By Phil Calhoun
While commissions may not be the reason professional health benefits brokers chose this field, the beauty of persistent commissions is unique to our industry. Brokers enjoy the benefit of a sale that leads to commissions which are consistently paid, most often monthly. Over the years we’ve faced threats and learned valuable lessons. As our industry evolved through numerous changes, this rich history can be helpful to more clearly look at today’s challenges. Some of our current concerns are not as unique as they often seem.
Understanding our current payment model and how it has evolved over time is a great launching point. Persistent commission payments are the envy of many professionals. Sometimes it is hard to explain to outsiders how recurring monthly commissions allow us to earn a consistent income. Commissions are a function of the market and arose because the nature of the business is complex—choosing the right insurance plan is quite complicated, and studies show that many people end up choosing a less than optimal plan when they solely rely on their own judgment. Brokers therefore must stay well educated to serve clients by matching them with appropriate medical plans offered by insurance carriers that require monthly premium payments. Insurance carriers need brokers to consistently support clients and usually prefer to employ an outside sales force. This gave rise to the role independent brokers play in medical plan distribution. Without this demand for highly skilled independent benefits professionals, commissions would vanish. It is because of this demand for talented brokers that we are able to build a business. And a business with persistent revenue has value.
Why Be a Broker?
A career based on health commissions works well for some people. Compare the income a health benefits professional can earn with other professions that require four years or more to earn advanced degrees and certification to get a job and move up the ladder.
- A teacher with four years of experience and a Master Degree earns $75,000 a year.
- A hospital-based physical therapist with a doctorate degree and four years of experience earns $85,000.
- A communications grad with a bachelor’s degree after four years earns $65,000.
- Compare this to a health broker who can reach $75,000+ annually when they work hard and continually grow their book over four years. Look beyond the four years and the health broker’s ability to work hard and increase commissions by more than a 5% wage adjustment annually looks very strong.
Many professionals look at our industry and call our monthly checks “mail box checks” since as long as clients are pleased with the service received, they pay their premium and the checks keep coming.
The history of health care shows how rising costs led to a need for health insurance. Rising insurance rates link to how broker commissions evolved. For newer brokers, this history may be so remote it is hard to relate to their experience today. A review of commissions can give all brokers the background which shaped our industry. As we walk through time we can see how the early health brokers, plan reps, carrier reps, and general agencies led the way. Perhaps one of the greatest take a ways that holds true today is that the harder one works to win new business and retain clients, the greater the satisfaction gained from building a living for yourself and loved ones.
The history of commissions is directly related to historic events involving economics, health care, politics, war and the marketplace response to these events over time.
Our industry is the result of government laws and regulations which impacted healthcare service delivery and medical care costs. These events caused numerous changes that eventually opened markets that drove opportunity for brokers to enter the equation. The role of brokers arose from the growing demand for health insurance and the eventual role General Agencies played in medical plan distribution. The door swung wide open for independent brokers in 1970s.
Before WW ll many government departments provided oversight of both health care delivery and the few medical plans available. Some government divisions such as the Department of Corporations (established in 1914 and removed from insurance duties in 2013), the Department of Insurance (established in 1868), and now the Department of Managed Health Care contributed to the evolution of our industry. Through time and today as well, the impact of powerful lobbies such as labor unions, the American Medical Association (AMA), and eventually insurance carriers and politicians, shaped new laws as much as blocked efforts to pass potentially harmful laws. This roller coaster ride continues and sheds light on how our professional lobbying organizations lead the way, providing collective support and representation for all health brokers.
Industry milestones linked to commissions
1940s—Employer Sponsored Health Insurance: The end of WW ll spurred a shift to high employment as industry and markets exploded. This growth resulted in increased competition for hiring and retention. To compete for employees, businesses began to offer health insurance coverage as a way to win out over their competitors. Although in the late 1940s brokers were not able to sell medical plans because the large employers dominated during this time. It was the beginning of the employer-sponsored health insurance market. Today there are more mid and small employers and in California 47% of all Californians get their health insurance from their employer.
1965—Medicare: President Lyndon Johnson proposed an expansion of the Social Security Act of 1935 to address the need for seniors and disabled citizens to access affordable healthcare, both through physicians and hospitals. Johnson signed the Social Security Act of 1965 which laid the groundwork for what is now known as Medicare and Medicaid.
