One of the key components of the Patient Protection and Affordable Care Act (“PPACA”) is the minimum medical loss ratio (“MLR”) requirement. Under PPACA, health insurance companies must spend at least 85% of their total premium revenue on clinical services or activities that improve health care quality for large group health insurance policies and at least 80% for small group and individual health insurance policies. If a health insurance company does not spend these minimum amounts, it must remit premium rebates to insured individuals equal to the amount by which the insurer’s actual MLR is less than the PPACA required minimum MLR. The health insurance industry lost its battle to include in the numerator of the MLR calculation the commissions that insurers pay to health insurance agents and brokers, or otherwise to exclude the commissions from the MLR entirely.1 Under PPACA, these commissions are considered administrative expenses of an insurer. Consequently, some insurers have reduced their commission rates paid to distributors of health insurance policies and health insurance agents’ compensation is being squeezed drastically, calling into question their ability to survive as insurance intermediaries.
In reaction to this dilemma, health insurance agents and brokers are seeking new ways in which to be compensated for their services. Some have begun charging fees to their customers, mainly the small group insured employers, as well as continuing to receive some form of commission payments from the insurers for which the insurance agents and brokers sell insurance policies. Some insurers have agreed with their agents to bill and collect from the group insured employers these agent or broker charged fees in order to streamline their collection, and in some cases, the insurer charges against balances due to it from the agent the broker or counselor fees. This practice raises a number of legal and regulatory compliance issues:
A. Requirement for Insurance Counselor or Consultant License
A significant number of states regulate insurance counselors or consultants, which render insurance related services to purchasers of insurance.2 As an exemplary definition of an insurance counselor, the Georgia Insurance Code provides that:
"Counselor" means any individual who engages or advertises or holds himself or herself out as engaging in the business of counseling, advising, or rendering opinions as to the benefits promised under any contract of insurance issued or offered by any insurer or as to the terms, value, effect, advantages, or disadvantages under the contract of insurance, other than an actuary or consultant advising insurers. When receiving a fee, commission, or other compensation for this service, such individual shall not receive any compensation from any other source on or relating to the same transaction.
O.C.G.A. 33-23-1 (a)(6). While a health insurance agent or broker is authorized to become licensed as a counselor, in order to receive a fee from an insured and a commission from an insurer in the same transaction the counselor must disclose to the insured the existence of the compensation from the insurance company prior to the customer’s purchase of insurance and must obtain a written acknowledgement of such disclosure from the insured.3 It should be noted, however, that at least one state, Kentucky, prohibits a counselor from receiving compensation from both the insured and insurer for the same transaction regardless of disclosures.4
Many states require the counselor fee arrangement with the insured to be in writing.5 Regardless of the existence of a state law requiring a written fee arrangement, insurers should require all counselors that are also appointed agents to reduce his or her counselor agreements with insureds to writing, if only to clarify the agent’s mutually exclusive duties and that the agent is acting in his or her counselor capacity and not as an agent of the insurer in rendering counseling services. The existence of a written counseling agreement between the counselor and the insured is extremely important for distinguishing the counselor fee from insurance sales commissions.
B. Can Insurance Brokers Charge a Fee to an Insured and Receive Commissions from Insurers?
The health insurance broker who receives compensation from both an insured and insurer with respect to the same insurance policy purchase and sale transaction runs the risk of creating a dual agency relationship with both insured and insurer, which is fraught with potential fiduciary obligation violations. This risk is exacerbated in states that only issue insurance agent licenses and do not recognize insurance brokers in the insurance code licensing regime.
Nevertheless, it is possible for an insurance broker to perform activities for a fee in addition to acting as an agent and receiving a commission insofar as the broker activities are in addition to the agent type activities (i.e., based upon sale or placement of policy) or the broker activities are exclusive of the insurance transaction. For example, in New York fees charged to insurance customers by insurance agents6 and brokers7 are governed by New York Insurance Law § 2119. In essence, there are two types of fees: a consulting fee, which can be charged by either an insurance agent or insurance broker, and a service fee, which can only be charged by an insurance broker.8
The consulting fee must comply with the following two requirements:
1. The consulting fee must be charged for the types of services enumerated in the statute: examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above complies with the above; and
2. The services and compensation amount or basis for the determination of the compensation must be set forth in a written agreement and signed by the NY Customer.
