Editors note: In California Broker’s September 2019 issue Phil Calhoun wrote a well-received article about the history of commissions. In that article, Phil focused on the history prior to 1990. He promised there would be a follow up to that article and here it is. If you missed last year’s September issue, you can find it online at www.calbrokermag.com.
By Phil Calhoun
Part Two of the History of Commissions begins with story of hard work and survival, and then moves into an introduction on how general agencies formed and the role general agencies played to facilitate connections between carriers, general agencies, brokers and clients. Part Two follows the September 2019 article which covered the history of commissions prior to 1990. We now begin in the 1990s as we see the growing role of the broker, the demise of indemnity plans and the rise of HMO plans.
Commission Driven Personal Stories
Most brokers from the early days of the health insurance industry moved into health from life. These earliest brokers had began selling life insurance in the 1960s and 70s but, since health insurance was not distributed on a wide scale through independent brokers, most were unable to sell health plans. This all changed once health plans were available to sell.
At this time the majority of brokers who added health insurance to their portfolio were licensed to sell life insurance and disability. Many of these brokers had several clients, both individuals and small businesses, and when health insurance came along and carriers opened the door these brokers jumped on the opportunity to sell medical plans. Of course, brokers had clients that were a built-in prospect base to offer health insurance.
Two agents exemplified this history.
Scott Dutenhoefer got his license in 1971 when hired by Fidelity Union Life insurance group where he had become a policyholder immediately upon his college graduation. Then, as Scott looked around for work, he decided to join the life insurance sales team of Fidelity, the same company where he purchased his first life policy. He worked lead lists hard and sales added up slowly as he made a good living mostly selling to college students about to graduate. Once health insurance sales opened to brokers in the 70’s Scott acted quickly and got appointed with Blue Cross. Scott’s timing was excellent. He continued with life sales for 10 more years and sold health policies to his life prospects. Scott built his business and was able to afford a home in Orange County, raise a family and provide for his wife and plan his future retirement. Recently Scott sold his group business and spends time on Medicare and financial planning.
Scott often led with life insurance and sold health when the prospect said no to a life policy. Most of the time Scott got two sales and made twice the commission on one client!
Don Goldmann also worked in the life industry when he first started his insurance career. Don moved into the health benefits profession after starting with life insurance. Many life agents and brokers have similar stories centered on this opportunistic shift where carriers opened sales of health plans to the outside brokers who gave selling health insurance a try. While selling policies, Don also focused on building relationships within the health insurance industry. These relationships became a bonus for Don as about the time carriers opened the door to brokers Don was poised to connect general agencies with carriers to access the large numbers of brokers who could sell their health plans. Initially, Don oversaw the general agency development for the MetLife medical HMO plans. The carriers preferred general agencies since the recruiting, contracting, training and underwriting, were outsourced. Don had great success connecting carriers with general agencies. Don knew brokers would be excited about the compensation for new and renewal commissions and foresaw this opportunity and connected several general agencies with carriers.
Don was in position to play a key role to link carriers with general agencies just as carriers began to select general agencies in the mid 1980s.
The Beginning of General Agencies
Many carriers entering the health plan market did not have an inside sales force capable of enrolling enough individual prospects. To be competitive and enroll new business efficiently, carriers decided to access independent brokers. Carriers worked through general agencies to reach large numbers of brokers. This move not only proved to be a viable method to add policy holders in the 1970’s but has held true today. General agencies brought their values to carriers as they handled all aspects of supporting independent brokers. Carriers at this time made the move from exclusively selling through inside sales teams to working with independent brokers through general agencies. To this day the multi-level distribution channel involving carrier-general agencies-brokers remains a highly effective way to reach customers.
While other HMOs worked with brokers to sell large group plans (defined 25 employees and up in those days), MetLife was the first to work direct with outside brokers and they paid competitive small group commissions, which gained the attention of health brokers. MetLife commissions were competitive at 20% new and 10% renewal. High commissions were needed as premiums were very low in the 1970s and 1980s and brokers needed motivation to sell. MetLife also was the first HMO to commit to distribution through the newly minted general agencies that were starting to come to market. MetLife’s first three GAs included Word & Brown, Group Benefits Shoppers and AIM Marketing.
