Fee Fi Fo Fum!
The Patient Protection and Affordable Care Act is beginning to change the health insurance market landscape. Given the act’s requirements, some of the changes, such as the elimination of annual and lifetime coverage limits for “essential benefits,” were wholly predictable.
But other changes are being developed as a reaction to other mandates contained in the act, such as new fee arrangements piloted by several carriers.
For firms considering expanding their use of fees in lieu of (or in addition to) commission-based compensation, these proposals are ideal at some level. They will:
- Provide draft fee agreement templates for brokers and clients
- Bill and collect fees from clients and remit them to brokers as part of premium collection for firms that desire this, and
- Ensure policy forms will encompass the new fee arrangements.
Each brokerage is expected to negotiate fees with each client. Individual brokerages remain free to use their own agreement templates and to bill and collect their fees. The carrier offer to handle that administrative burden, however, clearly eases any transition to a fee model.
Another benefit for firms seeking to more broadly use fee-based compensation, is the carrier obligation to ensure policy forms filed with state regulators allow fee-compensation arrangements—for example, ensuring filings are “net of commission.” Although the proposed fee arrangements appear to be permissible, we question whether this model is viable nationwide without statutory changes in some jurisdictions.
Brokers must consider whether additional licensure is necessary and whether there is any impact on the ability to continue to collect contingent or override compensation if they use these arrangements.
We have identified four primary legal issues your firm should evaluate when using these arrangements.
Overall Permissibility. The arrangements appear to be impermissible in at least six states: California, Iowa, New Jersey, North Dakota, South Carolina and West Virginia. These states prohibit fee collection for insurance placement activities. New Hampshire also prohibits such collections in the 50-and-fewer market.
California has determined these arrangements are not allowed because agents are generally prohibited from collecting fees and any producer who sells health insurance must be licensed as an “agent” under California law.
Contingent Compensation/Overrides. Six states—Colorado, Delaware, Florida, Kentucky, Maryland and Nebraska—prohibit producers from collecting fees for health insurance policy placement while also collecting compensation from the carrier related to the placement. New Hampshire imposes this rule on the over-50 group market. It is unclear whether regulators will apply this prohibition to contingent compensation and other carrier-provided bonuses, but it merits monitoring.
Most states that allow placement fees have disclosure or written agreement requirements before fees can be collected. Although the carrier fee agreement templates should satisfy most of these requirements, your firm should ensure the templates specifically disclose carrier-related compensation you may receive under most state fee and commission disclosure regimes.
Licensure. The proposed fee arrangements trigger additional licensure requirements in at least four states. In Georgia, Kentucky and Maine, brokers must be licensed as counselors or consultants. In Oregon, small-group brokers must be licensed as consultants.
Rate/Form Filing Requirements. In four states, the law requires placement fees be included in the policy and rate filing. Arkansas, Hawaii and Tennessee filings simply stipulate that placement fees will be negotiated between brokers and clients. We will not know this definitively, however, until these states have reviewed and approved some filings.
Louisiana prohibits insurers from quoting premiums “net of commission.” The quoted premium must be a specific dollar amount inclusive of all consideration charged for the insurance or its procurement. The Louisiana insurance commissioner has said he will not approve carriers’ fee-based compensation.
Alabama, the District of Columbia, Maryland, Massachusetts, Montana, New Mexico, South Dakota, Virginia and Wyoming have a generic requirement that all “charges for insurance” must be included in the policy and approved rate filing. Service fees do not constitute “charges for insurance.” However, carriers should still ensure that their policy filings in these states are clear that policies are being placed on a net-of-commission basis and placement-related compensation is negotiated between brokers and clients.
The new carrier-mandated fee arrangements clearly present a set of challenges, but they also may present an opportunity previously unimaginable: having the carriers lead the effort to clear the state-law underbrush that can make it so difficult to navigate a fee environment. If you use these arrangements, be sure your fee arrangements and the carriers’ associated policy filings satisfy all their requirements.