One year after the passage of healthcare reform—embodied in the blockbuster Patient Protection and Affordable Care Act (ACA)—it's still difficult to see just what form it will take and, more important, what kind of impact it will have on the marketplace.

The jury is still out on what promise to be the law's most disruptive aspects: the shape, form, and function of the exchanges; the effect of MLR floors on broker compensation; and employers' inclinations related to defined contribution and exchanges. And the biggest issue facing US healthcare—healthcare value and affordability—seems to have taken a backseat to access, at least in much of the popular press.

But 2014 is just around the corner, and no one can afford to put strategy and planning on hold while waiting for finalized regulations and definitive industry reactions. We wanted a view from the front lines, and to get one, we turned to the nation's healthcare brokers, agents, and consultants.

For this year's edition of the Benefits Selling and Oliver Wyman Healthcare Study, we surveyed more than 1,100 members of the health distribution channel from all size segments and geographic regions. Our goal?

To gather the collective view of those closest to the daily buying and selling of health care in order to understand the current marketplace, the impact of reform, and how business models are shifting to meet the needs of the new, post-reform marketplace. What follows here is the channel's view of health care reform and some early indicators of where the market is headed.

The Coming Storm
First, agents and brokers believe reform is really going to happen. Congress is still making noises, a number of states are dragging their feet, and at least one court has declared the law unconstitutional, but none of this has persuaded the agent community that ACA is going away. Across the market, from individual agents to national account consultants, only 13 percent of respondents said ACA would be repealed.

On the other hand, only 13 percent thought it would be implemented on time and as written. A full 58 percent believe reform will be scaled down, while another 12 percent predict that implementation will be delayed. As for impact, reform is universally expected to disrupt health care distribution. Up and down the market, roughly half of all agents, brokers and consultants said reform will have a negative impact on their business.

In particular, small group and individual agents peppered the survey with commentary about reform's implications for commissions and migration to exchanges. “[If unchanged before 2014], the exchange will cause my business to dissolve” said a small group broker from Illinois. Meanwhile, an independent agent from Georgia had a slightly more optimistic take. “Health care exchanges could completely replace me, but then again, they may not!” this agent wrote.

“It depends how the state implements it.” Interestingly, for all its legislative drama, brokers saw 2010 as a relatively stable year for health benefits. Roughly two-thirds of respondents indicated their clients made either no material changes or minor buy-downs to benefits. That was a bit of a surprise: In last year's survey two-thirds of respondents predicted clients would be more aggressive in making changes to benefits in 2010.

What happened? Many brokers point to the legislative environment and the complexity of the law itself. They describe how clients spent the first three months of the year wondering about the legislation, and much of the remainder of the year trying to figure it out. “The complexity of reform and the political climate has made being in the benefits business a nightmare,” said one small group broker from Virginia. Uncertainty might have kept clients from changing benefits, but it created extra work for agents and brokers.

“[Reform] is causing us to take a lot more time with clients,” said one middle market broker from Illinois. “There is a lot of trepidation and uncertainty regarding what's going to happen…there's a need for more handholding time.” And reform arguably distracted the market as a whole from attending to important business.

As a small group agent from Washington put it, “Confusion and complication breeds inaction.” It's critical the market regain its focus on benefits strategies that best address root cause issues: unit cost and utilization patterns. Today, however, the calm is over, and the storm is on the way.

Brokers indicate the market is headed for a period of greater turbulence in 2011. This is particularly true in the lower end of the market, where roughly 60 percent of small group brokers and individual agents believe their clients will be more aggressive with buy-downs in the coming year.

A third of these brokers foresee they will have to aggressively shop carriers in order to meet the needs of their clients. “Medical insurance premiums will continue to increase at unsustainable levels,” predicts a consultant working with the middle market in Washington.

Don't expect to use up your vacation days this year. It will be a year with a lot of shopping, a lot of carrier disruption, and a lot of costs being pushed to the consumer. And that translates to a busy, difficult time for brokers.

Moving to Exchanges
Demanding customers and bigger benefit buy-downs are a serious concern, but health care reform poses a far greater threat: the potential migration of customers to the exchanges. We asked respondents what percentage of their clients would make the shift during the exchanges' first two years of operation (2014 – 2016).

Brokers in the individual market had the highest estimate — predicting 43 percent of clients would move to the exchange — followed by small group clients at 36 percent. But it''s worth noting that within each of these segments some brokers predict 70 percent or more of their customers in these segments would shift to the exchange. More surprising is the disruption brokers foresee from larger employers.

Respondents expect 24 percent of middle market employers to move to the exchanges, and just under 20 percent of large group and national accounts employers. It might be tempting to rationalize these numbers. (“Sure, some groups will move, but not all…”) But what happens if a few large, reputable firms make the move — and it works? Will others be slow to follow? 

The mood in the marketplace was ably summed up by Mike Brewer, president of Lockton Benefit Group, in testimony before the U.S. House Education & Workforce Committee's Subcommittee on Health, Employment, Labor and Pensions: “Many clients have told us, 'We won't be the first to drop coverage, but we won't wait to be third, either.”

The Impact of Reform
If customers move to the exchanges, what role, if any, will brokers have in serving them —and how will large-scale defections affect the remaining business? Our respondents had a mix of opinions. About one-third of small group agents see their role shifting out of health completely, while roughly another third see it expanding to include support of individual buyers.