1973—Health Maintenance Organizations (HMOs): The HMO Act of 1973 signed by Richard Nixon was passed in spite of the efforts of the AMA to shut this law down. The AMA had a successful record of blocking legislation for years. This time, the law passed with the support of businesses and individuals who responded to the promise of lower premiums and lower health care costs.
The HMO Act provided direction to HMO programs and encouraged HMO plans to use cost saving measures such as preventative care. The HMO Act eventually opened the market to carriers offering Medicare HMO plans through brokers and then Medicare Part D plans through field marketing organizations (FMOs). Brokers were paid commissions when enrolling clients into HMO plans. Once the market accepted HMO plans, prices became competitive. When doctors contracted with the HMO plans, this change enabled employers to offer their employees medical plans at a lower cost than PPO plans. California led the way accepting HMOs. The first HMO plans were required to be non-profit which created more change in the market.
This pivotal act also drove the development of Independent Physician Associations (IPAs) which organized solo physicians into formal and informal groups to negotiate prices with insurance companies. Many of the larger medical groups in California were formed to build primary care physician negotiating leverage with HMO carriers.
1975—MetLife first to market with small group brokers: In 1975 MetLife opened the door to independent brokers to sell their health plans direct to customers. Prior to MetLife, HMOs were sold through the plan’s employee sales representatives. Commissions to brokers with the original MetLife plans were paid at 20% new and 10% annual renewal, the first persistent commission plan for small group medical. Because brokers responded and enjoyed success with this compensation model, its set the stage for other carriers to do the same.
MetLife had initially started offering indemnity health insurance plans in 1921, so it took the marketplace years to push the carriers to work with independent brokers. The trend for carriers to pay persistent commissions to brokers began as noted in 1975. Premiums from this period were $30 for an individual for a PPO and $60 for an HMO. This difference between the PPO and HMO commissions began to draw closer in just a few years due in large part to aggressive management of medical costs and a shift by healthy individuals to sign up with HMOs.
Kaiser aligned with MetLife and began paying brokers in 1975 for group medical business.
1992—Pre-existing conditions eliminated: AB 1672 passed in 1992 protecting employees access to coverage even with pre-existing conditions. The market response to this California assembly bill was to eliminate the need for underwriting of group medical plans and spurred expansion of the role of General Agencies. This enabled independent brokers to sell health plans to employer clients. Employees could now move to another employer without losing their health plan access. Employers began to offer group plans more often as all eligible employees could get coverage.
- commissions were leveled and rates were age based
- no underwriting was necessary
- carriers offered bonuses and retention incentives to brokers
Additionally, all Master General Agents (MGA) now had to follow Guaranteed Issue rules which reduced the value of many association plans.
2003—Medicare Part D Begins: George W. Bush updated Medicare to include prescription drug coverage with the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 [https://www.ssa.gov/history/tally65.html] (Medicare Part D). Enrollment was (and still is) voluntary, although millions of Americans use the program due in part to the penalties of not enrolling when eligible.
Medicare Advantage carriers added Prescription Drug Plans (PDP) and insurance carriers offering Medicare Supplement plans fed policyholders into the PDP market. All of the PDP plans pay commissions to brokers who are certified annually and shop during open enrollment for PDP options especially when clients experience a medication change. Currently, many PDP options are available and provide brokers the ability to help educate their clients.
2003—Health Savings Accounts
The Medicare Part D law included tax deductible Health Savings Accounts (H.S.A.). Brokers offered the required carrier high deductible plans to match with H.S.A.s. Premiums for the qualified high deductible plans were lower and opened the door for brokers to educate clients and prospects how these plans worked. This served to both retain clients and win new group business.
Throughout history politicians have tried to get various forms of socialized medicine passed. Some of these include:
- 1943 Wagner-Murray-Dingell Bill—The bill proposed universal health care funded through a payroll tax. Viewed as socialized medicine the bill never came close to passing.
- 1961 Single Payer Plan—Senator Edward (Ted) Kennedy proposed a single-payer plan that would be funded through taxes. Again, the perception was that this was socialized medicine and the plan never got support.
- 1993 Health Security Act—President Clinton tried once again to pass socialized medicine with the Health Security Act of 1993 but this bill died quietly after many public hearings and push back from many lobbies.
