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Government investigations into intermediary compensation practices, which focused initially on property/casualty placements, have expanded into the employee benefits arena and resulted in divergent industry expectations.
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, Tenn.-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% "pay to play" commission from insurers in placing stop-loss coverage for the Herkimer County, N.Y., self-insured employee health plan.
Brokers and consultants began seeking such payments from insurers about 10 years ago when employee benefit costs started to climb and employers sought relief in the form of lower fees and commissions from their vendors, said Terry Havens, the chief executive of Havensure L.L.C., a Cincinnati benefits consulting firm.
In many instances, overrides help offset fees that employers pay for the broker's services, said Ted Reese, president of Des Plaines, Ill.-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," Mr. Reese said. "Overrides represent about 2% to 3% of total revenue."
Since the probes by New York and other states started examining employee benefit placements, the Labor Department in July added a section to its Form 5500 Annual Return/Report to include broker compensation in excess of $1,000 from parties other than the plan itself or the plan sponsor. This change is likely to raise the awareness among employers of these additional compensation arrangements, sources say.
Some employers, such as Marsh Supermarkets Inc. in Indianapolis, restructured their broker contracts to ensure greater transparency. Mark Kitchen, the grocer's benefits manager, said Marsh Supermarkets put its broker on a retainer and "began doing everything net of commissions" in 2005.
Dennis Passovoy, president of Resource Financial Group Inc., a benefit broker in Austin, Texas, predicts the additional scrutiny of contingent commissions and overrides will result in their eventual phase-out. "That would make us happy. We've always had a policy of transparency," he said.
Even prior to settling with governmental parties in March 2005, Aon terminated its contingent commissions worldwide, a company spokesman said. 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 said.
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," said Helen Darling, president of the National Business Group on Health, a Washington consortium of the largest U.S. employers.
But Mr. 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," Mr. Havens said. "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," said 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?," Mr. Boress suggests. "Employers almost always end up paying for what was ostensibly a 'free service."'
Mr. 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, Mr. Havens said 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," said 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. However, if you weren't looking before, you're not going to be looking at all of the additional data," Mr. Wells said.