Most broker compensation is disclosed. That is the part employers find hardest to believe once they go looking, because the number that explains a decade of renewal increases was usually sitting in a document they already received.
The practices below are not fraud. They are standard industry arrangements that have drifted, and the drift almost always runs in one direction. Nobody breaks a rule. The cost just lands on the plan rather than the people advising it, and broker compensation keeps climbing while it does.
This is the second half of a list we have been working through on The Business of Benefits podcast. Part 1 covered tactics 12 through 7, including the one letter in a contract that multiplies a fee by 2.4 times. This post covers 6 through 1. Four of the six turn on broker compensation in one form or another, and the last one explains why the other eleven work at all.
Where this list came from
Every year the IRS publishes a memo called the Dirty Dozen. It lists legal tax structures and processes that are being abused, so taxpayers can get their house in order and everyone knows where enforcement attention is headed.
We built the benefits version. Twelve practices that are legitimate on paper and expensive in application. None of this is happening everywhere, and plenty of advisors do none of it. But most plan sponsors could probably find one or two of these in their own plan right now.
Each one gets the same treatment below: how to spot it, what it costs, how to fix it, and then the call. Dirty, or just dumb?
Tactic 6: Market leverage and cross-plan offsetting
Every large agency makes some version of the same pitch. We place enough business with this carrier that our size works in your favor at renewal.
Ask for the number behind that claim and it does not exist. In securities, a statement like that could be proven or disproven, because the data is public and standardized. In health and welfare plans the data is routinely restricted, which is precisely why the claim survives.
There is also a pattern that holds across every line of insurance: the best products pay the worst commissions. A plan that genuinely wins on merit does not need to buy its own distribution.
The part that actually costs you money
Where leverage does exist, it tends to run toward the agency rather than the plan, and most of it is broker compensation by another name. Book of business bonuses. Persistency bonuses. Bundled and proprietary contracts. Pharmacy collectives the agency holds a position in.
And then there is cross-plan offsetting, which is the mechanical version of the same problem. A carrier brings the brokerage a list of clients renewing in the same window along with a revenue number it needs to hit. The brokerage decides who absorbs it.
That decision is not underwriting. It is a judgment about tolerance. Which client has swallowed increases before. Which one is already close to leaving. Which one had a quiet year and will not look too closely.
If you are on the receiving end of a cross-plan offset, you are subsidizing another employer’s renewal with your own money, and your rates have stopped reflecting your own risk.
How to fix it
Ask for an underwriting exhibit in writing that shows how your rates were built and confirms they are based on your plan’s experience only, with broker compensation shown separately. Review your contracts for cross-plan offsetting language before you sign rather than after.
Then run the simplest test available. Line up your last three renewals against your last three years of loss ratios. If your rates moved independently of your own claims experience, the leverage was never working for you.
One client asked for the underwriting exhibit this year and found the carrier was not factoring all of the rebates it had received into the loss ratio. That single correction brought the renewal down by about 10 percent.
Dirty, and it was the easiest call of the six. The only measurable leverage turns out to be broker compensation. Market leverage is unprovable by design, and cross-plan offsetting is not aligned with the client in any version of it.
Tactic 5: Compensation that scales with your premium
This is the broker compensation structure most mid-market plan sponsors are still on, and it is the one worth running the numbers on yourself.
Take a 500 employee plan at roughly $12,000 per employee per year. That is about $6 million in spend. At a 4 percent commission, the advisor earns $240,000.
Now take a 12 percent renewal, which is common on a fully insured plan. Spend goes from $6 million to $6.72 million. The commission goes to $268,000.
The plan got $720,000 worse. The advisor got $28,000 better. That is broker compensation working exactly as written.
How to spot it
Beyond the headline percentage, the broker compensation structures that compound it are growth bonuses, persistency bonuses, and the overrides that appear on a disclosure as “we may receive additional compensation” and are never given a figure.
