Now, with the passage of the 21st Century Cures Act, the nation’s small employers again have a clearly compliant way to reimburse employees who get their own individual policy tax-free.

Big win for local brokers

This additional approach to providing health benefits is clearly a win for small employers. Given how expensive health insurance has become, many are going to want to at least explore it with their health insurance broker. This is great for local brokers, and bad for the HR technology firms trying to cut them out.

To understand why, it is important to understand the value proposition of the HR technology firms that cut out the local broker. These firms win based on their ability to minimize HR transaction costs for small employers. Their salespeople emphasize their ability to do this, while at the same time de-emphasizing the importance of having a local health insurance broker who has local relationships and a local understanding of the market. Why do they do this? Because their software is, in fact, good at minimizing HR transaction costs — and also because they don’t have local brokers.

This approach works often enough because many small employers themselves do not fully appreciate the value of having a strategic, local broker. Larger employers appreciate it more, which is why Zenefits had such a hard time in its “Enterprise” segment and David Sacks’ first action as CEO was dismantling it.

The reason many small employers do not appreciate the value of a local broker as much is because they have not yet found themselves in a position where they really need one. But given the complicated nature of health insurance, many local brokers feel that these small employers likely will one day. With the 21st Century Cures Act, that day is here for every small employer across the country.

Why? Because dropping the group plan and reimbursing employees tax-free for individual coverage is just the sort of complicated situation where a small employer will want a strategic, local broker’s advice. This approach could be a nice win-win for the employer and employees alike, but structuring it correctly, having the proper messaging at the employee meetings, and then helping the employees get individual policies — all of it needs to go just right.

Most small employers will not feel comfortable announcing this on their own and they certainly won’t feel comfortable sending their employees to a call center in Arizona for help evaluating and signing up for individual policies.

Are you a local broker who has lost a client to an HR technology company that cuts out local brokers? Call that former client and ask them if they’ve heard of the 21st Century Cures Act. Despite these HR tech companies’ very robust corporate blogs, as of this writing there is not a single mention of this new law on any of them. Which brings us to the challenges this new law poses for these companies, and why the edge it gives local brokers is likely to persist for quite some time.

Challenges for HR tech companies trying to cut out local brokers

When small employers begin hearing about 21st Century Cures and the ability to reimburse employees for individual coverage, many will want to learn more. When the technology firm is the broker, it faces a myriad of challenges:

• The revenue model they’ve shown investors falls apart if groups drop their plan

• Their software doesn’t support reimbursing for individual coverage

• Their support model doesn’t fit with advising individual employees on individual coverage

• Venture capital investors are not known for their patience

Let’s take these one at a time.

The revenue model they’ve shown investors falls apart if groups drop their plan. On average, commissions are higher for small group health insurance right now than they are for individual health insurance. We have seen them anywhere between 50 percent and 300 percent higher. For a variety of reasons, local brokers are in a much better position to navigate this fact with clients than a remote HR technology firm.

Their software doesn’t support reimbursing for individual coverage. Ouch. They sold the client on how their HR software would minimize HR transaction costs, particularly around benefits. And now it doesn’t work for this really attractive strategy? Some of the HR technology firms that license their product to brokers such as EaseCentral, BerniePortal, Maxwell Health, and Employee Navigator have reimbursement of individual premiums built-in. Another point in the column for the local broker.

Their support model doesn’t fit with advising individual employees on individual coverage. There is a huge difference between having one conversation with a decision-maker at a company of 20 employees versus 20 different conversations with 20 different employees who are all the decision-makers for their own policies. Local brokers are in a better position to do this than HR technology firms.

Venture capital investors are not known for their patience. If the HR technology firms begin losing clients or simply not gaining new ones at the clip they promised their venture investors, pressure will begin to mount on them. Local brokers can wait longer for the economics of supporting a small group reimbursing employees for individual coverage to be more attractive; the HR technology firms trying to cut out the broker cannot.

Also, bear in mind: the small employer doesn’t have to actually drop its plan in order for the local broker to be favored here. It just has to think it might want to do so at some point. In many cases, that alone will be enough to make the employer want to stay with a local broker. This will especially be true if the local broker has begun incorporating HR technology into its own value proposition — something more and more of them are doing.