When a traditional marketplace changes and we save money, we cheer it as “disruptive innovation.” That was one of the big ideas behind the Affordable Care Act (ACA) healthcare marketplace and Exchanges like Washington’s Healthplanfinder. Buy direct and save; avoid sales commissions. Be your own insurance broker or ask a “navigator.” But, as the Harvard Business Review crabbily observed,
In our experience, too many people who speak of “disruption” have not read a serious book or article on the subject. Too frequently, they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do.
“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses.
What appears to be disruptive innovation may just be disruptive. Lawmakers grumble that too many people have been buying “crappy” plans from insurance producers (aka agents and brokers) instead of “reformed” plans through Exchanges. Apparently, people would buy reformed plans if they knew how much money producers are making on “crappy” plans.
Congress has fixed the problem. After December 27, 2021, health plan buyers must be told how much insurance producers and others are earning from the sale of health plans. These requirements were embedded in Division BB of the Consolidated Appropriations Act, 2021 (CAA) which also included Title I (No Surprises Act) and Title II (Transparency). The CAA established disclosure standards for group health plans as well.
In proposed regulations published September 16th, OPM, IRS, DOL, EBSA, and HHS joined in developing standards for individual health plan transparency including requirements for disclosure of compensation of insurance producers to individual health plan buyers. No regulations have been proposed for group health plans although they will be like those governing employer pension plans.
The flurry of activity designed to improve health plan markets addresses perceived buyer ignorance of the money producers and others are paid to push insurance products.
Part of the increased need for transparency stems from the expanded availability of short-term, limited-duration insurance coverage. Insurance agents or brokers often receive higher commission rates for enrolling consumers in short-term, limited-duration insurance coverage compared to coverage that meets ACA requirements. There are concerns agents or brokers could encourage consumers to enroll in short-term, limited-duration insurance coverage due to their high commission rates. [Fed. Reg. at 51763]
Citing Congressional reports, HHS finds that “issuers offering short-term, limited-duration insurance coverage have business practices that incentivize agents and brokers to engage in fraudulent or misleading practices. In addition, there are concerns that there may be deceptive practices surrounding the sale of short-term, limited duration insurance.” [Fed. Reg. at 51764]
Parenthetically, HHS notes that in 2018, insurance producers were being paid 2% commissions on reformed plans and 23% on average for short-term, limited-duration insurance plans. For 2021, California Blue Shield’s published commission rates for new individual PPO plans is 1.3%. Hmmm, that is disruptive.
Group Health Plans
The CAA compensation disclosure provisions applicable to group plans are no surprise. Much of the information already shows up on required DOL Form 5500, Schedule C for compensation to a service provider paid $5,000 or more, directly, or indirectly from the health plan. In 2012, DOL reserved a spot for group health plan disclosures when they adopted disclosure regulations for pension plans. [29 CFR §2550.408b-2 (c)(2) Welfare plan disclosure (Reserved)].
The CAA statutory provisions fill that spot with standards like those for pension plans [codified at 29 U.S. Code § 1108(b)(2)(B)]. DOL’s Frequently Asked Questions about the 2009 Form 5500 provides some insight into DOL’s interpretation and application of disclosure requirements.
A group health plan administrator may use plan assets to contract for reasonable services necessary for plan administration. Any contract executed on or after December 27, 2021, between a group health plan and a “covered service provider” who “reasonably expects $1,000 or more” in direct or indirect compensation is “unreasonable” unless certain disclosure requirements are met. The contract threshold applies “regardless of whether such services will be performed, or such compensation received, by the covered service provider, an affiliate, or a subcontractor.”
(bb) The term “covered service provider” means a service provider that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 (or such amount as the Secretary may establish in regulations to account for inflation since December 27, 2020, as appropriate) or more in compensation, direct or indirect, to be received in connection with providing one or more of the following services, pursuant to the contract or arrangement, regardless of whether such services will be performed, or such compensation received, by the covered service provider, an affiliate, or a subcontractor.
(AA) Brokerage services, for which the covered service provider, an affiliate, or a subcontractor reasonably expects to receive indirect compensation or direct compensation described in item (dd), provided to a covered plan with respect to selection of insurance products (including vision and dental), recordkeeping services, medical management vendor, benefits administration (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness services, transparency tools and vendors, group purchasing organization preferred vendor panels, disease management vendors and products, compliance services, employee assistance programs, or third party administration services.
(BB) Consulting, for which the covered service provider, an affiliate, or a subcontractor reasonably expects to receive indirect compensation or direct compensation described in item (dd), related to the development or implementation of plan design, insurance or insurance product selection (including vision and dental), recordkeeping, medical management, benefits administration selection (including vision and dental), stop-loss insurance, pharmacy benefit management services, wellness design and management services, transparency tools, group purchasing organization agreements and services, participation in and services from preferred vendor panels, disease management, compliance services, employee assistance programs, or third party administration services. [29 U.S. Code § 1108(b)(2)(B)].
