Inside Baseball – Medicare Edition

It’s nearly that time of year again. The weather is about to start cooling off, the hunt for the MLB playoffs is on, and Medicare Annual Enrollment season is almost upon us! Okay, so maybe one of these doesn’t feel like it quite fits with the others, but I believe that baseball has more in common with insurance than you might think. In my time at UNC-Chapel Hill, I took a class on the history of baseball in America, and what I found is that you can use the game as a lens through which to view so much more. So, let’s step up to the batter’s box and explore the inside baseball of Medicare.

Picture this…you’ve just retired, you’re turning sixty-five in a few months, and you’re gearing up for a relaxing transition to Medicare and the joys of a post-working lifestyle. Next thing you know, your phone rings with a helpful insurance agent on the other end of the line offering to explain your transition to Medicare. After talking for about an hour, you have an idea of the plan you want, the company you’re going to get it with, and how to get it done. The next day, your phone rings again with a different insurance agent, but you don’t pay it any mind.

Then the following day, two more calls. Fast forward six months and you’ve fielded 50+ phone calls, you’ve got an inbox full of emails, and tons of physical mail to boot. By the end of it all, you’re tired of even thinking about Medicare. Why is it that you suddenly feel more popular than “modern day Babe Ruth” Shohei Ohtani? I like to think of these agents as the leadoff hitters on a baseball team. They’re out there on the phones, going door-to-door, holding seminars, and doing anything else they can think of to sell more insurance. While they may not be the most powerful hitter on the baseball team, they are trying to be consistent enough to hit as many singles as possible, selling insurance policies and generating commissions. The higher the batting average, the more commissions they’ll earn.

It should be no surprise that most of the people on the other end of the phone are just trying to sell you insurance to earn a commission. It may, however, be a surprise that I don’t think that’s necessarily a bad thing, as long as you understand what is going on! The methods will vary; some people may focus more on education first and sales second. Others may use more of a high-pressure sales tactic to get you to sign on the dotted line before you get off the phone, a strategy that I do not condone. Regardless of methodology, understanding the structure of commissions helps shine light on the reason behind sales recommendations.¹

For Medicare supplements, it’s common for insurance agents to be paid based on a percentage of the premium amount of the policy you buy, usually around 20 percent of the annual premium. On top of that, they’ll usually receive an additional commission each following year the policy is in force, often referred to as “trailing commissions” or “trails,” that can be around 10 percent of the original premium. In this sort of commission structure, there can be an implicit incentive to sell higher-priced policies in order to have a higher commission, or an incentive to sell a company that pays a higher percentage commission overall.

As for Medicare Advantage, agents are often selling $0-premium plans, but don’t let that premium fool you into thinking there’s no financial incentive at play with these plans. Medicare Advantage plan commissions are usually paid as a flat rate of several hundreds of dollars for a new plan enrollee, regardless if the premium is $0 or $100 per month. There is also often a bonus for enrolling someone in their first-ever Medicare Advantage policy. Prescription Drug Plans have flat rate commissions for their sales too, albeit they are usually much lower than Medicare Advantage plans.

I always recommend working with a broker who represents many insurance companies as opposed to a captive agent who only represents one. The term “agent” is often used interchangeably (just like I’ve been doing in this post), but it’s good to know that the difference exists. The process of becoming a broker is fairly complicated; it’s rare for brokers to contract with a large number of companies directly. Instead, they’ll usually work through Field Marketing Organizations (FMOs) or Independent Marketing Organizations (IMOs) who act as the middleman. Because of the large amount of business they do, these FMOs and IMOs get contracts with many different insurance companies with more favorable terms than would be available to an individual, and then they subcontract with the brokers who are actually out there selling policies.

I like to think of these marketing organizations as cleanup hitters on a baseball team. They have a lot more power and influence than the leadoff hitting brokers, and they are there primarily to be a resource to help those agents get over the hump and cross home plate (make a sale) more. Usually, these arrangements between brokers and marketing organizations end up benefiting both parties; the broker gets easier access to sales support, leads, and other factors to assist them in their sales process, while the FMOs and IMOs get to boost their RBI numbers, getting a piece of the commission from each of the many different brokers that they’re working with.

Once you reach your sixty-fifth birthday and the transition to Medicare is in the rear-view mirror, the ball game isn’t quite over. Remember those trailing commissions I mentioned earlier? Well, they don’t last forever. It is common that after six years these trails will stop, and the agent who sold you that policy is back up to bat to try to sell you a replacement to restart the commission cycle. That said, there are no loyalty bonuses or other benefits for you for sticking with one Medicare Supplement policy or Medicare Advantage plan for a long period of time, and premiums tend to increase each year. So it is often mutually beneficial to switch plans every few years. Remember to work with a broker to shop around, compare as many plans as possible, and pick one of the lowest rates for the plan you want rather than sticking with any one company.

When it does come time to switch, you might wonder what causes the broker on the other end of the line to recommend one insurance company as opposed to another? First and foremost, it’s usually health underwriting. In fact, that’s one of the main benefits of working with a broker who has access to a large number of companies! Do you have a heart condition? Well, one company might not mind that as long as it’s stable, while another company might disqualify you for coverage entirely. After underwriting, some other important considerations to make with your agent are the insurance company’s financial ratings, customer service, and history of rate increases.

Beyond that, there are other reasons an agent may be recommending a certain company. As I hinted above, even though your broker may have access to dozens of companies, they may get paid significantly more for selling some of them compared to the others. Some contracts have a higher commission built in, and IMOs and FMOs commonly run sales contests: for selling a large number of policies with a certain insurance company (or group of companies), the agent may get flown to a tropical island or other vacation destination. So even though there may be a company who would cover you for a lower premium, it is possible a broker may recommend a comparable company with a slighter higher premium for their own benefit. That’s not to say that switching won’t still save you money and be a good option for you; there just may be more underlying the recommendation than it first appears.

From the infamous Chicago Black Sox in the early 1900s to the Astros stealing signs here in more recent history, America’s pastime has shown us there’s always more than meets the eye. While I can assure you there’s nothing nearly as nefarious as those two baseball scandals going on when an insurance agent calls you, I do think it’s important to peel the curtain back and talk about the “why” behind their recommendations. Any worthy agent will truthfully answer questions about their compensation and recommendation reasoning. As a fiduciary, it’s my goal to mitigate conflicts of interest like commissions or sales incentives and ensure that the product I’m selling is truly in the best interest of my clients. Is your insurance agent doing the same?

Jacob Yocco, CFP®

1. Discussion of commission structure is based on personal experience; see an independent explanation here