Why Consultant/Broker Compensation Matters: PUBLIC SECTOR

According to the Kaiser Family Foundation, an organization focused on national health issues, as well as the U.S. role in global health policy, health insurance brokers/consultants in Texas earn $8.25 per plan member per month (PMPM), on average, for “Large Group Market” employer groups. (like the City of Amarillo)

There are approximately 4700 members on the City of Amarillo’s health plan (employees, spouses, dependents).  The quick math:  4700 members x $8.25 x 12 months =  $465,300 per year in broker/consultant compensation.

Now this is the state average for private and public plans according to Kaiser, not me, and I know the City of Amarillo isn’t paying their current consultant this amount of money, and I’m not saying it should be.  However, I know that the current consulting firm isn’t even receiving a quarter of this amount.

Or are they?

Brokers/Consultants can earn “revenues” in several different ways, not just through direct fees paid by the City.  Overrides, commissions, bonuses, fees from TPA’s, fees from PBM’s, prescription fill fees, shared savings from plan providers, etc.  These are all different ways brokers/consultants CAN POSSIBLY be compensated.  Typically, these revenues are not disclosed to the employer, which could be seen as a conflict of interest.

The most common form of revenue not disclosed to employers is override commissions, and bonuses based on the FIRM’S entire book of business size and retention, not just doing business directly with the City of Amarillo.  For example, larger brokerage firms are commonly paid very large, sometimes as large as seven figures, bonuses from insurance carriers for “retaining” a certain amount of business with that particular carrier.  These are called “retention bonuses”.  Ex:  retain 98% of groups with carrier, carrier pays out bonus.

That would be a pretty large conflict of interest since it creates a substantial incentive to keep, or move the City’s business to that particular carrier, even if it is not in the City’s best interest to stay with or move to that carrier.

Secondly, this type of compensation completely renders the RFP process unfair to smaller firms, like mine.  Here’s why:  Butler Benefits is not as large as HUB, or Holmes Murphy, or Willis Towers Watson, so the carriers do not treat us the same (they don’t pay us large retention bonuses).  I can assure you, I don’t have a seven figure bonus on the line this year for retaining business with Blue Cross Blue Shield, or Aetna. 

Because we do not receive these forms of revenue at the agency level, we do not have any other option but to charge higher consulting/brokerage fees than larger firms. This makes Butler Benefits & Consulting, and firms like our’s, less competitive in the eyes of City decision makers, who rank “PRICE” as the single largest determining factor in selecting who wins a City bid.  That is a biased and unfair process.  From the RFP:

Almost HALF of the RFP’s total awarded points are based on “Pricing”!  Of course it is!  45% based on price, and only 9% based on demonstrated subject matter expertise.  This is sending a message that RESULTS don’t matter, STRATEGIES don’t matter, and that only your fee really matters. If I have the lowest pricing, well, I’m almost halfway home!

You may be thinking that these indirect forms of compensation do not matter, or that somehow the employer is not paying for it.  They are.  But more importantly, understanding that it is this type of mis-aligned incentive that is part of the reason healthcare costs keep going up, is critical.  It perpetuates a model where healthcare costs keep inflating at 8% per year on average.  Isn’t that what the City is trying to free itself from?  If so, it is important that the City knows and understands ALL of the mis-aligned incentives that keep propping up the failing status quo.

I do not know whether the City’s current consultant/brokerage is receiving any form of indirect revenue or not, and I’m certainly NOT leveling that accusation. But here’s what I do know.  The average broker/consultant, free of all indirect forms of revenue, charging only a fee for their services, should be making anywhere between $240,000 to $400,000 on the City’s group.  $240,000 of annual compensation equates to approximately 1% of the City’s overall plan spend per year, a fairly common amount consultants charge on groups of this size.  However, the City is paying its current consultant/broker a meager $57,000 annually.

Here is a snippet from meeting minutes of a Consent action item from City Council Meeting on July 2, 2019.  Five people voted yes, zero people voted no, and the motion carried.

From reading the RFP, it included a full scope of brokerage/consulting services that would typically warrant a much higher compensation level. 