Under the Consolidated Appropriations Act, brokers and consultants to group health plans have to disclose direct and indirect compensation in advance of a contract. The Department of Labor’s guidance on that requirement is worth reading once, because a broker compensation disclosure that quantifies nothing is not really a disclosure.
How to fix it
Find the broker compensation disclosure first and confirm you actually have it. Then check whether a dollar figure is attached or only a percentage. If you are told enrollment is not final, have them project off last year and send an updated figure after open enrollment closes.
From there, the move is arithmetic. Calculate your current percentage as a flat dollar amount. When the renewal comes in at 12 percent, recalculate the percentage so the dollars stay flat, and start the conversation there. If the scope of services has not grown, the broker compensation does not need to either.
Mostly dumb. In the small market, carriers often force a percentage and a 40 life company cannot absorb a flat consulting fee, so commissions exist for real reasons. It turns dirty when broker compensation is never quantified, which is the part the CAA was written to address.
Tactic 4: The point solution pile-on
Every renewal brings something new. A navigation app, a musculoskeletal program, a diabetes platform. Each one priced small enough that it never triggers a real conversation, each carrying its own broker compensation, and nothing ever comes off.
Four dollars per employee per month sounds like nothing. On a 500 life plan it is $144,000 a year.
The version nobody catches
Worse than the cost is the solution that was never permitted to function. We watched a brokerage add an international pharmacy to a fully funded plan whose pharmacy contract expressly disallowed any solution outside its own network.
Nothing was communicated to members. A member filling a drug that could have been sourced internationally got no notification. Nothing counted toward deductibles or accumulators, or toward the specific deductible and the plan’s claims.
At the end of the year the brokerage looked at a list of missed opportunities and asked why utilization was zero. It was not allowed, not integrated, not communicated and not calculated.
The compensation layer
There is a second broker compensation problem sitting underneath. A broker can do the right thing on the medical plan, charging a flat fee rather than a percentage, and still have a dollar inside the pharmacy contract, a dollar inside the stop loss and 25 or 50 cents inside the FSA.
Plan sponsors are led to believe they have a flat fee for the healthcare plan, and then find broker compensation sitting in every adjacent line. There is a buck in everything.
How to fix it
- List every vendor with what you pay each one, then divide the annual fee by the number of employees who actually used it.
- Check overlap. Two vendors tackling the same problem creates confusion for members about who handles what.
- Ask whether your existing administrative services agreement permits the solution, and get the answer in writing.
- Ask for utilization based pricing rather than per employee per month, so you can test whether your population needs it before committing to a fixed fee.
Both, and it is the only one on the list that earned both. Dumb to bolt on a vendor without evaluating the claims data or the contract. Dirty to spread broker compensation across every line and disclose it on none of them.
Tactic 3: PBM compensation
Have you ever seen a dollar figure for what your pharmacy benefit manager makes on your plan? Most employers have not, and most assume the cost is simply part of the plan.
It is not one fee. It is several, and PBM and broker compensation both move in ways that never appear as a line item:
- Per claim or script fill fees, charged every time an employee, spouse or dependent fills a prescription. The highest we have seen recently is $2.75 per fill.
- Rebate retention, where a portion of manufacturer rebates never reaches the plan.
- Spread pricing, the difference between what the PBM charges the plan and what it reimburses the pharmacy.
- Collective agreements, where the agency holds a share of the economics and the broker compensation is invisible to the plan.
- Admin fees that live in the contract rather than the proposal.
Concentration is part of why this persists. The Federal Trade Commission’s interim staff report on prescription drug middlemen found the three largest PBMs process nearly 80 percent of the roughly 6.6 billion prescriptions dispensed in the United States, with the top six above 90 percent.
The red flag you can check yourself
During a PBM RFP, compare admin fees across bidders. If the transparent PBMs quote one number and another quotes a fraction of it, perhaps 90 percent less, that money is being made somewhere else. Nobody is doing the work for free.
So go to the contract and look for two things. Does it prohibit spread pricing, and does the PBM retain any portion of rebates?
