Gary Franke was in the middle of a meeting with the Washington state health exchange’s CEO when he received a text that ultimately changed the direction of his practice.
“It said we’re getting paid zero percent from Group Health Cooperative for their PPO plans,” Franke said.
Because they were losing money on these plans, Group Health stopped paying commissions for new business. Up to that point, Franke said, he had been thinking about charging a broker fee instead of relying solely on commissions. But when he first raised the issue to a group of his peers, he didn’t receive much encouragement.
“I started a Facebook group for more than 100 health insurance brokers in the Seattle area,” he said. “When I said I was thinking about charging a broker fee and I asked everyone what they thought about it, people said, ‘Good luck with that. Tell us how that works.’”
But Franke was undaunted in his effort to move to a fee-based practice. Today, when you visit the website for Franke’s agency, Achieve Alpha Insurance in Bellevue, Wash., you can watch a video on enrolling in health insurance, book an appointment online and view a list of the fees Franke charges. The list of fees is simple and straightforward:
· Option 1: No fee if a prospect enrolls in coverage using Franke’s online video web platform as their own, provided that the prospect lists Franke as their broker. Despite this option being fee-free, Franke says his company is still available to support clients with any needs they have during the year.
· Option 2: If Franke or his staff helps a prospect sign up and enroll in coverage, the fee is $99 for one person or $198 for two or more people.
· Option 3: If a prospect buys a life insurance or disability insurance policy from Franke, he will waive the broker fee for one year.
Franke’s move to a fee-based practice comes as health insurance brokers try to adapt to a world where commissions on individual plans are evaporating.
Before the Affordable Care Act implemented the medical loss ratio (MLR) on insurers, broker commissions averaged 5 percent based on monthly premiums for individual plans, according to a Modern Healthcare report. Today, many Blue Cross plans as well as four of the nation’s largest health carriers have reduced or eliminated commissions for individual plans. In a 2016 survey of its members who sell health insurance, the National Association of Insurance and Financial Advisors (NAIFA) found 93 percent experienced reduced or eliminated commissions on the sale of individual health plans.
More brokers are looking at moving to fees as a way to get paid to serve their clients, according to another NAIFA member study. More than half of the NAIFA members surveyed said they would charge fees if commissions continue to remain low.
Move With Confidence
For the past two years, Franke has charged a fee to enroll people in individual health insurance. He said that he started the move to fees “with confidence.” He informed people in advance of his plan by writing a blog about it and sending it to his clients. He also added information about fees to his PowerPoint slide deck and created a YouTube video on the subject. Prospects who call his office receive a voicemail message in which he spells out the fees.
Most clients responded positively to the move, he said. “About 45 percent said, ‘OK, fine, you probably should have charged this years ago. We didn’t know how you got paid, and we didn’t want to ask,’” he said. “Another 25 percent said, ‘Well, OK, fine, that’ll work.’ The third 25 percent were like, ‘Well, I don’t know.’”
Now that he has wound up his second year of charging fees, Franke said.
“People know what to expect. They said, ‘Yeah, we know you have a fee. Yeah, I’m willing to pay it.’”
One reason many clients were willing to pay the fee, Franke said, is because so many brokers in his area have left the individual market. In addition, Franke’s practice serves many workers who serve as independent contractors to the technology industry, so they have to buy their own health insurance.
“Consumers are saying they want help, they have issues,” he said. “Mainly, we’re getting more people who have problems. Or we’re seeing people who don’t want to deal with it; they’re saying, ‘Dude, just figure it out for me and do whatever.’”
Franke estimated that he lost about 5 percent of his clients when he switched to a fee-based practice. But he made about $24,000 in broker fees during his first year of charging fees and made between $25,000 and $26,000 in fees in 2017.
That amount might not seem like a lot of money, but Franke said by charging a fee for individual health insurance clients, “at least we cover our overhead and make some money on it, and then we cross-sell life and disability and accident plans.”
Franke said one result of moving to a fee-based practice is “it gave me a more unbiased approach to health insurance. People like that because they’re paying me to find them the best coverage.”
As an example, he mentioned that some brokers in his area had stopped selling one particular health plan in favor of another one that was more expensive.
“I didn’t think it was ethical for me to do that. Let’s say it might cost the client an extra $600 for the year for a roughly similar plan. From that perspective, if I charge a $200 fee and the plan would have cost them an extra $600, then I just saved them $400.”
A Work in Progress
For Cathy Bajkowski, moving to a fee-based practice for her clients is “a work in progress.” Bajkowski is owner of CB Health Insurance in Elmhurst, Ill., specializing in health insurance for individuals and employer groups of 50 or fewer.
Bajkowski made the move toward fees in September 2016 after watching commissions decrease since 2010 and wondering “When will it end?”
After being inundated with phone calls one month and realizing that enrolling a client in coverage can take up to five hours, Bajkowski said she “hit a wall.”
