Final MLR rules count broker fees as overhead

December 2, 2011

The Department of Health and Human Services issued final regulations in December for the Medical Loss Ratios (MLRs) mandated by health care reform. The final regulations count broker commissions as part of a health insurer's administrative costs, rather than allowing them to be paid from the benefits side of the budget, as brokers had hoped.

The MLRs define the percent of premium that health insurers must use for paying for actual medical care or health care quality improvements. If insurers do not meet these guidelines, they must issue rebates to consumers according to a formula established by the government.

The law requires health insurers to allocate premium dollars within these parameters:

Percent of premium allocated to:	For small employer (<50) and individual plans	For large employer plans (>50)
Medical benefits/health improvements	80%	85%
Administrative costs	20%	15%

According to the regulations, health insurers will have to pay any broker commissions out of the administrative portion.

Before the final regulations were announced, brokers and agents unsuccessfully tried to persuade the government to reclassify commissions so they would not be considered part of the administrative costs. They argued that the law would do more than reduce broker compensation, it could also decrease consumer and small business access to the expert health plan guidance that brokers provide.

The MLR guidelines were released by the Centers for Medicare and Medicaid Services on December 6, 2011. The final and interim regulations also:

• Change the way MLR rebates are issued in group health plans so they will not be taxable income for the employees who receive them.
• Require clear consumer notices that include the amount of the rebate, if any, and an explanation of what the insurer's MLR level means, even if no rebates are needed.
• Phase down the calculation of the “special circumstances” MLR adjustment for mini-med plans over the next few years, rather than simply ending it abruptly. Mini-med plans will be banned completely in 2014.
• Recognize the special types of some health plans, such as expatriate plans, and level the MLR playing field between nonprofit and for-profit insurers in states with premium taxes.

See the government fact sheet for more details.

Impact on brokers — A report from the Government Accountability Office released in August 2011 shows that almost all insurers have already started adjusting commissions to agents and brokers to comply with the MLR requirements.¹ The release of the final MLR regulations may result in additional adjustments to compensation.

The new requirements may accelerate a move to new models of broker compensation, such as fee-based consulting, and may compel more brokers to broaden their portfolios with other valuable, non-medical benefits.

Impact on employers — This could leave some employers without the broker guidance they count on to make educated health insurance choices in a complex and rapidly changing market. Some employers may choose to pay fee-based commissions to retain this valuable support.

One important note — Self-insured health plans are not “health insurance issuers” as defined by the Public Health Service Act. This means employers who self-insure their medical plans are not subject to the MLR regulations.

Impact on employees/individuals — This element of health care reform is intended to benefit consumers by assigning more of their premium dollars to actual medical care and health care quality improvements, and fewer dollars to administrative costs. If health insurers do not meet the MLR requirements, consumers can expect rebates. The first round of rebates must be issued by August 2012, based on 2011 MLR levels.