Every now and then I see an article about the benefits brokerage business moving to a fee for service model. There are always a few comments from brokers who say they have done so and everyone should go fee for service. They make it sound easy. I would contend that moving to a fee for service business model is not nearly as easy as anyone may make it sound. I would also claim that those brokers operating in a fee for service model today may have somewhat of a false perception of the market. My theory, if I can call it that, is that while there may be some fee for service business in the market there still is no real price competition for benefits broker services. When price competition enters the market then we will have an industry that will then need to undergo dramatic changes.
Let me first address my theory about the lack of price competition. The benefits business, for the most part, pays brokers a commission. Regardless of the quality of the service two competing brokers will get the same compensation. It is an unusual business environment. Now some brokers have gone to a fee for service model. The false reality for those brokers, in some cases (I don’t want to over-generalize) is that those fees are often compared to what a broker is making on a commission basis. So one broker’s fees are not compared to another broker’s fees. The fees are compared to commission. Therefore price competition isn’t really in play.
There are markets (large group in some states) where fee for service is becoming more common. Even in those markets things are not mature. What I am basically saying is that employers are still comparing what the brokers are charging on a fee basis to what they were paying in a commission world. That commission world is still a recent memory and the fee they are now paying is often less than the commission they were previously paying. So things aren’t that bad as the fees are at least going in the right direction, from their perspective. This will change in time.
There are examples where fee for service have played out in a true competitive way. In NC the market went fee for service for large group a few years ago and in one quote to a municipality the incumbent broker quoted $25 PEPM and competitive prices came in at $9, $5, $2.50, and $2 for what was being presented as the exact same service. The incumbent was not even asked to be a finalist. This was true price competition and the market drove down prices significantly.
The reason I am writing this is because I think with Aetna moving to a fee for service model for their small group, and now purchasing Humana (if approved), we may see a much faster move to a fee for service model for all medical insurance sales. Another catalyst may be the upcoming rate battles between the insurance carriers and the Exchanges for the 2016 rates. What I am reading is that the carriers in many states are requesting rate increases from 15% – 35%. The federal and state exchanges are going to fight these rate increase requests and one casualty in this battle may be broker commissions. Carriers, to get their prices down, may move to the Aetna model of having the employers sign-off on how much they want to pay their broker. If this happens then you will have rapid price competition, something the benefits business has really never seen in the past.
In the comment section of one of the recent articles about the Aetna move to fee for service on the Employee Benefit Advisors website one writer said the following:
“Personally I believe that good agents who deliver real value should be cheering from the rafters. It is easy to talk about how much you are worth as an agent when the client has no idea what you are getting paid and no choice. Personally I hope that all medical carriers make this move. If they do I will get back into the group medical business.”
While this may sound noble the reality is that even in markets where people do deliver valuable services the difference in quality is hard to measure. Even those that provide good service will see margins go down and would not be cheering from the rafters. Price competition will impact all, both good and bad.
Most brokers have not had to operate their businesses with price competition. Price competition, in most instances, results in lower margins and thus lower profits. If margins are lower then the whole way benefits brokers operate their businesses may have to change. It will impact their staffing, the services they provide, internal operational practices and even incomes. The sales and marketing process will also change dramatically. Having to battle price competition is not a skill most benefit firms have developed.
I think there is a high probability that price competition will enter the benefits business and it will happen so fast most brokers will not be prepared or equipped to respond. It is best to anticipate this potential major business shift now. I have written a lengthy white paper titled, “A Path to the Future of the Benefits Business” that outlines the plan to compete in this new benefits environment. Benefits brokers may request this by sending me an email at firstname.lastname@example.org.
I administer a Taft Hartley plan and in recent years we have had a mix of commission and fee for service. We just adopted a policy of fee for service only and I am notifying carriers that we do not want any commission agreements going forward. I agree that this shift will likely reward some and diminish others. From my view this is a good thing. I do think it will favor the larger firms over the smaller, boutique firms. It does, however, raise the possibility that we might see more “pay for play” issues – especially for public sector plans.
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