Although it remains unclear how sweeping health care reform legislation signed into law last week will affect benefit brokers ultimately, brokers' initial concerns revolve around potential erosion of the employer-sponsored health care market they serve.

If premiums continue to rise, which many brokers believe will happen under the new law, employers could be persuaded to drop coverage as the penalty for not providing insurance—a $2,000-per-employee tax—is nominal compared with the per-employee cost for providing coverage, they say.

In the more immediate term, however, reforms provide benefit brokers an opportunity to expand their capabilities and offerings to help employer clients navigate and comply with the law, but brokers focused solely on procurement are likely to get squeezed out of the market, brokers say.

President Barack Obama last week signed into law health care reform legislation that will massively revamp the nation's health care delivery and financing system. At an estimated cost of $940 billion over 10 years, the plan aims to extend health insurance coverage to 32 million uninsured U.S. residents, chiefly by expanding Medicaid and establishing federal health insurance premium subsidies to those with moderate incomes.

The reform effort, however, is packed with provisions that will affect employer-sponsored health care plans, which has many benefit brokers concerned about the long-term viability of that market.

“We're concerned about the impact on several fronts—largely the long-term consequences on the employer-provided marketplace,” said Joel Kopperud, director of government relations for the Washington-based Council of Insurance Agents & Brokers. “We worry the mandates are ineffective and may not truly cover the costs of market reforms, possibly resulting in higher premiums,” he said.

The legislation contains provisions by which health insurers must abide, such as offering first-dollar preventative care coverage and eliminating lifetime caps and pre-existing condition exclusions, Mr. Kopperud said. But for insurers to pay for those market reforms, everyone needs to have health insurance.

“The fear is we're not going to have everyone in the system if the penalty for not being in the system is lower than what the monthly premium would be,” Mr. Kopperud said. “And if insurers don't have the people in the pool to cover the costs…then premiums are going to go up.”

At the same time, if enough young, and relatively low-income, healthy employees take advantage of “free choice” vouchers under the law and opt out of their employer-sponsored health plans to purchase cheaper coverage through new state-based exchanges, employers could be faced with adverse risk selection and see their premiums rise as a result, Mr. Kopperud said.

The more premiums rise, the more likely employers will be to pay the penalty and drop the coverage, brokers fear.

“The buy-in of health insurance for employers that elect to no longer provide health care to their employees is a substantially less premium than providing employees with commercial private coverage,” said James P. Lill, CEO of Mid American Group Inc., a benefits broker based in Westmont, Ill. “If a manufacturer…in competition with a Chinese company needs to find margin, it will be inclined to drop the private health care plan and simply pay the payroll tax. On the surface it looks like the payroll tax is about half of what a private plan costs.”

“Brokers greatest fear…is the slow, inevitable erosion of employer-sponsored health care,” said Mike Turpin, executive vp and head of U.S. benefits for USI Holdings Corp. in Briarcliff Manor, N.Y. “It's most likely to occur at the lower end of the market first because those employers are going to do the math and say, ‘$2,000 per person vs. $4,800 per person; What am I missing?' ”

Brokers say while some employers likely will drop coverage, they hope the incentive of recruiting and retaining the best employees will outweigh the cost benefit of doing so.

In the meantime, brokers say they have a more immediate opportunity to enhance their skill sets and provide clients with assistance and advice in navigating the new health care system.

“In my view, many brokers will have to play a different role than what they've been playing. It can't just be simply procurement anymore,” said Craig I. Hasday, president of Frenkel Benefit L.L.C., a unit of New York-based Frenkel & Co. Inc. “The casual broker that's been in the business for years and is not adding value…is going to get squeezed out. The skill set brokers have to generate has ramped up as a result of the complexity of the legislation.”

Catherine A. Sims, Denver-based director of client services in the employee benefit division of IMA of Colorado Inc., agreed.

“I think everybody agrees that rates are probably going to go up…so more than ever, for larger employers it's really going to be meaningful to manage their health care risk. That's a good thing for us,” she said.

In the shorter term, there also will be a lot of compliance issues associated with the new law, which bodes well for benefit brokers such as IMA that has experience with COBRA and Health Insurance Portability and Accountability Act compliance, Ms. Sims said.

Benefit brokers agree that those that can't add value likely will get squeezed out of the market as a result.

The “hallmarks” of a small benefit broker is its marketing and bedside manner, USI's Mr. Turpin said. “Now we're talking about intellectual capital and having to bring all sorts of resources to bear to prove our existence on the food chain—that we can improve clinical outcomes and we can serve as a really effective surrogate benefits and (human resource) resource for a lot of smaller companies that don't have the ability to afford it on their own.”

Ultimately, “what will happen is you'll have a much more professional and much more capable next generation of brokers, and you're going to see a lot of (brokers) slowly atrophy. It's not going to be a meteor-hitting-earth-and-all-the dinosaurs-dying type of event, but I think it's going to be a slow inevitable climate change” that will ultimately improve the overall quality of the market, Mr. Turpin said.