The Role of Agents and Brokers in the Market for

Health Insurance

Pinar Karaca-Mandic, Roger Feldman, and

Peter Graven

University of Minnesota

Outline

• Background on small firms and brokers • Research questions• Data & methods• Results• Discussion

Background on Small Firms

• Small firms historically have reported problems with the availability and affordability of health insurance– In 2008, 43% of firms with fewer than 50 workers

offered health insurance, down from 47% in 2000– In contrast, 96% of firms with 50 or more workers

offered health insurance– Small firms often cite cost as reason for not offering

health insurance

• 71% of small firms that offered health insurance in 2007 purchased their policy through a broker or agent (NFIB)

Background on Brokers & Agents

• Brokers sell insurance from more than one insurance company, agents from one company

• Both receive commissions from the insurer (2%-8% of premiums)

• Brokers and agents help firms determine desired benefit packages and obtain premium quotes for those packages, as well as serving as intermediaries between consumers, firms, and insurers (Cummins and Doherty, 2006)

Agency Breakdown

– As in other markets, brokers’ fees may vary with market structure

• Brokers/agents in concentrated markets may charge higher fees• Unless higher fees are accompanied by better service, small

firms in such markets will be less likely to offer health insurance

– Brokers/agents in concentrated markets may not act diligently to obtain prices or benefit packages that suit their clients’ needs

• Premiums for small firms that offer health insurance will be higher in concentrated broker markets

• High-deductible health plans (HDHPs) provide an interesting test case of the agency breakdown

• Small firms in concentrated broker markets may be less likely to offer HDHP

Research Questions

• As brokers/agents become more available and more competitive, what is the effect on:

1. Probability that small firms offer health insurance?

2. Premiums of health plans offered by small firms?

3. Probability that small firms offer a high-deductible health plan (HDHP)?

Employer Data

• Medical Expenditure Panel Survey – Insurance Component (MEPS-IC) for 2008– Nationally representative sample of establishments (business locations)– We selected firms with fewer than 100 workers and one establishment

• Outcome variables– Indicator for whether the firm offers health insurance– Conditional on offering:

• Premium for the plan with largest enrollment • Enrollment-weighted premium across all plans • Whether plan with largest enrollment has a high deductible (>$1,050

for single coverage)• Whether any plan offered has a high deductible

• Workforce composition and firm characteristics

Agent and Broker Data

• National Association of Health Underwriters (NAHU) membership database– The only national trade association that exclusively

represents health insurance brokers and agents– >100,000 licensed health insurance brokers and agents– We obtained counts of NAHU members serving small

firms by zip code (2008)

• Advantages: – NAHU members are likely to be active brokers/agents– Identifies brokers/agents that serve small firms

• Drawback: NAHU represents one-third of all brokers and agents

Market Structure Measures

• Number of brokers/agents per 100,000 population or per small firm in the market area– Captures availability of brokers as some markets do not have any

NAHU brokers– Appropriate measure of competition among firms with non-

symmetric cost structures and differentiated products

• Markets– County– Composite geography built on Core Based Statistical Area (CBSA) – Fixed radius of all zip codes within 25 miles– Variable radius of 25 miles or all zip codes within 25 miles

containing <1,000,000 people, whichever is smaller

Statistical Analysis

• We estimate the probability of offering insurance as:

Yim is the outcome for firm i in market m

Xm are market characteristics including broker/agent market structure

Zim are firm characteristics

are state fixed effects

• Followed by models of premiums and offering HDHP, conditional on offering health insurance

)()1Pr( 321 simmim ZXY

s

Broker Market Structure

Quartile County CBSA Fixed RadiusVariable Radius

1 0.00 0.12 0.09 0.06

2 0.90 1.15 1.17 1.05

3 2.31 2.35 2.43 2.55

4 6.68 5.62 5.97 6.57

Average number of brokers per 100,000 population by quartiles of the broker geographic market definition

Probability of Offering Insurance

Number of brokers per 100,000 pop (ref quartile 1)

