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Best's News Service - June 26, 2013 10:12 AM 2014 Could Be Make-or-Break Year for Small US Health Insurers, Experts Say OLDWICK, N.J. - 2014 could be a make-or-break year for smaller health insurance companies that have traditionally focused on the individual market under U.S. health care reform, several experts say. But some insurers have adapted by lowering expenses, including commissions, and still remain profitable, said Sally Rosen, an assistant vice president at A.M. Best Co. The industry, especially smaller health insurers and agents, are positioning themselves to try to survive 2014 — when the major provisions of the law kick in, said Scott Leavitt, past president of the National Association of Health Underwriters. NAHU represents agents, brokers and consultants. Under reform, individual plans must spend at least 80% of premiums on medical care costs. If they don't, they must issue rebates to policyholders. Robert Dial, vice president, chief compliance officer for United Security Life and Health Insurance Co., a small individual major medical company, told BestWeek that economies of scale don't favor smaller insurance carriers such as his when it comes to the MLR. "The impact of this law resulted in USLH having to reduce agent commissions, which adversely affected our ability to write new business," Dial said. Small carriers "are put at a significant disadvantage from the larger carriers, which have resulted in many smaller carriers having left the marketplace over the past two years." Insurers, regardless of size, have adapted by lowering expenses, including commissions, to comply with the 80% minimum MLR requirement, and still remain profitable, Rosen said. Some insurers also have exited the individual major medical product since the law was signed in 2010, Rosen said. "This included both smaller carriers and larger carriers where major medical was only a small portion of their overall business." Over the past two years, the MLR provision has resulted in agents' commissions getting slashed by half, Leavitt said. About 25% of agents across the United States have left the business. Other agents have merged with other offices or laid off staff, Leavitt said. For 2011, USLH had a 120% loss in one state but because the company had less than an 80% loss ratio in two other states, "We actually had to rebate money back to those policyholders while overall, with all of our states, our loss ratio actually exceeded the 80% threshold," Dial said. Overall, the company lost money "but still we were forced to pay rebates, therefore decreasing our claim reserves, which are needed for future years."


Sam Fleet, president and chief executive officer of AmWINS Group Benefits, a wholesale insurance broker and administrator, noted many insurers now are basing compensation on a "flat-dollar amount" instead of percentage of premium. Going forward, brokers don't get the benefit of medical trend. Before reform, every year, when premiums went up, brokers "got a raise," Fleet said. Fleet, meanwhile, predicts lots of consolidation, saying he knows of several small insurers looking to be acquired. Grace-Marie Turner, president of the Galen Institute, said smaller insurers are in the "crosshairs of this law. It's a huge hit for small businesses — whatever their business." Joseph Berardo, president and chief executive officer of MagnaCare, a health plan management company serving self-insured employers in New York and New Jersey, remains optimistic. There will be new distribution channels, products and ways for people to buy insurance, he said. Companies that build their technology and infrastructure to adapt "will be the market share gainers of the future." Companies that have operated in the individual business doing medical underwriting probably spent 65% to 70% on medical costs, he said. Some administrative expenses associated with signing on those customers were high, he said. The federal government, however, argues they won't have to "chase" customers, as people will flock to the health exchanges, which should reduce an insurer's acquisition costs, Berardo said. Under the Affordable Care Act, on Jan. 1, 2014, a major provision of the law — the individual mandate to buy health insurance, or a pay a tax penalty — kicks in. Individuals will be able buy coverage through the online health insurance exchanges. Many companies are trying to offset the impact of reform by expanding into other product lines. Some of these include benefit designs that are exempt from the Affordable Care Act - supplemental benefits, Medicare supplement, voluntary and ancillary lines, such as dental and vision, Rosen said. "Many of these product lines operate in competitive markets and the number of carriers offering coverage in that market is expected to rise." USLH is looking at increasing its efforts in non-ACA ancillary products, Dial said. These include dental, vision and hearing, accident, short-term medical and life insurance. With reform, small insurers are determining how state exchanges can help them grow market share, said Wayne Cafran, principal, advisory for KPMG. The incentive for people to buy health insurance is significant with the subsidies available to some segments of the population, Berardo added. Leavitt said many insurers are partnering with third-party administrators to get their administrative services up to speed so "if the marketplace collapses, they will be prepared to at least survive as an administrator." (By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

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