“I realized that my time is worth more than this,” she said. “I’m not doing this for free.”
Two years ago, Bajkowski said, she began charging a fee to those she helped sign up for coverage outside open enrollment periods. From there, the decision was made to move to a fee-based practice.
“We initially were concerned we would lose some clients, but we gained time and control over our practice,” Bajkowski said. “And we signed 45 new groups during this most recent open enrollment period.”
CB Health Insurance’s website includes an explanation of why fees are charged.
The explanation describes how agent commissions have been cut since 2010 as a result of the MLR. The website also notes that most Illinois health insurers aren’t paying agent commissions for individual policies sold outside open enrollment, while many group health insurance carriers have cut their commissions by 40 percent.
“For those who would like the expert advice of more than 25 years in the health insurance business, we are confident that you will find the fee is worth it for the time saved and peace of mind that you have the coverage you need!” the website states.
Bajkowski charges $250 to individuals to run quotes and check provider networks. For groups, she charges a one-time setup fee of $250 for groups of one to four members, $500 for groups between five and nine members, and no fee for groups of 10 or more. She will do a free 20-minute initial consultation to determine whether she is able to help a client obtain coverage.
Her advice to a broker who wants to move to fee-based? “Don’t be afraid to do it. You have value, and you provide a service that’s worth something.”
The impact of implementing fees “has been very positive,” she said. “Nobody we helped has come back to us later and said, ‘Oh my gosh, that wasn’t a good value.’”
The First Step Is Mental
The first step in moving to a fee-based practice is a mental one, according to a consultant who has advised many brokers along this journey.
Karen Kirkpatrick is owner of On Your Mark Consulting in Bronson, Mich., and has conducted a number of industry seminars on making the switch.
“It starts with the mental shift to change from the known to the unknown,” she said. “Brokers have been so geared to receiving commissions, to letting someone else make their mind up about what they can sell, to whom they can sell it, how long they can sell it and how much they’re able to earn from those restrictions that they’re like a bunch of sheep walking around.”
Everyone at the agency must be on board with the change to fee-based, Kirkpatrick said. After the decision to change is made, the next step is realignment. “You have to realign your resources, your staff, your producers to be able to support this model,” she said.
At the root of establishing a fee structure is determining each client’s return on investment (ROI) to the agency, Kirkpatrick said.
“Most brokers don’t know what their profit per individual is on their individual market book of business,” she said. “They don’t know what their return on investment is for the agency per producer, per account executive — even per client.”
In addition to determining ROI, the broker must determine their value proposition to retain those clients with the highest ROI and to cross-sell those clients whose ROI isn’t as high and get them higher. “You can take an independent agent with six employer clients, representing 3,000 lives, and they could be good with those six clients and double their revenue simply by cross-selling other products,” Kirkpatrick said.
Kirkpatrick recommends having everyone in the agency do time tracking to determine how much of the agency’s resources go to each client. “I have them select one or two clients in four different categories: the smallest and largest clients with the most product lines and the smallest and largest clients in terms of revenue. They need to pass sheets out to everyone in the office who touches that client and keep track of how much time they spend on that client.”
Green, Yellow and Red
Kirkpatrick said the combination of determining ROI and using time tracking will help a broker assign their clients into one of three categories: green, yellow and red. “Your highest ROI are your green clients, then the yellow and then anything under 25 or 30 percent ROI falls into the red category,” she explained. “That means when a green client calls or sends an email, that’s high alert — the agency addresses it right away. Yellow clients have a 24-hour turnaround. Red clients, the agency will organize its calendar to manage their administrative needs.”
Most agencies, she said, “are doing it backward.”
“Everyone allocates their resources based on size of client or high name exposure of the client, and it’s done wrong,” she said.
Kirkpatrick said brokers also need to know the agency’s operating costs, which will be taken into consideration when determining ROI. Commission earnings also are a factor.
“If you’re looking at 2017 commissions to get an estimate of ROI for a client, then you want to look at five years prior and see what your commissions were and see what kind of a hit you’ve taken,” she said. “Most of my clients, when they’ve done this, see they’ve probably taken a 40-50 percent hit in their commissions, yet they’re including more products and services. So if that isn’t backwards, I don’t know what is.”
The next step is for brokers to determine a goal for their agency’s earnings, Kirkpatrick said.
“Some say, ‘I would like to make what we made five years ago.’ Some say, ‘I would like to make what we made 10 years ago.’ Some say, ‘I just want to double where we are right now.’ And it’s a little bit of a guessing game when you are establishing the fees but you are taking into consideration the ROI and the commissions earned for that client.”
In coming up with a number to charge for a fee, Kirkpatrick recommended starting out with establishing a per employee/per month fee for group clients. “This will allow you to consolidate and provide a flat-rate fee if a group client wants an all-inclusive monthly fee or an annual fee or whatever. But at least you have the hardest part done, which is determining the per-employee fee.”
