There was time when an insurance agent could make a decent living enrolling individuals, families and small groups into health insurance plans. With the advent of the Affordable Care Act and the subsequent downward pressure on commission rates, agents can still earn a living selling health insurance but it is not without its challenges. The level of knowledge and service an agent must provide to his or her clients has increased while the commission revenue per client has declined.
ACA meant larger market for health sales
The ACA increased the overall market for health insurance by making it affordable to more individuals and families with the tax credits along with the removal of denying a person health insurance based on pre-existing conditions. That was good for agents. There are more people who want, qualify and can afford health insurance. The downside for agents is the four-fold increase in knowledge they need to have to properly navigate the health insurance market exchanges.
Health insurance agents must know more than just insurance
Whereas before the ACA the most daunting challenge an agent faced enrolling people into an individual and family plan were the five pages of health questions a client had to answer before submitting the application. Now there are no more health questions, but agents must be knowledgeable concerning the different conditions that make a household eligible the ACA tax credits such as citizenship documentation, definition of a household, and what is to be included in the Modified Adjusted Gross Income. This is if the individual or family enrolls through an exchange like Covered California. Off-exchange plans don’t require that expertise and some agents have decided to only sell off-exchange plans.
Expert in enrollment website problems
Another layer of necessary knowledge involves learning the application and enrollment software of the Marketplace exchange such as Covered California. Every month seems to bring a new wrinkle, page, or process to some of these enrollment websites as the exchanges update the software to fix glitches or add functionality. Then an agent also needs to keep abreast of all the provider and health plan changes that the health insurance companies make throughout the year. Of course, all this knowledge is in addition to the basics of health insurance like understanding deductible, copayments, coinsurance, PPO, HMO, EPO, HSP, and the new pediatric dental and vision benefits.
Health insurance commissions are dropping
While the overall work of the health insurance agent has increased, along with the potential market for new clients, the commissions paid by the health insurance companies and health plans has decreased. This is true in both the individual and family plan and small group market. Commission structures range anywhere from 1% to 5% for individual and family plans and 5% to 7% for small group plans. Many carriers have also instituted a declining commission structure such that the commission decreases after the initial enrollment year. The commission structure is regardless of whether the client enrolled through Marketplace exchange or off-exchange directly with the carrier.
Carriers play games with commission structures
If the commission structure is based on a percentage of the premium, it is calculated on the full monthly health insurance premium amount and not the tax subsidized amount the client pays. Some carriers also pay a higher commission for some plans like a Bronze or Silver and a lower percentage on Gold or Platinum plans. Part of the reasoning is that the premiums for the Gold and Platinum plans are higher- resulting in higher commission payments -, and these plans also have higher utilization rates. In other words, individuals purchasing higher benefit plans tend to use more health care services making them less profitable for the carriers. In 2014, one carrier just stopped paying commissions on new enrollments of the higher benefit plans to discourage their sale.
Flat rate compensation
Some carriers have abandoned a percentage based commission structure and moved to either a flat amount per member per month (pmpm) or a flat dollar amount for the initial enrollment. One carrier starts out paying $18 pmpm for the first year, and then drops down to $12 pmpm for all subsequent years. Another carrier pays a $100 one-time-payment for the entire year and $50 upon renewal in the following years. There are instances when the flat rate beats a percentage commission structure. One percent on a $800 monthly premium yields an annual commission of $96.
Be your own boss
Independent insurance agents, such as myself, are considered self-employed. I receive 1099s from the different carriers who paid me commissions throughout the year. Even though many agents have complained they didn’t get paid all their due commissions from enrolling individuals and families through Covered California, my less-than-perfect bookkeeping indicates that I received 99% of the commissions owed to me. The one exception is a small group I have through Covered California’s SHOP where I only received three months of commission in 2014. As of April 2015, I’m still waiting to be paid the balance of 2014 and commissions for 2015.
I earned over the federal poverty line for income
I have a small book of business relative to other independent agents. Most of my clients are individuals and families (approximately 180 households) and a few small groups. Less than 5% of my health business is from Medicare Advantage or Supplement plan enrollments. Total commissions from all lines of my health insurance business in 2014 were $29,823. In addition, I had another $2,000 of income from contract work where I write blogs for other websites. After I subtracted all the expenses, my 2014 Schedule C business income listed on my tax return was $23,524. The Self-Employment tax I had to pay was $3,324, or 14%, on my net business income.
Some health agents are earning good money
From the calculations I did in 2014 I estimated that the health insurance companies and health plans were paying about $9 million dollars in agent commissions per month on individual and family plans. Obviously there are some agents making a lot more money than I am as a health insurance agent. And that is just fine. Your income is proportional to the amount of effort invested. My primary marketing vehicle is my website. Agents with a general agency that has a store front, use direct mail advertising, or have other lines of insurance such as home and auto, most likely have a larger book of business and commissions than I do.
