The new broker compensation disclosure law that went into effect at the end of December will add transparency to the broker/client equation—and that may benefit some brokers more than others, according to industry observers.
The Consolidated Appropriations Act of 2021 (CAA) requires brokers and consultants who work in the health benefits field to disclose compensation from sources such as insurance carriers, including commissions, fees, and non-cash compensation. The new disclosure rules are similar to rules that went into effect for the retirement plan industry about 10 years ago.
The law requires any provider of insurance brokerage services to disclose their compensation, whether the compensation is direct (bonuses and fees) or noncash (gifts such as meals or tickets). The new regulations require disclosure of direct and indirect payments to brokers that equal $1,000 or more, and disclosure of non-cash compensation that equals $250 or more.
The new requirements are part of the broader ERISA law regulations and should help employers who provide health benefits for workers through plans sold by brokers (also called service providers), according to Amy Gordon, an attorney with the Chicago office of Winston and Strawn. “Under ERISA, if you engage a service provider, the compensation needs to be reasonable,” she said. “And the only way to know that the compensation is reasonable to know exactly what those providers are being paid—and then you can make an assessment on whether that payment is reasonable compensation.”
The benefits of transparency
For some in the industry, the disclosure rules will not be a big change: a growing number of brokers already offer full disclosure of what they’re being paid by carriers. David Contorno, founder of E Powered Benefits has been a proponent of full disclosure for brokers for some time. “Most employers don’t understand how brokers are compensated,” he said. “Brokers are not out there actively disclosing how they’re getting paid, and employers are not demanding to know how brokers are getting paid. Brokers are essentially purporting to represent the interests of their clients, but they’re paid by this third party that has very different interests—that’s the problem with the system.”
Contorno added that the commission-based system that many are familiar with has strong disincentives to lower health care costs overall. “In a commission-based model, you make more money as your client’s costs go up,” he said. “In our model, we get paid a bonus by the client for lowering their health care costs.”
He noted that the changes to the 401K and retirement plan disclosure rules showed that brokers can be transparent and still do well. “That changed the industry, when those laws were changed,” he said. “It really brought fees and overhead down for 401K plans. And it really improved the performance of the participation in those plans. So, I’m hoping that’s the case here as well.”
Will the new regs affect premiums?
Gordon noted that the majority of brokers still make their money from commissions but agreed that the new transparency might give some brokers an edge. She added that similar regulations about disclosure around health insurance plan commissions were suggested at the time of the retirement plan changes but were put off when the Department of Labor (DOL) received pushback from the brokerage industry. “This has kind of been in the works with the DOL for years,” she said.
Another interesting question will be whether the new disclosure of compensation will have any ongoing effect on premiums, Gordon said. For example, if brokers start relying less on commissions, or cut back on that type of compensation as part of a competitive strategy, would that bring down costs for the carriers?
“If you ask an insurer to [quote a price] for an insurance policy on a no-commission basis, it typically does not change the premium. This is an amount that the insurers have essentially ‘baked in’ to the premiums,” she said. “I’m wondering if now this is going to shake up the industry because maybe they’re going to pay lower brokerage commissions on some products… will that essentially result in lower premiums? Right now, they say no, but I’m wondering if down the road that will change.”
What she does expect is that the transparency will have an impact on how clients/employers make decisions about what brokers they work with. Gordon said now that plan sponsors can see exactly what they’re paying for, they may be able to take a more evidence-based approach on which brokers are providing the best value for their dollars.
“I think once a plan sponsor sees exactly what they are paying for the services they are receiving… if the service provider is stellar and provides great service, and the sponsors see they’re paying a little more than they thought; I don’t know they’re going to fire that broker,” she said.
“But if the broker or consultant is just passing muster with the plan, and the fiduciary of the plan now sees, ‘we’re paying them the X-plus-20% for barely passable service,’ I think the plan fiduciary is likely to look elsewhere for better service, based on the compensation that’s being paid.”
Gordon added that most of her clients are reporting that their brokers are ready for the new disclosure regulations. “No one is saying ‘we’re not going to be ready,’” she said. “So now it’s going to be up to the fiduciaries of these plans to decide whether this is a lot more compensation than they were anticipating, and then act accordingly.”