Don Goldmann helped carrier and general agencies link together to access brokers in California. His first major effort was linking MetLife with general agencies. Timing and relationships were the key for Don along with representing the best plan available when HMOs first reached the market. “MetLife’s small group HMO plans rose to the top of the new style quoting reports that newly minted general agencies were promoting,” said Goldmann The HMO plans wanted to gain attention so being placed on page one of the quotes, since the quotes were often organized by the size of the deductible associated with indemnity health plans, became ideal placement. Since an HMO had no deductible and were cost effective, a top placement and ranking in a general agency’s quote caught everyone’s attention, according to Goldmann.
“HMOs like FHP, Kaiser, CaliforniaCare, Maxicare, General Med and eventually Health Net rose up over time to compete with MetLife. HMO plans initially had trouble competing, however, because MetLife developed significant market share and broker loyalty when they led all carriers by paying brokers healthy commissions,” stated Goldmann.
Health Plan Changes
During the 1990’s competition on indemnity health care plans intensified when HMO plans decreased the cost of premiums. It was during this decade that indemnity premiums crossed a pricing threshold and became more expensive than almost all of the HMO plans. PPO plans came to market as a reaction to the HMO/pure indemnity pricing comparisons. PPO plans essentially gave indemnity focused carriers a new plan that was initially competitive with HMO plan premiums. During this period carriers increasingly worked with independent brokers in order to more effectively bring their plans to prospects and add market share affordably. Once again independent brokers played a key role in the marketplace as they were able to accelerate a carrier’s expansion into a new market.
PPOs were popular and indemnity plans became harder to sell. As a result, PPO and HMO plans grabbed market share due to lower prices than indemnity plans which had no way to compete on cost management. Brokers helped educate consumers on why indemnity plan pricing was too high compared to options and consumers responded with a move to more affordable PPO and HMO plans. Brokers showed decision makers why indemnity health plans were no longer competitive as they had no physician network and rich benefits and required underwriting. Brokers selling indemnity plans had to send applications in and wait for underwriting approval. Underwriting was complex and confusing, which put brokers in the position to help clients understand complex new issues like participation, pre-existing conditions limitations, and coverage and charges definitions. Provider networks were not an issue with indemnity plans compared to HMO and PPO plans since indemnity plan members/policyholders could go to any doctor. Cost controls were absent as doctors were paid on a fee-for-service basis with no contracts or ceiling on how much could be billed. Eventually doctors did contract with carriers to be paid based on a “usual, customary and reasonable” standard which allowed doctors to bill, get paid a portion of their charges, and balance bill direct to the patient who was responsible to pay the remaining balance. This pricing structure did not place enough control on the cost of the care and eventually indemnity plans of this nature were priced out of the market in favor of the cost controls of PPOs and HMOs. Doctors were not pleased with the result of this change in their payment structure, but the market moved and brokers helped lead the way.
Carriers and Commissions
From the beginning, Blue Cross used mostly inside sales reps when the health plans were indemnity based. The change to HMO plans moved the needle as the competition imposed by the HMO plans was the reason Blue Cross started a non-profit called Health Net as a subsidiary in 1992. This move coincided with a move by Blue Cross to “for-profit status” as Blue Cross became a public company. The public company change required Blue Cross to move its HMO business to Health Net, the new company formed for this purpose. Also at this time, Blue Cross created a new public entity called WellPoint (1992) to operate its managed care business.
Leonard Schaffer, the Blue Cross CEO during this change to a public company, was generally credited with the rapid success of Wellpoint. He led the way as Blue Cross shifted sales strategies and moved to an independent broker network. During this period, carriers would often implement changes rapidly. Case in point: within a few week time period the entire Blue Cross inside sales group, which consisted of hundreds of employees, were released to sell as independent contractors. Also at this time a newly created general agency known as CIMS (California Insurance Marketing Services) became a general agency working with Blue Cross.
With one of the largest PPO networks in the state, Blue Cross’ commitment to independent brokerage and general agency sales exploded opportunities for brokers. Following this lead, Blue Shield and even Kaiser embraced the value of selling through independent brokers. Again brokers benefited from carrier competition and the support of general agencies.