Health insurance, work smart and hard work
From my perspective, I feel like I have worked very hard to earn the commissions I received. First, I invested innumerable hours developing my website and then producing quality blogs that attracted readers. Those readers turned into clients. Secondly, I spent a tremendous amount of time working for clients to make sure they received the tax credits they were entitled to. Finally, there is far more work than most people realize when it comes to supporting and advocating for the client in terms of billing or provider problems at the insurance company level.
I need to diversify
I am not complaining. Health insurance has been good to me. I’m able to really help people and make a little bit of money doing it. There are careers that are far more lucrative. And the better path is to diversify so that as an agent you sell not only health but other lines like home and automobile as well. (Commissions on the property and casualty side are quadruple that of health insurance). If you decide to tackle health insurance be prepared for a substantial amount of time providing client service on issues that have nothing to do with the actual insurance.
2016 Insurance Agent Income
2016 was a slightly different year in that I did try and diversify my income. I published a book of local history in August of 2016. However, the expenses to publish the book far outstripped the revenue I was able to generate in Q4 of 2016. My gross health insurance commissions from individual and family plans, small group, Medicare, dental, and vision insurance was approximately $43,900. I incurred $13,800 in expenses directly related toward the health insurance business for a net taxable income of $30,100 for 2016.
Without doing a analysis of the proportions, I’m guessing that 80% of the commissions were for individual and family plans, and the remainder was from small group and Medicare enrollments. the 2016 commissions were up about 15% from 2015. The open enrollment period allowed me to realize a net increase in clients. I lost some families to Medi-Cal and others picked up group insurance. There was also a noticeable shift from Anthem Blue Cross to Blue Shield plans. This will most likely help my gross compensation as Blue Shield pays a percentage of the total premium for the commission whereas Blue Cross has a set per member per month amount.
I have no idea what Trumpcare will look like of if the carriers will even have the insurance agent marketing channel. But I’m working on another history book to further diversify my income.
October 2015 updated
Since I wrote this post back in April the compensation landscape for agents has continued to deteriorate. It wasn’t a big surprise, but Covered California will not renew the token $58 per person compensation that agents used to receive for assisting with the Medi-Cal determination for individuals. Anthem Blue Cross announced they are dropping their per member per month agent compensation from $18 to $16 for the first year. They are keeping renewal compensation at $12 per member per month. (They pay Covered California $13.95 per member per month for each individual enrolled in a Blue Cross plan through Covered California.) Cigna informed agents that they will not pay any commissions on new Silver, Gold, or Platinum enrollments for 2016. Bronze plans will receive a 5% commission. Western Health Advantage told agents that they are splitting their commission structure. Agents who enroll consumers in WHA plans through Covered California will receive $22 per member per month. That same individual enrolled in the same plan off-exchange, or directly with WHA, will receive a 5% commission.
2015 Commission Income
Over the long New Year’s holiday I was able to do some preliminary calculations of my earnings as a health insurance agent for 2015. Income from health insurance commissions will be approximately $38,177. That includes IFP, Small Group, Medicare, Medi-Cal compensation and a little bit of commission from dental plans. I had another $3,000 of income from a combination of website traffic and payments for writing content for other websites. My estimated expenses for 2015 are approximately $6,562 which includes E&O insurance, website costs, mileage, marketing, office supplies and telephone bills. This nets out to approximately $31,615 for 2015, this may change after I complete my schedule C later in 2016.
While a net income of $31,615 for 2015 looks like a big jump from the $23,524 of 2014, I have to remember that Covered California finally paid me back commissions they owed me for 2014. (See Covered California SHOP fails to pay commissions). On this net income I paid $5,875 in estimated quarterly tax payments to the IRS.
Even though the commission structures are being eroded down to minimum wage levels, I think 2016 will be very similar to 2015 if not a little bit better. I’m starting to pick up a few more dental plans and small groups that help take the edge off of the declining commission rates for individual and family plans. Regardless of any increase I receive in commissions for 2016, I wouldn’t recommend a career of representing health insurance companies to anyone. Agents are destined to be replaced, not by choice but by design, with online enrollment portals and call center staffers who know very little about how health insurance actually works.
The future of agents
As I expressed to the Board of Covered California at their October meeting I’m most concerned about the deflation of agent commissions. The health plans and insurance companies are slowly forcing agents out of the market. These are the same folks who are responsible for over 40% of the enrollment through Covered California. For every consumer who enrolls directly with a carrier or through Covered California without the assistance and support of an agent saves the health plans money. No one cares that without agents, consumers don’t have an advocate to sort through the confusing mazes known as Covered California and health insurance.