SC Health Insurance Consumers pay $250 per Year in Agent Commissions

Wonder why health insurance is unaffordable?  South Carolina’s health insurance companies pay insurance producers (agents and brokers) on average $20.85 per member per month ($250 and change per year) for individual policies, the second highest in the country.  See http://www.statehealthfacts.org/comparereport.jsp?rep=108&cat=17&o=a&sortc=1. On small group policies, it’s a more middling $17.52 per member per month.

Broker compensation has been a big issue of late in the health care arena.  One of the big advances of the Affordable Care Act (ACA) is to put a floor on the amount of premium that actually pays for health care—called the Medical Loss Ratio (MLR)— set at 85 % for large group policies and 80 % for individual and small policies.  That compares with South Carolina’s regulatory standard of 55 % going to health care for individual policies.  [A PowerPoint in which I explain this is at http://scphi.org/wordpress/wp-content/uploads/2011/06/health-insurance-exchange.pdf.]

When initially faced with these new standards, South Carolina insurance regulators (and we use the term in its loosest sense) sought a waiver, claiming that the new limits would work a hardship on insurers because they compete for producers (the new name for agents and brokers) with other insurers by offering higher commissions.  The smaller, less efficient, companies would be run out of South Carolina.

In other words, the real competition in health insurance inSouth Carolinais not in providing better benefits at a better price, but in competing for producers, sellers, through increased levels of commissions.  Those commissions are simply transaction costs which add friction to the system and not efficiency.  Paying producers more provides no benefit to the health insurance consumer; rather, it incentivizes producers to push products which pay them more rather than those delivering value (better benefits for a better price) to consumers.

The National Association of Insurance Commissioners (NAIC) was tasked to determine precisely what makes up the MLR under the ACA.  Brokers and agents tried repeatedly to advance the absurd proposition that their commissions should be counted as part of the 80 % dedicated to health care and not the 20 % to cover overhead.  In the end, they lost that argument.

In 2014 the Health Benefits Exchange comes online.  That will be a marketplace through which individuals and small groups will purchase insurance and access premium and out of pocket subsidies.  Historically, agents and brokers were needed because health insurance policies are always written in legalese, a dialect of Greek, and explained in Vietnamese.  You needed a translator.  However, new requirements for plain English policy explanations and better decision support tools should make producers redundant.  In addition, producers have a fundamental conflict of interest with their customers.  They are paid by the insurer … and not for getting you a better deal.  The more you pay, the more the producer makes.  Consumers are better off if Exchanges and the entryways to them are producer-free zones.

However, the requirement in SC insurance laws that you be a licensed producer to “sell, solicit, or negotiate insurance” may well force anyone buying through the Exchange to fork over money to a producer to buy insurance through that Exchange.

Governor Haley decries “government picking winners and losers”.  However, laws such as ours requiring an agent to peddle you health insurance—whether you need one or not—do exactly that.  The winner is the agent and the losers are consumers.

This would be bad enough if we were talking chump change.  But $250 a year is not chump change.  SC should change its insurance law and the feds, in designing our new Exchange, should ensure that state producer-protection laws don’t apply to consumers purchasing through the Exchange.

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