Of all the noteworthy scenes in the political thriller, “All the President’s Men,” few stand out quite like the character “Deepthroat’s” famed parking-garage meeting with Robert Redford. It’s during this scene that, in reference to the Watergate scandal, “Deepthroat” advises Redford to simply “follow the money.” How many times have you given yourself this advice, while trying to pinpoint exactly where something had gone wrong?
Well, something is wrong, and we’re finding more and more that the problem lies in the advice that employers receive from their health insurance brokers/consultants.
Figuring out the best method for offering employees healthcare is a decision that can carry a huge financial impact for a company. This effect on a company’s bottom-line notwithstanding, decision-makers also need to consider the well-being and morale of employees. Take a moment to think about how companies typically purchase healthcare for employees:
- You hire an “employee benefits professional” to represent you in the marketplace. They serve as broker, ultimately placing your company with an insurer who you pay a premium to directly.
Have you ever taken the time to consider where this broker’s compensation really comes from?
- The answer is complicated, hidden and, as you may have guessed, rarely disclosed. The broker’s compensation comes directly from the premium payments that you make to the insurer. In fact, the broker is typically given a percentage of the premium that they place with the insurance company. The short answer here is that the broker profits directly from its own recommendation.
- You trust your broker to make the best recommendation for you, independent of compensation. But, the broker is paid directly by the insurance company. Nothing about this process is truly independent, and in most other lines of business, it would be considered a serious conflict of interest.
How about this?
- Think back to your most recent health insurance renewal, where it’s likely that you saw anywhere between a 10-15% increase in premium. You have two options here – accept this double-digit increase or try to save on cost by diminishing the quality of the benefits that you offer to employees. Shockingly, if you choose the first option, there’s actually a high likelihood that your broker will receive a bump in compensation based off the increase in premium.
If that’s not bad enough, there’s also “hidden compensation” built in here.
- In some cases, brokers can be paid undisclosed compensation, based on the size of their book of business with a carrier. The higher the total premium that’s under control, the higher the compensation. Many carriers also offer bonuses called “contingency” or “persistency” payments, where a broker is paid for keeping business in place, or providing “new placements.” According to an industry studies of benefits brokers, on average, 4-12% of a broker’s annual revenue is derived from these undisclosed payments. Such data suggests that broker recommendations might not always be made in the best interest of the client, but more so, to preserve the compensation that’s received from the carrier. Ultimately, these incentives are influential in favoring one carrier over another, but they provide virtually no relief to the client itself.
Is there a solution?
- You should be raising these same points to your broker, as early on as possible in the renewal process.
- Ask your broker if they’re able to carve-out the commissions received from carrier premiums. In effect, they’ll be lowering your premium by this amount and then work with them on a fee-for-service basis.
- To ensure independence, you should consider having your broker bill you directly, as you would with most other professionals consultants, attorneys or accounting firms.
- Also, ask and confirm in writing if they are working off a standard commission schedule or do they inflate it, many do.
- Lastly, ask your broker if they participate in “contingency” programs with your current carrier and whether or not that will influence their recommendation.
The insurance industry has always carried a pre-conceived notion of immorality and lack of trust issues when it comes to making client recommendations. In some cases – not all – we find that benefit professionals’ primary concern is maximizing their own individual profit.
We pride ourselves on providing our clients with honest, innovative work. And we’re not alone. We’re surrounded by a number of reputable brokers who work hard to avoid the “stink” that’s tied to the industry as a result of other brokers’ misdeeds.
Our hope moving forward is that insurance professionals will begin to act with the same discretion and transparency that’s required of other professionals – CPAs, attorneys, and anything of the like.
Changing the compensation process, disclosing revenue streams and working on a performance based or results bases would be a great start.