I know that the title for this article might sound odd, but it was an actual question posed to me recently while presenting to a prospective client. While we make it a point to NEVER present based on any specific inadequacy of our competition, rather base our presentations on our value and merit, this question is one we often get when having a strategic discussion with our prospects.
First, please know that I did not in this circumstance, nor do I ever speak negatively about my competition – they are not in the room to defend themselves nor do I know any specifics regarding what they may or may not know – instead, we present what we DO know and what we do with the information we have. At our core, we are educators. We believe that our clients should be making educated decisions rather than blindly taking a recommendation or believing something is right, just because it’s what the insurance company tells them. This is what we ultimately define as the difference between a broker and an advisor. With that being said, in an effort to give you one definitive statement as well as some basic questions/information, we hope that you too will be better educated when going into a renewal discussion with your representative.
INSURANCE COMPANIES ARE NOT IN THE BUSINESS OF TAKING LOSSES
This seems like a pretty obvious statement, but it’s amazing how quickly it’s forgotten when approaching the renewal and marketing process. When I started in the industry almost 20 years ago, there were nearly that many health insurance companies. Today, due to consolidation, market pressures, and increased regulations, within most areas of the country there are fewer than half a dozen – and in most cases the majority of the market-share is owned by only one or two carriers at most. As a matter of fact, we are getting so close to a monopolistic industry that the federal government has recently begun to step in and begin enforcing anti-trust laws when it comes to the mergers and acquisitions within the health insurance industry.
While the Affordable Care Act (ACA) was passed with the intent of lowering the cost of health insurance, in 2010, the year the law went into effect, the life and health insurance industry generate approximately $773.3 billion in revenue. By 2014, just four years into the roll out of the ACA, revenues had increased almost 15% to nearly $900 billion. During this same time, by March of 2015, the ‘Big 5’ as we refer to them (Anthem, Aetna, Human, United Healthcare, and Cigna) saw a combined stock price increase averaging over 220%. Given these unprecedented results, if you are shareholder – who’s interest, might I just state, is the primary focus of these health insurance companies – you are likely ecstatic about these increased profits; however, if you are an insured and paying higher than ever premiums, you are likely left wondering what ‘cost control’ impact the ACA has had at all. Now this article is not meant to beat up the Affordable Care Act, as there are arguably some positive impacts of the law (i.e. elimination of pre-existing condition and annual maximums on benefits, and extended access to care for dependent children). However, these statistics are just further proof that insurance companies are not in the business of selling policies in which they cannot make money.
I make this statement often when speaking with clients and prospects as I want them to understand the overall motivation of the entities from which they are making these significant purchases. Let me clearly state that I am not against insurance company profits – if they weren’t profitable, we would be left with no other option but a single payer government controlled system – but my clients rely on me to insure that they, my clients, are spending their money wisely. By understanding the level of profitability that is built into every health insurance policy, we can better target the overall expenditure, have a more positive impact on rate negotiations, and implement strategies that better serve the purchaser.
WHAT EXACTLY IS CREDIBILITY?
Often times when insurance carriers are trying to convince me and my clients of the need to increase rates year over year specific to each client’s population, they often use terms like ‘trend’ and ‘credibility’. While I can write an entire article on ‘trend’ and how this term is commonly used to communicate a very subjective target for insurance companies, I’m often amazed at how carriers will use ‘credibility’ to justify increased costs. Credibility is a real thing and refers to the underwriter’s ability to use a client’s unique and specific data to set an expected risk factor; however, I’ve never had an underwriter be able to properly convey to me what 100% credibility really represents – is it 1,000 covered lives, 10,000 or 50,000? The truth is that for most underwriters, the credibility of any one specific group is based upon that carrier’s entire block of business.
The credibility factor given to a company is largely based on the population size or sample of that specific group. Sadly, however, carriers will use credibility as a leverage tool when providing a renewal. If a group has positive claims history, carriers will invoke ‘credibility’ to convey that while a group may be performing better than the target, they cannot provide a reduction in costs due to the groups lack of a large enough population to lend significant credibility to their data. Conversely, if a group is performing poorly and the claims exceed the target, those same underwriters might convey a much higher need to increase the rate due to claims performance – thus the inverse impact of those credibility factors that prevented rate reductions in good claims years.
HOW IS THE ONE REPRESENTING ME GETTING COMPENSATED FOR THEIR WORK?
Most agents or brokers earn commissions. It’s no secret that compensation is a motivating factor. I have stated for years that the insurance model is inherently broken because those agents that company’s utilize to secure a ‘competitive rate’ are rewarded based how much that rate is. Now, I am not advocating that agents or brokers should not be compensated for their work; however, shouldn’t that compensation be determined by how much they save a client, not how much they have them spend? This historic model of commissions often puts the client and their agent/broker into a position of conflicting objectives.
Early on in my career a broker I worked with had a saying, “Trend is my friend.” He would make this statement with Gordon Gekko like grin each time he received a renewal on one of his cases. Insurance companies are often invoking medical trend as a need to increase premiums year over year. In other words, how much is a medical procedure one had completed this year going to cost next year, should that same procedure be needed again. There have been many opposing views on what true trend really is, but the insurance market has worked to convince us that this number has ranged an average between 7% and 15% each year for the past two decades. So, why is trend a broker’s friend? What is the impact of trend to a broker that is paid a commission? It means that just in a trend renewal a broker earning commissions is getting a 7% to 15% raise. Very few industries are yielding a guaranteed 7% to 15% increase in profits each year for doing the same work as the year prior.
Most insurance carriers will remove the commissions from their policies if directed to so by either the client or their representative; however, in some cases they will not. Some states also have restrictions on the removal of commissions if an agent is not properly licensed to charge fee’s; however if the carrier and the state will allow it, a fee-based compensation model will insure that all transitions are being done transparently and that all interests are aligned. At the very least, the key is having open dialect with a broker about their compensation.
WHAT DO WE DO WITH THIS INFORMATION?
Benefits, and health insurance to be more specific, often times rank in the top 5 expenditures within a company’s P&L. Yet, most organizations operate on a year by year strategy, with little knowledge of how insurance plans are rated, and a renewal window of, in most cases, less than 60 days to manage options. Too often decision makers are not asking their ‘representatives’ questions surrounding how their rates are generated and more importantly how those same representatives are compensated. So, what do you do with the information we have reviewed today? Well, that’s up to you. Knowledge is the key to insure that you are asking the right questions that will provide the most positive impact to your organization. To learn more about our approach visit our website at www.gdpadvisors.com