This is an issue that gets discussed by independent firms looking to break through into the public sector arena rather frequently.

The City has a $24 MILLION plan spend, and they hire consultants to help them manage that plan, and the fact they are only paying their current consultants $57,000 a year raises questions.  Two things here:  1)  If that is actually true, it is well below what the consultant/broker should be making, and perhaps it is one explanation as to why the City’s costs keep going up, not down.  The consultant isn’t very incentivized to really get creative in helping our City lower healthcare costs. (After all, effectively lowering healthcare costs isn’t easy peasy work. It’s hard!)  Or 2)  It simply isn’t true, and the consultant/brokerage firm is making far more indirectly and/or by other undisclosed means.

But in the City’s eyes, this is all that they are making. 

This establishes a completely unrealistic expectation for City decision makers whenever considering a future, new consultant/broker.  In their mind they say, “We paid our last consultant/broker $57,000, and now here’s this guy charging $240,000!  Wow!  He’s unrealistic, we would never pay that much!”….despite the fact it’s well below the State’s average broker compensation on groups of this size.  They aren’t considering that maybe the broker charging $240,000 isn’t making additional revenue elsewhere…because they don’t really know how brokers/consultants can make money.

So, here’s what we propose.  Why not establish a performance-based compensation contract for your next consultant/broker?  Your goal and mission is to reduce healthcare costs, no?  Instead of accepting 8% increases year after year after year, why not hire someone to reverse this trend?  Make it the primary objective, and put it in a contract.  Paying someone to actually LOWER COSTS begins with believing costs can be lowered in the first place.  If you think “it is what it is”, and that healthcare costs cannot be corralled, our City will continue paying status quo firms to get status quo results.  But imagine this…., what if the City actually SHARED a percentage of the savings with the consultant?  Now BOTH PARTIES are financially aligned; the City wants to lower costs, and the consultant wants to make more $$$$. Win, win. Instead of putting 45% of the RFP score on “pricing”, what if they City put 45% of the RFP score on “results”?

Let’s say the City implements a consultant’s recommendations that lead to 20% spend reduction.  For the City of Amarillo, that’s almost $5 Million in a year…..AMAZING, and possible!  You wanna pay someone $57,000 a year and expect those results?….come on… But if the City could lower costs by $5 Million per year, what is that worth?  A minute 2% of the savings is almost DOUBLE what the City is paying the current consultant/broker.  Serious question to the City of Amarillo, would you pay a consultant $300,000 if and only if the City’s plan spend was reduced by $3 Million? 

More specific suggestion:  The City can pay me $50,000 guaranteed, and then pay me 10% of whatever amount I’m able to help the City LOWER costs.  It’s a performance-based agreement.  You don’t save, you don’t owe me anything.  You save $5 Million, you owe me Half a Million and you get to keep $4.5M.  There’s nothing to lose in this type of agreement. Whenever I ask local citizens/taxpayers in town whether or not they would support our City entering into THAT KIND of contract, they love it. Nothing saved, nothing spent. Pay for outcomes….pay for actual performance.

Perhaps larger consulting/brokerage firms know they will not be asked to disclose ANY AND ALL forms of compensation to the City, which is why they artificially lower their RFP bid fee. I asked a City official last year if the City had a signed agreement that the consultant/broker would disclose ANY AND ALL forms of compensation, and the response was, “No, we have no reason to believe they are making any more than $57,000.”

And this language under the RFP’s “Scope of Services” ensures the incumbent, once hired, maintains the unfair advantage in the future. The City is asking current consultant to prepare bid specs…..bid specs like 45 percentage points based on pricing alone.  Textbook conflict of interest. They’re heavily influencing the future RFPs that people like me are asked to respond to.

FINAL THOUGHT

If the City is looking for results, perhaps it should consider paying a consultant in a way that motivates the consultant to work in the City’s best interest.  Put the City’s actual medical and pharmacy claims out to bid, and demand responses on what consultants would do to lower those costs, and watch what happens.  I promise the City will begin to get new responses, new ideas, new innovations, and not the same old set of status quo solutions that yield 8% average increases year over year.