One more thing worth knowing. When we run a PBM RFP, we request the contract first and send a questionnaire alongside it. The number of times the questionnaire answers fail to line up with the contract language is close to 100 percent.
How to fix it
Ask in writing for the definition of specialty in your contract, what pass through actually means in their language, and how rebates are handled. Then put every element of PBM and broker compensation into a flat per member per month administrative fee rather than allowing spread pricing and retention to sit underneath.
Dirty in most cases. PBMs are one of the dirtiest places in a healthcare plan, and also one of the easiest to fix, because almost all of it is contractual. There are good ones doing this properly.
Tactic 2: Voluntary benefits and your free benefits technology
If your enrollment platform is free and your employees get free one on one counseling, something is paying for it. It is the commission on the voluntary products sold during those meetings, which means it is your employees.
That is broker compensation funded by employee premium, and it creates two problems worth separating.
The counseling session is also a sales conversation. There is real value in one on one benefits education, but when the person running it is paid on what gets enrolled, your employees are not receiving unconflicted advice.
And where loss ratios on those voluntary products run low, employees pay considerably more in premium than they will ever receive back in claims.
Why this moved from uncomfortable to litigated
Heaped commission structures on voluntary lines can pay 60 percent or more of first year premium, and we have seen one this year at 87 percent. The structure then encourages a carrier change in year three, when the schedule drops, so the cycle restarts.
A wave of ERISA litigation filed this year names both brokerages and employers, with voluntary benefit commissions averaging in the 30s against a reasonable benchmark closer to 2 to 6 percent for a large employer.
The employer exposure is the part plan sponsors miss. When the company receives a benefit, often a discount on its own consulting fee, funded by employee premium dollars, the safe harbor stops applying and the voluntary program can become an ERISA plan.
None of this makes voluntary benefits bad. A hospital indemnity plan paired with disability does real work for employees who have no other option. The issue is that none of it requires the compensation to be hidden.
How to fix it
Ask what is paying for the free platform, and ask to see the broker compensation schedule on the products funding it. Your fiduciary responsibility for reasonable plan expenses does not stop at the medical line.
Dirty. Broker compensation on voluntary lines is straightforward to benchmark because the products are straightforward, which means the figures are knowable and are simply not being shared.
Tactic 1: Obstruction of data and contract access
You ask for your claims file or your executed contract. You get a summary, a delay, or a reason that is really an excuse.
Sometimes the obstruction is the broker. Sometimes it is the contract the broker brought you. Sometimes it is the carrier. We have seen a carrier provide five pages of health plan data and the broker pass along one of them.
What data access actually means
Five pages is not data. A quarterly carrier report is not data. What you need is accounting to the penny: not only where the money went, but what it was for, down to the procedure code. Without that there is nothing to benchmark against, so there is no way to judge whether a cost was reasonable.
Knowing you spent $1.8 million on cancer and $900,000 on neonatal care is a summary. Claims line by line is a record. You would not accept the summary version for any other eight figure expense in your business.
The same gap shows up at renewal. A 40 percent increase justified by two high cost claimants on the following page tells you nothing about whether that risk is ongoing. Maybe the individual has left the company. Maybe the prognosis changed. Without the detail you cannot underwrite it, so you cannot argue with it.
How to fix it
Negotiate terms alongside price. The first term to ask for is data collection, ideally a raw data feed sent to a third party warehouse you own and control. This is more achievable than most employers expect: raw feeds are available on level funded plans, and we have negotiated claim level accounting on a fully funded plan this year.
Expect pushback. That is the point at which the work starts, not the point at which you stop, and the data is what finally makes broker compensation checkable. If a vendor will not give you your own data, you have learned something useful about whether they belong on next year’s shortlist.
There is also a compliance angle. The gag clause prohibition compliance attestation requires plans to confirm that nothing in their contracts blocks access to cost and quality data. If restrictions like these are sitting in your agreements, that is not just a frustration. It is an attestation problem.
