AG probes state health insurers Focus is on commissions paid to brokers

By Liz Kowalczyk and Andrew Caffrey
Boston Globe
November 14, 2004

The Massachusetts attorney general's office is investigating the state's health insurance industry over lucrative commissions offered brokers who are supposed to bring employers the best insurance deals.

Insurance brokers, who can influence heavily which health plans employers buy, for years have received cash bonuses, sometimes valued in the hundreds of thousands of dollars for the largest brokerage firms, and recently even exotic vacations. But brokers generally don't disclose these incentives to employers, who use brokers to help them sort through health insurers' products and make objective recommendations.

"We're actively investigating the ways in which brokers are compensated," said Alice Moore, chief of the public protection bureau for Attorney General Thomas F. Reilly. She declined to provide details, but said the review includes brokers who advise employers on all types of employee benefits, which include health, life, and disability insurance.

Among the insurers who said Reilly's staff has called them to discuss broker commissions are Blue Cross and Blue Shield of Massachusetts, Harvard Pilgrim Health Care, and Tufts Health Plan.

So far, the attorney general's inquiry is preliminary, and there are no known allegations of wrongdoing. However, the examination of incentives dangled in front of insurance brokers in Massachusetts comes amid a high-profile investigation in New York, where Attorney General Eliot Spitzer sued Marsh & McLennan Companies last month alleging the huge insurance broker actually rigged bids in exchange for payments from insurance companies. Spitzer also is concerned generally about the lack of disclosure, saying it can allow brokers to make recommendations that benefit them without clients knowing.

The Massachusetts inquiry also comes at an especially sensitive time, with employers, employees, and government officials aghast at sharply rising costs for medical care and health insurance. Any suggestion that health plans are being recommended for anything other than the best price and service is bound to set off alarms. A half-dozen employers contacted by the Globe said that they were unaware that brokers receive any payments other than standard commissions and said they are troubled to learn that brokers generally don't disclose these special incentives, known as "contingent commissions."

"Clients have a right to know," said Connecticut's attorney general Richard Blumenthal, who has subpoenaed more than two dozen insurers and brokers. "The mantra of 'trust us, we're on your side,' simply has been disproved all too often. That may be fine for nine of 10 brokers, but consumers have to ferret out the minority of brokers who may have genuine conflicts of interest."

But many Massachusetts brokers say the bonuses are too small to influence decisions and that because all insurers offer them, brokers are not pulled toward one insurer over another.

"The real question, do they have triggers in there that incent the wrong behavior among the broker community? And I don't think they do," said Joseph Gray, managing partner of Longfellow Benefits in Boston. He said that his company account and sales representatives do not even know what type of additional commissions the firm is eligible for. "I don't see that as the item which impacts the delivery of health care and the overall cost problems in the delivery of health care."

Nonetheless, Longfellow is changing its policy regarding disclosure. "In the past it wasn't uniform. Going forward we will be telling clients about these payments," Gray said.

Meanwhile, last week, the Council of Insurance Agents and Brokers, an industry trade group, said contingent commissions should be legal, but that state regulators should require full disclosure to employers.

Employers hire brokers to make objective recommendations on which health insurance products to use. For that service, brokers receive a standard commission, generally 2 percent to 4 percent, which is taken out of employers' premiums. These basic commissions are disclosed to most employers, as the law requires.

But since the mid-1990s, when the number of employers using brokers began climbing, Massachusetts health insurers started paying volume bonuses to brokers for enrolling significant numbers of employers in their plans, and for re-signing them in future years. Brokers and insurers said they generally do not disclose these payments.

The legality surrounding these contingent commissions is unclear, and attorneys general in numerous states are trying to sort through the legal issues. There are no specific Massachusetts insurance laws prohibiting them, or requiring disclosure, according to insurance division officials, and contingent commissions are standard industry practice.

But in his numerous suits against various parts of the financial services industry, Spitzer, the New York attorney general, often has found ways to force changes to longstanding practices through new legal challenges.

As for the contingent commissions, one lawyer said that if they harm a broker's objectivity, that could violate Massachusetts state consumer protection laws.

"If you steer the employer to the highest priced product simply to enrich yourself, that's a breach of fiduciary duty," said Steven Schreckinger, head of the insurance practice at Palmer & Dodge and a lawyer for Harvard Pilgrim.

The Globe obtained copies of four insurer bonus programs, which health plans distribute to brokers annually. The state's major insurers all offer contingent commissions that reward brokers for bringing in and retaining business, but they differ in the amounts and other details.

