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Will the medical schemes broker survive?

29 September 2008 Gareth Stokes

The Council for Medical Schemes (CMS) recently published a document titled: “Remuneration of Health Brokers: Revising the Regulatory Framework.” As the title suggests the CMS has its sights set on broker commission in the medical aid environment. They believe that medical schemes are paying too much in broker commissions and are proposing a number of interventions to tackle the issue.

Why all the fuss?

The CMS remains narrowly focused on the actual expense incurred by medical schemes. Their latest attack on commissions is similar in nature to their continued obsession with the cost of private hospital care… With this sector under siege from various government departments it makes sense for the CMS to run their finger down the ‘big ticket’ expenditure items and pick up on the next ‘problem’ area: the rand value of payments made to brokers in the latest financial year. “Medical schemes spent one billion rand on brokers in 2007,” they say. And “given the affordability constraints on medical scheme membership, it is incumbent on the Council to assess the impact of the regulatory framework.”

Why is medical cover so expensive? We’ve been told that private hospital admissions are the largest expense item across all medical aid schemes. But the CMS has found another category that needs attention. They’re on a quest to rewrite the broker commission legislation to ensure that “incentives for brokers created by remuneration in terms of the regulatory framework are consistent with consumers receiving best advice and assistance which is not tainted by the possibility of conflict of interest!” The CMS further states that the current broker remuneration system displays a number of shortcomings. Let’s take a look to see how the CMS proposes the problem be addressed.

Putting the squeeze on independent brokers

The CMS hopes to revise the regulatory framework in line with the proposals made in the abovementioned document. They are at pains to point out that these proposals will only affect broker commissions and not place any additional behavioural restrictions on the brokers who remain in the industry.

The first thing you need to know is that the CMS will create two classes of medical schemes representatives. On the one hand you will have brokers who act as agents of a particular medical scheme (called marketing agents) while on the other you will have brokers who act as independent agents for consumers (called independent advisors).

The marketing agent will be a single-product specialist who will provide facts on the medical scheme to which he is affiliated only. This, says the CMS, is totally acceptable “provided that the consumer is under no illusion that what is being offered is impartial, independent advice and assistance.” Marketing agents would effectively be employees of the medical scheme in question, and remuneration to the marketing agent would be part of the legitimate business expense of the medical scheme. Has anyone noticed how commissions paid are already slightly reduced? The marketing agent is “paid by the medical scheme concerned (and not by the administrator or any other party which may have an interest in marketing any other scheme).”

Is there anything left for the independent broker to chase?

So what happens if you decide to pursue the independent advisor route? Will the broker who decides to do business independent of the medical aid scheme make a go of it? It’s going to be difficult. The CMS proposes that “independent advisors would operate in terms of a contract negotiated with the consumer, based upon an agreed upon tariff.” The consumer would then pay for the ‘advice’ on an ongoing basis and would be free to cancel the contract at any point. The CMS further proposes that the party initiating the business with the independent agent (whether employer or employee) would pick up the tab for advice.

The CMS’s next proposal flies in the face of how medical schemes brokers have been operating for years now. They suggest that independent advisors have no “contract with any medical scheme or administrator and would not be able to receive any form of remuneration or incentives for broker service or any other type of service directly or indirectly from a medical scheme or administrator.” It doesn’t leave much room to manoeuvre. There are a number of other proposals too. The CMS suggests there would be no cap on the fee that an independent broker could charge – and that such fees would be determined by natural market forces.

A magic trick to make commission expenses disappear

And here’s the big question. If the CMS is really trying to assist medical schemes (and possibly their members) in bringing medical aid commissions down, then their proposals don’t make any sense. They aren’t reducing the R1bn spent by medical schemes on broker commissions each year! Instead they’re cleverly moving the expense out of the medical schemes ‘commission’ heading and repositioning it. Under their proposal the commission expenditure will fall through the cracks. Some will be hidden in medical schemes ‘general expenditure’ accounts and the balance will be paid directly by medical aid consumers as financial advice fees. They’re solving the commission problem with a clever smokescreen which allows the medical schemes to look good (and probably corner a slice of the money that would usually have gone to brokers) and leaves the consumer thinking they’re paying less for medical aid when in fact they’re paying slightly more!

But don’t let us influence your opinions. Download a copy of the 16-page submission (available at www.medicalschemes.co.za) and get busy with your response. The CMS has requested feedback from affected industry participants: “Please use this opportunity to make submissions on these proposals. Tell us what you think of them, and why. If you find some of the ideas particularly good, please say so. If you find them problematic, let us know this as well. If you have even better suggestions, by all means make them.” If you’d like to have your comments heard you need to forward them to the council before close of business on 6 February 2009. (This deadline was extended from 24 October 2008 following representations made by stakeholders). Written submissions can be emailed to broker_comments@medicalschemes.com