Carriers found independent brokers a cost effective distribution channel
Initially HMOs were sold direct to consumers through inside representatives. FHP broke the pattern in the mid-1980s and worked with independent brokers selling large group medical plans. Most HMOs followed FHP’s lead. MetLife, General Med, MaxiCare and CaliforniaCare and PacificCare, along with Health Net, Blue Cross, Blue Shield and Kaiser all decided to work with independent brokers.
Due to the success brokers had with sales, carriers valued both independent brokers and general agents and this distribution system became a fact of life by the late 1980s. This system, while profitable for the brokers, was equally profitable to the carriers as they were able to reduce selling costs. However, as could be anticipated, the growth of an ever-greater percentage of a carrier’s sales through “non-employees” had a blow back effect of sorts.
Commission Tension Between Brokers and Carriers
In the late 1980s, Blue Cross was first to mandate minimum sales for brokers to keep commission renewals. Brokers with fewer sales per year than the contracted minimum required were forced to turn to the general agencies as a way to deal with this carrier pressure. This move was pursued by a few carriers as they tried to deal with ways to restrict continual commission payments to brokers and to deal with the impact of vested commissions. At this time the fear was high that other carriers would follow suit. The dynamic created by rising premiums resulted in greater payouts for brokers with commission contracts tied to a percentage of premiums. Some carriers saw the solution was to move to pay based on a per-member-per-month payment. When brokers rebelled against payment based on per member per month, the move failed.
Love and Hate—
While brokers enjoy bringing new plans and carriers to clients, in some cases it pays to watch out for changes. Having a Plan B is suggested to deal with those times when a carrier makes a significant change.
Brokers need to be aware and have a Plan B ready
Some painful reminders:
- Assurant in 2014 decided to cut commissions to 1% (from 20%/10%) after open enrollment in late 2014. Enrollment for IFP closed and when brokers received the email close to year’s end they had no time to move clients.
- Health Insurance Plan of California, a failed state specific choice based small group platform that began in 1994 and was conceptually similar to Cal Choice. In an effort to revive the failing program it was renamed PacAdvantage and managed by the Pacific Business Group on Health Group. It was modeled after large employer pooling concepts but allowed small employers to go direct to HIPC without a broker. If a broker was used broker fees were published. Brokers were paid less when placing business with HIPC than outside or direct to the carriers. Brokers fortunately had California Choice available with better service, support, lower premiums and fair commissions. The HIPC closed in 2006 after 13 years and who knows how much tax payer support.
- PacifiCare pulled away from brokers. One example of what can happen was PacifiCare. PACIFICARE, not UHC, was the carrier who re-did commissions and sent brokers new contracts to modify vesting. Around 1995 PacifiCare decided to mail new broker contracts in which they could cancel vesting at any time while working to build an internal sales force. Sales from brokers dropped so fast that this move was made for one year only and then PacifiCare returned to work with brokers.
- 2016/2017: IFP compensation changes! From 10% downward to either 1% or 2% or a flat dollar amount.
- Small Group compensation changes. In 2016, commissions changed from 7% to 8% downward to 5%.
- Blue Cross provided notice when they pulled their individual plans out of most California markets in 2018 following UHC, Aetna and others who never entered the California market when plans turned metallic. Now in 2020, Anthem is coming back to some counties!
Note to the wise broker, read your carrier contracts to understand the risks to commission renewals and changes in commission amounts. With new carriers, check the compensation terms as vesting is often not included giving the carrier the right to change the amount paid possibly on a retroactive basis.
Read your carrier agreements and understand which carriers offer options to vest and also transfer commissions. When carriers allow vesting you generally have the option to be inactive for a period of time and still get paid.
Today commissions may or may not be comparable to the percentage of commissions in the past because the guaranteed nature of the market has increased the number of possible sales and the average premium per sale has increased tremendously. One way to look at the changes in commissions over the most recent five years is to appreciate how premiums have doubled since 2013 and how even though commissions dropped from 7% to 5% for group, the net impact is important to consider.
For group: The recent 25% drop in small group commission would be matched once three years of 8% annual premium increases happen. With the recent three year history of premium increases we have washed out the 25% reduction.
For IFP the math is different. A drop from 10% to 1% or 2% is another story. Look for changes to this IFP commission structure as our professional associations work to build the commissions to 5%. This request, if accepted, will be due to Covered California listening to appeals and recognizing the value a broker brings to consumers.
