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The issue of whether to include broker and agent fees in the medical loss ratio (MLR) requirements has been a topic of great debate, particularly for the National Association of Insurance Commissioners (NAIC). The ACA requires health insurance carriers covering large employers to spend at least 85 percent of premiums paid on claims or quality improvements, and carriers covering small group and individual insurers spend 80 percent, or refund the difference to policyholders, beginning in 2012.

Currently, any payment a health insurance company makes to an independent agent or broker involved in the sale of a policy is counted as a non-claim, administrative expense. Thus, any portion of a consumer’s premium payment that goes to pay agent and broker commissions is included in the denominator of the MLR equation, but not the numerator.1 Given the new MLR requirements, the inclusion of broker commissions in the MLR calculation has raised concerns that insurers will lower or restructure fees to brokers and agents to meet those requirements.

In a Consumer Watchdog letter to NAIC Commissioner Sandy Praeger and members of the Health Insurance and Managed Care (B) Committee, the consumer advocacy group asserts that the MLR requirement is the strongest consumer protection in the ACA. They also cite a recent NAIC health actuarial task force report that found the broker exemption to have certain and negative effects on the consumer protections in the health reform law, and saw no evidence to suggest that consumer access to advice and insurance issues would be disrupted if broker commissions were decreased. The NAIC actuarial working group study referred to eight states that currently have higher MLR requirements. In the eight states, the work group did not find evidence of market disruption or consumer complaints concerning diminished access to professional health insurance advisors. Senator John D. Rockefeller IV (D-WV), a proponent of the health law’s MLR requirement, issued a report showing that if the MLR requirement had been in effect in 2010, consumers would have received $1.1 billion less in rebates if broker commissions were excluded from the MLR calculation.

In an effort to inform the debate between opponents and supporters of the requirement to exclude commissions paid to brokers from revenues used to calculate the MLR, the NAIC Health Care Reform Actuarial Working Group conducted a study to provide evidence of the impact the MLR is already having on brokers’ commissions. On June 7, 2011 the B Committee adopted findings of the workgroup and the policy recommendations outlined in its report.

The report evaluates data on payments to brokers; however, it does not include information on past increases in broker compensation that have occurred as result of premium increases. It outlines 12 policy recommendations for adjusting the MLR calculation2, including:

• Excluding certain types of costs from the MLR calculation, such as bonuses or fees paid to health insurance exchanges in 2014;
• Giving special treatment for different types of brokers, depending on whether they are independent or are employed by a carrier;
• Capping the percentage of the premium dollar amount paid per policy that could be excluded from the MLR calculation;
• Increasing the MLR to reflect the exclusion of commissions;
• Substituting a deduction for broker compensation for the federal tax deduction currently in the MLR; and
• Allowing special treatment for broker compensation until 2014.

According to the Bureau of Labor Statistics, there were more than 434,000 brokers in 2008. The individual and small group markets heavily rely on brokers to guide them through the purchasing of health insurance. In April, a National Association of Insurance and Finance Advisors (NAIFA) survey found that 75 percent of insurance brokers have seen their fees decrease since the MLR regulation took effect, with more than half facing decreases of more than 25 percent. Two-thirds of brokers who have seen reduced income have absorbed the losses themselves, while 13 percent have either laid-off staff or reduced their hours in order to offset the lost fees. The federal Rogers-Barrow broker bill (HR 1206), “Access to Professional Health Insurance Advisors Act of 2011,” would remove brokers’ commission and fees from administrative costs. The bill is currently sitting in the U.S. House of Representatives with 82 co-sponsors. The Congressional Budget Office has yet to score the proposal.

The recently adopted NAIC report outlines policy options, but it does not assert a position on what policy strategy the NAIC should support. The final decision on policy approaches will come from the health insurance committee and the debate will likely center on whether to endorse the Rogers-Barrow broker bill.

¹Committee on Commerce, Office of Oversight and Investigations Majority Staff, Consumer Health Insurance Savings under the Medical Loss Ratio Law. Staff Report for Chairman Rockefeller. May 24, 2011. http://www.statecoverage.org/files/SenateCommerceReport.pdf

²Hansard, S. (2011, June 13). State Commissioners Approve Report With Medical Loss Ratio Options for Brokers. BNA’s Health Care Policy Report. (Subscription Only).  Retrieved June 23, 2011 from http://news.bna.com/hcln/HCLNWB/split_display.adp?fedfid=21041969&vname=hcpnotallissues&fn=21041969&jd=a0c8a4a4x1&split=0