Editor’s thoughts:
The CMS proposals place medical brokers into the debate that’s been raging in the insurance industry for ages: fees versus commission, tied-agent versus independents! Do you think the two-way distribution channel consisting of marketing agent and independent advisor will reduce expenses in the medical aid environment? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Fritz, 13 Oct 2008
It is with great shock to see that people that doesnt work with the individual, regarding one of peoples's main consernce in there financial planing nl.medical aid, can come up with this noncence. but it comes closer to the review of our commissions and now all this...after attending the launch of one of the biggest medical aids in SA, it came to every bodies attention who listened that day, that medical invlation are the highest cause for medical premiums to increases. Out of the five conseps explained that day, the brokers were last in line. Why dont the CMS REVEAL TO THE PEOPLE WHAT BROKERS NEED TO PAY THEM AND THE FSB EVERY YEAR TO KEEP OUR DOORS OPEN!! and after we have paid for the last four years, this is how the CMS re-pays us. Can the CMS please go and do there homework in SOUTH-AFRICA before they try to copy the rest of the world !!!!
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Added by BH, 06 Oct 2008
In 2003 CMS replaced brokers co-admin fees with commission capped at R50 p.m. Many brokerages were almost destroyed. Those who made Medical Scheme business their primary activity were forced to change to something else. And now that they have, they are probably not dependant on health care business anymore. What CMS does not realize, is that being a health care broker has become a sideline value add to our clients. A service that brings no profit in it's own right. For many brokers it might be worthwhile to simply walk away from health care business. Why waste more time with this senseless government interference? Like in 2003, they will do what they want anyway. Brokers should only offer health care advice to those clients prepared to pay their fee. (R1'000 per hour sounds good) and refer all other clients to CMS (Considdering the rediculous accreditation fees, they are on the broker's payroll anyway). I'd like to see their faces when thousands of medical scheme members knock on their doors for advice.
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Added by Mainsail Financial Services, 03 Oct 2008
It's not about "levelling the playing fields" or about "unbiased advice", previous legislation has already achieved this. It's about the money. Medical Schemes have had to pay brokers more money because as the schemes become more and more complicated in an attempt to offer less benefits for more money, consumers are having to turn to brokers for help in selecting the best and most cost-effective plans. This is just another attempt to force the consumer to pay for advice, which they can't afford and so consumers will be at the mercy of slick marketing campaigns and agents and the "unbiased advice" which they are claiming to enforce, will disappear altogether as the brokers go under.
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Added by JEC, 01 Oct 2008
It seems that, by taking the ceiling away, tied agents will in fact end up earning more than current brokers do which means that more will be spent by schemes, not less and there will be no advice, only factual information about the scheme. In addition to this, the role of the advisor in assisting clients, i.e. 'so much choice amongst a bewildering number of medical schemes and benefit options' to quote Council, will now be up to the client to battle though alone as there is hardly a business incentive to be an independant agent...
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Added by TM, 30 Sep 2008
If ever we needed proof that the CMS is a destructive force, we have it now. If not that, then they have a hidden agenda - to wipe out intermediaries. Medical aid options have become increasingly complex with us being paid less and less for our services. The average remuneration is around R57 (Vat included) per month per membership - at the effective hourly rate of R1 000 one needs to run an efficient AND law-abiding practice, it means that a client has not much more than 25 minutes to discuss his options and problems per year. Anymore than this is a loss. No-one can force me to run my business at a loss, and any further pushing and conniving by the CMS (who, by the way, has done preciously little that is tangible for the client so far), will see us merely not offering this service anymore. Hence the clients is on his own or having to pay a proper consultation fee of R1000 per hour. Is this what the CMS wants? Or should I rather ask - do they care?
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Added by Jamie, 29 Sep 2008
If anything like this is implimented it will drive more brokers from dealing with medical aids. I cannot see any improvement for clients and infact they wiil almost certainly be worse off. Do any of the people involved in decision making have any experience in broking and dealing with clients at the "coal face"?? I would certainly doubt it!!
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Added by John , 29 Sep 2008
I stopped my involvement with medical schemes some 5 years ago simply because I could not keep up with all the changes every scheme brought about every year, the general trend being more money for less benefits. I am acutely aware of some intermediaries collecting commissions every month who do absolutely nothing in return for this commission. It is so because many of my clients ask me to help them with something their broker just doesn't seem to be interested in fixing for them. I always decline, telling them that I do not get involved because I don't have the knowledge to do so. Of course I have lost some clients as a result, when they go and find someone who can fix their medical aid problem, and this person tells them he is an expert in 25 other fields as well, but that is part of the game. But I don't agree that the measly amount that the broker gets paid is the actual drain on the resources of the medical aid funds or administrators or whoever pays the commission. The authorities should take a look at where some of the executives of the medical aid societies and administrators live and the transport they use to get there and back. That should give a clue!
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Added by Sharon, 29 Sep 2008
