That's mostly because of the guidance that clients need to negotiate the choppy waters of health insurance reform, learned assistance that producers expect clients will require for some time.

But the new model also will be driven by the anticipated move to a fee-based compensation system that producers say already is emerging to replace the current compensation model of insurer-paid commissions. That development also is a product of the PPACA and new regulations relating to which pots of funds health insurers must tap to cover certain expenses, including producer compensation (see “Medical loss ratio issues still up for grabs“).

The new business model almost certainly will trigger some fallout, mostly hitting small producers, observers said.

Some report that the level of advisory services that clients need will take a measure of resources that small producers will not be able to muster. Those without adequate resources to keep abreast of quickly changing developments in the market will be forced to merge with larger, more affluent agencies or exit the business, large producers anticipate.

Even smaller agents expect their numbers to shrink at least somewhat. However, they maintain that there will be plenty of opportunity for hardworking and knowledgeable independent small agencies.

A chaotic period

At no other time in recent history have health insurance buyers relied more heavily on their agents and brokers for direction, as producers and their clients have been whipsawed by developments with the PPACA since late 2010, industry observers say.

Two courts have upheld the law, another has struck down the law's individual coverage purchase mandate, and a fourth has ruled that the entire law is unconstitutional. All of that sets up a probable U.S. Supreme Court review of the law within a year or two, prompting insurance buyers to wonder what their compliance requirements are.

Meanwhile, following the Florida federal court's ruling that the PPACA is unconstitutional, at least one of the 26 states involved in that litigation has decided not to implement the law. In Florida, Attorney General Pam Pondi interpreted the court's opinion as an injunction of the law, state lawmakers have no plans to pass legislation to implement it, and Gov. Rick Scott has said that no state agency will work on it.

In Congress, Republicans attempted to repeal the PPACA. But Republicans have vowed to amend it significantly, and even President Obama has said he would not oppose changes, as long as they keep the essential elements of the law intact.

By then, producers and their clients already had grown frustrated by compliance regulations from the federal government. Many producers noted that after issuing difficult-to-meet health plan non-discrimination rules last year, the government rescinded them after many employers already had made plan decisions they would not have chosen otherwise.

For example, under the regulations' grandfather provision, employers that remained with their incumbent insurers could retain health plans that failed to meet new non-discrimination rules without paying a hefty $100 daily fine per discriminated-against plan member. Some employers paid 20 percent higher premiums to remain with their insurers, and they did not have time to shop their accounts when the government pulled the regulations in late December, said Scott Even, sales manager at the Tucson office of general agency Rogers Benefit Group.

Valued advisors

Given the fluid nature of the health insurance environment, an agent “has to be a strong intellectual, strategic partner to the client,” said Christopher Nadeau, principal and employee benefits practice leader at Boston-based William Gallagher Assocs. Insurance Brokers Inc., a large independent agency.

“The broker and agent who can't walk a client through this is in serious jeopardy,” not only of losing clients but of also facing professional liability claims for providing inadequate or erroneous guidance, he said. In some cases, even the most sophisticated clients don't know what they don't know about the law, Nadeau said. That could put clients at a competitive disadvantage in their own industries if their agents and brokers are not on top of the latest and sometimes cloudy developments with health coverage.

Agency executive Craig Hasday agreed that agents have to become strong partners with clients. “We have to maintain constant contact with clients about the situation, because it's literally changing every day,” said Hasday, chief operating officer of New York-based Frenkel Benefits LLC, a unit of Frenkel & Co.

Agents and brokers have no other option if they want to remain independent and stay in business, said agency owner Steven Spiro. “They're going to be left in the dark if they don't reinvent themselves to become advisors to clients in the future,” said Spiro, owner of The Excelsior Group Inc. of Valley Stream, N.Y.

“And if agents haven't been an advisor or counselor for them already, shame on them,” he said. “My philosophy has always been to get them on price and keep them on service or advice.”

But more than allowing an agency to survive, becoming a valued advisor will help it thrive, Even said.

“Knowledge is power—it's like an education race” among producers, with the losers leaving the market or getting swallowed up by the winners, said Even, noting that 2010 was one of his best years due to the chaotic health insurance environment.

Clients—from the most sophisticated businesses to mom-and-pops—not only want but genuinely need their agents to be strong advisers who are on top of the latest developments, agents and brokers are finding.

For example, a large private equity company that was developing a 5-year business plan last year as it prepared a project bid had no idea it faced discrimination penalties if it did not modify its health plan within a few years to meet new PPACA requirements, Nadeau said. Gallagher Assocs. pointed out the issue after the company consulted the agency on another matter.

If the discrimination issue had gone undetected, the company's bid would have been inadequate, Nadeau said. Now, the private equity company is concerned that its competitors do not understand the issue and will underprice their bids. The client is making sure its competitors understand the issue so all of the bidders will be playing on a level field, Nadeau said.

Another client that sponsors a self-insured plan covering 300 lives did not realize its benefits costs would nearly double to around $4 million annually within the next few years as a result of the PPACA provision that eliminates lifetime health insurance coverage caps, Nadeau said.

