It's time to lift the curtain on how brokers get paid

When PPACA was passed in March of 2010, the collective breath of the insurance broker world was held as they waited to see what it meant for the future of their business. Would they become obsolete, as the carriers sold policies directly to individuals due to the mandate, or would reinvention become the key to survival?

The individual market exploded once pre-existing conditions were overlooked and guaranteed issue rolled out. Carriers were thrilled with the prospect of a large percentage of uninsured Americans finally obtaining coverage. However, the block of uninsured that jumped at the opportunity for coverage were those who needed it the most—the sick.

Related: Why consulting is here to stay: benefits brokers in the ACA age

Over time, carriers reduced commissions, and smaller agencies became disadvantaged by their lower volumes. Some creative agencies increased quarterly and annual bonuses and banded together to create larger blocks of business that would allow higher PEPM commissions.

In recent years, carriers have tried to keep commissions inside of the medical-loss ratio, while brokers and groups like the National Association of Health Underwriters have pushed for it to be defined as a pass-through expense. Currently, broker compensation is still included in the administrative expense.

The small-group market is required to allocate no more than 20 percent of the premium dollars to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions. Large-group is limited to 15 percent. This provision in the PPACA has reduced compensation in some markets by as much as 50 percent, according to the National Association of Insurance and Financial Advisors.

The evolution of fee-for-service

Scalability created many issues that frustrated agents and carriers alike. The intense level of service required to cater to the nature of this new block of business became overwhelming, as a disproportionate amount of time was spent on a small percentage of agents’ books. As a result, many agents shifted their focus back to the more-predictable group side.

Another result has been strategic decisions by many brokers to sell individual books of business as carriers increasingly reduce and eliminate commissions. Changes to an agency’s P&L became even more drastic when many carriers pulled out of the individual market altogether, leaving a huge gap in revenue overnight.

Consumers soon felt like they were left in the dark, as their trusted advisors disappeared from the equation. Select agents, sensing an opportunity, capitalized on assisting this market by charging a fee for service, meaning consumers could still access advisors’ knowledge and guidance in the individual market.

The performance differentiator

Other brokers and consultants were more inclined to take a long hard look at the way that they have always done business. The majority of agencies were already providing ben admin platforms, knowledgeable support staff, and HR expertise; this approach was universal enough that it was no longer a differentiator. Instead, a growing number of advisors have realized they can be better compensated while also bringing additional value to the table.

Rachel Miner, employee benefits strategist at Employee Benefit Advisors of the Carolinas in Charlotte, is one broker who has found success in reducing the PEPM and creating a tiered kicker tied to performance. Miner tells prospects that she feels so strongly about what she’s going to do for them that she is willing to put her compensation at risk. “It ties me closer to the case, because I’m concerned about what’s happening to the group on a more routine basis,” she says.

This approach is opening new doors, as clients appreciate the new model and are more willing to open their inner circle to additional opportunities.

A push for fee transparency

David Contorno, president of Lake Norman Benefits, foresaw the fate of commissions with the passage of the ACA. Taking a proactive stance and looking for opportunities in what initially appeared to be chaos and negative changes in the market, he saw his salvation in transparency.

The process has taken about three years, and he still has clients who are not fee-based and provide compensation in the traditional way. “You don’t have to go down the path of fee-based or performance-based,” he says, “but if you can’t look your client in the eye and tell them how much you’re being paid, from wherever you’re being paid, then you’re being overpaid. Get to a point where you are providing enough value where you can say, ‘this is how much I’m making on your case—and I’m proud of it.’”

He now addresses claims on a weekly basis and reviews large ones for anomalies before they are funded, so that they can be stopped, if inappropriate. “It opens a whole new avenue of thought around health care and how to really change it,” he says.

Other consultants have gone head-to-head with Contorno for new clients and lost due to his offer of a performance-based contract. But if you can’t beat them, join them—the experience has prompted many of his peers to adopt this model.

Perhaps the biggest proponent of this model is Health Rosetta, a grassroots movement inspired by Dave Chase’s TEDx talk entitled “Healthcare Stole the American Dream – Here’s How We Take it Back.”

Health Rosetta’s Code of Conduct promotes a strict model of transparency and instructs members “to bring transparency to all levels of health care financing, from how we get paid, to how insurance companies and PBMs get paid and how providers get paid.”

When misaligned incentives are present, the strategies presented may not be in the best interest of the client. But with full disclosure, all parties are aware and can therefore make informed decisions.

Fee transparency also falls to the vendors that offer additional compensation, from sharing in rebates to the PBM or stop-loss commissions that don’t appear on a 5500 form as an incentive to place business with them. The major categories of disclosure, as detailed on HealthRosetta.org are:

1.  Product and account specific financial compensation. These are typically what we think of when we think of how brokers and consultants are compensated, but it’s just the start. In particular, look for abnormally highly compensated additional services.
2. Non-account and non-product specific financial compensation. While this may only be a small percentage of the overall compensation, across all of a broker’s or consultant’s clients, it can be enormous. For some offices, this is their entire source of net profit each year. This can significantly affect products suggested. Common types include book-of-business and volume-based commissions.
3. All other financial compensation, conflicts of interests, and perks. Brokers and consultants may have an enhanced position with a carrier or vendor through all-expense-paid trips, conferences and even paid membership to preferred carrier panels.
4. All non-financial compensation, conflicts of interests, and perks. Conflicts can also arise from relationships rather than compensation. Brokers and consultants often present options with products and services for which they have a direct ownership or stakeholder position. Coalitions, administrative platforms, and private exchanges are often owned and operated by firms. These products and services are frequently positioned more favorably without a thorough market assessment.

Making the move

Recently, I began my own shift toward fee- and performance-based compensation. The market has long needed a change from the persistent opacity that has become acceptable for decades. Providing value and full disclosure resonates with me, and with a relatively new agency, we are nimble enough to make changes without much disruption to our business model. As we move forward with prospects, they quickly become our advocate to their peers.

Joining the Free Market Medical Association has led to several introductions to like-minded providers who wish to deliver the same value and transparency. In addition, direct primary care has been one of the biggest tenets of the movement. If you are looking to make the transition, reach out to a local DPC provider and you will be embraced as an agent of change.

Many advisers using fee and performance-based compensation are willing to share how to make the transition if you are willing to learn. These three podcasts have a wealth of information to assist in the transition as well: The Phia Group, ShiftShapers and Reconstructing Healthcare.

As transparency has taken a front seat in the marketplace, advisors are using it to provide value and reduce health care spend. With annual trends eroding profit margins, clients and prospects are more inclined to work with those who have skin in the game.

Curtis Colbert is the founder of Simplified Insurance Solutions. His firm is dedicated to bringing transparency and cost controls to the employee benefits space.