A school district in deep South Texas was paying their benefits consultant $614,000 per year but didn’t know it.
By Bill Rusteberg
I was retained by the district to audit their self-funded health plan as the CFO wanted to “see where all the money was going.” So I showed her where every penny went, including the cookie jar she didn’t know she had.
Another school district in the same geographic area was paying their consultant over $1,000,000 per year and either didn’t know it or thought that was a reasonable, bargain price. (We have to believe the former is true but who can tell?).
I’ve run into this time and time again over the years. Competing as a fee based consultant is tough when the competition earns undisclosed fees which in many instances can exceed the fees paid to them by plan sponsors.
A case in point was a Dallas branch of a national firm which bid $24,900 on a Texas county to guide the county through a competitive RFP process for group medical and ancillary benefits, and remain on board for a full 12 months to meet with the group on demand, hold employee benefit meetings, and provide actuary work with financial projections at year end.
Bear in mind the firm’s representatives incurred travel expenses to and from the client including air fare, hotel, car rental, and food. It would be impossible to make a profit off a measly $24,900. So, as expected, the firm recommended a BUCA (everyone in our industry knows that the BUCAs compete for brokers through monetary reward and all kinds of incentives).
I’ve had personal experience with this common industry practice. On more than one occasion while working with a client on a fee basis I have been approached by BUCA representatives offering bribes to steer the business their way. “Bill, if you place the case with us we can pay you our standard bonus compensation schedule through our company’s general commission fund.”
A consultant I know well, when I asked if his national firm was earning undisclosed compensation on a public school district they were providing consulting work on a fee basis, the answer was “I hope not.” I would have rather heard “Are you crazy Bill, that would be unethical!”
On the first case mentioned above, a fee based consultant would necessarily have to charge more than $24,900. But of course that would not look too good on a spreadsheet. That number should be triple that, or between $50,000 to $75,000.
So lets do the math on that. Expenses eat up 40% to the total fee leaving a 60% balance. Then one must calculate, if they can, the value of experience and time. That’s gonna be a big number. What is left is taxed at +30%. All of that should be on a spreadsheet, not just the total fee to be charged.
But what about the hidden compensation? I’ve sometimes been told our fees are “too high” and “can’t you lower your fees, we really want to do business with you but we simply can’t afford to pay what you want. Our current broker / consultant charges much less!”
Well, that’s all about the change effective January 2022. The following report by Alston & Bird outlines the future of broker / consultant compensation disclosure:
See pages 12 – 14
HIGHLIGHTS (Is second bullet point a loophole where direct compensation disclosure is not required?)
§ Direct compensation is compensation from the plan itself (plan assets).
§ Amounts paid by the employer/plan sponsor would not be considered plan assets but
participant contributions are always plan assets.
If disclosures are not provided plan fiduciaries must take a series of actions including ultimately notifying DOL and terminating the service provider in order to avoid a prohibited transaction.
Take Aways/Action Items for plan administrators and other plan fiduciaries
§ Identify all consultants and brokers with respect to any group health plan.
§ Determine whether any service provider receives any direct compensation and the amount of that compensation.
§ If known, determine whether the service provider receives any indirect compensation and the amount of that compensation.
§ Be prepared, beginning next January, to make a demand to any covered service provider who has not provided adequate disclosure.
§ Establish and document that a responsible fiduciary actually reviews the disclosures and determines that the compensation is reasonable.
RiskManagers.us is a specialty company in the benefits market that, while not an insurance company, works directly with health entities, medical providers, and businesses to identify and develop cost effective benefits packages, emphasizing transparency and fairness in direct reimbursement compensation methods.