Note that the group plan disclosures apply to dental and vision while the individual plan disclosures do not.
Here are the statutory disclosure requirements for group health plans governed by ERISA:
- A description of the services to be provided to the covered plan.
- If applicable, a statement that the service provider or an affiliate or subcontractor will provide, or reasonably expects to provide, fiduciary services to the covered plan.
- A description of all direct compensation the service provider or an affiliate or subcontractor reasonably expects to receive for services.
- A description of all indirect compensation the service provider or an affiliate or subcontractor reasonably expects to receive for services (including incentives paid to an insurance brokerage firm not solely related to the contract with the covered plan).
- A description of the arrangement between the payer of the indirect compensation and the service provider.
- A description of the services for which the indirect compensation is received, and the identity of the payer of the indirect compensation.
- To the extent compensation is paid among a service provider, the service provider’s affiliate, or the service provider’s subcontractor on a transaction basis (such as commissions or finder’s fees), a description of any such arrangement and identification of the payers and recipients of such compensation (including the status of a payer or recipient as an affiliate or a subcontractor).
- A description of any compensation that the service provider (or an affiliate or subcontractor) reasonably expects to receive in connection with termination of the contract or arrangement, and how any prepaid amounts will be calculated and refunded upon such termination.
- A description of the way in which any direct or indirect compensation will be received by the service provider or an affiliate or subcontractor. [29 U.S. Code § 1108(b)(2)(B)(iii)].
This information must be disclosed to the responsible plan fiduciary before the contract or arrangement is entered into, extended, or renewed. In addition, the service provider must notify the plan fiduciary of any change to required disclosures as soon as practicable, but generally not later than 60 days from the date the service provider is informed of the change.
A responsible fiduciary is a person with authority to contract for the plan. Plan fiduciaries should consider amending its existing contracts or otherwise reaching agreement with existing contracted providers to comply with the disclosure standards next year.
Individual Health Plans
The CAA and the proposed regulations require insurers that offer individual health insurance coverage or short-term, limited duration insurance to disclose the direct or indirect compensation they provide to insurance producers. This information must be disclosed before plan selection and on any document confirming initial enrollment. The insurer must also disclose direct and indirect producer compensation to the policyholder at renewal including “an explanation of qualifying thresholds for the payment of indirect compensation.” The insurer must provide this information to HHS as well.
The disclosure requirements apply to any contract between an insurer and producer that is executed on or after December 27, 2021, including the execution of “contractual addenda or revisions to the material terms of a pre-existing contract.”
(a) In general. A health insurance issuer offering individual health insurance coverage or short-term, limited-duration insurance must make disclosures to individuals, as described in paragraph (c) of this section, and provide reports to the Secretary, as described in paragraph (d) of this section, regarding direct and indirect compensation provided by the issuer to an agent or broker associated with enrolling individuals in such coverage.
…(c)(5) Compensation information. At a minimum, commission schedules or other documents that detail the applicable commission levels used to satisfy the requirements of this section must clearly specify commissions paid by the issuer to an agent or broker for the applicable plans for which the agent or broker has an appointment with the issuer, and distinguish between commission payments associated with new enrollments and such payments for renewed enrollments if the issuer differentiates compensation for those two types of enrollments. At a minimum, compensation information must also explain the qualifying thresholds for the payment of indirect compensation, such as bonuses, to an agent or broker. If an issuer of individual health insurance coverage or short-term, limited-duration insurance also offers direct or indirect compensation that is not captured by the commission schedule, the issuer must supplement the disclosure of the information on the commission schedule with additional documentation disclosing such other compensation.
…(e) Applicability. The requirements of this section apply with respect to contracts executed on or after December 27, 2021, between an agent or broker and a health insurance issuer offering individual health insurance coverage or short-term, limited-duration insurance, as applicable. For the purpose of determining the date of contract execution, the execution of contractual addenda or revisions to the material terms of a pre-existing contract is deemed the execution of a new contract. [Subpart F (45 CFR §148.410)]
As for how this disclosure will work:
HHS assumes that the compensation information to be provided to potential policyholders prior to finalizing enrollment would be provided by agents and brokers on behalf of issuers.
HHS anticipates the required information would be provided in the form of a commission schedule, a similar document satisfying the requirements of 45 CFR 148.410(c)(5), or a supplemental document detailing additional compensation not on the commission schedule, detailing the compensation structure of agents and brokers who assist consumers in enrolling in and purchasing individual health insurance coverage or short-term, limited-duration insurance. [Fed. Reg. at 51756]
HHS assumes that the disclosure and supplemental documentation disclosing compensation not included on the commission schedule provided along with documentation confirming enrollment would be available to all enrollees in the same coverage, in the same household, via the policyholder receiving the disclosure information and informing all enrollees on the plan. [Fed. Reg. at 51757]
Without question, the new regulations will prompt reconsideration of compensation and methods of compensation if for no other reason than to simplify disclosures.
Whether the new disclosures change behavior…we want what we want.
