agent side of the business is one where I’m curious about how it works as the insurance agent selling policies is usually the most public facing side of the insurance universe. The broker/agent model is broken on the individual market.
— LouiseNorris (@LouiseNorris) September 28, 2016
The fundamental problem is how brokers get paid and who pays them. Brokers who work the individual market and the very small group market are paid by the insurance carriers. Their commission can be a flat fee per covered life per month, it can be a percentage of commission, it can be a combination of a head fee and a percentage. The actual payment structure varies. At the same time, a good broker should be seeking to find the best situation possible for the person who is looking for insurance. And this is where the problem lies.
A good agent will place people into insurance products that are very appropriate for them. We looked at this in March:
A good broker should be able to talk to a perfectly healthy 26 year old and determine that they have minimal anticipated medical needs and no relationships with local providers so once their risk tolerance is established for which band they want to buy in, the recommendation would be to go to the cheapest plan possible with a minimally acceptable network. That same broker talking to a 45 year old diabetic will recommend a different plan in the same metal band. That 45 year old’s older sister who is anticipating an elective surgery next year would be better off in a plan with a low co-payment for inpatient hospitalization instead of a plan with a $3,000 per day inpatient co-pay.
The broker, if they are helping the consumer, is creating much closer to optimal choices for coverage instead of significant over and under coverage that confused individuals will buy on their own. Since most people are risk adverse and they also rely on branding, carriers can more easily up-sell to people who really don’t understand the insurance market intimately.
A carrier with a significant broker inflow of members for their individual and very small group products will see a higher percentage of their covered lives and premium dollars be attached to people with high medical loss ratios (MLR). High MLR means low profitability as there are fewer healthy, low cost premium paying covered lives to share the burden.
The defensive measure is to cut the broker inflow as much as possible. The easiest way of doing that is to make it utterly impossible for a broker to make money on selling a policy. The slightly more complex way is to change commission structures so the only profitable to the broker policies are profitable to the carrier as well even if they are not a good policy for the individual customer.
Brokers have the odd need of wanting to eat and pay their mortgage, so the rational response to the elimination of commissions by a single carrier in the individual market is to push policies offered by other carriers that still pay commission. If everyone no longer pays commission, one of the biggest sources of navigation and assistance disappears as brokers will shift their efforts to lines of business that will allow them to earn a living.
The PPACA Navigator program is a partial and incomplete work-around of this convoluted set of perverse incentives. The Navigators are paid by a third party whose revenue cycle is independent of the success or failure of any carrier. Their ability to make a living is not dependent on pushing people to go to Mayhew Super Narrow Silver even though Blue Cross Blue Shield Skinny Silver Enhanced is really the better plan at roughly the same price. The problem is that the Navigators are very limited in what they can tell people and as a cohort there is not a depth of experience nor knowledge that brokers have gained over working a field for an entire career.
But I think something like the Navigator model or buyers directly paying the broker a flat fee for insurance shopping assistance are the only models that make sense given the incentives of carriers to avoid having a higher than typically expected proportion of high MLR members.