Brokers: A Price Above Rubies by Brian Klepper

OK. Now that Matthew’s away, let take a break from picking on the doctors, the hospitals, the health plans, the drug companies, and the device companies. Let’s talk about the brokers.

Brokers, you’ll recall, connect health plans and employers. They typically represent themselves as unbiased, protecting employers’ interests and helping them objectively negotiate the hall of mirrors on the path to buying health benefits.

There’s only one problem with this story. Brokers are generally paid sales commissions by the health plans. They are not paid by the employer, but by the insurance companies. Which of course makes them maybe a teensy bit less objective than we might like.

And they’re not simply paid. They’re paid VERY WELL, often 6%-10% or more of the premium.

Here’s a note I received over the weekend from a broker pal in Florida where, like everywhere else, the explosion in health care cost is pricing increasing percentages of small business purchasers out of the coverage market. Prospects are increasingly hard to find and close, so the plans have been raising the bounties. He writes:

One specific thing I remember from your presentation several years ago is really ringing true.  You mentioned that we, as agents/brokers, were probably being overpaid for our services (via inflated commissions).  I was probably the only agent in the room who agreed with you. Well, it has gotten worse in Florida.  One carrier is paying $30 per employee per month regardless of premium for groups of 4-50; another is paying a whopping $41 a month per employee!   For most of last year and the first six months of this year, another carrier was paying a base commission of 5% of gross premium (with production bonuses pushing that to 7% for most agents/brokers), AND was paying a $1,000 bonus each month for any agent who submitted two groups of  more than 4 employees; $5,000 each month for those agents submitting 3 -5 groups of at least 4 employees each; and $7500 for 6 groups per month or more.  Many of us were getting at least the $5000 bonus each month, sometimes for as little as 15 or 20 covered employees TOTAL for the month!  This means that they were paying us either 5% or 7% of gross premium AND a huge bonus, which annualized pushed most of my business with that group close to 10% commission average. That’s ludicrous when the public is scrambling to try to pay premiums – and it is indicative of how out-of-whack our current insurance market is.The industry is heading down the tubes, slowly but surely.  I now think it is inevitable that the government will eventually weigh in, and I don’t see how it can be otherwise (especially in a low-wage state like Florida, where small group health insurance premiums for families in their 50’s and 60’s can easily approach $2,000 a month and more).

Let’s talk for a moment about the employer with 50 employees who is buying coverage in good faith. What would be the response to the knowledge that on a one year 50 employee contract, $24,600 ($41x12x50) goes to the broker. This is the person who convinced you to buy a particular plan, though if you had gone with the plan he disparaged, he might have taken home only half that.

Both are excessive, of course, but the deeper issue is whether the employer knows that the broker will be paid a commission by the chosen plan, and the size of that commission.

It’s simply another case showing that, without transparency, the health care marketplace can’t work and the walls come closer to tumbling down.

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19 replies »

  1. I am studying broker and agent commissions and bonus structures. How can I get information about what different insurers pay?

  2. I realize laws and regulations are different in most states, but to use generalities in this situation discredits those who do provide a services to help clients make informed decisions about the benefits they offer their employees.
    I agree. Of course there are some bad apples and of course they will attract the most publicity, however, for every unprofessional agent not “earning” their commission, there are 10 who are conducting their due diligence and adding more benefit than their commission value to both the insurance company and insured.

  3. How about a group of Brokers in my area that received “secretive” payments for moving clients to another local insurer? How about the fact that the secret bounty was in addition to the normal commission paid to the brokers and IS still unknown to the client? How about the fact that the bounty was even higher on a per head basis if you moved business from specifically named local carriers who were the stiffest competition in the area? How about the fact that this insurer is owned by the largest non-profit hospital in our area, who also happens to own the stop-loss carrier as well? How about the fact that this non-profit does not require pre-certification for services rendered at their own hospital? Did I mention that this non-profit seems to have an endless source of cash flow? I wonder where that comes from. Did I mention that this organization will stop at nothing to prevent the public and their clients from knowing this? Paper delays in the legal system, unproduced documents & etc. Does anyone know what a SLAPP lawsuit is? The first case filed against this organization by a local competitor, was settled out of court the day before the jury trial was to begin. The headline in Modern Healthcare read “Purchase Skirts Trial”. The 2nd lawsuit filed against this organization is still in process and scheduled for trial next year. It is taking place in another county and out of the view of the locals. Then this organization, obviously with their backs against the wall, files a case against a honest, local Broker who was aware of their unethical business practices because they felt he may have had something to do with the new found awareness of their tactics. This local Broker has fired back and countersued this organization and the brokers on the take. A local judge refused to dismiss the counterclaim indicating enough info existed to move forward on the grounds of civil conspiracy and antitrust issues. Has this been in the paper? No. Does the general public know? No. When a statewide Health Underwriters newsletter published a story about it, the organization began the intimidation procedure it has used so many times over. Then came the subpeonas. This case is moving slowly. Why? Paper delays & legal tactics that shouldn’t even be allowed to go on in our judicial system. How long are we in the health insurance industry going to sit back and watch these types of brokers and insurers pollute our reputations? When are these polluted brokers going to realize that they themselves will pay the ultimate price while the big insurer, in all its money, walks away with a minimal fine and a checkbook to repair its reputation? And should a new blog be started as to how it is legal that a non profit health foundation (that’s what the hospital is referred to) can use its tax exempt dollars and status to fund this type of secret broker payoff? And let us not forget, that ERISA clearly states the money generated because of the existence of a plan, BELONGS to the plan. I’m wondering if one of our local school districts could have used that extra $300,000 that one of the polluted brokers secretly accepted for moving their business? Probably not. I’m sure it was just as easy to cut out busing. Oh well, won’t the district be happy once the broker is found out and has to repay the plan. And let’s not forget the Excess benefit penalties.

