A consumer advocate group wants to be part of an insurance-industry discussion on whether to exempt broker and agent compensation from a health reform law that aims to cut wasteful insurer spending.

The group, Consumer Watchdog, is rallying members to demand that state insurance commissioners reject a resolution that removes producer compensation from medical loss ratio (MLR) calculation.

The MLR rule, enacted under the Affordable Care Act, requires insurers to spend 80 to 85 percent of revenue on health care and quality improvement efforts.

Broker groups say because producer compensation is included as part of the  "administrative" side of the medical loss ratio, this is forcing insurers to cut individual and small group commission rates by as much as 50 percent, using the MLR as justification.

The U.S. Government Accountability Office backs up the broker claims. In July, the GAO released a report, which found most insurers say they're responding to the MLR rules by cutting brokers’ commissions or are planning to cut brokers’ commissions. 

“Almost all of the insurers we interviewed were reducing brokers’ commissions and making adjustments to premiums in response to the PPACA MLR requirements,” John Dicken, a GAO director, wrote in a letter summarizing the GAO’s findings. “These insurers said that they have decreased or plan to decrease commissions to brokers in an effort to increase their  MLRs.”

Though commissions are being slashed, Consumer Watchdog says taking broker pay out of MLR would cost consumers an estimated $1.1 billion that would have been paid out by insurers as rebates, and would render the health reform provision meaningless by spending health premiums on overhead, salaries and profit.

"Health insurers are going after the only rule in health reform that could force them to cut wasteful bureaucracy and excessive profits. Exempting sales commissions from this key consumer protection would free health insurers from the rule, leaving brokers to demand higher pay and insurance companies to increase premiums at will," said Carmen Balber, Washington Director for Consumer Watchdog. "Insurance commissioners considering this blatantly political move should remember that their responsibility is to protect citizens, not insurance industry profits."

Backers of the broker resolution assert that health reforms will drive brokers and agents out of business and leave consumers without "professional advisers" in choosing and dealing with insurance companies. However, the consumer group says, all credible data says otherwise.

Consumer Watchdog gives three examples:

1) A recent study by an industry lobby and trade group—the Independent Insurance Agents and Brokers of America—found that "organic [customer base] growth improved, albeit modestly, and profitability held constant across most of the study's six [broker and agent] revenue groups."

The study credited more efficient business operations—exactly what the health reform legislation sought—for much of the recovery from an industry slump that began in 2006, long before federal health reform was even debated, said Consumer Watchdog. (See the IIABA report at http://www.consumerwatchdog.org/resources/iiaba2011profitstudy.pdf) 

2) The NAIC's own staff report earlier this year found that removing broker compensation from the MLR calculation would mean a $1.19 billion loss in rebates for consumers in 2010.

The same research failed to show that consumers will be harmed if broker pay remains in the MLR formula and some of the most excessive payments are reined in.

In fact, of the eight states surveyed that have existing rules requiring MLR near or greater than the 80 percent federal standard, not a single state reported any consumer complaints about lack of access to insurance brokers, even though commissions are generally lower in such state. (Download the report at http://www.consumerwatchdog.org/resources/phiareport.pdf) 

3) Insurers are cutting back on some of the most excessive broker compensation schemes.

One North Carolina insurer, Wellpath, reported that the MLR efficiency rule caused it to reduce first-year commissions for individual policies from 27 percent to 14 percent.

The MLR standard was included in the health reform law specifically to eliminate that kind of waste. (Download the letter here http://www.consumerwatchdog.org/resources/nc_mlr_request_09062011.pdf)