The way most employee benefit brokers are paid using commissions as a percentage of revenue didn’t make a lot of sense to Tara Conger, vice president of human resources at Palmer Johnson Power Systems.
As healthcare costs at the Madison, Wisc.-based servicer and supplier of components for heavy-duty, off highway transmissions and axles rose by double digits annually, so did her brokers compensation. That “got really frustrating as our benefits weren’t getting any better,” Conger says. “Costs were just going up and the broker got a percentage of it and it was such a backwards system.”
These commission-based payment structures for brokers and even the fee-based models have created little incentive for brokers to manage costs. To overcome that, a handful of agencies across the country have transitioned some clients to performance-based contracts, where compensation is directly tied to lowering costs. Traditionally, these contracts will have a lower than normal annual fee and then further compensation is tied directly to meeting performance goals, such as lowering healthcare costs or better managing chronic conditions. For example, if healthcare costs are cut by $10 million annually, the broker may receive a $5 million payment and so on.
In its simplest form, this new method is aligning the financial incentives of the consultant with the interests of the client, explains David Contorno, president of Lake Norman Benefits in Mooresville, N.C. But it does not work for every client — or broker.
Contorno believes the current benefits landscape is made up of “perverse incentives” and the more services or higher increases he received by selling more products or negotiating larger cost increases for the client, the bigger monetary incentives he got. In performance-based contracting, he is aligning the employees, brokers and patients in healthcare every day, he explains.
For clients Contorno has transitioned, such as Palmer Johnson Power Systems, he charges a base fee that covers his costs, tied to the amount of work he is performing. Additional compensation is tied directly to lowering costs. To determine those percentages, Contorno and the client will come to a mutually-agreeable schedule of goals that trigger certain payments.
It’s part of the reason that Palmer Johnson Power Systems hired Contorno. He makes it a point to be as transparent as possible about how he is paid. The commission-based system didn’t make sense to Conge, she explains and she believes “it is just employers being uneducated about how their broker is getting paid and I do not understand it.”
“You want your interests to be aligned,” she adds. “My theory on that is I want our broker to have skin in the game with us so it’s a true partnership — the better we perform, the better we do, the better they” get paid.
Since working with Palmer Johnson Power Systems, Contorno has hit the highest percentage payout every time that he could because the plan performed so well, Conger says. “That’s what we want,” she explains. “That’s a win-win for everyone.” In the last two years, the company’s total health spend has decreased 25% and because of moving to a self-funded model, its per employee, per year costs have decreased from $13,500 in 2014 to $9,300 in 2017.
It has also changed how Contorno’s interacts with them and all his clients on performance-based contracts to make him proactive rather than reactive, allowing him to reach out and interact with clients on “a deeper and different level and tell them about things before they become a problem,” he says. “We can do things to control and influence the problem.”
A tried and true model that works
The model often works best for consultants, rather than brokers, explains Jack Kwicien, managing partner at Baltimore-based brokerage consultancy Daymark Advisors, as consultants aren’t compensated for product sales, as brokers often are.
Brokers became accustomed to receiving up to 5% of medical insurance premium as payment and as healthcare costs rose quicker than inflation, they got a pay raise. But the market dynamics are changing as most carriers in many states have moved from compensation being a percentage of premium to a per employee/per month payment of about $20. In Florida, Aetna announced it was issuing all renewals net of commissions.
That's why brokers are being “reluctantly wedged into a position where they will start entertaining performance-based contracts,” Kwicien says. “The employer is pushing back and saying, ‘What have you done for me lately and in the last four months we haven’t seen you. I don’t know what you are doing on my behalf.’”
How it works
For several large (1,000 employees or more) clients, Matt Moraski, president and CEO of Gravity Benefits in Southwest Florida, will put in a self-funded plan that has a performance guarantee tied to the outcome of the program.
“If someone’s annual spend in 2016 was $20 million, we may come in and say, ‘Based on what we are seeing, without any benefit changes, using our model, we have proven results, we believe we can save you 8% year-over-year. If we do that, if we save you 8% of $20 million, we would reduce our consulting fee and take a piece of the agreed upon savings,’” he explains.
His firm is putting its fee at risk. For example, if his fee was $200,000 in a normal contract, he will cut the fee by more than 60% in a performance-based contract. “We have everything to lose and if don’t do what we say we will … the client will pay us a lot less,” he says. “If we do what we are going to do and the return on savings is huge, we could make more.”
Kwicien explains the risk for brokers can be great as the agreed upon goals often rely on behavioral change in employees and create more work for the employers.
“Whatever the game plan you come up with is, it will take some time to implement and show meaningful results,” he says. “It is not like you can implement it today and in three months, you will have major shifts.”