  4. While it may be true some brokers receive larger commissions, in Washington State, health plans offered to groups under 50 lives must be filed with and the rates, with the commission figure into them, approved by the OIC.
    If a group selects a plan then the rate filed is adjusted up or down based on the age, zip code of the employees, and NAICS classification.
    If the group goes directly to the carrier the carrier will offer only their plans. If the group uses a broker, we show the group a variety of plans offered by the carriers that are admitted to offer plans. If the employer enrolls directly with the carrier or if they use a broker, the commission is the same. It is not negotiable.
    You do a diservice to those brokers who help small employers (2-50 employees) navigate the health insurance market and who service those accounts by helping employees work through claim issues and benefit questions during the year.
    For reference, I work with groups with 2-10 employees and in general, my company receives 2%-5% commission based on the size of the group and the carrier. I don not favor any carrier over another because of the commission, but if the carrier has better customer service, and better plan designs and rates than another I will promote them. If it’s in the best interest of the client.
    I realize laws and regulations are different in most states, but to use generalities in this situation discredits those who do provide a services to help clients make informed decisions about the benefits they offer their employees.

  5. Sorry pal, I didn’t write the article. You did. Where is your data? You refer only to one person in Florida. I’m afraid that isn’t statistically valid.

  6. Brian,
    As a former sales and marketing exec with the nation’s largest health plan, I can confirm that your figures are accurate. The per member per month or per subscriber per month flat rates were instituted in an effort to stem the increasing automatic raises for brokers each year as rising health care costs dictated (ostensibly)the need for increased premiums. At the height of the health care inflation, 15% premium increases created an automatic 15% raise for the broker with no incentive to reduce the base on the part of some, less than honorable, brokers (not all, there are some very good folks out there, too)
    Transparency is definitely one of the keys to helping consumers better understand how the health care dollar is spent, but accountability to the consumer by the health plan, provider and distribution channel (brokers, consultants, etc.) is equally important. I find it quite interesting that the carriers are touting transparency as the be all to end all for hospital, drug and physician charges, but quake at the thought of that same transparency initiative switching the spotlight to their administrative expenses and behind the scenes deals.
    You forgot to mention, that in addition to the monthly compensation and quarterly bonuses, most carriers offer incentive trips for top internal producers and broker/consultants that price out at upwards of $7 to $10K per person (including spouses and guests) to exotic locales like Hawaii, Grand Caymans, Ireland and Italy. Of course, these trips always have an educational component thrown in so that it appears to have legitimate business purpose. While this is a standard reward system in sales for durable and non durable goods, I personally found it troubling in an industry where $1000 monthly family premiums have become the norm…
    In defense of many broker/agents, there are many who truly earn their commission dollars and provide valuable services as intermediaries helping consumers navigate the murky waters of today’s third party payor system. But for every “great” broker, there are 3 snakes out for a buck who can talk a great game and won’t deliver. My message to all of my employer contacts was always ” interview your broker like you are hiring a CFO for your company, know exactly what they will deliver and how much they will be paid.” As with everything else in today’s consumer driven society, buyer beware!

  7. To C. Naylor
    Sorry, Pal. I wasn’t paid. I’ve been in health care for a long time and have watched a lot of brokers up close. The quotes that I posted were real. If you have a different point of view, then prove it in collaboration with other brokers. We’re eager to see your information. Show us the data.

  8. I see situations every day where the consumer bought coverage without the assistance of a broker. Almost without exception, they purchased a plan that was too costly for the coverage it provides. Consumers typically underestimate the kind of coverage they need and buy plans that fail to deliver real value.
    As others have pointed out, the compensation figures you throw out are over-stated. The commission is paid on a sliding scale and usually works out to 1 – 3% of premium on small (under 50 lives) cases.
    When a business owner cuts out the broker to save 3% on premium they usually end up with a plan that is 10 – 15% higher in premium than one a good broker would recommend.
    So where is the savings?
    My clients save an average of 30% vs. plans they pick on their own.

  9. I am a broker. I know I can find a few despicable cases to point at about journalists. You have not done your homework. I see commissions in the range of 1% to 3%. In many cases they are graded, i.e., the % drops significantly as the premium increases. This is very poor journalism. Whatever you were poid for this is too much.

