As health insurance producers look back on one of their busiest quarters in recent memory, it's easy to forget that just a year ago many were predicting that the Patient Protection and Affordable Care Act would spell the end for brokers and agents. Now producers are back. In fact, they never left. Oliver Wyman and Benefits Selling's annual health care survey asked more than 400 brokers and agents for their take on the market, the business environment and their plans for the future. We found producers adapting quickly to the post-reform world, though many challenges remain.

The picture for producers looking forward is one of opportunity in the midst of disruption, where scale and innovation pay dividends.

Surviving the public exchanges

In May, the Centers for Medicare & Medicaid Services finally confirmed it would permit brokers and agents to play a major role on the public exchanges. If that wasn't enough to drive home to consumers the value of trusted advisors, the fumbled launch of HealthCare.gov in October seemed to finish the job.

But by November, when we conducted our survey, brokers were of two minds about the public exchanges. Sixty-eight percent of producers handling individual business described consumer demand for exchange enrollment services as “none” or “weak,” while 32 percent said it was somewhat strong or very strong. Based on the compensation received versus the effort to enroll, 19 percent believed it was worth their time to support individual enrollment on the public exchanges—a small but significant share.

Demand for my services to help enroll individuals on the public exchange has thus far been:

Problems with the public exchanges—not just the federal exchange but some of the state programs as well—compounded the challenges in the early days of open enrollment. Of brokers who attempted to enroll members, 85 percent said they succeeded 5 percent of the time or less, and only 3 percent succeeded at least half the time. On the other hand, 75 percent of respondents, both large and small, agreed that carriers viewed them as partners in the public exchange segment. Larger brokers were more likely than smaller to express a positive opinion of the economics of the public exchanges—consistent with the generally more positive attitude of larger brokers toward the business environment and the future.

Nonetheless, almost half of respondents said public exchanges will have a negative impact on their business over the next three years, with only 19 percent anticipating positive effects. And when asked about the emergence of exchange navigators, retail distribution of insurance (by companies like Walgreens, an early entrant), and payer-run direct models (via the web or call centers), producers were much more likely to describe all of them as threat rather than opportunity.

Thriving on the private marketplaces

Producers were quite bullish on the prospects of private exchanges—particularly for small groups (1-100 lives). Forty-three percent of respondents predicted that more than a quarter of small groups will use some form of private exchange by the end of 2014. (In general, the larger the group, the less likely producers thought they were to adopt private exchanges.)

About 30 percent of respondents—slightly more than last year—said they believed private exchanges could have a positive effect on their business. And even the pessimists in the group are taking steps to adapt to private exchanges; more than half said they are at least somewhat likely to partner with or offer a private exchange platform to attract or retain accounts that want one, while 27 percent said they were very likely or certain to.

Adapting to deliver more service

Now that producers have a well-defined role in the post-PPACA market, they're somewhat optimistic about their future relationship with health plans. Thirty-seven percent report that insurers increasingly view their organization as a strategic partner and differentiator. Larger producers are more likely to believe that their relationship with carriers is growing stronger, while smaller producers were more likely to say that it is being scaled back.

At the same time, producers made it clear that average commissions from core medical benefits are declining. Health plans, which have PPACA regulations to comply with and price performance targets to meet, have set in motion strategies that are already squeezing producer economics. Our survey respondents expect to be squeezed even further: Nearly half (47 percent) predicted that average commissions for health insurance will decline in 2014—a prediction quite consistent with what they have predicted in other years of the survey. Twenty-eight percent predicted that they will decline by 25 percent or more, and 12 percent expect them to drop 50 percent or more.

But even as health plans are working to compress margins in the channel, brokers say they're being expected to provide more—especially high-touch advisory services to help employers and members navigate the increasingly complex landscape of benefits choices created by reform.

Health plans want to facilitate the migration of members from group to individual plans, bundle ancillary benefits around “total health and risk protection” value propositions, and connect accounts to proprietary exchange platforms. They are looking to foster deeper partnerships with producers that can help them meet these new-world objectives, and they are expanding incentives and rewards for producers that are up to the challenge. Faced with this exploding appetite for service, it's no wonder that more than 50 percent of producers surveyed believe their workload will increase significantly in 2014.

In the face of lower margins in the core medical business, producers will be looking for ways to expand, grow revenue, and diversify risk. Health plans, too, are seeking additional sources of revenue to make up for their own declining margins as a result of PPACA restrictions such as the MLR limits. Producers and carriers alike have zeroed in on ancillary products as a growth opportunity. Almost two-thirds of respondents believed that incentives from ancillary sales would increase in 2014, particularly in the traditional ancillary lines of vision, dental, life insurance, and short and long-term disability.

Winning through economies of scale

Whenever an industry undergoes structural change, the predictable result is that the strong grow stronger and the weak get squeezed out. In the business of health insurance distribution, there are definitive signs of a growing consolidation wave. Some 47 percent of producers in our survey expect to either acquire or be acquired over the next five years—a clear sign of the pressure to achieve economies of scale while meeting the increasingly sophisticated demands of health plans.

Our respondents are divided on whether they expect to be among the survivors of the coming shakeout. Nineteen percent say they expect to acquire other brokers, and 20 percent to buy out someone else's book of business. Just 8 percent expect to be acquired, while 18 percent expect to exit the health brokerage business over the next five years.

Planning for the future

In 2014, the channel faces a complex set of challenges. Producers will have to make sure they have the scale to deliver the full range of services health plans will demand. They will have to learn their place in the public exchanges, and have to either compete or collaborate with private exchanges. To develop a winning three-year strategy, they will have to answer some tough questions:

• • How do I define an economically sound role for myself as the traditional group model transitions to emerging private exchange platforms?

• • Given the pluses and minuses of the public exchange marketplace, should I invest in building the capabilities to operate there?

• • Where will I find new revenue if average commissions in the core medical business continue to erode?

The next three years will be both exciting and challenging for producers as they attempt to seize the opportunities and avoid the pitfalls of the post-reform world. They believe they can play a vital role in supporting non-traditional forms of distribution, as well as broader health plan objectives. At the same time, an expanded business focus will require new skills, capital, scale and sophistication. Decision making will be confounded by an uncertain and shifting landscape with new entrants and emerging threats. Consolidation with other producers might be required.

The producers left standing will be nimble, deliver incremental value, and strike the right mix of partnerships and alliances necessary to retain competitive positioning. Those who remain entrenched in traditional models face an uncertain future.

Here's what they told us:

1. A small but material segment of brokers have waded into the public exchanges, earning commissions from enrolling individuals in PPACA policies.

2. Compared to last year, producers are feeling better about private exchanges. They expect significant adoption but are less likely to see them as a business threat compared to other emerging distribution channels. A substantial number plan to align themselves with a private exchange.

3. Nevertheless, brokers are feeling the pressure of commission reductions in the health business and disruption to the group market, especially with small groups dropping coverage.

4. Relationships with carriers are evolving, and some producers are carving out a larger value-added role for themselves. Larger producers were more likely to report that carriers view them as strategic partners, while smaller brokers and agents tend to report that their carrier relationships are deteriorating—suggesting that the business of health insurance distribution is increasingly becoming a scale game.

5. In response to economic pressures and evolving carrier distribution strategies, the trend toward consolidation seems to be gaining momentum. More than a quarter of respondents said they expected to either exit the business or be acquired in the next five years, while almost 40 percent say they will either acquire another producer or buy out another producer's book of business in the same period.