Should Agent Commissions Be Excluded from the Medical Loss Ratio Formula?

Two separate bipartisan bills have been introduced in the House and Senate that would specifically exclude independent insurance producer (agents and brokers) compensation from the medical loss ratio (MLR) formula required by Section 2718 of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148).

The MLR rule, effective January 1, 2011, mandates that at least 80 percent of individual and small group premiums and 85 percent of large group premiums collected by health insurance companies must be spent on medical care or activities that improve health care quality. If insurers fail to meet these MLR formulas in 2011, they are required to rebate to their enrollees the difference between their actual expenses and these statutory targets, starting in 2012. While Section 2718 of PPACA failed to specifically classify independent agent compensation under health care costs, the MLR rule provided that agent compensation is included in the MLR formula.

What Services Do Agents and Brokers Provide?

Licensed independent insurance agents and brokers provide a wide range of services for both individual consumers and the business community. Producers interface with insurers, acquire quotes, analyze plan options, and consult clients through the purchase of health insurance. They also provide guidance regarding benefit and contribution arrangements to ensure compliance with applicable State and Federal laws and regulations; assist with establishing section 125 plan tax savings under the Internal Revenue Code, health reimbursement arrangements, flexible spending arrangements, evaluating and securing small business tax credits as provided in PPACA, and other programs to maximize tax advantages and ensure compliance with applicable Internal Revenue Service guidelines; create educational materials and provide on-site assistance to aid in employee benefit communication; assist in managing eligibility for new hires and terminated employees; provide advocacy for employees through the health insurance claim process; and advocate for employers with insurers in developing proposals, renewals, and for service issues throughout the year.

GAO Study of MLR implementation

The Government Accountability Office (GAO) was asked by the House to examine the private health insurance market to determine its early experiences in implementing the new MLR requirements. The GAO found that most insurers were reducing brokers’ commissions and making adjustments to premiums. Almost all insurers said they had decreased or planned to decrease commissions to brokers in an effort to increase their MLRs. One insurer said that their decision to implement new activities would be affected by whether or not an activity could be included as a quality improvement activity in the MLR formula. Another insurer said that they have considered exiting the individual market in some states in which they did not expect to meet the MLR requirements.

Industry and Congressional Support

On November 22, 2011, the National Association of Insurance Commissioners (NAIC) adopted a resolution stating that “Congress should expeditiously consider legislation amending the MLR provisions of the PPACA in order to preserve consumer access to agents and brokers.” The NAIC, whose core mission is to protect consumers in all aspects of the insurance business, strongly advocates for the continuing role of licensed independent insurance producers in health insurance, and has expressed that the ability of agents and brokers to continue assisting health insurance consumers at this time of rapid market changes is more essential than ever.

According to CQ Healthbeat News, a spokesperson for Senator Mary L. Landrieu (D-La.) has stated “As chair of the Senate Small Business Committee, Senator Landrieu is concerned that HHS’s interpretation of the health care law threatens the ability of insurance agents and brokers, many of whom are one- or two-person small businesses, to continue providing essential services to consumers who depend on them to assist with coverage or claims problems.”

House and Senate Bills

Senate bill S. 2068, introduced February 2, 2012, is sponsored by Senators Mary L. Landrieu (D-La.), Johnny Isakson (R-Ga.), Ben Nelson (D-Neb.), and Janet Murkowski (R-Ak). The House version (H.R. 1206) has 172 bipartisan co-sponsors. The Senate bill differs slightly from the House bill.  For example, the Senate bill (1) does not contain the provision in the House bill that would allow states a longer period to comply with MLR requirements for the small group market through waivers provided by CMS, (2) would limit the exclusion of agent commissions from the MLR to health premiums for individual and small group markets, and (3) would not exempt bonuses paid by insurance companies to agents.  Despite the differences, the House sponsors have indicated support for the Senate version.

Questions Remain

Why hasn’t HHS reacted to these concerns – especially in the wake of the GAO study and bipartisan legislation?  Other questions also are being asked. For example, will adherence to the MLR rule hurt the availability of low-cost high deductible plans for consumers due to the fact that the MLR only counts payments by insurers, not payments made by individuals to meet the high deductible? Will the rule result in higher health costs due to the elimination of competition in the market and because the cost of fraud prevention must be counted as an administrative cost?  And ultimately, will the MLR lead to the elimination of all or part of the private, for-profit health insurance industry?