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The Unintended

Impact of MLR

Even President Obama has acknowledged that parts of last year’s national health care law are flawed. In his State of the Union he said “anything can be improved” and invited members of Congress to offer ideas on how to fix it.

Fortunately, Rep. Mike Rogers (R-MI) and John Barrow (D-GA) have answered the president’s call and introduced legislation that would exclude insurance brokers’ compensation from the so-called Medical Loss Ratio (MLR) calculation. The MLR provision of the Patient Protection and Affordable Care Act (PPACA) went into effect January 1 and requires insurers to spend 80 to 85 percent of premiums on medical care or quality improvement efforts. It has brought a slew of unintended consequences.

A new survey by the National Association of Insurance and Financial Advisors finds that three-quarters of the NAIFA members surveyed have seen their commission percentages drop since the MLR came into play, in many cases substantially. For insurers, cutting commissions was the easiest way to reduce the “administrative” side of the MLR ledger. More than half of the brokers surveyed report commission decreases of 25 percent and nearly two out of ten have seen 50 percent decreases. Consumers’ premiums, meanwhile, have not gone down.

The consequences are far reaching. Brokers do much more than sell insurance. They serve their clients, not the insurance companies, helping people when they have trouble getting procedures approved or claims processed. They provide corporate clients with individual enrolment assistance for their employees. They create and administer company wellness programs. Now, almost a quarter of brokers whose commissions have fallen say they have had to reduce their customer service and 30 percent more say they will do so if commissions remain low.

Many brokers, who are themselves small business owners and employers in their communities, have already had to downsize. Some 13 percent have laid off or reduced the hours of their support staff, affecting an average of two people per office, and 23 percent have considered following suit. If the situation continues, 26 percent will make further staff cuts–and hope they can somehow stay in business.

And while a stated goal of the health care reform is to increase competition, the MLR is having an opposite effect. More than one in ten of those surveyed have already stopped selling and servicing health care policies for individuals and nearly 30 percent foresee having to do so. Only a few, around 4 percent, have stopped selling health insurance altogether because of the MLR, but almost 20 percent will leave the business if commissions remain low.

Congress and the president certainly never intended for the PPACA to limit consumers’ health care choices or reduce the quality of their coverage. Removing agents’ commissions from the MLR equation would be a huge improvement and a first step towards ensuring that Americans retain the important support and customer service that professional, licensed agents provide.

The NAIFA survey shows that insurance markets are being disrupted and consumers are being harmed across the nation. Congress needs to fix this part of the health care law for the sake of agents and their employees, but particularly for consumers who rely on the services they provide.

Terry K. Headley, President
National Association of Insurance and Financial Advisors
Falls Church, VA

An Open Letter to

Kathleen Sebelius,

Secretary of Health

and Human Services

Dear Secretary Sebelius:

The spiraling increase of cost of group health insurance is a concern to us all. I am writing this letter to state that I sincerely believe a health insurance agency (agent) is an extremely valuable asset in controlling the cost of health insurance premiums at the time of renewal. As you are aware, the insurance agency works for the employer and not the carrier. The agent’s perseverance, almost always finds a way to negotiate a lower rate than the one quoted by the carrier at renewal. A case in point: with every renewal we received for our clients that employ over 50, for calendar year 2011, we were able to secure a better rate than the one presented by the carrier. Rate reduction is accomplished by securing competitive bids and/or carefully analyzing the claims experience of the previous year and discussing those nuances with the carrier.

As an example, our agency was an advocate for our largest client in controlling the amount of renewal increase received from the carrier for a 10/01/2010 renewal date. (We are declining to mention by name either the client or the carrier in this case.) In doing our independent analysis of the premiums and claims, for the previous year, an increase in the premiums was necessary. We believe, for this client, the increase should have been approximately 15%. The first renewal rate action from the carrier, however was a 23.1% increase. In some cases, this raised the price of individual health insurance from $382.80 to $472.33, and the price of family health insurance from $1,114.00 to $1,372.33.

Over a period of 60 days, through competitive pricing and a discussion with the carrier, we received a total of five renewal quotes before an agreement was reached on a 16.6% increase. The first, as stated, was 23.1%; the next was 21.2%; the next 20.6%; the next 18.6% and finally 16.6%. The last rate resulted in price increases as little as $63.54 for individuals and $184.92 for families.