County CBSA Fixed Rad. Variable Rad.quartile 2 0.169* 0.0565 0.102 0.153*

0.0973 0.0942 0.0931 0.0881

quartile 3 0.229** 0.112 0.126 0.272***0.0949 0.104 0.0989 0.0906

quartile 4 0.302*** 0.210* 0.229** 0.291***0.0943 0.108 0.102 0.0979

Premium Conditional on Offer (most popular plan)

Number of brokers per 100,000 pop (ref quartile 1)

County CBSA Fixed Rad. Variable Rad.

quartile 2 -232.3* -440.0*** -275.4** -149.8

122.3 126.5 119.4 110.3

quartile 3 -100.1 -372.5*** -301.1** -215.7*

122.2 143.7 130.6 116.4

quartile 4 -267.6** -312.9** -365.6*** -167.4

123.3 142.8 134.5 125.7

HDHP Conditional on Offer (most popular plan)

Number of brokers per 100,000 pop (ref quartile 1)

County CBSA Fixed Rad. Variable Rad.

quartile 2 0.11 0.349** 0.0781 0.206

0.143 0.136 0.135 0.134

quartile 3 0.0311 0.304** 0.211 0.253*

0.14 0.149 0.141 0.136

quartile 4 -0.105 0.0847 0.131 0.168

0.14 0.15 0.147 0.146

Predictions

Number of brokers per 100,000 pop (in quartiles)

Probability of Offering

Premium conditional on

offer ($)

Probability of HDHP

conditional on offer

quartile 1 0.414 4,737 0.350

quartile 2 0.438 4,505 0.400

quartile 3 0.446 4,637 0.410

quartile 4 0.457 4,470 0.390

Endogeneity Concern

• Agents/brokers may locate in areas with strong unobserved demand for insurance, and/or areas where employers prefer generous benefits – Implies that our estimates of the effect of market

structure on: • Offering insurance may be biased away from zero• Premiums may be biased toward zero

– We control for a large set of economic and demographic conditions at the county level, state fixed effects, and employer characteristics (e.g. other fringe benefits)

Sensitivity – Exclude Key Variables

• We exclude county-level economic/demographic characteristics & other fringe benefits – Offer estimates should go up – Premium estimates should go down

Base Sensitivity Base Sensitivity

Quartile 2 0.0565 0.132* -440.0*** -331.3***

Quartile 3 0.112 0.154** -372.5*** -280.1**

Quartile 4 0.210* 0.338*** -312.9** -247.6**

Offer Premium

Sensitivity – Examine Larger Firms

• Larger firms should not be affected by the market structure for agents and brokers that serve small firms

• We estimated all models for larger firms (>100)• Expect inability to reject null of no difference• Results for CBSA are shown, others are similar:

Base Large Base Large Base Largequartile 2 0.0565 -0.383 -440.0*** 44.91 0.349** -0.199quartile 3 0.112 -0.577 -372.5*** 32.34 0.304** -0.254quartile 4 0.210* 0.253 -312.9** 105.5 0.0847 -0.483**

Offer Premium HDHP

Discussion

• Affordable Care Act (ACA) will create state-based health insurance exchanges where individuals and small firms can shop for health insurance– Exchanges may take over some functions of brokers – Policies will be standardized so search costs should

be lower– What role will brokers have in the new exchanges and

how will they be compensated for their services?

• Two working models may offer some ideas: Utah and Massachusetts

Utah and Massachusetts

• Utah started a pilot exchange in 2011 for employers with 2-50 employees– Employer chooses a defined contribution and employees

shop among about 70 health plans offered in the exchange– Employers are encouraged to designate a broker who

receives a commission of $37 per month per employee

• Brokers play a smaller role in the Mass. Health Connector– Brokers receive fixed fee of $10/month for employers with

1-5 employees and 2.5% of premium for 6-50 employees– If broker is not used, the fee is used for Connector

administrative costs– Most enrollees are non-group members

Summary

• Brokers and agents play an important role in helping small firms navigate the complexities of health insurance

• When broker availability increases (moving from no brokers to one or more)– Likelihood of offering health insurance increases– Premiums decrease, conditional on offering– Probability of offering HDHP increases, conditional on offering, but

evidence is not consistent across geographic market definitions

• When broker/agent market becomes more competitive (moving from 1 broker to more than 1)– Likelihood of offering increases– Not much effect on premiums – No effect on HDHP offering