Specifically, does the broker fee agreement align with the success of your health insurance offering, and help you hold your costs down while allowing you to successfully attract and hire the people you need to grow your company?
Your insurance broker's compensation may influence the type and amount of products and services they provide when designing the best benefits package for your business relative to price. How your broker is paid (i.e. commissions, fee-for-service, fee-for-performance) will factor greatly in their health care coverage recommendation. As an insurance buyer, understanding the different types of payments or compensation can help you ensure the best results for your business.
- Commissions are pretty self-explanatory. Your broker's compensation is typically a straight percentage of health insurance policy premiums paid; it may also be a flat, fixed rate amount calculated on a per employee per month basis and is usually paid by the insurance carriers. As your insurance rates increase, so does your insurance brokers commission check. Complicating matters more, there may be additional methods of compensation, which may or may not be disclosed by the broker or insurance carriers. Neither forms of the standard commission compensation model are tied to financial incentives to lower your overall health insurance plan costs.
- Fee-for-service means you're charged a flat fee, typically per employee per month, for the basic services you receive rather than the policies themselves. Although this addresses the problem of your brokers fees increasing every time your premiums increase, it doesn't necessarily incentivize them to lower your costs. The broker fee agreement also may not address the potential conflict from undisclosed compensation such as marketing fees, overrides, service fees, and bonus incentive payments to brokers.
- Fee-for-performance, which arguably better aligns with your desire to reduce costs, is when your entire broker fee agreement is based on a flat rate, plus an additional amount based on the cost saving your insurance achieves. This aligns the financial incentives of the insurance broker with providing you and your employees with lower premiums.
How the type of compensation received influences your costs?
You provide health insurance benefits for your employees through a plan that is either fully-insured or self-insured.
- Fully-insured plan design is one where the insurance company assumes the risk for costs associated with claims made by your employees. The premiums you pay are based on utilization of the benefits of the plan and the cost of those benefits.
- Self-funded plans pass the cost of medical claims to you, either on a 100% basis or up to a cap limit. The cost of any claim exceeding the cap limit is secured by medical stop-loss insurance. Self-funded plans allow you greater flexibility and transparency for controlling costs, but also come with additional considerations as it comes to plan setup and risk tolerance as the plan sponsor.
The monthly per participant insurance premiums paid in the large group market rose 3.7% between 2016 and 2017, according to the Kaiser Family Foundation. This percentage increase came after a 6% increase the year prior. To the point we made earlier, brokers who receive commissions experience year over year increases in their compensation, which does not align with your desire to lower your plan costs.
Commissions outside your broker fee agreement
A decent starting point to identify benefit brokers compensation is the Form 5500 (Annual Return/Report of Employee Benefit Plan), which provides some of the information you need regarding the operations, funding, and investments related to your insurance coverage. Schedule A (Insurance Information) provides a partial disclosure regarding premiums paid, reserve amounts, claims, commissions, and fees, as well as to whom these amounts were paid. Be cautioned however, that not everything you need to know about compensation is required to be disclosed by the insurance companies which is why you should consider a broker fee agreement to require disclosure of all compensation.
If you take a sample survey of these filings, you will uncover some interesting information about premiums, commissions and fees received by your insurance broker, and the relationship between increases/decreases in costs and plan type. Fully-insured plans surveyed showed increases from 6% to 12% relative to year over year premium increases. Additionally, income from hidden fees rose for these types of plans as well as your costs - this not a compensation model that you want to continue. You are pressed to continue paying the same amount of compensation without some reduction in total cost; it is ludicrous to pay even more!
If you are not receiving full disclosure of compensation information you are endorsing the idea that these types of increases are simply the cost of doing business. Since the Form 5500 filing cannot be viewed as a reputable source of information for broker compensation, you are certainly within your right to demand complete transparency when it comes to what they are being paid.
Choosing a better model for compensating your brokers to improve costs
Your insurance broker has no incentive to impact the rising costs in your medical benefits plan unless you tie their compensation to performance. Continuing to do things the traditional way, compensating your broker via commission on the premiums you pay, which increase 4% to 6% year over year, is not going to work for your bottom line long-term. This way of doing things within a fully-insured plan forces you to cut benefits and/or increase the cost share between you and your employees.
If you choose the path of increasing your employee share of costs as a way to curb your rising costs, instead of attacking the issue of aligning your insurance broker’s compensation to a sustainable medical insurance benefit ROI, you will find it much more difficult to stay competitive in the marketplace, find the right employees, and effectively manage your benefits.
For more information on the steps your firm can take today to improve align your brokers financial incentives download your free copy of DCW Group’s Ebook, The Definitive Guide to Health and Benefit Plans.