Dirty across the board, and the only unanimous verdict in the series. Any restriction on your own company’s healthcare data, your own spend and your own employees’ risk is indefensible. You would not buy anything else this way.
Fix number one and you solve the other eleven
Work backward through both halves of this list and every tactic depends on the same thing: an information gap.
Unquantified market leverage only works if you cannot test it against your own claims. Broker compensation that scales with premium only hides if the disclosure is vague and the invoice is never reconciled. A controlled market check only passes if you cannot see what the other carriers actually offered. A point solution’s value stays theoretical if utilization is never measured. PBM economics and the broker compensation inside them only stay invisible if nobody reads the contract.
Close the gap and the conversation changes. Once you hold claims accounting to the penny, a renewal presentation has only one job: how are we going to reduce the frequency and severity of claims, and here are our claims. Anything short of that is a carrier swap dressed up as a strategy.
What to ask for at your next renewal
| Ask | Why it matters |
|---|---|
| A quantified broker compensation disclosure, in dollars | Percentages conceal the scale. A dollar figure starts a real negotiation. |
| An underwriting exhibit in writing | Confirms your rates were built on your plan’s experience and not somebody else’s. |
| Broker compensation across every line, not just medical | Pharmacy, stop loss, FSA and voluntary all carry their own economics. |
| Your PBM contract before the questionnaire | The contract is where spread pricing and rebate retention live. |
| Utilization data for every point solution | Cost per actual user is the only honest measure of a vendor. |
| A raw claims data feed to a warehouse you own | This is the term that makes all the others enforceable. |
Frequently asked questions
Is broker compensation that scales with premium illegal?
No. Percentage of premium compensation is legal and in parts of the small group market it is the only structure carriers will support. The compliance issue is disclosure rather than the structure itself, since federal rules require brokers and consultants to group health plans to disclose direct and indirect broker compensation in advance of entering a contract.
How do I check my own broker compensation?
Request the broker compensation disclosure and ask for a dollar figure rather than a percentage. Ask specifically about broker compensation inside the pharmacy contract, the stop loss and any voluntary lines, and whether the firm holds equity in or receives revenue share from any vendor it recommends.
What is cross-plan offsetting in simple terms?
It is when the increase one employer should have absorbed is moved onto another employer in the same brokerage’s book, so a carrier hits a revenue target without any single client seeing a figure they will refuse. Your rates stop reflecting your own claims.
Can employers actually get claim level data?
Yes, more often than they are told. Member level data requires a business associate agreement, a plan administration purpose and a secure place to store it, and those requirements are met routinely. The practical obstacle is timing, because the right has to be negotiated into the contract before you sign.
Are point solutions worth it?
Often, when they are chosen from your own claims data and your contract permits them to operate. The failures tend to come from stacking vendors without measuring utilization, or from adding a solution your administrative agreement disallows, which produces a line item that cannot function.
Want the full conversation? Every figure above comes from Part 2 of Health and Welfare Plan Practices: Tactics or Tricks, Dirty or Dumb? on The Business of Benefits podcast, where Donovan Ryckis, Chelsea Ryckis and Patrick Ansara work through tactics 6 through 1, including where broker compensation hides, and grade each one.
If you want to know which of these are sitting in your own plan, that is what a fiduciary-first review is for. Schedule a call and we will start with your contracts.
Sources
- U.S. Department of Labor, Field Assistance Bulletin No. 2021-03, on the CAA compensation disclosure requirement.
- U.S. Department of Labor, Understanding Your Fiduciary Responsibilities Under a Group Health Plan.
- Federal Trade Commission, Interim Staff Report on Prescription Drug Middlemen.
- Centers for Medicare & Medicaid Services, Gag Clause Prohibition Compliance Attestation.
Figures attributed to Ethos experience, including the $720,000 and $28,000 broker compensation example, the $144,000 point solution math, the $2.75 script fill fee and the voluntary benefit commission percentages, are drawn from client work discussed on The Business of Benefits podcast.
