Lower commissions: an unintended but predictable result of health reform

Under health care reform, insurers must pay at least 80 percent of premiums out in the form of medical expenses. The goal is to make insurance more affordable, reduce insurance company profits and improve value for consumers and individuals. Insurers are looking to trim administrative expenses to meet the requirements, and they have sales commissions in their sights. As the Wall Street Journal reports (Health Overhaul Hits Sales Commissions):

Among the first to feel the effects of the nation's health-care system overhaul are insurance salespeople, whose commissions for selling policies to individuals and small groups are themselves getting overhauled... The commissions typically run between 4% and 6% of a policy's premium, but can be as high as 30% for the first year.Companies are already starting to change how they pay salespeople. Starting on May 1, Independence Blue Cross of Philadelphia, Pa., stopped paying small-group agents a percentage commission and instead switched to a monthly flat fee for each contract sold.

What's going on here? Independence Blue Cross actually has a medical loss ratio of 85 percent, so it doesn't need to cut commissions to meet the requirements. Instead, the company and others are using health reform as an opportunity to put pressure on the brokers and ultimately change the way insurance is sold. Insurers are often unhappy with brokers, especially when they switch customers between plans from one year to the next in search of a higher commission or to show their clients they are adding value. But insurers are also wary of making unilateral changes, fearing they will lose market share.What's going on now in health insurance reminds me of the shift by the airline industry a few years ago. In the olden days travel agents routinely received a 10% commission on domestic tickets. Eventually airlines turned to direct sales by phone and the Internet to get rid of travel agent commissions entirely. It helped to have airlines like Southwest that pioneered the direct sales model. Something similar is going on with health insurance. I wouldn't be surprised to see insurers opening up their own retail branches and increasing their web presence.Now that medical underwriting is falling by the wayside the selling of health insurance will become more commoditized. That will enable health plans to shift to a different model. Those that move aggressively will enjoy a competitive advantage through lower costs. My insurance agent friends might be upset at me for pointing this out --but I hope they don't shoot the messenger.