Moreover, the medical loss ratios for the first six months of our client’s renewal period (61.0%, 82.4%, 63.9%, 115.5%, 67.8% and 82.3%, for an average of 78.9%) was is in line with the final increase, showing the value of our advocacy for our client. Granted, this is an extreme case to get five rate reductions. However, as stated previously, with every group of over 50 employees, after negotiation with the carrier or carriers, the original renewal rate was negotiated to a lower rate. Further, with two of our groups, having fewer than 50 employees, the carrier typically does not negotiate their renewal rate; we were able to secure a lower renewal because we were able to prove to the carrier the demographics of the group had changed.

Cases like this one are not atypical. They happen daily throughout the country. Agents and their staff represent clients in finding the most competitive rates available. This brings me to my first request. Please consider allowing the agency’s commission to be excluded from the 15% or 20% the carrier has for their overhead. If the insurance agency’s commission (5%) is to be included in the medical loss ratio (80% or 85%) the carrier must spend on claims; this will have the effect of neutralizing the strongest advocate the employer has in the fight against sometimes exorbitant annual rate increases. The carrier, potentially, will reduce our commission dramatically, thereby eliminating staff that works every day helping the insurer negotiate the bureaucracy of the carrier and solving a multitude of problems. It is my understanding that representatives like Mike Rogers of Michigan and John Barrow of Georgia are preparing to introduce a bipartisan MLR commission bill in the House. An MLR exclusion commission bill is “an adjustment that never should have been drafted this way in the first place,” according to Jessica Waltman, a NAHU vice president. It is my understanding that the state of Maine has adopted an MLR exemption for the state’s producers. There is tremendous value to the employer and employees to have an agency as an advocate. I believe the examples that we have provided herein will show that value. If it is convenient for you, please share this letter with Senator Rockefeller and others that may be interested in discussing this further.

In Oklahoma, in the recent past (2002), Blue Cross Blue Shield of Oklahoma allowed two separate association plans to be formed; one for community banks and the other for manufacturers. These association plans proved to be successful. There were approximately 70 banks and over 200 manufacturers on these two separate plans. The reason for the success was twofold. One, each bank or manufacturer became a member of their association health plan at different rates based on their demographics and location. Second, the claims were pooled in order to spread the risk. In 2008, Blue Cross decided association plans were illegal in the state of Oklahoma. Therefore, the two groups no longer had their claims pooled. The result of this decision left many small banks and manufacturers with dramatic renewal increases that they would not have had if they were in an association plan that pooled claims. Pooling the claims and spreading the risk was and would be good for all. There is a possibility new legislation in Oklahoma ma be passed this month, which would correct our state law and allow association plans to pool claims.

My second request is that you kindly consider adopting regulations, through PPACA, that would allow association plans to pool their claims. Under today’s PPACA legislation for 2011, many small banks and manufacturers would now be part of a large group and 85% of their premiums would be spent on claims. As you are aware, under the PPACA legislation, only 80% of the premiums are mandated to be spent on claims for groups with less than 50 employees. Mandating 85% of the premiums will help the smaller entities that are members of an association pan. Also, it is our understanding that the administrative cost,by the carrier, would be reduced. Therefore, members of the association would have a built-in savings from the start. It is certainly a fact that claims will drive the renewal rtes for the coming year. It is also a fact that spreading the risks over thousands of lives will stop the dramatic spike in rates for a smaller company that has one serious illness.

I am aware that controlling the escalating cost of health care is extremely important to you and your office. I believe that the two requests that I have made above will greatly assist you in that effort. Further, may I refer you to the March 14th article in Forbes magazine written by David Whelan. Whelan’s interview of Clayton Christensen, Harvard’s innovative professor, contains recommendations on controlling the costs of health care. His recommendations deal with reducing the cost of health care from the provider to the consumer.

I appreciate the time it has taken to read this letter. I wish you the very best.

Richard S. Lillard, CEO
Richard S. Lillard Company
Miami, OK

National Underwriter welcomes your letters and comments. Please send your feedback to [email protected]. Letters may be edited for size and clarity.


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