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Brokers Associated With More, Cheaper Health Coverage, Study Says

Health insurance agents, feeling threatened by the Affordable Care Act, will welcome research from the University of Minnesota that supports their longstanding argument that agents and brokers make insurance shopping easier and cheaper.

A new paper by economist Pinar Karaca-Mandic and colleagues finds that small employers were more likely to offer medical coverage in markets with many brokers competing for business and offering health plans. “We also find that increased agent/broker competition is associated with lower premiums,” they wrote.

Like middlemen everywhere, health insurance brokers argue that their ability to steer customers through the market thicket makes them worth their commissions. (For medical policies, commissions are usually paid by insurers.) Often they act as virtual benefits departments for small employers that can’t afford their own human resources staff. Others say broker fees add to administrative expenses and drive up overall health costs.

Karaca-Mandic found that small firms were about 20 percent more likely to offer health coverage in counties with the most brokers serving small firms than in counties with the least. The data are from 2008. In counties with the fewest brokers, the average annual premium for a single employee was $5,173. In counties with the most brokers, the annual premium was $4,495 — 13 percent less.

The report, posted as a working paper by the National Bureau of Economic Research, was funded by a grant from the federal Agency for Healthcare Research and Quality.

The findings raise a chicken-and-egg question. Did employers in the broker-rich counties offer more coverage because they had access to better information? Or were there more brokers in those places because of higher employer demand for health insurance?

Karaca-Mandic and colleagues tested the data for clues. For example, if higher overall demand for health insurance was the cause of wider coverage in some markets, they reasoned, large employers would show the same variability in premiums and coverage patterns from county to county as small firms. But they didn’t, suggesting something else was influencing small firms to offer insurance. Large employers don’t usually use brokers, they figured, so maybe brokers were the X factor for greater coverage among small firms.

“Greater availability of brokers and more competitive broker market structure play an important role in reducing search costs and improving offer rates in small firms,” they concluded.

The Affordable Care Act was supposed to make insurance shopping easier for small firms and individuals by offering comparable products through online marketplaces due to open in October. The Obama administration is financing the training of “navigators” to help individuals enroll, giving taxpayer subsidized competition to brokers.

Brokers also lost out when regulators declined to count commissions as part of the minimum medical claims and quality-improvement spending insurers must achieve. Bipartisan legislation is pending in the Senate that would reverse that.

Given the lack of awareness about many aspects of the Affordable Care Act, “I would say there will still be a lot of demand for brokers, at least in the short term,” Karaca-Mandic said in an interview.