The client had counted on its medical stop-loss insurance to continue limiting its annual costs to $2 million annually. That coverage is critical to the client, because a baby covered by the plan was born last year with hydrocephalus—water on the brain—and is incurring annual medical costs that exceed $2 million.

The client did not understand that, unlike with health coverage, the PPACA does not eliminate the lifetime limits cap that medical stop-loss insurers impose, Nadeau said. The client's coverage is expected to run out next year, he added.

The resulting doubling of benefits costs would bankrupt the company, which now is considering its options, Nadeau said. One possibility is cancelling its health plan and taking the much smaller federal annual penalty of $2,000 per covered life, or $600,000 in that client's case, he said.

Sweating the small stuff

There also are little-publicized provisions of the PPACA that agents and brokers need to be expert on since clients won't be, said Henry Loubet, chief strategy officer at Torrance, Calif.-based Keenan & Assocs. Keenan is among the nation's 20-largest brokers.

For example, the PPACA provides $5 billion of subsidies to employers for use in funding the healthcare component of their early retiree programs. On a first-come first-served basis, employers can obtain an 80 percent subsidy in the form of a reinsurance reimbursement of the medical claims of retirees 55 and older who are ineligible for Medicare, as well as for their spouses, surviving spouses and dependents. 

Loubet said that the agency already has helped 25 of its clients obtain $10 million in subsidies. The application process for each employer is complicated, taking about 180 hours to complete, he said. “You do anything wrong, you have to apply again.”

In many cases, the clients were not aware the program existed. “One of our jobs is to look out for our clients and customers,” Loubet said.

Many observers do not anticipate agents' value as healthcare advisors will diminish after helping clients clear the initial hurdles they face in complying with the PPACA.

For example, many producers note that plans meeting non-discrimination criteria this year or next might fail government tests in subsequent years. Regulations as they are currently written do not provide enough guidance to allow employers or agents to make that determination, many producers say.

Another example is the help that some agents and brokers expect clients will seek in 2014, when the state insurance exchanges are scheduled to become operational. The exchanges are designed to cover individuals who do not have health insurance through employer-sponsored plans.

Noting the current difficulty that smaller groups and individuals have in selecting health plans, Spiro said: “As smaller groups and individuals have exchanges made available to them, although they'll think it'll be easy selecting coverage, I think they'll need more advice than before—especially if agents were not advising them previously.”

Other services that aren't advisory in nature also will buoy an agent's value, Hasday said. Those could include processing plan enrollment, handling plan communications and providing wellness and payroll deduction services, he said.

Bigger and better?

Who will be capable of delivering such expertise, grounded in a thorough understanding of evolving federal and state regulations and legal developments?

Executives at large agencies say they have the resources that smaller producers do not to provide value to clients and demonstrate it to prospects.

For example, William Gallagher Assocs. has created a half-dozen-member health reform advisory team that meets weekly to discuss the latest developments in health insurance reform and blog about it on an unlocked section of the agency's website. The agency has created various checklists for both small and large groups and provides updates on rules and regulations, timelines and calculators. It also has committed significant resources to training its health insurance producers.

“From a marketing standpoint, this has been wonderful for us,” Nadeau said. “The small broker won't be able to keep up with that,” plus all of the “insane” amount of reporting requirements that health plan sponsors will be facing, he said.

Small agencies that cannot afford or do not want to invest in the infrastructure needed to handle it all are “good acquisition targets for us,” Nadeau said.

But that scenario does not have to play out, said John Prible, the Washington-based vice president of government affairs for the Independent Insurance Agents & Brokers of America, whose 300,000 members have 9 employees on average.

“I don't' see a competitive advantage for these big guys at this stage,” Prible said. Through the Big I and its state associations, smaller agents and brokers “have the same access to information as large brokers” that can be used to appropriately advise clients, he said.

The potential of inadequate compensation for agents and brokers as a result of the PPACA's and a new regulation's treatment of health insurers' expenses is a greater threat to small producers, Prible said.

Small agency executive Bob Bramlett concurs that small producers can be valuable advisors to clients.

Bramlett, president and chief executive officer of The Bramlett Agency Inc. in Ardmore, Okla., said he brings his staff of 16 plenty of actionable information that he collects from the Big I, the organization's state association and health insurers.

Bramlett sits on Big I's executive committee and is active in the state association, but he maintains that those positions do not give him a leg up on other producers.

“Any member of their state association has access to any of this information, because it comes from the national association,” he said.

“But a producer has to be willing to take that information and act.”

Spiro agreed. He also notes the wealth of resources available by aligning with a general agency. For now, drawing on those resources do not cost small producers, since general agencies are compensated by insurers through commission overrides.

That compensation model could change given the pressure the PPACA is placing on the existing compensation model, Spiro acknowledged. “But I don't expect this to happen for awhile.”

Neither Bramlett nor Spiro, however, are Pollyanna-ish.

“I can't say that a large agency with an entire department devoted to benefits isn't going to have a leg up on an agency with only three employees,” Bramlett said. “But smaller agencies can aggregate or cluster with others and work with associations.”

And there is no time like the present to start, if a small agency hasn't already, agency executives say.

“It's a critical time—there's no doubt about it,” Bramlett said.