Blue Cross and Blue Shield of Massachusetts' "Preferred Broker Bonus Program," one of the oldest programs, promises a range of bonuses to brokers who keep at least 90 percent of their Blue Cross business with Blue Cross the following year, or who bring in at least $1.5 million in new premiums. The more business the broker retains or brings in, the higher the bonuses climb. For instance, a broker who retains 90 percent of his Blue Cross business gets a bonus of 0.9 percent of his total Blue Cross premium, while a broker who retains 95 percent gets a bonus of 1.3 percent of the premium. Blue Cross caps its bonuses but declined to say at what levels. According to several brokers, these bonuses can reach into the hundreds of thousands of dollars.

In its new "Broker Red Carpet Program," Harvard Pilgrim Health Care offers brokers similar types of bonuses, called the "Elite Producer Bonus." The plan also offers perks such as an annual broker golf tournament, which will be held in June at the Tournament Players Club in Norton.

To launch its new Liberty product, an innovative health plan that employers have been slow to embrace, Tufts Health Plan this year promised brokers awards of $500 to $10,000 for the first two companies they enrolled, as well as bonuses for building volume. The two brokers with the most Liberty members by Jan. 1, 2005, "will win a trip to an exotic location that will take place in April 2005," Tufts' brochure promises. Tufts also has a general bonus program like Harvard Pilgrim's and Blue Cross's.

Moore declined to say whether the Massachusetts attorney general's office is specifically reviewing these broker awards.

Several Massachusetts brokers and insurance executives said brokers generally don't disclose these bonuses to employers, and a half-dozen employers the Globe interviewed were not aware of them.

"If they ask about it, we tell them," said Edward Maguire, a senior vice president for Sapers & Wallack Insurance Agency Inc. in Cambridge. "It's not something we're trying to hide."

Some of Boston's biggest brokers, including William Gallagher Associates and the Bostonian Group, declined to return phone calls from the Globe or describe their practices.

Several employers were surprised and troubled to learn about the bonuses.

"I need to know what the compensation is for anyone who's working on our behalf," said Kathleen Collins, vice president of human resources for the Massachusetts Society for the Prevention of Cruelty to Animals in Boston, which uses a broker to advise the organization on health insurance. "I need to know they're working in our best interest."

Paul Ginsburg, executive director of the nonprofit Center for Studying Health System Change, a policy and research organization in Washington, D.C, went further.

"Even if the broker discloses it, I don't want them to have incentives to keep me with Blue Cross rather than switch me to Harvard Pilgrim," said Ginsburg, whose organization studies 12 US health care markets, including Boston. "I would only be comfortable with this if I knew brokers get the same bonuses from all the insurers."

There are subtle ways a broker could influence a buying decision without the client knowing about it, much less the broker's motive for doing so, others in the industry said. The broker could say that some carriers declined to bid for the business, leaving another insurance company that did bid in a stronger position. Or, a broker could disparage a carrier he doesn't want to see selected, by contending the insurer has a bad reputation for paying claims or something else that's important to the employees.

But many insurers and brokers defend contingent commissions.

"Their first duty is to the client, and we think they know that," said Timothy O'Brien, senior vice president for sales at Blue Cross, which has agreements with more than 1,000 brokers that outline business practice standards.

O'Brien said that Blue Cross paid $66 million in broker commissions last year, including $14 million in bonuses, but he declined to disclose how many brokers received the extra payments. He said the amount involved is small for a company the size of Blue Cross. The payments represent 10 percent of the insurer's administrative expenses in 2003, and 1 percent of the premiums Blue Cross collects.

Kevin Counihan, senior vice president of sales, marketing, and member services at Tufts, said he doesn't believe his plan's bonuses create a conflict of interest for brokers, and that the dollar amounts are modest. "There are only two trips given out, it's not like there's this wholesale chartered flight of these guys going somewhere," Counihan said. "Liberty is an innovative plan and it's a greater investment of time and effort by the broker to educate employers."

Several employers agreed, saying they would know if their broker wasn't representing their best interests. Dale Shores, chief financial officer of Roche Bros. supermarkets, said he directly reviews all bids for health coverage submitted by the insurance companies, rather than screen them through a broker. That means there is little opportunity for his broker, who takes care of paperwork and other details, to game the selection process to any one company. The Massachusetts health market is so small -- three to five carriers that have very similar networks -- that differences in products are obvious, Shores said.

Harvard Pilgrim executives said they put their bonus plan in place three years ago to compete with other insurers and because so many more employers are hiring brokers. Last year, Harvard Pilgrim said, it paid bonuses to 29 brokers out of about 750 who received standard Harvard Pilgrim commissions.

Tom Hamel, manager of broker relations, said the insurer is reviewing its program because of regulators' growing focus on commissions and will ask its broker and employer advisory councils for advice on how to proceed.

"This is giving us the opportunity to rethink this strategy," Hamel said. "Everyone's asking this question internally: 'Should we be disclosing these bonuses?' "

Copyright 2004 Globe Newspaper Company
2004 The New York Times Company

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