  10. Before making statements like this on a global basis, you need to do more research. Very few companies pay the commissions that you are mentioning. The highest I remember seeing from a highly rated carrier was about 5% many years ago. Most pay on a flat monthly fee. Yes, some increase that fee based on the volume, but that is usually because the larger producing agencies do much more of the work for them and submit a higher percentage of completed paperwork (vs. having to call to get answers to simple questions like birthdates that were omitted). Maybe I take a different perspective than most other agents. I tell my clients that I work for them and only represent the carriers. I will get quotes from all of the major carriers and show an apples to apples comparison. This includes benefits, rates and provider networks. I have never made a decision based on commission, and never will. I am also not afraid to tell my clients what I am paid. They see me many times throughout the year and I meet with their employees as needed (including 2 AM for third shift employees). I only receive a portion of the commission as the agency receives a portion to cover the large support staff that we have for dealing with claims and benefit issues. We have people call us, and not a toll free number provided by the carrier. We refer to the commission as a servicing fee and earn what we get paid. Yes, I know some agents who try to market based solely on what commissions they will receive, but they usually are not very successful or long-term in the business.

  11. I’ve been a broker/agent for almost 20 years and decided early on in my career to disclose, to the client, all the commission I make on any transaction. I think it’s giving everyone one of us a bad name when commission and bonus payouts approach 30%. Ask AON and Marsh about disclosure.
    Let the clients know what the broker makes. It keeps us honest and in most cases the client will be surprised how little the actual payouts are.

  12. And what well funded group is going to lobby, donate to political campaigns, offer after DC well paid careers, and wine and dine politicians in order to offset the millions being spent now to “influence” political parties to keep the present system going?

  13. This is a classic example of a dysfunctional unregulated market where these leeches who add no value to the transaction take resources out of the delivery system. Exchanges sponsored by the government are the best chance to improve unbiased information-sharing as they provide through numerous other consumer/buyer-oriented information-only websites. This is not a panacea but eliminating the broker function, which is solely the result of a dysfunctional, opaque information exchange, would be a giant leap forward in making the market work more efficiently. B Lee

  14. Brian , I think what you might be finding are extremes, Flat commission schedules do not work in most circumstances. Carriers who offer them are many times desperate for new business, probably because of a limited network. Carriers must continue to add new business as underwriting wears off after a time and you need to offset the xtra claims.
    I believe the Governor of Pennslyuvania, is trying to mandate an 85% loss ratio, which will obviosly have an effect on small businesses in PA.

  15. Here’s a little more perspective from someone inside a health plan. Health plans enjoy paying brokers 6% for new business just as much as home buyers like paying brokers 6% for new homes. If insurers could get the market to switch to another system, one in which they wouldn’t lose market share, they would. The problem is they don’t know how, because employers, especially those who aren’t large enough to have dedicated staff that understand the health insurance market, feel that they need brokers.
    One solution supported by health plans in the past, particularly smaller regional plans, is health insurance exchanges. They provide a range of standardized offerings so that non-experts can make clear comparisons on rates and benefits. Thus, they can cut out the broker middle-man and can be substantially more efficient.
    But cherry-picking doomed the exchanges, as chronicled on this blog and elsewhere. That, and the fact that the biggest insurer in any given region often has felt threatened by exchanges because they give smaller competitors a more even footing. So the smaller insurers have tended to participate in the exchanges, which have been seen as the equivalent of going to Wal-Mart or Dollar General. And of course brokers hate them and don’t steer their clients towards them.
    The answer to this market failure, like so many others, lies with government. Government needs to set up health exchanges or create the conditions that allow them to flourish, such as requiring community rating, forbidding rejections based on prior conditions, and creating subsidized individual mandates so that everyone is part of the system.
    Massachusetts has the right idea with what it calls its Connector, which is just the sort of health insurance exchange I’m talking about. We can disagree on the details of the Mass plan, but there is no more efficient way to retain private health plans than to institute an insurance exchange.
    Brokers don’t need to be outlawed…they can live on as consultants paid by the firms who want their services to select a plan. Of course, the broker industry would be decimated, much like travel agents in the age of Orbitz, Priceline, etc.
    Wonk out.

  16. Thanks, Brian, for that illuminating information. NOw I know why the insurance companies “have to” keep raising their premiums due to “losses” in covering patients – losses to the brokers, for crying out loud!

  17. Thanks, Brian, for that illuminating information. NOw I know why the insurance companies “have to” keep raising their premiums due to “losses” in covering patients – losses to the brokers, for crying out loud!

  18. The sad part is that the industry, in general, refuses to address the real problems employers are having to deal with. When profits are so high, there is hardly any incentive to change the way business is done and the industry will end up like the frog in the pot that ultimately boiled to death.
    The industry keeps telling employers to get larger and better buckets to bail the boat and refuse to tell them how to fix the hole in the bottom. Otherwise, all the bucket manufacturers would either be out of business or certainly have their sales/profits diminish.
    This makes no sense!