HSChange

The Role of Health Insurance Brokers: Providing Small Employers with a Helping Hand

Originally published by the Center for Studying Health System Change

Published: October 2002

Updated: April 4, 2026

Issue Brief No. 57 | October 2002 | Leslie Jackson Conwell

For small businesses navigating the health insurance market, brokers have long served as essential guides — connecting employers with coverage options and helping them make sense of complex plan structures. While there are costs associated with using brokers, research conducted across 12 nationally representative communities by the Center for Studying Health System Change (HSC) found that brokers deliver substantial value to small firms. Their services include obtaining premium quotes, explaining benefit options to employees, and troubleshooting problems on behalf of employers. In certain markets, brokers also helped educate employers and workers about state initiatives aimed at expanding coverage. Rather than simply adding cost, these findings suggest that brokers offer meaningful benefits to small employers, health plans, and policy makers alike.

The Role of Brokers in the Small-Group Market

Health insurance brokers are a familiar presence in the small-group insurance market. Research indicates that at least half of small firms — defined under HIPAA as those with two to 50 employees — secure health benefits through brokers or agents. Most health plans also regard brokers as an extension of their own marketing operations. Despite this prevalence, the precise role brokers play often remains opaque to those outside the insurance industry. A clearer understanding of how these intermediaries work with employers and health plans can help policy makers craft more effective strategies for expanding insurance coverage among small-firm workers.

The cost of coverage remains a major barrier for small employers. Administrative expenses — including broker commissions — contribute to higher premiums because small firms have fewer employees across whom to distribute fixed costs. Because commissions can represent a significant share of those administrative expenses, policy makers have periodically proposed regulating them to bring premiums down. However, it remains uncertain whether reducing or eliminating commissions would actually lower costs, since health plans would likely absorb the services brokers currently provide and pass those expenses along to employers.

As part of the Community Tracking Study (CTS), HSC researchers conducted site visits to 12 communities during 2001–02, examining the costs and benefits of using brokers and exploring how their role was evolving. Through interviews with brokers, health plan representatives, and small business associations, researchers mapped the range of services brokers provide to both plans and employers.

Understanding Broker Commissions

Health plans reported that brokers wield considerable influence in directing business their way. In highly competitive insurance markets — such as Orange County, California, and Seattle — plans reported that brokers were responsible for more than 90 percent of small-group business referrals. Some insurers relied almost entirely on brokers, distributing their small-group products through general agencies. Even in less competitive markets, brokers played a meaningful role. In Indianapolis, for example, despite Anthem's dominant market position, plan representatives emphasized that brokers remain central to their distribution strategy.

Brokers typically earn commissions from health plans in exchange for selling insurance products. Plans generally treat commissions as a fixed administrative cost built into premiums for all small firms — meaning all small employers effectively cross-subsidize the cost of broker services, whether or not they use one. This structure creates a strong incentive for small firms to engage brokers.

Commission rates varied across the markets studied, generally ranging from 2 percent to 8 percent of premiums. In two markets, state regulations directly influenced commission levels. New Jersey's 1992 small-group market reforms required health plans to spend at least 75 cents of every premium dollar on medical expenses, prompting plans to reduce commissions. In New York, 1993 reforms capped HMO broker commissions at 4 percent of premiums.

Within individual markets, commissions also varied based on health plans' business strategies and shifting market conditions. Plans seeking to expand market share tended to offer higher commission rates to attract referrals — one small Indianapolis plan, for instance, paid brokers 10 percent even though the local norm ranged from 6 to 8 percent. The underwriting cycle further influenced rates, with plans offering higher commissions when building enrollment and pulling back during periods focused on restoring profitability.

A small number of plans found that paying commissions did not align with their business model. Blue Cross Blue Shield of Central New York, for example, chose to rely on internal sales staff rather than paying commissions — but this was feasible only because the plan dominated its local market. Traditionally, group- and staff-model HMOs also avoided paying commissions, though this was shifting. Kaiser Permanente in Orange County and Univera in Syracuse both began paying commissions as a competitive strategy to attract more small-group business.

Some plans used commission structures to discourage brokers from referring high-risk groups. In Miami, for instance, health plans declined to pay commissions for groups with fewer than 10 members — counterintuitively, since commissions typically decrease as group size increases to reflect lower per-person marketing costs. This practice of discouraging referrals based on group size violated HIPAA's federal small-group market reform provisions. The Centers for Medicare and Medicaid Services condemned these practices and urged states to take enforcement action.

Benefits for Employers and Health Plans

Brokers assist employers by helping them establish a price range and identify desired benefits, then gathering premium quotes from multiple insurers. Many brokers create side-by-side comparisons — or "spreadsheets" — so employers can evaluate different rates and benefit packages. Once an employer selects a plan, brokers typically help explain the coverage options to employees, assist with enrollment paperwork, and ensure that new members receive their benefits documentation and member cards.

