Health reform law requires health insurers devote 80 percent of the revenue generated from its individual and small group businesses to paying for health care; 85 percent must be devoted for large groups. A bipartisan House bill introduced in March would exclude independent producer commissions from the portion of the medical loss ratio that accounts for administrative costs.

Before the NAIC would endorse the bill, consumer representatives and some commissioners pressed for further study of the effects MLR was having on producer compensation. [See NAIC stalls commission vote] 

Insurance regulators have been sharply divided over what, if any, impact MLRs are having on producers and whether insurers are simply using them as an excuse to cut commissions, A.M. Best reports.

But from the data that the NAIC has collected from the National Association of Health Underwriters (NAHU); Connecture (a software company that works with health insurance carriers and brokers); three large health insurance companies and several states, regarding commission levels, the group observed several things, according to a recent report draft submitted by The Professional Health Insurance Advisors (EX) Task Force:

1. The numerical data from the three companies, NAHU, and Connecture do not provide a clear trend in commission reductions prior to 2011.
2. However, some of the states with higher MLR requirements do report reductions in commissions over several years in their states.
3. In 2011, a significant number of companies have reduced commission levels, particularly in the individual market. However, a significant number of companies have not reduced commissions in 2011.
4. The states with higher MLR requirements have not observed any problems with consumer access to insurance or to producers.

The NAIC says it can't make meaningful conclusions from the collected data at this time, because the data sets from these sources are "incomplete" and none of the private data was made available for public review.

If the MLR requirement were applied to 2010 data collected by the NAIC, A.M. Best reports, insurers would have paid a total of $1.95 billion in rebates to individual, small group and large group customers, according to the report. But if agent and broker commissions and direct sales salaries are excluded from the rebate formula, as is proposed by the bill, those rebates drop to a total of $680 million — a decrease of roughly $1.3 billion.

Still, NAHU urges the harm to consumers by damaging their ability to obtain services from agents and brokers will far outweigh any decrease in potential rebate.

"The new law is making [small employers] nervous about hiring and even offering benefits at all," Jessica Waltman, senior vice president of government affairs at the National Association of Health Underwriters, said in April. And brokers and agents in turn are "diversifying, ceasing to offer certain types of coverage, ceasing to represent certain carriers, leaving certain markets, and in some cases as a last resort reducing client services and cutting their staff. All this means is that there will be less agents and trained service professionals to help American health care consumers."

A recent survey by the National Association of Insurance and Financial Advisors found member agents and brokers who sell and service health insurance policies, 75 percent have seen their commissions decrease since the MLR went into effect Jan. 1, 2011. An additional 13 percent have been informed by insurance companies that commissions will be cut in the near future.

What's more, nearly a quarter (23 percent) of the agents who have seen their commissions fall have reduced services for their clients, while 11 percent have stopped selling and servicing policies for individuals and 4 percent have gotten out of the health insurance market altogether.

"One goal of the health care law is to increase competition, but the MLR provision is having an opposite effect," says NAIFA President Terry K. Headley. "As agents are driven out of the marketplace, their clients have fewer and fewer choices for receiving coverage with quality customer service and less opportunity to have plans tailored to their specific needs. These are things agents bring to the table that the government or the insurance companies on their own can't replace." 

According to the NAIC's report, the Working Group received various suggestions as to possible ways to modify MLR definitions, methodology and/or numerical standards to support producer compensation. Some of these variations could be combined as appropriate. All of these options are in addition to the default option of making no changes to the current MLR formula:

1. Types of compensation in addition to commissions, if any, eligible for special treatment;
2. Types of producers for which compensation is eligible for special treatment;
3. Limits, if any, on the amount of compensation given special treatment;
4. Increase the numerical MLR standards (85 percent and 80 percent) to reflect the exclusion of commissions;
5. Substitute producer compensation deduction for the federal tax deduction;
6. Limit the number of years that special treatment of producer compensation will be applicable to the period prior to 2014 when guaranteed issue will apply and exchanges will be in place.

Beth Mantz Steindecker, a health care analyst at Washington Analysis, told National Underwriter Life & Health in March that NAIC support is a "key factor" in building momentum for House action. But a greater hurdle will be the Senate, she says.

"House support will be important, but the Senate is a key obstacle because Senate liberals, led by Sen. John Rockefeller, D-W. Va., and Sen. Tom Harkin, D-Iowa, are key opponents of any change to the law," Steindecker said. 

More medical loss ratio coverage from BenefitsPro:

• PPACA: NAIC panel backs MLR measure
• NAIC ices agent comp MLR exclusion effort
• NAIFA's agent survey exposes MLR impact
• Group calls broker bill a 'death blow' to consumers
• Special report: The MLR aftermath