An insurance agent, broker or consultant cannot charge a consulting fee for services that are not expressly authorized. For instance, a consulting fee that is charged by the insurance agent or broker for activities such as submitting insurance applications for customers or providing premium quotations would likely be deemed as insurance agent or broker activities conducted for an insurer for which a consulting fee cannot be charged by the insurance agent or broker.9 Thus, the insurance agent or broker should carefully craft the Consulting Memorandum10 particularly regarding the description of the services for which the consulting fee will be imposed.11
A service fee can be charged to an insurance customer by an insurance broker as long as the service fee complies with the following two requirements:
1. The service fee must be charged for services rendered by an insurance broker in connection with the sale, solicitation or negotiation, issuance, delivery or transfer of an insurance contract which is made or negotiated in New York, or for any services in connection with or on account of such insurance policies; and
2. The services and compensation amount or basis for the determination of the compensation must be set forth in a written agreement and signed by the NY Customer. 12
The types of services for which a service fee can be charged by an insurance broker are much broader than those which can support the assessment of a consulting fee. Of particular importance is that the service fee can be charged for “agent” like services such as the “sale, solicitation or negotiation,” whereas the consulting fee cannot. Whatever services are to be provided, the Service Memorandum should be crafted with clear definitions of the services and broker compensation.13
C. Insurance Producer Compensation Disclosure Statements
In addition, certain states require insurance producers to provide to an insured and obtain an insured’s signature on certain written insurance producer compensation disclosure statements. These rules will still apply to a health insurance broker who receives a consulting or other fee from an insured as well as a commission payment from an insurer, in states where both forms of compensation in a single transaction are permitted.
1. NAIC’s Producer Licensing Model Act
As the result of the 2002 investigation by then New York Attorney General Elliott Spitzer (the “NY AG”) of compensation agreements in place between insurance brokers and insurers, the NAIC’s Producer Licensing Model Act (the “PLMA”) was amended in 2004 to require an insurance producer to disclose the nature and amount of commissions received from insurers to a consumer only when “such producer receives any compensation from the [consumer].” Only a handful of states have adopted producer compensation disclosure requirements, namely Arkansas, California, Connecticut, Georgia, Illinois, Nevada, New York, Oregon, Rhode Island, Texas, Utah, Washington and Wisconsin. Arkansas has adopted expanded disclosure requirements requiring that:
Before the placement of insurance business, all insurance producers shall disclose: whether the producer or its affiliate represents the customer or the insurer; the source or sources of the producer’s or affiliate’s compensation for the placement; and if the producer represents the insurer, the producer shall disclose to the customer that the producer provides services to the customer on behalf of the insurer.
2. New York Insurance Regulation 194
In January 2010, the New York State Insurance Department (“NYSID”) adopted a new regulation, NYSID Regulation 194, to address a perceived transparency issue related to the disclosure to purchasers of insurance policies of compensation paid to insurance producers in connection with the sale of an insurance policy (the “Producer Compensation Disclosure Rule” or the “Rule”).
a. Mandatory Disclosures by Insurance Producers to Insurance Customers.
Under the Producer Compensation Rule, an insurance producer in the process of selling an insurance contract (which includes both personal lines and commercial lines of insurance), surety bond, contract of guarantee or annuity contract) must disclose to the purchaser, either orally or in a “prominent writing,” “at or prior to the time of application for the insurance contract” the following information (collectively, the “Mandatory Insurance Producer Compensation Disclosures”):
(1) a description of the insurance producer’s role in the sale;
(2) whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract sold;
(3) that the compensation paid to the insurance producer may vary depending on a number of factors, including (if applicable) the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts that the producer [ ] [sells for] the insurer; and
(4) that the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale, and the compensation expected to be received based in whole or in part on any alternative quotes presented by the producer, by requesting such information from the producer.
11 NYCRR § 30.3(a). If the insurance producer provides the Mandatory Insurance Producer Compensation Disclosures orally, the insurance producer must also disclose the Mandatory Insurance Producer Compensation Disclosures in writing to the insurance customer “no later than the issuance of the insurance contract.” 11 NYCRR § 30.3(e).
b. Additional Required Disclosures by Insurance Producer if Requested by Insurance Customer.
