CEOs Need to Resolve This Healthcare Conflict of Interest
At the risk of ruffling a few feathers in my own supply chain (yikes!), I think it’s time to finally talk honestly about one of the biggest reasons why it’s so hard for CEOs to get their health insurance costs under control.
The reason is simple: Most insurance brokers earn more when your health plan costs more.
That’s right: Most employers buy health insurance from brokers whose compensation is based on a percentage of the total cost of the plan. Talk about a conflict of interests!
Now, there is nothing illegal or even immoral about this situation, and it is not even the brokers’ fault. It’s just the way things have always been done in the supremely inefficient healthcare industry.
But that doesn’t mean employers have to keep doing it that way. In both my Forbes article and my Bloomberg articles, as well as my previous Vistage posts, I’ve written about the urgent need for CEOs to finally get market incentives working in their favor for a change by aligning their company’s financial interests with the interests of their employees, managers, and advisors. And a great place to start is with your insurance broker and healthcare advisor.
It’s simple. All you have to do is construct an arrangement with your broker that materially rewards him or her more when your health costs go down than when they go up. It’s not rocket science — every CEO learned this stuff in business school. Right?
Believe me, in no way do I wish to denigrate the work brokers do to help employers meet their health insurance needs. In fact, I believe they play one of the most critical roles in the entire healthcare industry. I simply believe that if they had a greater financial interest in helping businesses lower their health costs, then they’d be more likely to do so.
That’s the wonder of free market forces — something that we could use a good deal more of in our dysfunctional health care system. Or as healthcare author and thought leader Joe Flower put it: “We could have better health care at half the cost, without denying care to anyone, just by driving economic incentives back into the system.”
I have studied disruptive innovations in the healthcare industry my whole career. And in almost every case, breakthroughs have been designed by advisors or vendors whose financial incentives were aligned with those of their customers and clients.
And interestingly, no group is better situated to wield the purchasing power of the buyer to effect change in the healthcare industry than the broker community. And don’t forget: any broker who aligns his interests with the employer’s, and thereby helps him lower his health care costs, is a broker with a competitive advantage over rival brokers.
To be sure, there are laws that govern whether brokers can make this change. Every state has its own set of insurance laws that dictate how agents, brokers, and consultants can be paid. They also dictate how large an employer has to be (in number of employees) before it can break the broker commissions out of the insurance premiums. For some states the number is 50; for others it’s more than 100 before an employer can receive premium quotes net of commissions.
Many states also require that brokers be licensed before they can be paid directly by the employer versus earning a commission from the insurance company — and they cannot do both. In Texas, for example, a broker can either be a licensed health insurance agent to receive commissions from the insurance carrier, or a licensed health insurance counselor to be paid directly by employers. One person can hold both licenses, but must choose one or the other in each working situation.
In some areas of the country, brokers are being paid a flat amount per employee/member, and that rate does not increase even when overall health plan costs go up. This may keep brokers fees in check, but it does not drive innovation, which lowers costs and improves profit for all. So, once again, incentivizing brokers in lower employer costs is the only way for both to profit from innovation.
This conflict of interest inherent in the insurance industry between brokers and employers is not new. It has been debated over and over for years, with some claiming that brokers cannot truly have their client companies’ best interests at heart when the paycheck comes from the carrier, and others insisting that competition between the brokers for clients serves employer interests.
I don’t intend to settle that debate — I intend to circumvent it by asking CEOs to remember the first lesson of sound business management:
If you want to achieve a key business objective — be it launching a new product or reducing your company’s health costs — you need to incentivize your managers and employees internally and your vendors and suppliers externally to help you succeed.