A law change that took effect in late 2021 requires employee benefit brokers, advisors, and consultants to disclose who pays them, how they’re paid, and what they’re doing to earn their pay. Employers and plan sponsors now have an opportunity to evaluate if the services provided are in line with the compensation. The disclosures will also provide clearer insights into the financial incentives brokers receive that may not always align with a benefit plan’s best interest.
CAA broker transparency provision requires disclosure to plan sponsors
In an effort to increase transparency in healthcare costs, Section 202 of the Consolidated Appropriation Act, 2021’s (CAA’s) Division BB, which focuses on private health insurance and public health provisions, included a requirement that brokers disclose all direct and indirect compensation that they’ll receive as well as the services they’ll provide. The provision took effect on Dec. 27, 2021, and applies to all contracts renewed or written on or after that date.
What is “direct and indirect broker compensation?”
Direct broker compensation includes payments from the plan sponsor in the form of fee for services. It also (and more commonly) includes compensation that the broker receives from the insurance carrier in the form of commissions that may be calculated as a percentage of premium amounts or a flat-dollar amount per employee per month (PEPM) (or similar).
Indirect compensation includes bonuses or additional commissions for hitting certain goals or retaining business with a carrier. Brokers may get higher commissions when they renew or place business with the same carrier. A broker may also receive a referral fee or bonus for placing new business. Brokers can also be heavily incented with noncash items, including tickets to events and trips. For some brokers or agencies, these indirect or contingent sources of compensation are a significant portion of their revenue.
Misaligned incentives and mismatched value
We’ve previously explained how this compensation structure creates incentives for the broker that don’t align with the employer or plan sponsor. If the broker knows that commissions will increase when premiums increase, why would they work hard on behalf of the plan sponsor to mitigate the increase? Likewise, if a broker knows that keeping many of their clients with the same insurance carrier will mean a higher overall compensation level, they may not present their clients with more cost-effective options for placing the business elsewhere.
While employers are aware that brokers are paid commissions, many are unaware of the total compensation and incentives paid to brokers. Brokers are less than enthusiastic about the CAA compensation disclosure requirements. They’re nervous about what will happen when employers start comparing their compensation to the value they bring, and they’re uncomfortable with the spotlight it will shed on their lack of independence.
CAA broker compensation disclosure requirements will help employers get value for what they pay
Plan sponsors who rely on a benefits broker should ask when they can expect to receive their disclosure. The disclosure should include details of all direct and indirect compensation the broker receives, as well as the full list of services they plan to provide. The broker compensation disclosures required under the CAA will allow plan sponsors to ask critical questions like:
- Does the arrangement bring the appropriate amount of value?
- Are there incentives in the arrangement that influence their recommendations?
Consider the options
There are other ways to structure benefit advisor compensation that can remove most, if not all, commissions and indirect compensation from benefit contracts. For instance, the fee-for-service model shifts the dynamics of the arrangement. The advisor or consultant is paid by the plan sponsor for services and results.
Plante Moran Group Benefit Advisors (PMGBA) is an affiliate of Plante Moran that provides independent, transparent health and welfare benefit consulting services. PMGBA delivers customized solutions and cost-effective strategies to meet the unique needs of our clients and their employees.
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The bottom line: CAA broker compensation disclosure requirements can help you engage a benefits advisor that’s open to a transparent and independent arrangement where value is aligned with results. Reach out to a member of our team to learn more — we’re here to help.
