Health Reform Law Creates Emphasis On Broker Volumes

Some call it the "dirty little secret" that health insurance brokers have kept from their clients, but now health care reform regulations that limit insurer administrative expenses are bringing to light the lucrative extra compensation that agents and brokers have been pocketing for decades.

Pressure to meet new minimum medical loss ratio requirements that cap administrative expenses also is prompting health insurers to not respond to brokers that do not bring them large volumes of business, which could limit some smaller brokers' ability to fully shop the market on behalf of their clients, industry sources say.

Meanwhile, brokers that bring more business to certain insurers are getting special treatment and, in some cases, additional compensation, potentially creating an incentive for them to steer business to those insurers regardless of employers' best interests, those sources say.

Health insurance agents and brokers historically have received bonuses based on the volume of business they produce, but such pay will be significantly reduced under the Patient Protection and Affordable Care Act.

In a letter sent June 2 by Washington-based America's Health Insurance Plans to the National Assn. of Insurance Commissioners, AHIP urged regulators to exclude broker commissions from insurer administrative expenses. An NAIC task force indicated it would support such a move, but the NAIC's Executive Committee chose not to take any action during a July 12 public conference call.

In response to the MLR regulations, which took effect Jan. 1, some insurers began breaking out commissions that had been embedded in premiums and requiring brokers to seek fee-based compensation from their clients.

Other insurers, such as Jacksonville-based Blue Cross and Blue Shield of Florida Inc., have been "tiering" brokers based on volume, technology adoption and willingness to "partner" with the insurer by allowing underwriters to accompany them on sales calls to employers, said Jon Urbanek , group vp, sales, distribution and local presence.

Those who make the cut become eligible for production bonuses to help cover some of their fixed expenses, he said. But other types of overrides and bonuses "are going away. They are going to be really hard to do in the new world of mandatory MLRs," Mr. Urbanek said.

Historically, benefits brokers have been compensated with commissions, fees and bonuses. The commissions either are a percentage of the premium or, in the small-group business, a fee per employee per month. Brokers also have been eligible for bonuses based on the volume of business they bring to a particular insurer.

By law, health insurers are required to furnish every employer with 100 or more employees with a Form 5500 that shows commissions and bonuses paid to the broker servicing the account. But many employers pay little attention to the information on this form. Because employers with fewer than 100 employees and municipalities aren't required to file Form 5500, they generally don't know what their broker is paid unless they ask, sources say.

"There are a lot of brokers around the country that make their living on contingent commissions," said Patrick J. Haraden , a principal at Longfellow Benefits in Boston.

As health care costs have increased, so has broker pay, as it generally has been a percentage of premiums, others say.

"I have known those in the industry who have jokingly referred to 'trend is their friend,'" said Catherine Sims , a vp at IMA of Colorado Inc. in Denver.

While some industry sources say this compensation model has provided an incentive for brokers to pool their business with a single insurer to increase their potential bonuses, PPACA-prompted broker tiering could be equally damaging by shutting some brokers out of certain markets.

"I cannot get a quote from Anthem Blue Cross of Maine because I don't do enough business in Maine," said Jim Edholm , president of Business Benefits Insurance in Andover, Mass.

In the past, some brokers that did not place sufficient business with certain insurers accessed those markets via general agents, but even those arrangements may soon disappear. But some insurers no longer will work with general agencies, said David R. Marom , president of Marom Consulting L.L.C. in New York, who said he used to rely on a general agent to place certain business.

Anita Verheul , executive vp at William Gallagher Associates in Boston, said she also is seeing "tiering of commissions" based on volume of business. "They could be paying more, or they may provide in-kind services like training," she said.

"Insurers said they want to do more with fewer brokers," Dennis Donahue , managing director of Wells Fargo Insurance Services USA Inc. in Chicago, said at the recent Employee Benefits Leadership Forum in Colorado Springs, Colo., hosted by the Council of Insurance Agents and Brokers. "They're creating incentive packages--not additional compensation, but access to underwriting, dedicated claims units, benchmarking reports--things that the brokers could use to distinguish themselves."

"Carriers are saying, 'We have hundreds of brokers. Which are the strongest and most effective?'" said Tom Lerche , national leader on health care reform at Aon Hewitt Inc. in Chicago. "Instead of trying to manage a broker portfolio of 50 or 100, they are dropping brokers who have low volume."

J. Hyatt Brown , nonexecutive chairman at Brown & Brown Inc. in Daytona Beach, Fla., said he knows of one unidentified insurer that is "grading" agents and brokers as 1, 2 or 3, "and it has to do with volume. So they are giving more competitive pricing to the brokers that bring them more volume."

As the market shifts to fee-based compensation from the insurer-paid commission model, many brokers are transforming into consultants, stepping up the services they provide or diversifying their businesses.

"We've added things to boost our value proposition like surveys, actuarial modeling, hosting webinars and seminars," said J. Michael Brewer , president of Lockton Benefit Group, the employee benefits division of Lockton Cos. L.L.C. in Kansas City, Mo.

"Until health care reform occurred, a lot of brokers got very specialized and focused on traditional employee benefits. What we're starting to see is a lot of brokers looking for diversified revenue, a way to use the expertise they already have and find new revenue models," said Michael Reid , director of operations and client services at twentytwenty Insurance Services in Lakewood, Calif.

<p>But industry sources anticipate that most old-guard and mom-and-pop producers will either be forced out of business or, if they are lucky, be acquired by larger, more successful agencies.

"I think this is going to be very difficult for the traditional agent," said J. Brent Finnegan , managing partner at SafeHarbor Consulting & Risk Management L.L.C. in Boston, which is looking to acquire "broad-based agencies that we hope will have an employee benefits component."

"We certainly don't want agencies that have a lot of clients with 100 or fewer lives. But if they're doing middle-market business, we're interested," he said.

All health insurance brokers now are forced to lift the veil that has largely guarded their compensation from their clients, which for some could mean earning less.

"The unintended consequence of this transparency will be like what's happened in every other industry--transparency will drive compression," said Mike Turpin , executive vp at USI Insurance Services L.L.C. in Briarcliff Manor, N.Y. "No one is looking at this industry and saying, 'Wow, look at the tail winds at their back!' Instead, we have to learn how to tack into the head winds."

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