In addition to the Mandatory Insurance Producer Compensation Disclosures, the insurance purchaser may also request at any time prior to the issuance of the insurance contract that the insurance producer disclose additional information regarding the insurance producer’s compensation, which information the insurance producer must disclose to the insurance purchaser “in a prominent writing...” at or prior to the issuance of such insurance contract, or, “if time is of the essence to issue the insurance contract, then within five business days” after issuance of the insurance contract. 11 NYCRR § 30.3(b). Such additional information includes the following (collectively, the “Additional Insurance Producer Compensation Disclosures”):
(1) a description of the nature, amount and source of any compensation to be received by the producer or any parent, subsidiary or affiliate based in whole or in part on the sale;
(2) a description of any alternative quotes presented by the producer, including the coverage, premium and compensation that the insurance producer or any parent, subsidiary or affiliate would have received based in whole or in part on any such alternative coverage;
(3) a description of any material ownership interest the insurance producer or any parent, subsidiary or affiliate has in the insurer issuing the insurance contract or any parent, subsidiary or affiliate;
(4) a description of any material ownership interest the insurer issuing the insurance contract or any parent, subsidiary or affiliates has in the insurance producer or any parent, subsidiary or affiliate; and
(5) a statement whether the insurance producer is prohibited by law from altering the amount of compensation received from the insurer based in whole or in part on the sale.
11 NYCRR § 30.3(b).
Insurance brokers and counselors receiving both fees from insureds and commissions from insurers must carefully evaluate compliance producer compensation disclosure rules.
D. Potential Re-characterization of Broker Fee as Premium
Will the broker or counselor fee be respected as such or rather recast as premium income of the insurer making the purported fee part of the premium for purposes of the MLR calculation and state insurance premium tax law? While a fee paid by an insured to an insurance broker for real services rendered by the broker to the insured should be respected as a fee, if the broker does nothing more that provide traditional sales services, an insurance department could argue that the fee is in substance a commission from the insurer if the insurer’s rates are reduced by the amount of the broker fee. While under PPACA the federal Department of Health and Human Services (“DHHS”) clearly has federal jurisdiction over the MLR, it is unclear whether DHHS will use its authority to re-characterize counselor fees as commissions. To be sure, DHHS has already exerted its authority over the substance and manner of the calculation of MLR, resulting in the substantial MLR calculation differences between the DHHS MLR Rebate Form (“DHHS Form”) and the NAIC Supplemental Health Care Exhibit (“SHCE”). Some of the differences relate to the timing of the reports, the SHCE is due on April 1, whereas the DHHS Report is due June 1, but some of the differences are substantive, such as certain aspects of the calculation methodology or what constitutes a health improvement expense.
DHHS, however, has not yet addressed the alternative compensation models that have developed in the wake of the final MLR rule. Nonetheless, DHHS has the authority to adjust the MLR regulation to include certain insurance agent and broker alternative compensation arrangements as part of the administrative expense of the insurer. The agent or broker fee could effectively be included as additional premium paid by the insured. This would not necessarily subject the insurer to additional premium tax because the DHHS Form is mutually exclusive of the insurer’s state-based reporting of premiums. The DHHS Form is ample proof of the willingness of DHHS to prescribe reporting requirements that are different those prescribed by the various states; so anyone with such arrangements should monitor any new guidance or statements regarding the MLR Form from DHHS.
Some insurers have entered into agreements whereby the insurer bills and collects broker or counselor fees on behalf of brokers or counselors, and a subset of those insurers are also exercising a right of set off against the fees so collected for any amounts owed by the broker in his or her capacity as an agent to the insurer. Insurers collect these broker or counselor fees, which could easily be separately billed to the insured, because these fees are typically included in the insurer’s premium invoice to an insured. In addition to blurring the line between a fee on the one hand and premium and commission on the other, this arrangement might also violate a state’s insurance unfair trade practices act. For the protection of insurers, they should require brokers to enter into their own written services and fee payment agreement with insureds. Finally, it is likely that any move by DHHS to address broker or counselor fees would be in the form of substantive requirements for recognition of third-party agent or broker fee arrangements. Consequently, and insofar as is possible, insurers should seek to minimize their role in the alternative compensation arrangement and ensure that agent or broker has a written agreement with the insured for the payment of the fee by an insured. If the insurer feels it necessary to collect the broker or counselor fee on behalf of the broker or counselor, then the right of set-off described herein should not be included because it conflates the insurer’s relationship to the broker/counselor and his/her fee with the insurer’s relationship with the agent and his/her commission.