Broker involvement often extends well beyond initial enrollment. Small employers rarely hire dedicated benefits staff, so they tend to treat their broker as a de facto benefits department — turning to them when employees encounter issues such as denied claims or service disputes.

HSC researchers found less consistency in brokers' approach to policy renewals. Some brokers focused on continuity, encouraging firms to renew and explaining any proposed changes to premiums or benefits. If a premium increase seemed unusually steep, these brokers would explore alternative options. Others, however, treated every renewal cycle as an opportunity to conduct a fresh market search for the lowest available price.

Health plans benefited from broker relationships as well. Brokers generated business referrals, allowing plans to maintain smaller internal sales teams. By helping firms complete applications accurately, brokers reduced the need for plans to chase down additional information. In Orange County, some plans even distributed their underwriting guidelines to brokers, which limited the volume of quote requests plans had to process. Brokers sometimes provided less tangible but equally valuable benefits — PacifiCare representatives in Orange County described how brokers helped educate small employers about the plan's position during a high-profile contract dispute with the area's largest provider system.

Working through brokers also had drawbacks for plans. Some plan representatives noted that brokers could act as communication gatekeepers, limiting plans' ability to build direct relationships with prospective clients. Others reported instances of brokers providing inaccurate information about plan products or miscommunicating details to employees.

The Evolving Role of Brokers

While nearly all observers at the time confirmed that brokers remained entrenched in the small-group market, several forces were beginning to reshape their role.

Advances in information technology were creating new channels for small employers to purchase insurance online — either through broker-operated websites or directly from health plans. Some observers drew parallels to the airline industry, where online booking eroded travel agents' commission-based business model. But purchasing health insurance involves far more complexity than buying a plane ticket: significant differences in provider networks, covered benefits, and cost-sharing arrangements make comparison difficult. The high opportunity cost of researching plans independently meant many small firms still preferred to rely on brokers.

Changing market conditions were also reshaping demand. Health plan consolidation in markets like Greenville, South Carolina, reduced the number of available options and lessened the need for broker guidance. In Seattle, plans began contracting selectively with the most knowledgeable and productive brokers. Meanwhile, in Orange County and Syracuse, employers were increasing their reliance on brokers and seeking expanded services, such as administration of COBRA continuation coverage requirements.

Public-sector dynamics also influenced the broker landscape. In Syracuse, brokers had begun referring eligible families to Medicaid and the State Children's Health Insurance Program (SCHIP). Although brokers received no direct compensation for these referrals, the effort built goodwill with employers who could direct low-income workers to publicly funded coverage for dependents. Conversely, efforts to exclude brokers from public programs created friction. When Florida and California legislators attempted to create small-employer purchasing cooperatives that bypassed brokers, the resulting pushback was significant — Florida ultimately established brokers as the sole distribution channel, while California abandoned a policy of itemizing commissions on invoices after facing broker resistance and continued employer preference for broker services.

Despite these shifts, brokers remained deeply embedded in the small-group insurance market. While they provided clear benefits to small employers, their services — combined with rising costs for health care, technology, and pharmaceuticals — contributed to the overall expense of small-group coverage, pricing some firms out of offering insurance altogether.

Policy makers have often assumed that brokers simply add to the already high cost of health insurance. But this view may be too narrow: while brokers do represent an expense, they also provide important services to health plans and employers. These relationships hold potential as an asset — not just a cost — in efforts to expand coverage to more workers at small firms.

FAQs: Understanding Brokers

What is a broker?
Brokers are typically independent agents who earn commissions from insurers for selling insurance products. They usually work with multiple insurers, whereas agents maintain an exclusive relationship with a single insurer. A general agency — sometimes called a wholesale distributor or "broker's broker" — acts as an intermediary between brokers and insurers, distributing products from multiple carriers.

Who uses brokers?
While brokers serve clients ranging from individuals to very large firms, they most commonly work with small employers — those with two to 50 employees.

How much does it cost to use a broker?
Health plans typically pay broker commissions, which are built into premium rates. Commission rates varied across and within the 12 markets HSC studied, generally ranging from 2 percent to 8 percent. Rates tend to decrease as group size increases. All small firms effectively pay for broker services through their premiums, regardless of whether they actually use a broker.

Sources and Further Reading

Notes

1. The Health Insurance Portability and Accountability Act (HIPAA) defines small firms as those with between two and 50 employees.

2. Marquis, Susan M., and Stephen H. Long, "Who Helps Employers Design Their Health Insurance Benefits?" Health Affairs, Vol. 19, No. 1 (January/February 2000).

3. The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits: 2001 Annual Survey, The Henry J. Kaiser Foundation (2001).

4. Hall, Mark A., "The Role of Independent Agents in the Success of Health Insurance Market Reforms," Milbank Quarterly, Vol. 78, No. 1 (March 2000).

5. Correspondence dated July 14, 2000, to the National Association of Health Underwriters.

Issue Briefs are published by the Center for Studying Health System Change (HSC). Originally published October 2002. Updated with current context April 2026.