Educated Guessing Game
Establishing fees amounts to an “educated guessing game,” Kirkpatrick said. It takes into consideration all of the products and services a broker offers, the broker’s commissions data, the time tracking, and ROI per client.
“And then you start to do potential revenue breakdowns based on those fees,” she said. “It could be anywhere from $20 per employee per month up to $100 per employee per month. And someone might look at that and say that’s not even possible. Well, it is, because we see in the PEO [professional employer organization] industry that on average it’s $75 per employee per month. And that is for all coverage, for payroll, for HR. You know many brokers are getting into all those spaces with all the extras they provide to their clients.”
Offering workers’ compensation insurance is another feature that brokers could partner with a property/casualty agent or bring in the P/C side of their agency, if they have one, to add to their group client offerings, Kirkpatrick said.
“So, outside of the ‘we’ll hire and fire and do employee terminations for you’ — you could do everything else from a PEO model. So why wouldn’t you be able to charge and demand $60, $70, $90 a month per employee if you’re offering those goods and services?”
If a health insurance broker is working with a P/C agent or the P/C side of their agency, then they could come up with a three-tiered fee structure depending on what services they will offer to their clients, Kirkpatrick said.
But for brokers who are working only with life and health insurance, she said, a good start is to establish what she called a “Tier 1 model,” where the baseline is an amount that covers operational costs with perhaps a 10 or 15 percent profit, and then decide what will be included in that fee.
“Do you remove all commissions from all products? Or just remove commissions from health insurance and then you still get commissions on ancillary products? Are you going to include a basic HR service, basic benefits administration, COBRA flex, plan documents, 5500s, full-blown human capital solutions with payroll and talent management and all those things? So that could be the difference from Tier 1 to Tier 3, [and it] could be anything from $22 per employee per month to $80 per employee per month.”
Selling Fees to Clients
How difficult is it to explain the fee-based structure to clients? Kirkpatrick said it’s not difficult as long as the broker is transparent with the client. Here are her suggestions for approaching the subject.
Tell the client that although you receive commissions from a carrier, you don’t always agree with that carrier’s product offerings. You would like to be able to present the client with different products that may be better for them but may not always come with commissions. You cannot work for free. So although you are being paid by the carrier to sell insurance, that payment is only for selling the product. What about all the client meetings, enrollment assistance and HR assistance — who is paying for that?
An alternative way she suggested to approach the subject would be to tell the client that the carrier commission covers the cost of holding an enrollment meeting for health insurance and helping the client determine the plan that is best for them. But if the client needs the broker to do enrollment assistance or claims advocacy, then there will be a fee.
Setting the Pricing Calculator
A variety of factors go into what Rob Krieg called “the internal pricing calculator” that determines the fees his firm charges its group clients. That fee usually is set up as a per-employee/per-month amount.
Krieg is area vice president for health and welfare consulting with Hill, Chesson and Woody, a health benefits firm serving midsize employers in Durham, N.C.
In setting a fee for group clients, Krieg said his staff first estimates the resources that their firm will use for a particular client over the next 12 months.
“That could be how much of our time and resources will be needed for our underwriting team, or our health management team, their communication needs, how many live enrollment meetings will they need us to lead, how aggressive of a health management or wellness program will they need us to lead or create for them,” he said. “We’ll look at factors such as the size of the group, their location. A variety of factors to go into this pricing calculator to create a price that we would then translate into the per-employee/per-month fee.”
Krieg said his firm has experienced diminished commissions, much as other brokers have seen. But although they are still receiving carrier commissions, those commissions usually go to offset a consulting fee agreement his firm has with its clients.
The employer clients get a choice, Krieg said. Does the client want Krieg’s firm to carve out all the commissions and have the client pay the firm directly? Or does the client want to have the commissions offset the consulting fee?
Although Krieg said his clients have responded favorably to the shift his firm made to fee-based over the past five years, some clients needed to be educated about the reasons behind the move.
“Our long-standing clients remember the days when we provided all these services and we were paid from our carrier, and they ask, ‘Why do we have to sign this fee agreement?’ So we try to codify it to them: Here is what we provide, here is what we get paid, here is the dollar amount on a per-employee/per-month basis.”
From Brokerage to Consultant
Krieg said his firm’s move toward charging fees came along with its shift in focus from being a benefits broker to being an employer consultant. His advice to others who are thinking about moving to a fee-based practice is not to be afraid to have the “consultant conversation” with clients.
“We want to be consultants for our clients, and the best way to show them we are acting in their best interest, that we are their trusted advisor, is by having an agreement with that client where they are compensating us,” he said.
“Our allegiance must be with our clients. And moving to a fee-based structure really helps demonstrate that. It removes any conflict of interest.”