Controlling rising employee benefits costs requires an understanding of the drivers within your employee benefit programs that are controllable and then taking corrective action. If you are an employer with over one hundred benefit eligible employees then one of the drivers which plays a part is the way your employee benefits broker is compensated- Commissions vs. Fees.
As employee benefit advisors we know the first item to look at to assist in lowering the trajectory of future cost increases is to examine how the broker or advisor is being compensated. No, we are not talking about a race to the bottom to see which brokerage firm can provide the cheapest annual cost. We’re talking about how employers compensate an employee benefits broker. The typical arrangement is on commission. The brokerage firm receives a percentage of the medical premiums as compensation for their services. The employer pays their premium to the insurance carrier or Third Party Administrator (TPA) and the carrier or TPA passes the commission on to the broker. While the commission may be a fixed percentage from year to year, left unchecked the actual dollar amount your brokerage firm is receiving each year is increasing, mirroring your medical premium increases. This compensation is disclosed on a Schedule A and then in your annual 5500 filing.
So let’s think about this for a second. Your medical premiums are rising each year due to several cost drivers, some within your control and some not: Utilization within your group, medical inflation, pooling or stop-loss charges, premium taxes, PPACA fees and so on. A brokerage firm compensated on commission, a percentage of premiums, is receiving an increase in compensation based on all of these factors added together each year. In what universe does this make sense for the client? A better approach is for the client to compensate the brokerage firm on a flat fee basis, removing this lift in compensation each year.
In a flat fee arrangement the broker’s interest and the client’s become aligned. The client wants lower benefit costs and the broker now has a burning desire to control costs to justify their existence because the client is directly paying their fee. In a commission scenario how upset is the broker really if the client takes a 7.8% rate increase? Their commission just went up 7.8%. What extra value did the brokerage firm or broker provide to justify the 7.8% increase in their compensation? Under a flat fee arrangement the broker’s fee to manage a client’s medical program may increase, but the increase will be tied to increased value and services, not medical premium increases.
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