I have been in the industry for over 15 years and left the big coprorates 4 years ago to go it on my own. I have been a Health specialist but feel I should rather sell life insurance and short term as I could make a killing for alot less hassle. Most of my clients can hardly afford the medical scheme contribution of R500 per month for which I am getting a whopping R15 per month. The amount of client visits intially and delivering of cards and then dealling with the on going claims problems does not even cover my costs for petrol, telephone etc. Already there are a number of brokers that charge the 1st month premium as there fee and thereafter the client is on there own. At the end of the day it is going to cost the consumer more to get professional independant advice, if there is even anyone left to give that advice. I hope all medical scheme contributions will reduce by 3% once this is implemented otherwise the three 3 wiseman have just made another wise decision. I will be surveying my clients to see who would be prepared to pay for the advice but I will in most likelyhood be closing my doors and looking for another career.
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Added by Gavin, 29 Sep 2008
Yet another well thought out plan from the powers that be. In true SA form the system will simply not work. The bottom line is Independant advice will no longer exist and the "client" will be worse off. Anybody in their right state of mind would obvioulsy use the Agent as this would be the accepted commission as it is now. So how then do the CMS think that the so called change will help? Perhaps they should look at other avenues and stop wasting money and time on a system that is allready regulated to its full degree. As per Jamie I sincerely doubt the CMS have done their homework as we all know the commission for brokers is a drop in the ocean compared with what the other fat cats are receiving.
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Added by Elna, 29 Sep 2008
I have been in the Insurance Industry for 22 years, doing Life, Short-term and Medical Aids etc. The commission earned by Brokers are so minimal compared to the time it takes to explain to only one client all his medical options, let alone the petrol and other expenses to get to the client. We visit our larger clients every year and spend a day or two to explain changes in their respective medical aids and increases as well as other options to them.......I often have to explain to other people who are not our clients how their medical aid works - they have often purchased it through an agent, who they never get the hold of or who have moved on....forcing the Brokers, like Sharon out of the Medical arena will not be in the consumer's best interest. We spend hours on the phone fighting for our clients, have had great success in doing so. Brokers like us are the ones who normally take the time to fight for a claim of an elderly or handicapped person, also who gives the right advise at the right time to prevent a client from being bankcrupted by a severe illness without the proper cover........This decision will not enhance the medical care for any of our clients but rather worsen it!
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Added by JS, 29 Sep 2008
Die Makelaar sal altyd die Vark in al hierdie fee verhale wees.Hoekom?Die amptenary is onbevoeg en onbekwaam.Alles wat goed werk moet vernietig word. Gelukkig dra die ANC sy eie kiem wat hom gaan vernietig.
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Added by Robbie, 29 Sep 2008
In response to the COUNCIL FOR MEDICAL SCHEMES PRESS OFFICE FEATURE: REMUNERATION OF HEALTH BROKERS Hi I am a financial planner who focuses on medical aid broking. All of my clients receive a minimum service level for the monthly ‘as and when’ commissions I receive. There are definitely many medical aid members out there not receiving any service for their monthly commissions. My argument is that free market forces will sort this out within the next couple of years. Dedicated medical aid brokers like myself are fast finding favour with the unserviced community offering them value for their money. This awareness of a valuable service will work its way through the market until all are receiving a service. As this takes place this will only raise the competition of service levels offered by advisors, thereby putting medical aid members in the best position for ongoing good service and advice. If this ‘as and when’ commission is removed, I believe that instead of improving the quality of independent advice it will actually remove the independent advisor and healthy independent advice. The general public have not had good medical aid support and advice up until now. Why would they start paying for it now when they don’t believe in it yet? We need to create an environment where good and independent advice grows a good name and creates a demand for it before we will be able to start successfully charging for it. The public’s poor view of medical aids and the insurance-broking industry in general will not encourage a market who are already skeptical of the industry, to pay enough to the independent advisor to sustain his or her business. I believe the medical aid advisor will die out and this will be great shame for those who have now come to enjoy the benefits of a very useful service at a relatively low price. Thank you for the opportunity to share my view. Kind regards Robbie Young - Financial Planner
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Added by Gary, 29 Sep 2008
Does the medical aid supplier pay any commissions? I ask this because we are currently having this same debate within the life insurance arena. There is a lot of debate going on around as-and-when commissions and claw back times but NO INSURANCE COMPANY ACTUALLY PAYS COMMISSIONS! They simply facilitate the collection of an agreed rate(which LOA found acceptable) and annualize this and pay the broker this amount. They also take a 8% annual fee for doing this work, a fee higher than the recommended 3% annual commission that the broker makes! What everyone is forgetting is the fact that the insurers are the one who are pushing this debate as a smoke screen for there horific costs taken in the past and it is easier to blame this on brokers who do not stand up and have a voice to fight these thieves! Surely they cannot persue this further. It was only a few years ago when commissions were cut drastically after serious debate and lobbying by big business who were able to successfully double there income on group business. Now we are having this same debate around the same issues and who are the real winners, and who will be the real losers? The fact that by suffocating the goose that lays the golden egg we will have the brokers leaving the industry and to apply there skills else where, the real loser will be those who need the help and advice, the man in the street, they will be the real losers! I wonder now if the "big deals" who were successful years ago to double there income are perhaps not at it again to get rid of the small independent broker, to force clients to correspond with call centre( which they have sucessfully put into place over the past three years) and are far cheaper way to service your clients? I wonder who is behind this new push?
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