E. Income Tax Reporting Obligation for Insureds
Insureds that pay a fee to an insurance broker or counselor are obligated to furnish an Internal Revenue Service Form 1099 to the insurance broker or counselor, reporting the amount of the fee paid. Many small group insureds or individual insureds may question their obligation to send a 1099 to the insurance broker or counselor and, if they do not and become subject to an IRS audit, the insured may point the finger of responsibility to the insurance broker or counselor, or perhaps the insurer, if the insurance broker or counselor fails to advise the insured of this income reporting obligation.
1. National Association of Insurance Commissioners - The NAIC’s resolution of November 22, 2011, requesting that insurance agent’s and broker’s commissions be classified in a way to reduce or remove the impact of the MLR calculation on agent and broker commissions. See, http://naic.org/documents/committees_ex_phip_resolution_11_22.pdf. The resolution passed by a vote of 26-20. U.S. Congress – H.R. 1206, sponsored by Representative’s Mike Rogers (R-MI) and John Barrow (D-GA), which would remove insurance agent’s and broker’s compensation from the MLR calculation. H.R. 1206 currently has over 200 co-sponsors. On February 2, 2012, Senator Mary Landrieu (D-LA) introduced S. 2068, a companion bill to H.R. 1206. Another bill, H.R. 2077 sponsored by Representative Tom Price (R-GA), would repeal the MLR requirement entirely.
2. 24 Me. Rev. Stat. Ann. § 1402; Mont. Code Ann. §§ 33-17-102 and 501 et seq., Neb. Rev. Stat. Ann. § 44-2607, Nev. Rev. Stat. Ann. § 683C.010, N.J. Stat. Ann. § 17:22A-28, N.M. Stat. Ann. § 59A-11A-1, N.D. Cent. Code § 26.1-26-02, Okla. Stat. tit. 36 § 1435.2, Utah Code Ann.. § 31A-1-301, 8 Vt. Stat. Ann. tit. 8 § 4791, and Va. Code Ann. § 38.2-1837.
3. O.C.G.A. § 33-23-46.
4. Ky. Rev. Stat. Ann. § 304.9-350.
5. Neb. Rev. Stat. Ann. § 44-2630, Nev. Rev. Stat. Ann. § 683C.060, N.M. Stat. Ann. § 59A-11A-5, N.D. Cent. Code § 26.1-26-35 (also defines counselor duties), and Va. Code Ann. § 38.2-1839.
6. Insurance agents represent the insurer in the solicitation of, negotiation for, or sale of, an insurance contract. See, N.Y. Ins. Law § 2101(a).
7. Insurance brokers represent the insurer in the solicitation of, negotiation for, or sale of, an insurance contract. See, N.Y. Ins. Law § 2101(c).
8. See, N.Y. Ins. Law §§ 2119(a) - (d).
9. See, OGC Opinion No. 08-04-03; but see, N.Y. Ins. Law § 2119(c)(1) (service fee inter alia).
10. OGC Opinion No. 08-04-03 provides an analysis of a fee memorandum and thus provides helpful guidance as to how the Department analyzes fee memoranda.
11. The consulting fee may be charged by licensed insurance agents and brokers in addition to their collection from an insurer of an insurance commission for the sale of an insurance policy issued by such insurer. See, N.Y. Ins. Law 2119(b)(1) and OGC Opinion No. 86-61; cf. OGC Opinion No. 2006-62.
12. See, N.Y. Ins. Law § 2119(c)(1).
13. The service fee can be charged by an insurance broker in addition to the collection of a commission from an insurer for the broker’s sale of an insurance policy issued by such insurer. See, N.Y. Ins. Law 2119(c) and OGC Opinion Nos. 2005-122.2 and 2006-62.