Does it even matter how your broker gets paid if they are paid by the insurance carrier?

Let me stop you right there. First of all, your broker may be paid by the insurance carrier, however, as a business with a group health plan, you are the one footing the bill.

Understanding how your broker gets paid may shed some light on the way they manage your business' needs. The two most common forms of broker compensation we see in the market are a commission percentage paid on the total premium and a per employee per month (PEPM) fee for service. Less common may be a one time fee paid by smaller groups.

For the purpose of this article we are going to focus on the influence of fee for service versus percentage of commission on brokers' decisions in choosing the best group health plan for your business

When it comes to selecting a group health plan for your business, it is undoubtedly a crucial decision that requires proper research and analysis. You need to consider several essential factors such as budget, insurance provider, and the broker's role, not just in choosing the most suitable plan for your company, but also beyond that in their scope of service.

However, one significant factor that often goes overlooked is the influence of the fee structure of the insurance broker.

Fee for Service versus Percentage of Commission:

Fee for service is a structure where brokers charge a fixed fee for the services they provide, regardless of the insurance plan you select. This means that brokers are not influenced by any decision that favors a specific insurance provider. On the other hand, a percentage of commission is a structure where brokers receive a commission based on a percentage of the insurance premium you pay. This could incentivize a broker to choose insurance plans with higher premiums or a higher percentage of commission as it results in higher revenue for the broker.

The Influence on Brokers' Decisions:

In a fee for service structure, brokers are more likely to offer impartial advice as they do not have any preference towards a particular insurance provider. They are not incentivized to choose a plan based on the commission they receive, but instead on what is best for your business. This means that brokers will analyze all insurance plans and provide detailed comparisons, ensuring that you select the best plan within your budget. On the other hand, brokers who operate under a percentage of commission structure may overlook the best insurance plan for your business to secure a higher commission payout.

Common Misaligned Incentives:

One of the significant misaligned incentives in the health insurance broker space is the tendency to recommend higher premium plans. This is because brokers receive higher commission payouts from insurance providers for more expensive plans. As a result of this, they may recommend a health plan that costs more than what your business may require, thereby increasing your overhead costs. Additionally, some brokers may receive bonuses and incentives from insurance providers for meeting specific sales quotas. This puts the broker's interest in making sales ahead of the client's best interest, which can result in inferior health plan recommendations.

Selecting the right group health plan for your business requires careful consideration of various factors, but the fee structure of your broker must also be considered. The fee for service model ensures a more impartial and comprehensive health plan selection process, while a commission-based structure may lead to misaligned incentives. Brokers operating under commission-based structures may prioritize personal compensation over what is best for your business.

Additionally, a retention bonus can be an effective tool used by insurance carriers to incentivize brokers to retain existing clients. In exchange for renewing business and retaining clients, brokers can receive a percentage-based bonus based on the overall number or percentage of clients they renew with said carrier. This incentive can sometimes have a negative impact on decision-making, as brokers may be influenced to recommend you renew your current carrier while that may not always be in the best interest of their clients.

Another way a retention bonus can impact brokers' decision-making is by encouraging them to prioritize the renewal of certain clients over others. This can potentially affect the advice they give to their current clients when it comes to selecting the right group health plan for their needs. While the broker may provide sound advice, it may be limited by their desire to retain the client and receive the retention bonus. This can hinder the recommendations they make and ultimately not be in the best interest of the client.

In addition, insurance carriers' behavior to offer retention bonuses can also create bias for brokers towards these carriers. This means that brokers may be more likely to choose an insurance carrier that offers a higher retention bonus, even if it doesn't necessarily have the most appropriate or comprehensive group health plan for a client. This bias can be frustrating for employers who want to work with brokers who prioritize their interests and objectives.

The retention bonus system can sometimes create a gap between what is ethical and what is profitable for brokers. Good insurance brokers will balance the primary goal of retaining clients with the provision of sound advice. Brokers should tell their clients of the various options available to them and which ones are most in line with their goals. But the financial incentive created by retention bonuses can sometimes complicate this balance and blur the ethical lines of decision-making.

In conclusion, as the customer who writes the check, you should know how your broker is getting paid and understand how that may impact the recommendations you receive. If you aren't sure how much your broker is paid or even how your broker gets paid then I suggest you make time to have that conversation.