Affordable Care Act’s Effect on Agents
It is largely believed by brokers and agents that selling medical insurance to large groups will not be effected by healthcare reform. Yet the question lies within the individual and small group side of the business.
Even though each state will decide on how to use their own medical insurance exchanges, the major points spoken about below are mainly from a national point of view.
Here's a list of the major points that will impact agents' ability to sell individual and small group policies:
Tax credits: Employers that have less than 25 employees with salaries averaging less than $50,000 that purchase medical insurance for their employees can look forward to receiving a tax credit if the company pays more than 50% of the employee's medical insurance premium. Up until 2013, this tax credit follows alongside a sliding scale, and companies that have less than 10 employees with wages averaging below $25,000 will receive the most: a 35% tax credit.
- Effect on Agents & Brokers: It's clear that because of the tax credits, small businesses in particular will be encouraged to obtain group medical insurance for their companies, which in turn will increase the opportunities that are available for agents & brokers.
Individual Mandate: In 2014, all U.S. citizens and legal residents of America will have to carry medical insurance, otherwise they'll be fined beginning in 2014, and will have to pay $695 per year by 2016. With this relatively small fine in comparison to medical insurance premiums, many will continue to go without coverage. Since the guaranteed issue provision will be going into effect in 2014, those uninsured could simply wait until they get sick to purchase medical insurance. For those that currently have insurance, the Individual Mandate will encourage them to keep their coverage. This will also be true for those that were seriously considering purchasing medical insurance for the first time.
- Effect on Agents & Brokers: Market opportunities are increased.
Employer Mandate: Starting on January 1, 2014, employers that employ more than 50 workers that don't provide a group medical insurance plan or offer medical insurance that provides less than "minimum essential" coverage, will be forced to pay a penalty of $2,000 per employee if at least one employee receives a government subsidy through the insurance exchange. These penalties can go up to $3,000 per employee, depending on the circumstance. For employers that offer group medical insurance, this mandate will encourage them to keep their medical insurance. This is also true for employers that had seriously contemplated buying medical insurance for their employees for the first time.
- Effect on Agents & Brokers: Market opportunities are increased.
Medical Loss Ratio Rebates: Starting this January, this provision requires insurers to spend 85% of the premiums collected from large employers on healthcare services or healthcare quality programs. This mandate also requires insurers to spend 80% of the premiums collected from individual and small employers on healthcare services or healthcare quality programs. If insurers don't meet these ratios, then they must give their customers a rebate.
- Effect on Agents & Brokers: Although insurers will face a lower medical loss ratio for individual and small group plans, it's anticipated that all aspects of group medical insurance coverage will be affected, which includes agent and broker commissions. It's expected that these new medical loss ratio provisions will leave medical insurers with about 8% to go towards commissions. Also, several medical insurance companies may try to keep costs at bay by utilizing general agencies, which would change the stable distribution costs to a variable cost structure.
Guaranteed Issue Coverage: Starting from January 1, 2014, medical insurance companies will no longer be allowed to rate up or decline people because of pre-existing conditions. Around the middle of 2010, people who had pre-existing conditions who hadn't had medical insurance coverage in the last 6 months had a new plan available to them, the Pre-Existing Condition Insurance Plan. This plan is meant to bridge the gap between now and when insurers will no longer be allowed to rate up or decline coverage due to pre-existing conditions in 2014. If people don't have to purchase medical insurance before an accident or illness occurs, then many will elect to not purchase the medical insurance and pay the penalty instead, and will wait to purchase the insurance at the point when a serious illness or accident occurs.
- Effect on Agents & Brokers: Higher medical insurance premiums could very likely be the result of more adverse selection. This could lead to agents & brokers being paid a higher commission rate per insured, and it could also encourage more people to elect to not purchase medical insurance and pay the penalty instead.
Tax Credit Expansion: To begin in 2014, small employers will be issued tax credits of up to 50% of their total expenditures on medical insurance. It's going to be issued on a sliding scale, and most of the 50% tax credits will be given to small employers that have less than 10 workers that have average annual salaries of less than $50,000. However, these large tax credits will only be obtained if the employer buys medical insurance through the exchange, and the tax credits will decline if the company's average wages go up or the number of employees it employs goes up. Many companies that currently have medical insurance won't see any benefits from this tax credit expansion, as the tax credits are mainly targeted for very small employers that pay the lowest in wages.
- Effect on Agents & Brokers: More companies will be swayed to buy small group medical insurance coverage for their employees. Therefore, market opportunities are expected to increase.
Medical Insurance Exchanges, Phase 1: Starting this coming January, Americans that earn more than 133% and less than 400% of the poverty level will be eligible for a tax credit. In this year's calculation, that would mean $88,000 for a typical family of four, and $43,000 for a single person. However, these tax credits will only be available through the exchanges. Even though the population with lower income will be encouraged to purchase medical insurance through the exchanges to get these tax credits, very few of these lower income residents currently buy medical insurance coverage using brokers or agents today.
- Effect on Agents & Brokers: Not noteworthy.
Medical Insurance Exchanges Phase 2: While the medical insurance exchanges will begin on January 1, 2014, it's still not clear on whether or not they will include a commission feature for agents & brokers. It's up to each state to decide on how to operate their exchange.
- Effect on Agents & Brokers: There will be some role for agents & brokers to play within the small group and individual markets for those that purchase their medical insurance coverage through an exchange.
It's likely that there will be opportunities for brokers of the individual and small group markets, and there may even be increased market opportunities up through the year 2013. Then, when the tax credits offered to small employers go into effect in 2014, and large businesses are being threatened by tax penalties, the need for brokers will be increased as employers will need guidance and advice regarding purchasing medical insurance.
The realistic scenario presents a danger when insurance premiums go higher than ever before because of the increased demand, and adverse selection. This may cause small businesses and individuals to forgo purchasing expensive insurance in favor of paying the less expensive tax penalties. Ironically, this is exactly the scenario that the healthcare reform laws were trying to avoid.
It is very likely that General Agencies may come out ahead because of healthcare reform. Because healthcare reform presents so many complexities to agents, it may encourage them to use General Agencies because of their expertise in benefits and their ability to provide high quality. In addition, a large percentage of employers may look to using a General Agency as a way of controlling costs, shifting the distribution costs from a fixed structure to a variable structure.
For many agents and brokers, the difficulty will lie in their ability to make the most out of the exchanges pertaining to individuals and small employers starting in 2014, or perhaps even earlier, since individual states can enact them before 2014.
As in the past, agents and brokers who get excited about innovation and change will continue to prosper and grow their businesses because of their ability to accept new market conditions.
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