If all your insurance broker has done is market your health care plan to a half-dozen carriers, you may not be getting your money’s worth, says Steve Freeman, president of USI in San Francisco.
“If you have 100 employees and multiply that by $10,000, the average annual premium is $1 million,” says Freeman. “If you are paying a 5 percent commission, your broker is making $50,000 a year on your account just for negotiating premiums. And there’s not a lot of incentive to work for lower premiums, because, as premiums increase, so does his or her commission.”
Smart Business spoke with Freeman about how to create transparency in broker fees and how to get the most for your money.
Why are broker fees becoming more transparent?
The Accountable Care Act requires a minimum loss ratio of 85 percent, so insurance companies have to spend at least 85 percent of premiums on claims for employers with at least 50 employees. And that cannot include broker compensation. As a result, brokers will have to be more transparent with their services and fees.
What questions should business owners ask their broker to make sure they’re getting the best value?
First, ask, ‘How are you impacting the cost of my medical claims, rather than just shopping it to insurance companies?’ Claims costs drive premium. The broker should also be focused on changing employee behavior to make them become better health care consumers. Suggestions should include ideas around aggressive wellness programs, evaluating different funding alternatives and analyzing the overall health status of the group. The broker should un-bundle your claims to help determine what is driving your price, because, if you can lower your claims, you can lower your premiums. Businesses should understand their claims utilization. For example, they could assess whether their emergency room visits are higher than other groups benchmarked in their region or industry. If so, the broker can target employees using the ER and educate them about how using urgent care instead of the emergency room will cost them and the employer much less.
Your broker should also conduct a large claims analysis. If there are very large claims, are employees utilizing the most cost-effective facilities that have better outcomes? You can also design programs to migrate more employees to facilities with better outcomes and lower costs than, for example, a teaching hospital, whose charges may be double but that have the same outcomes.
Can a small brokerage firm meet these needs?
The one-man or 10-man brokerage is dead. If a broker says, ‘call me for everything,’ or ‘I can take care of all your needs,’ that should be a red flag. Those shops can’t survive because they don’t have the intellectual capital for all of the necessary areas of expertise. Nor do they do the volume of business with insurance companies to get the deals that someone with a large volume of premium with these companies can get.
A larger broker will have ERISA attorneys on staff to advise on compliance issues, a medical director to do clinical reviews, teams that conduct analytic and underwriting work, and individuals doing HR and IT work. Brokers should be the quarterback, with a team behind them that understands compliance, legal, clinical, underwriting and communications. The broker’s job is to understand how to orchestrate that team, not to pretend to have all the answers.
What would you say to business owners who are comfortable with their broker simply shopping their plan?
I would ask what that relationship is worth to them. There are businesses that have a few hundred employees with fully insured plans that budget an increase of 12 percent a year.
If that broker is making a 5 percent commission and you are paying him $100,000 a year, what does he bring to you in value? How much business do you have bring in to make $100,000 in profit? Is your broker worth that revenue? What is he doing to bring your costs down?
Employers think they are just paying the insurance premium, and the broker is part of it, and that it is difficult to influence cost. But brokers actually can influence cost. Insurance companies come out with a 12 percent rate increase knowing that they can be negotiated down to 8 percent. The business owner thinks the broker did a good job getting to 8 percent. But a broker with underwriting and claims experience, before you even get the renewal notice, will tell the insurance company that your renewal should be 5 percent based on the underwriting formula of what you’ve done in the past. The broker should say, ‘Our expectation is that you will come back with a 5 percent rate increase, not 8 percent or 12 percent. But based on facts and claims use, it should be 5 percent.’ There is lot of room for negotiation.
How is the commission system changing with more transparency?
Instead of staying with percentage-based commissions, employer groups are paying a flat fee per year, and the broker compensation is based on the level of service he or she is providing. It is not a function of premium, it is a function of the services that broker is delivering to the firm. The employer group negotiates a flat fee per employee per month, or a flat dollar amount per month for the services it is getting, more like fees that are paid to an accountant or attorney.
The value of the insurance benefits should be evaluated based on results and managing total cost. The more transparent compensation becomes, the more aware clients will become of the services that their brokers are providing, or should be providing.
Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or email@example.com.