2014 Semi-socialized Medicine?
The Affordable Care Act was signed by President Obama in 2014. Signed as the Patient Protection and Affordable Care Act (PPACA) it was commonly called the Affordable Care Act (ACA). No Republicans voted for this law but the Democrats had a majority in the house and senate and were able to push through and pass the bill. The law was complex and consisted of thousands of pages. Due to the bill’s complexity, the ACA was rolled out over several years. ACA was passed as an effort to help the uninsured get health insurance and access to medical care and also included a guarantee that all would be able to get affordable coverage. At the time, most people had insurance through their employer or were on government coverage such as Medicare or MediCal. The uninsured totaled less than 10% of the population.
Today 93% of Californians have insurance and the 7% who do not qualify are mostly not citizens. As of now, most cannot qualify for government plans.
Those states which readily support the ACA spin the statistics of how many people signed up for coverage. The enrollment numbers most cited include all of the people who already had an individual plan. In reality, most of the net newly covered California enrollment activity ended up on Medi-Cal.
Supporters promised the ACA would allow people to keep their doctor and their plan. The ACA ended up forcing all but the very largest employers, and those on Medicare and Medicaid, to change to a new ACA plan. In several cases the new plans also required a change to a new doctor. The ACA changed most individual and small group medical plans because pre-ACA plans were no longer offered. Very few groups kept old plans called “grandfathered plans” which were purchased before the ACA went into effect on March 23, 2010.
Today, several insurance carriers have dropped out of the individual market in California—UHC, Anthem and Aetna are the largest—with more carriers looking to exit. Only Oscar, Molina and a few small carriers have entered the state.
To get a premium subsidy, people were forced to use the Covered CA online enrollment process which failed on launch for several days. Enrollment took additional hours and often days to complete. The ACA claims to have 11.7 million on coverage. According to the Public Policy Institute of California, only 3% of California’s population is on Covered CA, totaling 1.2 million. Ninety percent of the 1.2 million get premium assistance—less than 3% of the total state population (39.54 million).
Another 3% or 1.2 million Californians worked with brokers to purchase individual plans direct with carriers. These off-exchange plans were simply current policyholders who lost their plans and enrolled in new metallic plans.
The California Health Care Almanac 2018 states that 2.9 million Californians remain uninsured (9% of the population) and over half have a job but their employer does not offer health insurance.
Effects of ACA
The ACA used billions of taxpayer funds to develop multiple online enrollment processes. These were designed to qualify people to receive taxpayer assistance in the form of premium subsidies. This was an effort to get coverage for the mostly young and healthy uninsured. This population expected lower premiums in exchange for lower claims. Even with financial penalties for not enrolling, more uninsured people actually qualified for Medi-Cal than expected. Health Insurance and Health Reform Authority states that today, 34% of Californians are on Medi-Cal. The number has doubled since the ACA was enacted. Thirty eight percent of total state taxes go to pay for Medi-Cal.
Scorecard: A+ on Eliminating Pre-existing Conditions
Regardless of the numerous controversies, it could be argued that the most helpful part of the ACA was its pre-existing condition clause since most states had no viable options. In California, we already had a couple of guaranteed issue options so the ACA was helpful to add more. This was at a heavy cost to address a small number of people. In California, like most states, premiums were rising annually. The ACA has not changed this as rates have doubled from 2013 to 2018. Many brokers know what people and businesses went through the past 10 years as it was health brokers who were there to educate and guide clients through the process.
The California Department of Insurance as well as many state politicians have begun to listen to our professional association leaders and a handful of broker representatives as they provide consistent messages touting the value of what brokers offer their clients.
Next month we’ll run Part 2 of the HIstory of Commissions. In Part 2, Phil will cover a number of broker stories about how adjustments were made and discuss clever connections that led the way for general agency development. He’ll also explore how competition between carriers, brokers and general agencies helped the distribution system create needed solutions. Finally, Phil will focus on how history lessons help us plan for the future.
Phil Calhoun, MBA, is a Cal Broker editorial advisory board member. He has built, sold and acquired insurance agencies and books of business. He is the managing member of Lambda Insurance Services, an elite broker education and planning agency. He authored “The Health Broker’s Commission Protection and Purchase Guide.” Phil enjoys educating brokers on how to protect their commissions through all life events. Find him on LinkedIn here: https://www.linkedin.com/in/phil-calhoun-7a59491a/