As the health and welfare brokerage industry gets squeezed by the mandates of the Patient Protection and Affordable Care Act (PPACA), I have seen more agencies resort to desperate pleas for new business by offering to "save" a client money by taking a commission cut or a flat-fee arrangement in lieu of commission on fully insured medical policies. While this direct approach undoubtedly sounds alluring to business owners and chief financial officers, it belies a fundamental misunderstanding of the new PPACA underwriting rules.
With the PPACA rules on mandatory minimum medical loss ratios (MLR) rules now in place, brokers should not be saddling clients with "fee" arrangements or underfunded commission agreements on medical policies. The MLR rules require that carriers in the large-group market (more than 50 employees) operate at an MLR of 85 percent or higher every year. Otherwise, the carriers have to provide refunds for the policyholders. This means that, for every $100 you give a carrier, the carrier can keep up to $15 and must use at least $85 to pay claims.
With the $15 a carrier will keep, it must pay the brokerage that placed and services the account. Some carriers have dropped their standard commission to 4 percent from 5 percent because of this. But all of that is now irrelevant to an employer, because employers know that carriers will underwrite employer plans to be able to keep 15 percent of every dollar.
If a carrier's underwriting analysis of a group's demographic profile and claim experience suggests to the carrier that claims will be about $850,000 in the upcoming year, that carrier is going to peg annual premium to be about $1 million. That carrier is not going to reduce its underwriting assumption by the 1 percent or 2 percent commission cut requested by a broker. To do so would lead to a failure to profit under PPACA's complex web of price controls.
A carrier can retain 10 percent of the annual premium and pay a broker 5 percent. It can keep 11 percent and pay a broker 4 percent. It can keep 12 percent and pay a broker 3 percent, or it can keep 15 percent and pay the broker nothing.
The idea that a broker can "save" an employer money by going on a fee basis in the new world of health reform is, in and of itself, a demonstration of a lack of knowledge of PPACA. That might save a couple percent in the first year of implementation if the broker removes the commission reduction after a renewal has already been issued. But, in underwriting the next year, you can be assured that a 15 percent allowance for what the carrier can keep will be added right back onto claims.
