There are friends, and then there is the kind of friend who always listens and gives you the sagest of advice, who is adored by your husband and teenagers too, and who could call in the middle of the night and get whatever kind of help they needed from your family without comment or question. For at least one of us, David Curtis Smith, JD, REBC, the Senior Vice President of EbenConcepts, is one of those kinds of friends. Plus, he’s one of the smartest people we know and a rock star in the health insurance broker/employee benefits compliance world. So we are thrilled to lend him our platform this week and hope you enjoy this guest opinion piece on the broker and consultant compensation provisions in the Consolidated Appropriations Act.
With the adoption of the Consolidated Appropriations Act, 2021 (the CAA), Congress has mandated that agent, broker and consultant compensation on all group health plans and individual health insurance policies be disclosed effective for arrangements entered into, renewed on extended on or after December 27, 2021. While most of us are generally opposed to mandates, this is the kind of positive action that strengthens the role of benefit specialists and empowers us to demand the same level of transparency of providers and carriers/networks for our clients.
How will this work?
This law requires agent, brokers and/or consultants (and their subcontractors) to disclose their compensation to plan fiduciaries. Specifically, any covered service provider that receives compensation in excess of $1,000 annually must provide this disclosure. The disclosure must include amounts paid directly and those received indirectly related to group health plans. This requirement applies to both fully insured and self-funded, which includes level-funded plans. The law requires notification prior to the beginning of a plan year and creates an obligation to update the group about changes in that compensation that occur during the year.
What's included in compensation?
The law will require disclosure of commissions and consulting fees paid for welfare plans, including amounts paid for stop-loss commissions, referral fees paid for placing business with vendors such as pharmacy benefit managers, TPAs or other service providers, and indirect compensation such as bonuses and overrides.
Why is this good?
There are six ways that full disclosure will be good for our industry:
1. "Clean Hands" on Cost Transparency Issues. There is near universal agreement in our industry in favor of cost transparency for medical procedures and health care expenses like prescription drug costs and for protection against surprise billing. If we want to eliminate the uncertainty of what those costs are, how they differ based on the place of service, the underlying agreement with a payer (like a PPO network or health insurer) and what someone will actually pay vs. the cost… then we must be transparent about the compensation we rightfully earn from the valuable services we provide.
2. Help Employers Put Value on our Services. Let's be honest: for a long time, our profession has gotten paid in a way that didn’t allow our clients to see what they were paying for—and we do a lot for our clients. As more carriers have moved to add-on commissions (or ending commissions all together), many of us have learned the hard way that a big part of our sales job is tying what we get paid to the skills and support that we provide each customer. Sure, we've all had someone say: "I've never had to pay for that before; why should I start now?" But the reality is that none of us do what we do for free, and the key to full disclosure is that a fair profit is justifiable.
3. Employers Knowing What We Make Promotes Competition. For most small and mid-sized agencies, we don't have special deals or outside compensation coming from third parties for the business we place for our clients. But all too often we lose on "price" because the employer does not understand all of the intricacies of how agencies might be paid to use a certain PBM, stop-loss carrier or other arrangement.
4. Fix Issues with Cost Disclosure for Self-Funded Plans. The Form 5500 does not provide plan fiduciaries with the information they need to meet their fiduciary duties, and usually due to the fact that many consultants do not feel that the rules explicitly require them to fully disclose their compensation. Under ERISA plan fiduciaries must ensure that all fees paid by the plan to service providers are reasonable. The delay (Form 5500s are issued after the plan year to which they apply) and the lack of full information makes it impossible for plan fiduciaries to make this determination. Additionally, many in the industry take the position that virtually all fees related to the administration of a self-funded plan are not reportable because they are paid from the “general assets” of the plan sponsor. While I often disagree with some of my friends about this interpretation, this compensation disclosure requirement will take a big step toward clients understanding what their consultants are being paid, directly and indirectly, for the services provided to the employer, the plan and its participants.
5. What are you doing to earn your compensation? I know what our agency does for its clients and we, like many of my competitors, pride ourselves on making sure our clients know what we do to earn our keep. We're in the service business, bringing professionalism, perspective, and experience in the complex world of health and other employee benefits to employers who would otherwise be lost without good advice. I am not shy about tying our services to reasonable compensation and no one else should be either.
6. Mitigate misaligned incentives. Most agents and brokers are paid commissions, and this means that the higher the cost of coverage the more money they make. There is also the matter of referral fees, persistency bonuses, etc. These can result in the less than scrupulous in our industry steering clients to the benefit options in the agent’s best interest, even if it is not in the best interest of the client. Making this information available to plan fiduciaries allows them to make better decisions. It also rewards those of us who always act in the best interests of our client by letting them see just that.
How could this new requirement make things worse?
The CAA was passed on December 27, 2020, and with disclosures required reasonably in advance of renewals after December 27, 2021, this creates a very short implementation window. To date, the federal government has not indicated any intent to provide guidance on these rules. This creates an opportunity for those who wish to maintain the status quo to attempt to neuter the new rule. Smart lawyers are skilled at interpreting statutory language in a manner that meets their clients’ needs. Without clear guidance directing the industry we will end up with a hodge-podge of approaches to disclosure. Those of us who do the right thing and honor the spirit of these rules could end up at a competitive disadvantage relative to those who continue to push for obfuscation.
How can you make a difference?
To protect against this and, as importantly to serve employer plans with excellence, we need to demand answers from the United States Department of Labor. In particular, we should demand that the DOL make it clear that:
Each of us alone can “do the right thing,” but together, we can change the industry and make a true contribution to the health care crisis facing our country -- one that threatens the very foundations of our honorable profession and its work for consumers and those who actually pay for those health benefits.
