Healthcare reform is looming once again as we all know. Thereีs no consensus on what the final reform package will look like. But, Democratic leaders in the legislature and the Republican governor have embraced some common themes. It seems almost certain that some package of bills will be passed by the legislature and signed by Governor Schwarzenegger.
The most onerous theme is the requirement for 85% of premium dollars to be spent on direct care. The governor and legislative leaders want it to happen. Our markets would change dramatically if this provision became law. It would set up a battle over limited commission points between writing agents and the general agency (GA) system.
We now have a harmonious situation between the agent and the general agencies. As agents, we can use them for their quoting engines, get underwriting assistance, enrollment support, and other value-added services. We pay nothing for these services. The overrides that GAs make are built into the rates. Instead of buying their services, we bill it to our clients in the form of higher premiums. I see no way for this system to continue unchanged in a world of health reform, can you?
GAs make 50% of the commission that agents make and they get bonuses for volume as consolidators. So, if you make 7%, they make 3.5%. I keep hearing from agents that health reform will certainly cause many of us to take a haircut on commissions, but would you be willing to split commissions with GAs to retain the service you receive from them? How much of a split would be acceptable? How many gross commission points will there be to split? Thatีs where I see the looming battle between friends and family.
Imagine this scenario. As a producing agent, you have someone else prospect and write business for you. You do some work the first year to assist the writing agent and you get paid 3.5% level commissions as long as the business stays in force. You do virtually no service work while the contract is in force and very little, if any work at renewal. You keep getting your 3.5% level even if the writing agent loses the business or the client requests that no commissions be paid to any agent. The client doesnีt know you exist, but your points are built into the rates. Well, this is the situation as it relates to GAs representing health plans to direct writing agents.
GAs offer a valuable service to many California agents and brokers. In the past few years, they have expanded their services to include continuing educations seminars, enrollment assistance, and help understanding renewal processes. Some have gone even further by establishing third party administrative functions to help the agent community and to establish more value added services to clients.
Additionally, (and of real consequence) the GA shops support the legislative advocacy and other functions of the various agent associations throughout California. In fact, at least one agent association has become so dependent on GA money that it could collapse if that pool of funds were to vanish.
Still, it seems hard to believe that there will be enough commission points to support this type of distribution system. Carriers realize that they need to acquire distribution directly or through consolidators. They also realize that there are very few suppliers of the products we sell, making it less important to advertise their services through consolidators, versus direct distribution. Every agent knows enough about whom the carriers are to get that type of information themselves.
Several carriers are already looking to change this system. More than one has asked me to write direct instead of using my selected general agents. I have been offered direct access to underwriters assigned to my carrier representative, continuing education, subsidized errors and omissions insurance, and more. I expect office expense subsidies to be on the agenda before long. Some are even offering additional commission compensation if the cases are written directly. No one should expect this trend to reverse.
So what does all this mean and how can we deal with it as an industry? The first thing we need to do is understand that the status quo canีt continue. I donีt want to lose the services of GAs anymore than anyone else does, but as an agent, I have to question level commissions, first year, and renewal, for a consolidatorีs service. I service the business I write, year in and year out with no help from a general agency.
The argument is that carriers will need to spend money to acquire market share, but that argument rings hollow to me in a marketplace with only a handful of suppliers. Perhaps there is some compromise, which includes graded overrides for GAs to better justify their place in the market.
Many agents would gladly split commissions with GA shops in exchange for the value they bring. Individual producers who use support services from GAs need to understand that these services donีt come free, at least not in the future.
Finally, I think it is most important to address this problem internally. We need to have a frank discussion of small group compensation and how agents and GAs can coexist in the new world of healthcare.
There wonีt be a lot of bread left on the table if 85% of all premium dollars are going to be spent on direct care and if we expect carriers to deliver value added services, such as claims payments, medical management, fraud prevention, and general customer service. The time to have this discussion is now. q
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Jeff Miles is an independent agent in Marina Del Rey, Calif. He is the original founder and two-time president of the California Association of Health Underwriters. He welcomes your comments. He can be reached at jeff@milesorg.com or through his Website at www.jeffmiles.com.
