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Will broker pay change empower group health buyers?

Aetna excludes commissions from premiums; other insurers expected to copy move

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Aetna Inc.'s decision to exclude broker commissions from health insurance premiums in the fully insured large-group market beginning Feb. 1 could give employers greater leverage in determining how much their producers are paid and what services they must provide to earn that compensation.

Other health insurers are expected to follow Hartford, Conn.-based Aetna's move, which was triggered by new minimum medical loss ratio requirements established under the Patient Protection and Affordable Care Act.

Under the minimum MLR rules that took effect Jan. 1, insurers must spend at least 85 cents of every premium dollar in the large-group market on medical expenses, leaving just 15% to cover overhead including claims administration, customer service and sales expenses, including broker commissions.

Because broker commissions comprise as much as 5% of health insurers' sales expenses, it was inevitable they would be cut, sources say. These same sources said they were wondering which insurer would be first to do so, and now that Aetna has taken the step, other insurers are expected to follow suit.

In an e-mail, a spokesman for Minnetonka, Minn.-based UnitedHealth Group Inc. confirmed, “We are in the process of communicating with our producers about our intent to remove commissions from fully insured large-group business. As part of that process, we have been collecting their feedback on building an infrastructure that will assist them in making it as easy as possible to collect any service or consulting fee they may negotiate with the mutual clients we serve.”

Several other major insurers also have communicated to producers that they, too, will be excluding commissions from premiums in the large-group market, but they did not respond to Business Insurance's requests for confirmation.

Fee-based compensation for brokers and consultants has been a longstanding practice in the self-insured market where employers pay an administrative-services-only fee to insurers to manage their plans and negotiate compensation for their insurance advisers separately.

While many large employers that purchase fully insured products also have asked insurers to exclude commissions from premiums so they can pay negotiated fees directly to their brokers, for the most part, employers in the small and middle markets, defined as those with 51 to 1,000 lives, generally have paid their brokers via commissions embedded in health insurance premiums.

Although commissions have been disclosed previously on the Form 5500 filings that employers with 100 or more health plan members are required to submit to the U.S. Department of Labor, they have not been obvious, industry sources note.

Many health insurance experts expect that when employers see just how much those fees add to their health care costs, they will either try to negotiate a lower rate with their brokers or demand that additional services be provided to justify the compensation.

“I see a very strong analogy to what happened to travel agents in the travel industry,” said Paul Ginsburg, president of the Center for Studying Health System Change in Washington. When travel agents' commissions were excluded from airfares, “the airline market became more competitive.”

He added that large brokers that “have a lot more to offer besides just showing you different health plans” will have an advantage over smaller brokers that traditionally have focused primarily on the procurement process.

“This gives employers the opportunity to value each of the services their brokers provide and decide which to invest in,” said Vince Ashton, executive director of HealthPass, a partnership between the Northeast Business Group on Health, New York and the health insurance industry. “Some employers may decide to just use their broker for procurement and pay the fee for that service and then contract with another vendor for ongoing support services,” he said.

Making the portion of premiums attributable to commissions more visible “is a good thing for employers, especially in the small and middle market,” where they largely have been opaque, said Sherri Bockhorst, a principal at Buck Consultants L.L.C. in St. Louis. “If they have to add those dollars to their budgets, they'll definitely demand greater value.”

“It's a moment of truth. The brokerage community will be faced with justifying what they do and what they've been charging,” said Peter Gruenberg, chief placement officer for Willis Group Holdings P.L.C.'s human capital practice in Cranford, N.J.

Some health insurance industry experts suggested that many brokers, having been squeezed by employers not wanting to pay high fees for health benefits, will start pushing ancillary and voluntary benefits because those lines of coverage pay much higher commissions and are not subject to the MLR limitations set by the health care reform law.

“If you look at life, accident and health, those commissions are closer to 20% vs. what is paid in group health,” said Greg Arms, global employee benefits practice leader at Marsh Inc. in New York.

Others, however, forecast that full transparency of producer commissions in health care will increase employer scrutiny of other sources of compensation for employee benefit brokers.

“It's going to permeate every product and/or service offering, so the voluntary benefits commissions will also face scrutiny,” said John Zern, executive vp and Americas practice director at Aon Hewitt Inc. in Lincolnshire, Ill.

“The domino effect will be employers will be asking their advisers not only about health care, but about all other forms of compensation they're earning on other lines of business,” Mr. Zern added.