About 20 years ago, when I owned an employee benefits consulting firm, I accepted an invitation from a local benefits broker who wanted to discuss ‘business’ with me. The broker was very upset because one of his larger employer clients selected our organization to replace him.
His former client believed that our transparent fee-based approach made good, ethical sense. The broker had received commissions and bonuses from insurance companies and vendors that were built into the premiums paid by this client, who had no idea of the amount being paid out. Conversely, we billed the client a monthly fee for our services and accepted no incentives from the vendors – a more transparent approach that would not complicate our allegiance to the client.
As we finished our meeting, the broker’s final parting shot to me was simply: “No more taking over my clientele by using this approach.” My quick reply was equally frank: “It is up to our clients to determine how they wish to pay us, and they deserve to know how much we receive for our services.”
It was a rather contentious meeting. The broker felt very threatened…as well he should.
Commissions and Perks from Insurance Vendors
Cash and gifts discreetly given to insurance brokers and consultants by insurance vendors – in exchange for business – can create a conflict-of-interest that adversely impacts the ‘independent’ guidance employer clients expect to receive from their advisors. Commissions create a perverse incentive for brokers and consultants – as insurance premiums increase, so too will the commission dollars that are paid out to the benefits advisor. As a consequence, keeping premiums as low as possible may not be in the best financial interest of the broker/consultant.
Throughout my years as a benefits consultant, I was frequently approached by insurance companies and other vendors to place their products in front of our employer clients. In return, we could receive commissions, volume bonuses, and other perks such as trips to top vacation resorts. Without question, commissions and other perks dwarfed a fee-based arrangement. During this time, there was no transparency rule that required brokers and consultants to report this information to their clients. How a broker or consultant was paid by the industry was truly a wild west arrangement that required little to no accountability to those who actually paid the bills – the employer clients.
Our firm avoided such contracts with insurance vendors because our desire was to be paid directly by our clients. This philosophy was quite simple: we worked for the employers who hired us, and not for the insurance vendors who enticed us. Unfortunately, for many of our smaller employer clients, insurers would not segregate commissions from the premiums they paid, so we accepted the commission but voluntarily shared with the client the amount we received on their behalf.
For the record, I sold my consulting practice over 10 years ago. I was never comfortable with how the enticement of incentives in this industry could weaken ethical behaviors.
The Consolidated Appropriations Act of 2021
Given this backdrop, a new transparency regulation on compensation is about to take hold. Signed into law by President Trump on December 27, 2020, the Consolidated Appropriations Act, 2021, Public Law 116-260 (CAA) sets forth new compensation disclosure requirements that apply to brokers and consultants with respect to both fully-insured and self-insured group health plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). The CAA also incorporates similar compensation disclosure requirements for individual market coverage via the Public Health Service Act. Disclosure requirements in the group health market apply to “Covered Service Providers” (e.g., brokers and consultants) whereas, in the individual market, they apply to health insurance issuers.
In short, if these advisors “reasonably expect” to receive $1,000 or more in “direct” compensation – and/or more than $250 in “indirect compensation” from the health plan or insurance carrier – in connection with covered services to a group health plan, they must submit written disclosure to the client. Contracts entered into, renewed, or extended on or after December 27, 2021, must comply with these requirements.
These requirements generally apply to all types of health insurance plans, across all market segments – small group plans, large group plans, individual and family plans, self-funded plans, fully-funded (traditional) plans, flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), etc.
Brokers must also keep their disclosures accurate and up-to-date and are required to update disclosures within 60 days after any changes in commission occur. It is the broker/ consultant’s responsibility to report all direct and indirect compensation to the employer.
Brokerage and consulting services subject to the new rules include:
- Brokerage services with respect to the selection of health insurance products (including vision and dental), recordkeeping, medical management, benefits administration, stop-loss insurance, pharmacy benefit management, wellness services, transparency tools and vendors, preferred vendor panels, disease management, compliance services, employee assistance programs (EAPs), third party administrators (TPAs); or
- Consulting services related to the development or implementation of plan design, insurance selection (including vision and dental), record-keeping, medical management, benefits administration, stop-loss insurance, pharmacy benefit management, wellness design and management, transparency tools, group purchasing organizations, preferred vendor panels, disease management, compliance, EAPs, and TPA services.
