Government Insurance Inquiries Expand to Include Benefits Advisors
Government investigations into intermediary compensation practices, which focused initially on property/casualty placements, have expanded into the employee benefits arena.
Some industry insiders say the result will be greater transparency from benefit brokers and consultants going forward. Others say the transparency push will only open a new Pandora's box of potentially unethical behavior as brokers and consultants look for fresh sources of hidden compensation to replace that exposed by new disclosure requirements.
While most small and midsize employers use insurance brokers to place their employee benefits business generally on a commission basis, most large employers rely on consultants that often work for negotiated fees.
Regardless of the upfront payment arrangements, as recent investigations have brought to light, brokers and consultants often receive additional back-end payments, called overrides, which are generally based on the volume of business they place with an individual insurer.
While most of the investigations into contingent commissions in the placement of employee benefits business involved mainly group life and disability lines—such as those that led to settlements by New York and California with Chattanooga, Tennessee-based UnumProvident Corp.—allegations also involved placing insured health and welfare programs as well as some of the stop-loss coverage purchased by self-insured employers.
For example, a 2005 lawsuit filed by New York Attorney General Eliot Spitzer against Aon Consulting, a unit of Chicago-based Aon Corp., charged the broker received a 15 percent "pay to play" commission from insurers in placing stop-loss coverage for the Herkimer County, New York, self-insured employee health plan.
In many instances, overrides help offset fees that employers pay for the broker's services, says Ted Reese, president of Des Plaines, Illinois-based Corporate Benefit Consultants Inc. "A lot of people are asking upfront what our commission is. We say we may be eligible for the bonus, but won't know until year-end. In those cases a lot of clients are asking that the override be applied toward their fees."
If it did not receive overrides, "we would probably raise our fees slightly," Reese says. "Overrides represent about 2 percent to 3 percent of total revenue."
Since the probes by
Some employers, such as Marsh Supermarkets Inc. in
Dennis Passovoy, president of Resource Financial Group Inc., a benefit broker in
Even prior to settling with governmental parties in March 2005, Aon terminated its contingent commissions worldwide, a company spokesman says. Like many benefit brokers and consultants, Aon Consulting now provides "comprehensive disclosure of its compensation to clients, both before binding coverage and at the end of each year," the spokesman says.
The Form 5500 change should cement this movement toward greater transparency, many benefit experts believe.
Benefit managers will "definitely be looking more aggressively at rate quotes and fees," says Helen Darling, president of the National Business Group on Health, a
But Havens remains concerned that many employers will remain in the dark even with greater disclosure requirements.
"These developments are all positive improvements, but the major weaknesses remain," Havens says. "Employers haven't been diligent. They truly need to look at the details and be much more demanding. They need to press everybody involved in the plan—not just the intermediaries."
"Benefit managers should ask more questions," says Larry Boress, president of the Midwest Business Group on Health, a Chicago-based employer coalition.
Questions should include: "What are the services that will be provided? What money will you be obtaining and from what sources? Is any of that coming from the payment I'm making?" Boress suggests. "Employers almost always end up paying for what was ostensibly a ‘free service.’ ”
Havens advises that employers ask about additional fees that may be charged to a benefit plan because "these fees are where the money is coming from to pay overrides to the brokers." While insurers may be more concerned about compensation issues, Havens says he worries that will lead to brokers becoming "much more creative."
"There are almost as many ways for brokers to be compensated by insurers as there are for PBMs to get money from big pharma," says Darrell E. Wells, director of risk management for Odessa, Texas, who also manages the city's benefits program. "Don't assume that by specifying a commission-free, fee-only relationship that somebody's not still getting something. Remember, it's not so much what the broker says that's important. It's what they don't say."
"Transparency is the word of the decade. Everybody's transparent,” Wells says. “However, if you weren't looking before, you're not going to be looking at all of the additional data."
This story originally appeared in Business insurance, a sister publication of Workforce Management.