De-Constructing Myths About Compensation
One of the lesser-known provisions of the Consolidated Appropriations Act of 2021 is stricter disclosure requirements for group health plan broker commissions. On the surface, this seems like a great idea, especially in light of documents such as the oft-cited 2019 ProPublica/NPR report about broker compensation. What employer wouldn’t want to save more on healthcare costs by making sure that their broker isn’t making too much money off of them?
After reading the report, though, I’m left with more questions and concerns than I am with answers.
The report itself admits that its data is incomplete, stating that the investigating journalist only queried ten broker agencies, none of whom answered his questions. This makes almost no sense to me, considering that as of mid-2021, industry statistics showed 1.2 million insurance brokers in the United States - and even that figure omits the huge number of brokers who, like myself, work as independent contractors. Anyone with any level of statistical knowledge understands that this means the sample size was far too small.
That’s not the only problem with the ProPublica report. Several of its claims are outright incorrect, including the following:
Insurers pay brokers a commission for the employers they sign up. That fee is usually a healthy 3 to 6 percent of the total premium. That could be about $50,000 a year on the premiums of a company with 100 people, payable for as long as the plan is in place.
In the small group market where I work, only one (small) carrier pays compensation as a percentage of premium. The majority pay on a “per employee per month” basis, which means that there’s no additional compensation for a higher-premium plan. In fact, a PEPM incentivizes brokers to find the correct plan for an employer - regardless of cost - because having an appropriate plan reduces the number of employee waivers.
The numbers on this one also don’t add up. If $50,000 per year is 4.5% of the overall premium for a company with 100 employees, that works out to a premium-per-employee of $925.93 per month, or just north of $11,000 per year. A recent report from the Kaiser Family Foundation indicates that the actual average premium for employee-only coverage is $644.92 per month and the average premium for family coverage is $1,851.75 per month. Given that the number of people with employee-only coverage is roughly twice the number of people with family coverage, I have a hard time believing the claim of a $50,000 per year commission on a 100-life group.
My experience is that the average PEPM in the small group market ranges from $25 per month to $40 per month (and, for very small plans, they’re sometimes as low as $5 PEPM). For a 100-life group, that works out to a range between $30,000 and $48,000 per year - and the lower end of that is far more common than the upper end.
The ProPublica report goes on to make a statement that is outright ludicrous, at least in the states where I have worked:
Commissions can be even higher, up to 40 or 50 percent of the premium, on supplemental plans that employers can buy to cover employees’ dental costs, cancer care or long-term hospitalization.
In ten years working in a brokerage, the highest commission I have ever seen on a supplemental plan was 25%, and that was because the client agreed to a one-year load on the commission as a reward to their broker, for finding them a dental plan that was 50% of the cost of the previous plan with the same benefits. The industry standard for the smallest plans is 10% on group dental and vision, and 15% on most group life and disability products. (This reduces as premium goes up; for some very large plans, 5% isn’t unusual.) In addition, brokers routinely will shave that when they need, say, an extra 1% savings to sell something to a client.
It is true that commission on so-called “worksite” plans such as cancer or hospital indemnity can be higher in terms of percentages, but that doesn’t translate to more dollars since those plans tend to have significantly lower premiums. They also have a much lower participation rate; if you can get 20% employee participation on this sort of plan, you’ve done a great job.
Even then, though, I haven’t ever seen a commission above 33% for the first year alone. The particular product that paid that, then dropped to paying a 5% commission for subsequent renewal years. Even 40% wouldn’t have been that much, though, given that it was a rather low-premium plan.
In this case, I suspect that the ProPublica author may be confusing group plan commissions with individual life and disability commissions, which routinely exceed 50% for the first year (although by year 10 they’ve usually dropped to something along the lines of 2%). However, individual life plans by definition are not paid for by employers. It’s an apples-and-oranges comparison.
The ProPublica report then goes on to criticize volume bonuses that are paid to brokers, highlighting some of the best ones out there from Cigna, Humana and Blue Cross Blue Shield.
What it doesn’t disclose, though, is how frequently those bonuses can be earned. In my experience, the bonuses are only paid to the top 2%-5% of producers, and most producers are not confident of earning them in any given year; simply maintaining an existing book of business is rarely enough to qualify. As such, brokers don’t disclose them up front because the income isn’t reliable the way a commission might be; and if income can’t be counted on, it’s best not assumed.
The final misleading statement in the ProPublica report, though, concerns what the insurance industry calls “churning,” which is encouraging clients to sign up with a new insurer every year for the same benefits:
These massive year-one commissions lead some unscrupulous brokers to “churn” their supplemental benefits, Butler said, convincing employers to jump between insurers every year for the same type of benefits. The insurers don’t mind, Butler said, because the employers end up paying the tab.
The insurers may not mind, but at least in the two states where I’ve worked, the Insurance Commissioners certainly do. “Churning” is explicitly mentioned in pre-licensure training as an unethical behavior that can cost an agent his or her license. The most egregious examples of churning generally happen in the senior life insurance market, but there’s nothing in the ethical guidelines that limits oversight to that market. Agents in any insurance market can get into regulatory hot water if they are guilty of encouraging their clients to change carriers without good reason.
In the group market where I work, there’s a second reason incentivizing brokers to avoid switching insurance companies too often: changing carriers creates an enormous amount of work for both the broker and the employer, and it also opens up more opportunities for error. (This is in addition to the heartburn that it causes for the employees.) For that reason, most agents I work with generally will not recommend changing carriers unless there is a significant opportunity for premium savings, or unless there’s a significant problem with the current carrier.
Despite all these problems, I’m not ready to accuse ProPublica or NPR of intentionally setting out to mislead their readers. Instead, what I think happened here is that the investigating journalist didn’t have experience working in an insurance brokerage. He freely admits that his entire career has been spent in investigating the health care finance industry, which is very naturally going to lead to a particular bias.
It’s telling that Mr. Allen doesn’t mention that, while the ACA caps health insurers’ profits, there is no cap at all on medical providers, which has created some staggeringly high markups in some sectors (especially medical devices and prescription drugs). There is plenty of independent research showing that the biggest driver of health insurance premium increases is the growing cost of health care itself, not the insurers’ profit margins.
Don’t misunderstand; I’ll freely admit that health insurers are generally part of the problem versus part of the solution. But it makes little sense to me to assume that they’re the entire problem, or that the brokers - who, as I mentioned, are often independent contractors and thus don’t qualify for employment-based benefits - are egregiously complicit.
The average base salary for a health insurance broker is less than $50,000 per year; even among experienced agents, base salaries generally still average in the high five figures. This isn’t a field anyone goes into for high paychecks or prestige; indeed, there’s significant concern about the aging of the insurance agent workforce.
Most agents are like me, ending up in the field by accident after aiming at another one; and one of the first things I’ll tell people about my work is that it is not a good fit for someone who needs constant affirmation. (Nobody ever calls their insurance agent because they’re happy about something.) The reductions in commissions that have come as a result of the ACA aren’t making the field any better. I’m very concerned that these new disclosure requirements, which do not require any sort of contextual explanation, will only be one more issue that leads to more people exiting this field than there are entering it.
Originally posted at https://radius.stannumenterprises.com/2022/de-constructing-myths-about-compensation/.