Healthcare Crisis: Step 3 Insurance Brokers

This week the country is beginning to create a new health care policy. A broad sweeping change is something that may be desired, but is nearly impossible to either accomplish or do well. I am proposing a multi-baby-step process to resolve the healthcare crisis. You can find steps 1 and 2 below.

The over-arching goal of these thoughts is to create a national, highly competitive market for health insurance where there are many sellers with many options creating growing supply and sophisticated buyers making wise healthcare and insurance decisions, all of which will drive health care costs down more than any government plan.

Step 1 (Tuesday): Remove State regulation. Eliminate oligopolies by the large insurers who can afford these regulations. Allow innovative players in. Create more options and lower costs. There should be one, unified federal set of regulations that applies to all insurers and plans. One layer. One level playing field.

Step 2 (Wednesday): Allow groups of people to band together, local or national, employees, companies, unions, associations, charities, or new groups set up precisely to negotiate, purchase or develop health insurance plans, including self-funded plans which are optimal.

Step 1 and Step 2 alone will dramatically reduce healthcare costs within the federal government’s universal regulatory regime.

Step 3 has to do with how insurance brokers are compensated. Currently the insurance companies pay brokers a commission to sell their policies. This encourages brokers to encourage the highest cost option. The broker has a clear conflict of interest.

Far more troubling is the bonus practice. At the end of each year, insurance companies pay substantial bonuses to insurance brokerage firms for selling large volumes in their products. This encourages brokers to guide customers toward the firm that will pay the largest bonus, rather than to the one that may be best for the buyer.

I personally witnessed a proposal by a prominent brokerage firm presenting four options. United Healthcare was the preferred provider of this firm. If they focused on driving their clients in that direction they make the largest possible bonus at year’s end. Of course United Healthcare’s quote for the coverage was lowest.

We independently ascertained the real quotes from the other three providers. One was higher than United, but both of the others were actually lower for the same coverage. The broker intentionally marked up the quotes to make sure United Healthcare was the lowest option.

Theoretically the market should correct for this. The victims in this case were relatively small firms with limited resources trying to do the right thing by providing coverage for their employees. The broker was a friend of the head of HR who secured the quotes. These bonuses, at a minimum, should be outlawed.

These issues may correct themselves once Steps 1 and 2 are undertaken. Larger groups will negotiate better rates using professional insurance consultants and making brokers obsolete. Nonetheless, the bonuses are a factor in the rising costs of healthcare.