(May 2, 2005) The Next Insurance Scandal |
The Next Insurance Scandal: Health Insurance Kick-backs
We have endured the research analyst, mutual fund, and property and casualty insurance bidding scandals. We are awaiting the release of an SEC investigation into conflicts of interest involving gatekeepers to the nation’s pensions. All of these scandals involve similar business practices: companies that purport to be acting in the best interests of their clients (for a fee) are secretly profiting from ripping them off. Once the industry-wide scamming or skimming is revealed, the economics of the industry involved are radically altered. What’s this have to do with health insurance?
A company uses an insurance agent, broker or benefits consultant to locate the best health insurance for its employee group. In some instances the company may pay the broker a fee for his service; in other cases, the company understands the broker will be compensated by the health insurer. Regardless of how the broker is compensated, the company expects to receive competitive bids from the insurers and broker input regarding the best coverage available. Consistent with industry practice, the broker never discloses to the company the full extent of his compensation arrangements with insurers.
Sound familiar? As we now know, there are large insurance brokerages that have for years pretended to serve the best interests of clients who hire them, even as they steer clients to property and casualty insurers that provide the greatest kick-backs or commissions. The hidden financial arrangements these insurance brokers have with health insurance companies also are pervasive throughout the industry, add significantly to the cost of such coverage, and are easily concealed from customers.
In the health insurance arena, the commission paid to the broker is built into the premium the insurer quotes. Since premiums are based upon numerous factors considered by the underwriter related to the composition of the company’s employee group, it’s relatively easy to manipulate premiums quoted to conceal commissions. And since all the insurers pay these commissions, all quotes are inflated to some degree.
How sizable are these commissions? Commissions generally range between 3%-5% (but can be higher) and are paid monthly to the broker, out of employer/employee premiums. These are not one-time finder’s fees but are paid annually as the insurance contract is renewed. Additional substantial bonus money may be paid to brokers who write certain amounts of premium. These are referred to in the industry as “broker-bonus program” payments. While employers may have limited knowledge regarding the commissions brokers are paid by insurers, the “broker-bonus program” payments are an industry secret. As a result of the bonus payments, many employers may not be made aware of more competitive bids from other heath insurers, especially the closer the broker is to earning his annual retention bonus from the incumbent insurer. (This sounds awfully similar to mutual fund marketing where, until recently, the investor only knew he was paying the broker a commission but didn’t know about additional forms of compensation such as shelf-space payments, revenue-sharing arrangements and directed brokerage, which may have caused the broker to recommend the fund.)
Back to health insurance. For example, a company with 1,000 employees paying $1,900 a month each for family coverage would earn a broker (assuming a 5% commission) $95,000 a month in commissions or over a million yearly ($1,140,000). To this amount add the “broker bonus” payments. Still believe medical malpractice claims are the cause of escalating health insurance coverage?
For many Americans, their greatest monthly expenses are their mortgage and health insurance. Mortgage payments are either fixed or adjust within predictable ranges. Health insurance costs, however, can increase 30% a year. Family coverage can easily cost between $1200 and $1900 a month. An employee earning $10 an hour (a rate significantly above the minimum wage), working 40 hours a week for a month or $20,000 annually, cannot earn enough before taxes and any other living expenses, to pay for family health insurance coverage—if he can get coverage. We as a nation simply cannot afford this massive scamming.
In Massachusetts and New York law enforcement and regulators have been investigating these payments for quite some time. The major health insurers have been contacted for information. By now industry practices presumably are known to these officials. Health insurers are bracing themselves for upcoming public disclosure of these kick-backs. Some health insurance insiders unhappy about being forced to make these payments to brokers over the years were eager to blow the whistle and are disappointed with the delay in meaningful action. We believe this could be the greatest blow ever to the insurance brokers, given that health insurance premiums (and related kick-backs) are substantially greater than those related to property and casualty insurance.
Expect litigation, settlements and agreements to forego receipt of such future payments by the insurance brokers. How much will shares of the large insurance brokers be worth once they have sworn off all their ill-gotten gains?
Once again we are reminded that anyone who purports to offer objective advice can make far more money providing recommendations tainted by payments from the parties being vetted.