The message to brokers is keep involved with clients, consistently build the value of your role as a broker, and carefully pick the carriers you choose as your business partners.
We could all write stories about how the ACA impacted us, our clients and our industry. Many brokers have shifted to sell (more) life, annuities and ancillary products since the ACA began. Medicare is a viable product line to consider as Medicare enrollments are on the increase. Since business owners, employees and friends often mirror the age of a broker, most brokers aged from 50 to 70 have added or jumped into the Medicare market with great success. With more boomers retiring, more business owners are retiring. Adding Medicare just makes sense. Commissions for MAPD have increased, which helps. Future increases will be tied to federal government increases in Medicare, which in recent years has proven to be positive. Also, Medicare supplements pay a fixed percent so brokers earn more as the policyholder gets older and premiums rise.
For the Future
Current legislation in California that applies to commissions is often made available in news sources such as the John and Rusty Report or California Broker magazine. Often carriers update brokers on legal and industry changes. CAHU and NAHU, as well as your local underwriters association, provide solid commission updates pertaining to laws and bills.
The federal focus is on ACA and more changes are likely so we will see how the marketplace responds. California legislature for now is moving independent of federal efforts and sometimes in counter or opposite ways. So remember the state impact is often what broker’s need to address.
Tips for All Producers/Brokers
John Evangelista started his own agency in 1997 and has consistently added clients over the past 22 years to reach a solid base of both group and individual clients. Often agents find that large cases can result in substantial boosts in revenue. John knows what it takes to build a consistent income and commission stream. He suggests producers review their business development plans to incorporate these tips:
Join a professional association to learn, network and avoid repeating mistakes. Find a subset of colleagues and gather to share knowledge and connections to help one another.
Prioritize educating yourself on health benefits before studying the nuances of other insurances such as annuities or life.
Remember we are in a relationship business. Pick partners who over time can help you be more successful. Build and work on these relationships by making friends. Maximize client relationships with referrals. Lean on general agencies for technical support and choose insurance partners who can help you meet more client needs.
Understand the competition. Some individuals and companies are your friends; others are your competition. Screen ancillary brokers and payroll companies. Even CPAs can be licensed and take business away from you. If you refer to a professional and they do not reciprocate, they likely have a health broker referral relationship so confirm and move on.
Know your bread and butter. Develop and become a specialist in one health insurance product line at a time. You do not need to know P&C if you have a trusted P&C broker relationship. The same goes for other lines of insurance.
Finally, follow legislation and get involved in your industry. Seeing the wave before it hits can boost you and your business. Looking back, HSAs were a boost for early adopters. Cal Choice similarly opened doors and led to an increase in business. What will be the next early adopter employee benefit plan or program that could bolster your business?
Last Thought: Succession
Once you build your commissions to a point, all of your work is at risk without a plan to protect your commissions. Even a younger broker needs a successor who can step in to protect their commissions in a life event, as carriers will stop paying based on loss of certification or licensure. A handshake or verbal agreement with a successor broker is not enough. A formal agreement with a broker colleague is the best practice to keep commissions coming and paid as desired. For health brokers a written agreement often called a “commission protection plan” is best. David Ethington, 33, started 8 years ago in the health insurance industry. Today David is part of a team that works to protect commissions for brokers. “All brokers need a successor broker to protect their commissions in a life event,” states Ethington. After he helped grow agency revenues with his colleagues on a base of group, Medicare and IFP, David realized aging brokers needed help to protect their commissions to prepare for unexpected events. “For a broker who wants to sell their commissions, our team can help them. For brokers who want to stay active but have no formal commission protection, our successor program is a solid solution for active brokers to implement,” says Ethington. His company website has information on how to protect commissions including a growing library of videos and a handbook on the topic.
Phil Calhoun Integrity Advisors is the author of The Brokers Guide: “How to Protect, Grow and Sell Health Commissions,” which will be available in early 2020. Phil can be reached at 714-612-0306 or firstname.lastname@example.org
Special thanks to:
David Ethington, broker advisor. David can be reached at email@example.com or 800-500-9799. Website: https://commission.solutions/
Scott Dutenhoefer, active California broker since 1970. Scott can be reached at firstname.lastname@example.org.
John Evangelista, district general agent, Colonial Life. John can be reached at email@example.com