Healthcare Reform
Will Exchanges Eliminate Brokers?
by Alan Katz

There’s a big difference between bending and breaking; between change and destruction. This is especially important to keep in mind when talking about the impact health care reform will have on insurance brokers. Some commentators, like John Goodman, president of the National Center for Policy Analysis, are quite emphatic in their doom and gloom. In an interview published in HIU magazine, Dr. Goodman states “Under any sort of exchange that’s being envisioned by Congress or the White House, there will be no broker.”

Dr. Goodman is intelligent and highly regarded, but that doesn’t make him right. And in this case I’m confident he’s wrong. This confidence rests in part on the herculean efforts being made by the National Association of Health Underwriters and other broker organizations to include specific language in several of the bills moving through Congress that explicitly permit brokers to sell products offered in an exchange. But more importantly, I believe that even after the exchanges are up and running (probably in 2013) individuals and small business owners will still need the services of independent brokers.

While it’s (unfortunately) easy to imagine an exchange that eliminates the need for brokers, the exchanges most like to emerge from the debate in Congress are widely expected to be much more benign. Congress is likely to leave the details of the exchanges to the states. Given their financial conditions, most states will be hesitant – and perhaps unable – to make significant investments in infrastructure. Consequently, these exchanges are likely to keep things simple: standardizing marketing material; presenting rates and benefit information; simplifying enrollment forms and the like. Even if Congress creates more robust exchanges, it doesn’t spell the end of brokers. California created a purchasing pool back in the 1990s. The Health Insurance Plan of California (HIPC) served a role similar to that envisioned by some policy makers for a powerful exchange. The HIPC negotiated rates and benefits with carriers and allowed small business owners to purchase directly from the purchasing pool. Purchasers could use an independent broker, but they paid a five percent surcharge on their premiums to do so.
Did the HIPC displace brokers? Not really. Over 65% of the groups enrolling in the HIPC voluntarily paid the surcharge in order to work with an independent broker.

The Theory of Disintermediation

Health care reform is not the first development doomsayers have claimed would eliminate brokers. In the late 1990s, the Internet was going to displace brokers. One carrier president went so far as to tell a group of brokers they were dinosaurs and would soon be out-of-the-picture. Within a year that carrier president was gone. The brokers remained. Which leads me to Katz’s Theory of Disintermediation (a fancy word for elimination). The Theory holds that whether the Internet will eliminate distribution intermediaries depends on the interplay of six factors of the product or service being sold, specifically how:

1. Complex the product or service is to consumers.
2. Frequently the product or service is purchased.
3. Personal and critical the product or service is to consumers.
4. Expensive is the product or service.
5. Much on-site service is required to install or use the product or service.
6. Easily a description of the product or service can be digitized.

Here’s some examples of how the theory works.

Books: Books are pretty simple. Everyone knows what they are and how they work. Theory would predict that online book sellers like Amazon would come to dominate the book market. And they do. The niche reserved for brick and mortar book sellers is where advice, impulse or convenience are involved (best provided locally).

Travel: Booking a direct trip from one city to another is pretty straightforward and most travelers are comfortable with their own expertise. Travel can be expensive and getting there can be important, but the amount someone might overpay is relatively modest. Airline tickets can be delivered locally and are easily digitized. So the theory would expect routine travel to migrate online. And it has. However, travel agents still are commonly used for complicated itineraries and critical travel events.

Health Insurance: Health insurance is extremely complicated. Just ask someone to explain the meaning of “co-insurance” or “formulary.” People rarely shop for coverage, it’s expensive and it’s important to make the right decision. True, there’s no need to purchase health insurance locally and descriptions of rates and benefits are easily presented in a digital format, but these factors don’t carry a lot of weight in this situation. Not surprisingly then, the Internet is capturing an increasing percent of individual health insurance sales, but these buyers often consult a broker before making their a decision. And virtually all small group coverage involves a broker.
Even in a world where exchanges simplify health insurance policies and bring some standardization to marketing material and the like, consumers are still going to have to make a decision concerning an expensive, complex product, which they purchase infrequently and is critical to their health and financial security.

The need for independent expertise will be even greater for small business owners; they are making a decision that affects not only their own families, but also those of their workers. That’s a responsibility that most employers are reluctant to take on without expert support. The theory suggests brokers will still be needed. And where there’s a need, there’s an opportunity.

Health care reform is coming and it will bring changes. Brokers will need to adapt to a new reality. But adaption is not extinction. Just because someone claims the sky is falling, doesn’t mean it is falling. It could just be changing.
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Alan Katz, RHU is principal of the Alan Katz Group, which specializes in providing sales development and business strategy consulting to enterprises both large and small. He is a past president of both the California and the National Association of Health Underwriters. Alan speaks and writes frequently on health care reform and is the author of the highly regarded Alan Katz Health care Reform Blog (www.AlanKatz.WordPress.com, which has been recognized by LexisNexis as one of the “Top 50 Blogs for Insurance.” Portions of this article appeared as posts in the blog.