Employer Best Practices for Working with Health Insurance Brokers

This video provides an in-depth exploration of the "nested principal-agent problem" inherent in employer-sponsored health insurance plans, focusing on the misaligned incentives and informational asymmetry that drive up costs for organizations. Dr. Eric Bricker begins by analyzing the financial relationship between employers and health insurance brokers/benefit consultants. Using a specific example of an employer with 9,000 employees, he contrasts the direct fee paid by the employer ($175,000 annually) with the estimated commissions the broker receives from carriers, PBMs, and other vendors (approximated at $15 per employee per month, totaling $1.62 million annually). This stark 10x disparity immediately establishes the core conflict: the broker's primary loyalty lies with the carriers who provide the vast majority of their income, not the employer who hired them.

The analysis then frames this conflict using the Principal-Agent Problem, where the Agent (e.g., HR, Broker, Carrier) acts on behalf of the Principal (e.g., CEO, HR, Broker), but fails to do so due to misaligned incentives and informational asymmetry. The video details a four-tiered "nested" structure: the Organization (Principal) to HR (Agent/Principal), to the Broker/Consultant (Agent/Principal), to the Insurance Carrier (Agent). Bricker explains that the organization cares most about cost control, while HR prioritizes ease of administration due to understaffing. Brokers seek to maximize revenue while minimizing client time, and carriers maximize revenue, often heavily reliant on pharmaceutical rebates/commissions paid to PBMs. Furthermore, informational asymmetry decreases dramatically down the chain, with CEOs knowing "nothing" about healthcare, HR having little experience, and brokers often misunderstanding basic carrier contracting details (like variations in in-network allowed amounts), while carriers possess nearly all the expertise.

To combat these systemic issues, the video proposes real-world solutions categorized into incentive alignment and information enhancement. For incentive alignment, best practices include tying a significant portion (up to 20%) of HR’s bonus to the total health plan budget (fixed and variable costs). To manage brokers and carriers, the solution is mandatory competition: putting broker contracts and carrier contracts out to bid (RFP) every three years. This forces performance, as the broker is essentially bidding for the opportunity to earn the large commission stream. For informational solutions, organizations are advised to form benefits committees involving finance, HR, and employee leadership to mutually educate themselves on complex topics like PBM transparency and high-cost claimants. HR professionals must become "expert purchasers," learning contractual details and best practices from internal purchasing departments or specialized conferences. Finally, brokers are encouraged to gain expertise in provider payment mechanisms by engaging with organizations like the Hospital Financial Management Association (HFMA), ensuring they hear both the carrier and provider sides of the story to challenge carrier claims effectively.

Key Takeaways: • Broker Compensation Misalignment: Health insurance brokers often earn nearly 10 times more in commissions from carriers and PBMs than they receive in direct fees from the employer, creating a fundamental conflict of interest where their loyalty is financially tied to the carrier. • Nested Principal-Agent Problem: The employer health plan structure involves four nested principal-agent relationships (Organization -> HR -> Broker -> Carrier), each layer suffering from misaligned incentives and decreasing levels of healthcare expertise moving away from the carrier. • HR Incentive Alignment Best Practice: High-performing organizations align HR incentives by basing up to 20% of HR compensation on the total health plan budget performance, covering both fixed costs (premiums, consulting fees) and variable claims costs. • Mandatory Competition for Agents: To hold brokers and carriers accountable, employers must commit to putting both broker contracts and carrier contracts out to bid (RFP) every three years; this competition is essential to prevent exploitation and secure better terms. • Carrier Revenue Drivers: Insurance carriers often derive substantial revenue not solely from premiums, but significantly from RX payments, specifically rebates or commissions paid by pharmaceutical companies to the PBMs they own or manage. • Addressing Informational Asymmetry: CEOs and HR departments typically lack deep healthcare finance expertise; solutions include forming a Benefits Committee (involving finance, HR, and employee leadership) to collectively and continuously educate stakeholders on plan details, PBMs, and high-cost claims. • HR as Expert Purchasers: HR professionals should adopt best practices from corporate purchasing departments, focusing on contractual details and attending purchasing conferences to improve their ability to negotiate and manage vendor relationships effectively. • Broker Expertise in Provider Payment: Brokers must gain deep knowledge of how carriers pay providers (e.g., understanding price transparency and allowed amounts) by engaging with provider-side financial organizations like the Hospital Financial Management Association (HFMA) to counter carrier narratives. • Leveling Up Expertise: To achieve top-tier performance, organizations should strive to develop expertise one level beyond their agent (e.g., the Organization becoming expert in purchasing, HR becoming expert in provider payment, and the Broker becoming expert in care provision).

Tools/Resources Mentioned:

• HFMA (Hospital Financial Management Association): A professional organization for CFOs and financial leaders of hospitals and physician practices, recommended for brokers seeking to understand provider payment mechanisms.
• Google/AI: Suggested for finding public contracts between employers and benefit consultants to analyze fee structures.
• Purchaser Conferences: Recommended for HR professionals to learn best practices in contractual negotiation and vendor management.

Key Concepts:

• Principal-Agent Problem: A conflict of interest arising when one party (the Agent) is expected to act in the best interest of another (the Principal), but has misaligned incentives and superior information, leading them to act in their own self-interest.
• Nested Principal-Agent Problem: A chain of principal-agent relationships where the agent of one relationship becomes the principal of the next (e.g., Organization -> HR -> Broker -> Carrier).
• Informational Asymmetry: A situation where one party in a transaction or relationship has more or better information than the other, which can be exploited (e.g., carriers knowing far more about healthcare finance than employers or brokers).
• "Whose bread I eat, his song I sing": An ancient expression emphasizing that loyalty follows the source of income, explaining why brokers prioritize carriers over employers.