With Aetna poised to acquire Humana in 2016, industry observers have noted how industry consolidation generally and Aetna’s growing market share in particular will lead more intermediaries to adopt a fee-based compensation model. Although fee-based compensation for intermediaries is not a new concept, it is far less common than traditional commission based compensation. However, it appears increasingly likely that fee-based compensation will become much more widespread in the coming years.
Traditionally, insurance agents and brokers have been paid for their services primarily through commissions on the business they bring to insurance carriers. In addition, agents and brokers frequently received substantial overrides, bonuses, and other perks and payments from insurance companies for bringing in new business and keeping it with the same company. Many employers were not aware of the compensation paid to their agent or broker because it was “baked in” to their insurance premium.
In contrast to agents and brokers, benefit consultants generally do not receive commission from their clients’ business. Instead, consultants are paid directly by their clients for the services and advice they provide, and the portion of the premium allotted for producer compensation is cut out – with the savings passed along to the client. This type of arrangement was popular among larger employers, but was essentially unheard of in the small group market.
As Mueller QAAS CEO Jim Mueller has said for years, while it is always important to known what you are paying for, transparency in producer compensation is essential when a market is dominated by a few players and lacks vibrant competition. Since the passage of the Affordable Care Act, we have seen consolidation in health care delivery, financing, and distribution. Health care providers and hospital systems are aligning to integrate care delivery and increase their market share. The “big five” insurance companies have been circling each other for months in a multi-billion dollar game of M&A musical chairs. And insurance brokers are buying out the competition as well, from the local independent agencies all the way up to global powers like Willis and Towers Watson.
Back in 2010, Aetna CEO Mark Bertolini described a three part framework for creating transparency in his company’s commission structure. First, Aetna would allow large customers to negotiate compensation with their broker or consultant. Second, they would decouple commissions from premiums and the pressures of health care inflation. Third, Aetna would reduce the level of commissions to make their products more competitive.
Aetna recently announced that they are expanding this initiative to the small group market. Beginning this month, Aetna will no longer pay commissions in 15 states on groups with 2-100 employees. This change will become effective in other states, including Wisconsin and Illinois, in January 2016. Rather than pay commissions, Aetna will require brokers to negotiate a Producer Service Fee with their clients, which must be documented on a Billing and Collection Agreement signed by the client.
Some brokers have dismissed this as simply an effort to reduce producer compensation or evade the ACA’s Medical Loss Ratio. However, others have rightly embraced it as an important effort to increase transparency and ensure employers truly receive value from their agent, broker, or consultant. It is likely that Aetna will extend this policy to Humana clients once the merger is complete. Time will tell whether other carriers and the broker community will embrace the transition to a fee-based compensation model or try to hold on to the past.