How To Make +$100,000 In Undisclosed Revenue On A 250 Life Case

By William Rusteberg

Compensation earned selling self-funded group health insurance has never been better. Insurance brokers, in collaboration with their TPA partners, understand how to maximize revenue without clients knowing the true extent of their total compensation package.

Employers unknowingly fund the Scheme

Most employers trust their insurance broker. They rely on their broker to find the best and most cost effective program available in the market. They believe their broker is working in their best interests, and compensation is fully disclosed. In the case of a 250 life group, a broker fee of $5 per employee per month seems reasonable. That equates to about $15,000 per year in broker commissions.

So how is it possible for the insurance agent to make over $100,000 in undisclosed compensation, on top of what is disclosed? Certainly all costs associated with a self-funded health plan are known to the Plan Sponsor, right? Unfortunately, that is not always the case.

Revenue can be gained from stop loss insurance commissions (plus bonus & profit sharing with the carrier), pharmacy expenses (working the spread, share in rebates or just plain old commission add-on for every prescription dispensed), reinsurance fees (just a fancy word for “commissions”), and last but not least………. sharing of PPO discounts (hidden in claim costs).

Here is the formula: Rx (1.2) X 250 X 12 X $10 = $36,000; Stop Loss (45) X 250 X 12 X .15 = $20,250; Reinsurance Fee (7) X 250 X 12 = $ 21,000; PPO Discount Sharing (5%) X (3,666) X 250 = $45,825

Total undisclosed compensation in this case is $123,075.  With the PEPM disclosed broker fee of $5, the total annual compensation paid by the Plan Sponsor is $138,075, or a whopping $45 PEPM in agent compensation. Buying a new Cadallac every year has never been easier.

It is not uncommon for the broker’s TPA partner to earn additional hidden revenue too. In the TPA’s Administration Agreement you may find a statement such as “TPA may or may not share in compensation from some, or all of the subcontractors of the Plan.” Or, as we have seen in some of the BUCA’s Agreements, “If you want to know what your broker is making, ask him, not us.”

On groups that forego managed care networks, a TPA and their consultant/broker may earn additional revenue  as much as 35% of audit fees. And since audit fees are usually tied to a percentage applied to gross billed charges, or a percentage of savings, or applied to “allowed amounts”, a commission percentage on top of a percentage can add up fast. For example, a gross billed charge of $250,000 paid at $50,000 can generate an audit fee as much as $70,000 of which as much as $24,000 in commissions is paid to the TPA.  Not bad compensation to process a claim. (Forget the Cadallac, I want a company jet!)

Plan Sponsors are fiduciaries

Employers who self-fund an employee welfare plan take on certain requirements in the administration of the plan and managing its assets.  ERISA sets a standard for fiduciares which includes acting solely in the interest of plan participants by paying only reasonable plan expenses.

A plan participant may have recourse against a Plan Fiduciary for ERISA violations, a risk that should be addressed by plan sponsors. A careful review of expenses and contracts is of paramount importance.

Editor’s Note: Most  independent, fee based insurance consultants would charge $25,000 per year for advice and guidance. An employer may believe a consultant’s fee  of this magnitude is unreasonable. Afterall, they have a trusted insurance broker who is paid much less.