Do Fee Based Consultants Earn Kickbacks From Carriers They Recommend?

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One of the best kept secrets of the insurance industry is the practice of paying kickbacks to insurance consultants which are never disclosed to clients who pay them.

By William Rusteberg

One of the best kept secrets of the insurance industry is the practice of paying kickbacks to insurance consultants which are never disclosed to clients who pay for them.

Over the past twenty years there have been numerous lawsuits brought against major brokerage firms across the United States addressing this industry practice. One can find many such lawsuits on the internet. For example, see Marsh_complaint

“The employee further explained that the purpose was to allow Marsh to state to the client that it was not earning a commission on that transaction, when the truth was that Marsh would receive a commission when the client’s policy was later aggregated with other clients’ policies for the same line of business. ” 

“Marsh routinely determined which insurer would pay it the highest amount of undisclosed compensation and then placed its clients’ coverage accordingly….” 

In Texas we are aware of the practice which is alive and well as of this writing. We have been approached more than once by insurance companies offering to pay undisclosed kickbacks during an on-going competitive Request for Proposal process. One carrier representative said “there is nothing wrong with this, all insurance consultants get these bonus’s – it is not tied to any particular client and is aggregated within your book of business with us.”

The Texas Insurance Code prohibits an agent/producer who receives compensation from a customer for the placement or renewal of an insurance product from receiving commissions for the same placement or renewal, unless the agent/producer: (i) provides advance written disclosure to the customer of the method and factors used to compute the compensation, and (ii) receives documented acknowledgement from the customer that the compensation will be received by the agent/producer .

Agent/Producer and Life and Health Insurance Counselor (“LHIC”) The Texas Insurance Code prohibits a person who is licensed as both an agent/producer and an LHIC from receiving commissions for a service performed as an agent/producer if the person has received or will receive compensation from the customer for that same service. To perform services on a fee for service basis, i.e, insurance consultant, one must be licensed as a Life & Health Counselor and Risk Manager in Texas.

Any protocols in place between parties are necessarily mutually agreed. “Certain insurers were knowing and willing participants in these schemes; they agreed to the contingent commission or other undisclosed compensation arrangements and submitted the fictitious quotes that Marsh requested, knowing that these quotes would be used to convince clients that valid bids had been solicited and the best bid selected.” – Florida vs Marsh

Many benefit plans are governed by the Employee Retirement Income Security Act (ERISA) and must follow Department of Labor rules governing compensation arrangements. An article in Business Insurance, October 24, 2004 addressed these issues:

“The rules mandate that broker compensation arrangements be fully disclosed to the plan’s fiduciary, said Sheldon Emmer, a partner with Los Angeles-based law firm Emmer & Graeber who specializes in ERISA law. If the broker fails to disclose all compensation arrangements, the Labor Department can penalize the broker for ERISA violations, he said.”

“Without disclosing, you can’t take compensation because it would be a prohibited transaction,” he said.

When a broker discloses its compensation arrangements, the plan fiduciary must decide if the compensation is reasonable and if the cost of the plan is higher than it would have been had the coverage been placed by another broker or directly with the insurer, Mr. Emmer said. Fiduciaries who allow brokers to be overcompensated can be charged with a breach of duty and may face penalties, he said. “The fiduciary shouldn’t allow them to be more than reasonably compensated,” he said.

Third party administrators have a tough time competing against these “slush funds.” To combat this competitive disadvantage, some TPA’s bundle their services with other providers such as PBM’s, PPO network partners, stop loss carriers, audit firms, etc.,  as a source of additional revenue to be shared with the writing agent. Typically these revenue streams are not disclosed since the client is a third party beneficiary in most cases and not privy to the contract terms between the primary parties.

A July 6, 2011 post on this blog, “How To Earn A Decent Commission” explains methods used to earn undisclosed compensation:

Since the 1980’s, seasoned health insurance agents have developed ingenious methods to milk their clients for undisclosed fees and commissions.

Political subdivisions were targeted early on – health insurance agent ‘s operating costs in dealing with political subdivisions were, and continue to be,  high. Hunting trips, campaign contributions, scholarship funds, golf bets on the 19th hole for cash, renovating board members homes and offices, trips to Monterrey, Mexico in a rented motor home, trips to Vegas for ringside seats, prostitutes, expensive dinners, fishing trips to Costa Rica, Rolex watches,  are just a few of the every increasing costs of doing business with some school districts, counties and cities it seems.

Just how does a health insurance agent (or consultant) get paid? Let’s examine this in detail.

First, disclosed fees/commissions may just be the tip of the iceberg.  Usually a health insurance agent will represent that he or she gets paid by the insurance company, not their client. And, “I only get paid $1.75 per employee per month and 10-15% of the stop loss premium. The TPA and insurance company pay me, not you!”

On a group of 7,500 employees for example, that could amount to well over $350,000. Not bad pay.

But why settle for pennies on the dollar when opportunity rings?

A wise and seasoned health insurance agent would not be content with such a low pay scale knowing that there are numerous money pots within a health plan to be raided without the knowledge of their clients. What they don’t know won’t hurt them is a universal reasoning by some in the industry.

For example, if the average prescription per member in a given group is 1.2 per month, and there are 11,000 members in a group (employees, children, spouses), that would equate to about  158,400 prescriptions during a year. Working with a pharmacy benefit manager i(PBM) in conjunction with a third party administrator, an insurance agent can broker a $5-$10 fee per prescription. The fees thus generated show up as a claim, and not a fee or fixed cost. If the PBM contract is with the TPA and not the employer, these fees will never be disclosed. At just $5 per script, an agent can earn, on a case of this size, $792,000 above and beyone the “disclosed” fees/commissions.

But is $350,000 plus $792,000 enough to cover expenses and live the good life? Not for some. More income is needed, and easy pay is at hand.

An innovated health insurance agent will broker a 5% “commission” on PPO discounts too. For example, if billed charges on the above imaginary group are $75,000,000 during a year, and the paid or allowed charges through the PPO contract are $40,000,000, the agent can stand to earn another +1,500,000 in undisclosed fees.  These fees are disguised as a claim cost.

But is $350,000 plus $792,000 plus +$1,500,000 enough these days?  Probably not for some health insurance agents whose style of living demand large amounts of cash income. After all, they are competing with other agents for business. The agent with the most money draws attention to 4 out of 7 voting members of board.  Counting votes has never been easier than that.

How about milking ancillary product lines within a self-funded health plan? Disease management fees can be inflated. PPO access fees can be inflated too. Bonus overrides with the stop loss carrier can increase the disclosed commission of 10-15% to as high as 25-27%.

Unfortunately, we believe his is done quite frequently in the health insurance business. Milking a cow has never been easier.

Whatever happened to “transparency” and “accountability?”

It is without question there has developed a pattern of complaints in the last 20 years of the insurance industry’s secret scheme employed to gain sales advantage in a competitive market. Unfortunately this tactic makes the market less competitive than it could be.

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