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Leader's Edge Fee Fi Fo Fum!

New initiatives could have giant carriers collecting broker fees, but beware the regulatory perils.

By  Scott Sinder, John Fielding and Kate Jensen

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 use by brokers and their clients
  • Bill and collect the fees from the clients and remit fees to the brokers as part of their premium collection process for the firms that desire this, and
  • Ensure the policy forms they file with each state are properly formulated to 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 directly bill and collect their fees. The carrier offer to handle that administrative burden, however, clearly eases the transition to a fee model.

The other primary benefit for firms that have sought to more broadly use a fee-based compensation structure is the carrier obligation to ensure that the policy forms they put on file with state regulators allow the use of fee-compensation arrangements—for example, by ensuring that the filings are “net of commission.” Although the proposed fee arrangements appear to be wholly permissible with most states, we question whether this model currently is viable nationwide without statutory changes in some jurisdictions.

Other issues, such as whether additional licensure is necessary and whether there is any impact on the ability to continue to collect contingent or override compensation, also must be considered before using these arrangements in some states.

We have identified four primary legal issues that your firm should ensure are properly evaluated when using this type of arrangement.

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 small groups in the 50-and-fewer market.

California has determined that these arrangements are not allowed under state law 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 placement of health insurance policies while also collecting compensation from the carrier related to those placements. New Hampshire imposes this rule on the over-50 group market. It is unclear whether regulators will apply this prohibition to the payment of contingent compensation and other carrier-provided bonuses in this context, but it merits monitoring.

Most states that allow placement fees have disclosure or written agreement requirements before fees may be collected. Although the carrier fee agreement templates should satisfy most of these requirements, your firm should ensure that they specifically disclose any carrier-related compensation you may continue to receive as required 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, brokers placing policies for small groups must be licensed as consultants.

Rate/Form Filing Requirements. In four states, the law requires placement fees to be included in the policy and approved rate filing. In Arkansas, Hawaii and Tennessee, the 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 his department will not approve carriers’ fee-based compensation arrangements.

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