(There is a lack of clarity in terms of the scope of services and what plan service providers are subject to these requirements, particularly as it applies to the consulting category. Forthcoming regulations should hopefully provide additional guidance.)
Steps Employers Can Take
In 2021, ProPublica investigative journalist, Marshall Allen, wrote the book, “Never Pay The First Bill and Other Ways to Fight the Health Care System and Win.” The book included an Addendum that shares 13 questions that employers should ask their health insurance advisors to help determine how money from the industry might be influencing their advice to clients. These questions fit quite nicely with the upcoming regulations that will require compliance by brokers, consultants, and vendors.
- Do you or your company get paid any commissions from insurance companies or other vendors based on my organization’s health benefits? (Yes/No)
- Do you or your company get paid bonuses from health insurance companies or other vendors based on my organization’s health benefits? (Yes/No)
- Do you or your company receive any trips, meals, gifts, or other perks from health insurance companies or other vendors related to my organization’s health benefits? (Yes/No)
- Do you or your company get paid bonuses and/or commissions from health insurance companies or other vendors based on the loss ratio (or the profitability of the plan for the insurer) of my organization’s health benefits? (Yes/No)
- Do you or your company get paid bonuses and/or commissions from health insurance companies or other vendors based on the overall volume (including all business or new business) of employer-sponsored health plan members or groups? (Yes/No)
- Do you or your company get paid bonuses and/or commissions from health insurance companies or other vendors based on the retention of employer-sponsored health plan members or groups? (Yes/No)
- Do you or your company ever participate in “no shop” or “no market” offers on behalf of insurers or other vendors in which a bonus or commission is contingent on your not shopping an employer’s benefits to other insurers or vendors? (Yes/No)
- Do you or your company ever participate in vacations, trips, meals or other perks provided by insurance companies or other vendors, based on the volume or retention of employer-sponsored groups? (Yes/No)
- Do you and your company always disclose all bonus and commission money, and any other trips, meals, or perks to each employer group whose business might have qualified your company for the money or the perks? (Yes/No)
- Do you or your agency participate in fee-only payment agreements in which the only income you receive is coming directly from the employer who is purchasing the health benefits? (Yes/No)
- Do you or your agency participate in any payment arrangements in which the employer pays you directly for health benefits and your broker or agency takes a commission or a bonus from the insurance company or other vendor? (Yes/No)
- If you said yes to number 11: Do you always tell the employers who are paying you directly that an insurance company or other vendor is also paying you a bonus, commission, or other perk that’s based on that employer’s benefits? (Yes/No)
- If you do take direct payments from employers, what percentage of your benefit revenue is fee-based and what percentage is commission or bonus-based? Ethics experts say it creates a conflict of interest for brokers to claim to represent the interests of employers and then get paid by the health insurance industry. Will you please provide your perspective to explain why you represent employers who are purchasing health benefits but then also get paid by the health insurance companies?
Download these 13 questions an employer can ask health insurance advisors
Summary
The acquisition and management of health insurance is complicated, and because of this, employers are justifiably reliant on having trustworthy benefit advisors. The responses that come from the above questions should reveal the commitment advisors have to their clients. For those employers who are currently paying their advisors on a fee arrangement basis, having this discussion should be easy. However, also make sure these advisors are not receiving additional compensation and perks from your selected vendors. Double-dipping happens, and can weaken objectivity of the advisor.
Under this new regulation, benefits brokers will be required to disclose a range of information previously kept fuzzy at best, hidden at worst. Both individual and employer clients will now have a full view of the true incentives that guide brokers’ decision-making — the good, the bad and the costly.
Employers, especially those with self-funded health plans, are considered to be plan fiduciaries. This means they must act prudently and in the best interest of participants and beneficiaries covered under the health plan. These regulations should be helpful when determining which advisors are most trustworthy.
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