“The good news is the interests between adviser and employer become completely aligned,” he adds. “The bad news is unless a broker is very effective with plan design and implementation strategy to modify employee behavior, then all they succeeded in doing was impacting compensation.”
In the few years Contorno has used this compensation model, he says he has never missed a goal. In most cases, he says he shatters the goals. Despite that, he is not worried about missing his targets and always charges a base fee and how much compensation he puts at risk depends on client’s openness to change.
“Once I get to understand their expectations, I develop strategies to help accomplish that and based on reception to those, build incentives around that,” he says.
Not right for everyone
One of the major objections Contorno hears from other advisers about making the shift is that there are uncontrollable claims. “There is no such thing,” he retorts. “That’s the reason we have deductibles and co-pays and deductibles. There might be unexpected claims.”
Performance-based contracting is not the right offering for a brokerage’s entire book of business, everyone who has these contracts in place says.
For Contorno, the client must be open to change and willing to look at benefits from a different perspective. “If their willingness is high, then my willingness to do this is also high,” he says. “This isn’t about cost-shifting.”
Those employers who are ok with kicking the can down the road and find with a carrier renewal that contains an increase are not right for this. “It is the matter of being in the right mindset,’ he says.
Winning clients
For those clients where performance-based contracts can reap big healthcare cost savings, it can be a selling point, but only if explained correctly.
Mick Rodgers, principal and managing partner of Axial Benefits Group in Boston, says that when he puts his firm’s compensation at risk, it makes the story of his healthcare purchasing coalition credible. At Rodgers’ firm, per employee per year costs for proprietary healthcare purchasing coalitions he created are nearly half the national average. His firm’s revenue also doubled last year.
“Clients are thinking, ‘I’ve never heard this before. It seems like it makes a whole lot of sense for us,’” explains Rodgers, EBA’s 2017 Adviser of the Year. “But they don’t know what to believe and when someone puts a third of their compensation at risk to prove it lowers per employee, per year costs.”
“It helps me get the client because no one else is saying that,” Rodgers adds. “And then it helps me retain the client because it keeps us on our toes.” His firm currently has 50% of his clients on contracts with performance-based guarantees.
Conger, the client of Contorno, says that employers need to take a look at self-funding, which provides more cost opportunities and allows creativity. But it is all based on the broker.
“A lot of people think the broker’s goals and what they say is god,’ she says. “Hopefully that is the case but in sometimes there want to keep the fully insured because of high retention bonuses. … That is misaligned with what is best for the employer.”
Moraski believes his firm does not do a good job selling these contracts. There are more skeptics then willing participants and the marketplace has not adjusted for it yet, he says.
“Our own clients have loved it, but we haven’t earned a lot of new business off of it yet,” he says. “I think we will. I think the market will return to it and adjust to it in the near future.”
That change will come, he predicts, because employers that had been reluctant to change are now being forced to make changes as the industry has put them in a position to make that change.
Performance-based contracting is the future of the benefits industry, Contorno predicts. “We have built a very disruptive model,” he says of his firm.
How to make the shift
For brokers not on performance-based contracts, the transition to them can be a long and difficult task. “Right now, for producers to [make the switch] is three generation of compensation structures away,” Kevin Trokey, partner at brokerage consultancy q4Intellegence in St. Louis, says.
So many agencies, he explains, are hiding from the compensation conversation. “They have to recognize that if they aspire to be that, they can’t be intimidated about it,” Trokey says. “They need to see incremental steps today that makes them closer to a,” performance-based contract.
“I am stretched to find any agency out there that is doing [them] for a majority of their book of business,” Trokey says.
Contorno openly admits that a majority of brokers are not willing to talking about compensation. “The reason that brokers are not talking about how they get paid is because they are being overpaid,” he says. “I was being overpaid for a long time and my revenue was going up every year. The worse job I did for my clients, the more my revenue went up.”
Before even considering such a move, producers must recognize there are so many other areas where clients need help, such as insurance, compliance, communications strategy, wellness programs and talent efficiencies, Trokey says.
“Brokers have to become comfortable with the issue of talking about how they are getting paid and being able to quantify the impact they make with these solutions in a way they control,” he adds.
To start the transition, Trokey advises brokers sit down with clients to discuss the fact they are paid, how much they are paid and have a conversation around what the broker is doing to earn that compensation. “That is the first step to performance based,” he says. “If brokers can’t get comfortable with that conversation, their days are numbered.”
From there, brokers need to move into conversations around fee-based compensation, Trokey advisers and then eventually get to performance-based contracting.
“Lot of conversation and ability to quantify, ability to report, ability to communication,” he says. “Those foundations have to be put in place before a move to performance-based contracting.”
