@patpaule from insurer POV a member is a member; a broker sourced mbr may be less valuable as commissions + broker knowledge for adv select
— Richard Mayhew (@bjdickmayhew) February 10, 2016
This is part of a conversation I was having with an insurance broker. I think that most brokers will be leaving the individual health insurance market in the next couple of years for a variety of reasons. The biggest one is that brokers are expensive with commissions that range between 3% to 6% of the monthly premium. That chunk has to be paid for from the 20% of the premium that is not allocated to medical expenses. Insurers will often find a new customer is cheaper to acquire on the Exchange than from a broker.
However, the biggest reason why I think brokers will be forced to the margins of the individual market is they are a source of adverse selection from the insurer’s point of view. Let’s postulate the following:
a) The individual buyer has a decent idea of their probable health needs
b) The individual buyer will make significantly imperfect choices on the exchange.
c) The exchange has a wide variety of policies with both minor and major differences that make different policies attractive to very different people.
d) The broker is working towards the best interest of the individual buyer.
A good broker should be knowledgeable of the market and how different individual need profiles should play through a variety of different policies. A good broker should be able to talk to a perfectly healthy 26 year old and determine that they have minimal anticipated medical needs and no relationships with local providers so once their risk tolerance is established for which band they want to buy in, the recommendation would be to go to the cheapest plan possible with a minimally acceptable network. That same broker talking to a 45 year old diabetic will recommend a different plan in the same metal band. That 45 year old’s older sister who is anticipating an elective surgery next year would be better off in a plan with a low co-payment for inpatient hospitalization instead of a plan with a $3,000 per day inpatient co-pay.
The broker should help people choose better plans that meet their needs than what they would have chosen otherwise. That is the broker’s value proposition to individual buyers.
The alternate scenario with minimal broker support is that the 26 year old may buy a broader network and more expensive policy because of the branding of the insurer even though it is extremely unlikely that they’ll need any signficant services. Or the diabetic may buy a plan with high prescription co-pays but a low deductible that they were not going to hit anyways. Those errors of sub-optimal choice lead to higher revenue for the insurers for the same medical expenses. These errors may be small, a few dollars per member per month or they could be large. Medicare Advantage with broker support still shows sub-optimal plan purchases that ran to at least $25 per person per month in excess premiums.
If we assume that the Exchange markets will be reasonably competitive and fairly low margin, insurers in markets where one Exchange issuer drops broker commissions to either a nominal amount or pays no broker commissions will have to follow suit in order to avoid significant risk dumps that are created by optimal plan matching. And since some of the major national players are already at the point of paying brokers nothing for individual enrollments, most of the regional and local carriers will not be too far behind.