This latter view suggests some brokers will attempt to shift to a retail model — counseling and advising individual purchasers as they buy through the exchange. Interestingly, advisors at the higher end of the market are even more bullish on the retail paradigm. Here, fewer respondents predict the advisor's role will retreat from health, and 45 percent see their role expanding to include support of individuals who buy through the exchanges.

This sentiment around the need for support is corroborated by employers, who see themselves needing more advice and counsel as the planks of reform are set in place. In the meantime, agents and brokers see hard times coming on the compensation front. Across size segments, less than 15 percent of respondents believe compensation will hold steady or increase. While different segments have different predictions for just how much commissions will compress, the trend is clearly negative.

By segment, respondents have the following sobering projections for 2011 compensation: 61 percent of individual agents say 2011 commissions will decline by more than 25 percent 43 percent of small group agents say 2011 commissions will decline by more than 25 percent 32 percent of middle market group agents say 2011 commissions will decline by more than 25 percent It's not just the commission rate that's at risk; there is a possibility the structure of broker compensation could change altogether.

Respondents to our survey believed traditional percentage-of-premium commissions will continue to dominate between now and 2013. But beyond that, there was considerable variation. Individual and small group agents believe commissions will make up the majority of their income, with 10 percent to 20 percent of compensation taking the form of capitated, per-contract-per-month reward structures.

The middle market is looking increasingly to fee-based models; respondents in this segment predicted that by 2013 roughly one-third of their compensation will consist of fees negotiated between the broker and the client. (Several large carriers have announced plans to restructure along these lines.) This shift is expected to raise awareness of both what brokers are paid and what value they provide.

Some are predicting that in the future the relationship between broker and client will be defined by a direct service agreement tied to compensation. To get ahead of this trend, one middle market broker from California reported, “We are moving away from carrier-based commissions to consulting fees that we negotiate.”

The transition to a new model might be difficult for brokers, forcing them to formalize their service offerings and compete head-to-head based on the value they create for their clients. But that doesn't mean the change is a bad thing. To quote one middle market broker from Ohio, “A reduction in commissions and a transition to fees spells opportunity.”

Shifting Business Models
When we look at the whole range of survey results, an interesting break seems to be emerging between the individual and small group segments on one hand and the middle market, large group, and national account segments on the other. Essentially, the low end of the market is hunkering down, looking for revenue, and trying to make the most of every client.

Individual agents and small group brokers told us they planned to concentrate on delivering a focused set of services to their core customers, and expanding to a more diversified suite of ancillary/voluntary products such as life, LTD/STD that would enable them to replace lost health benefits income. Some plan to deemphasize health as a core offering — and 12 percent say they might exit the health benefits marketplace entirely.

On the other hand, a majority of middle market, large group and national account advisors said they will retain their focus on health as a core offering and continue to emphasize the importance of wellness in mitigating medical trend. They plan to keep building out their offerings to include services such as health advocacy programs, as well as more traditional services like benefit administration and self-funding services.

Also notable is the indication that middle market brokers, anticipating the emergence of exchanges and Web-based navigators, are shifting away from small group (<50 employee) business. “We will be focusing more of our marketing efforts on 50+ employee groups” one middle market consultant from Washington told us. “Small groups will suffer from less service from consultants, as compensation levels will be decreased by medical plans.”

Instead, brokers and consultants are redirecting their energy up-market. Here, the market appears poised for a sea change. As we noted earlier, employers are increasingly demanding higher service levels and broader capabilities. Top brokers and consultants appear to be aggressively shifting their business models in an attempt to provide them.

Meanwhile, larger brokerages and consultants are also positioning to address this market by repackaging and marketing their capabilities, or by acquiring established brokerages to gain access to targeted local markets. The likely outcome: significant channel consolidation and expanded service models.

Uncertainty Looms, but Change is Imminent
Clearly, the attractiveness of this type of model will only be understood once the final exchange rules are defined, commission shifts settle, and agents determine the magnitude of their relative role. The post-reform marketplace is still under construction, and to agents and brokers it looks like the architects are still arguing about the blueprints.

More than half of respondents indicated uncertainty regarding the value employers might find in moving to the exchange. This “wait and see” view is roundly echoed by employers. It's interesting to note how the conversation has changed over the past year. In the throes of the legislative debate, there was ample discussion about the need to extend access (the “Patient Protection” component of ACA) while also addressing the cost of care (the “Accountable Care” component).

One year later, the channel finds itself focused on relearning the rules of the game, with a consensus view that ACA's implications for compliance and employer sponsorship strategies will not tame medical inflation. But ACA has also set off an unprecedented level of activity in the broader healthcare community. Physicians, hospitals, and payers are moving rapidly to become more integrated. Emerging new care delivery models promise to move the system toward value-based care.

As these new solutions emerge, how will the agent, broker and consultant community help identify and drive adoption of new solutions that address root cause? In the words of one small group broker from New York, “Employers who are concerned about the quality and cost of benefits will require the services of an advisor more [in the future].”

If this proves true, then the channel has an important and immediate role to play in connecting new solutions from providers and carriers to their progressive employers that will begin their adoption. And optimism is far from dead. As one Small Group broker from Virginia told us, “I believe that health reform will bring opportunity to brokers that are progressive and those who have already put changes in place to adapt to the new business model that it will bring to the employee benefits industry.” From the front lines, a dispatch of hope.