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Where Agents Become Pawns: The Dark Side of FMO Contracting, and What it Means for Agents
Byron Edwards
May 9, 2023
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There are roughly 100k licensed Medicare agents in the United States, mostly small business owners deeply dedicated to serving Medicare beneficiaries in their local communities. But this Medicare distribution industry has significantly consolidated over the past five years as a few multi-billion dollar private equity-backed companies went on a massive agency buying spree, changing the industry for independents in the process. 

Now, those independent agents closest to the Medicare beneficiary are increasingly subject to horse-trading and complex machinations designed to maintain private equity’s profit margins, all while preventing access to tools and support that would help agents deliver exceptional service to their clients. 

Let’s start from the beginning: most licensed Medicare agents get certified-to-sell Medicare Advantage and Medigap products through independent agencies, typically started and run by a former agent with a knack for teaching and helping others. These agencies earn administrative fees every time one of their agents writes a policy. 

But small agencies and agents can’t work with carriers directly. Instead, the largest Medicare Advantage carriers work through larger national agencies called Field Marketing Organizations (FMOs) (or sometimes called National Marketing Organizations (NMOs) or National Marketing Alliance (NMAs)). Carriers created this structure to share the responsibility of day-to-day agent management across contracting, commissions, marketing, enrollment, client support, and compliance functions with large agencies. In turn, agents and smaller agencies have the ability to choose which FMO to work with on the basis of their services and technology. 

While these FMOs were formerly independent, the vast majority of them have sold out to private equity firms executing “roll-up” strategies over the last five years: buying a series of smaller companies, combining them and executing cost-cutting, then reselling them at a higher valuation simply because the combined entity is bigger. 

The immediate negative effect is that agents lose the support and relationships they previously enjoyed with their FMO. However, FMOs have taken more manipulative strides to protect their assets after acquisition, especially as private equity has started to run low on targets and feel the pressure from increasing agent churn. Below are a few examples of these tactics and how they impact the agents caught in the middle: 

Tactic 1: Horse-trading

Ideally, independent agents and agencies have the autonomy to choose who they partner with and are able to make the best decision for their business without being impacted by external limitations. While most agents do have some degree of flexibility to move between one FMO and another, there have been some restrictions put in place to prevent them from constantly moving back and forth. For instance, carriers might limit the number of times an agent can switch FMOs per year in order to mitigate the operational burdens that come along with updating hierarchies, commissions at the carrier level, and contracts.  

While policies across carriers differ, there are generally two options: either (a) the agent waits 90 days after which they are able to move to a new FMO or (b) the agent secures a “release” from their current FMO, which is a letter that states that the FMO approves of the move. It’s sound policy in theory, but the equilibrium between FMOs has resulted in a horse-trading game where agents and agencies are mere pawns in a broader competition for market share.

What we see all too often is that FMOs simply refuse to grant releases unless the accepting FMO agrees to release one of its agents in the future. There’s even a name for this: a “reciprocal release.” 

To use a baseball analogy, it’s like the Yankees saying to the Red Sox, “I’ll agree to trade Derek Jeter today only on the condition that should David Ortiz want to play for us in the future, you need to trade him to me.” What happens is that Jeter’s and Ortiz’s opinions no longer matter as the team owners battle it out. Ortiz may want to play for the Yankees but the Red Sox don’t have to let him go so he’s out of luck.

Now, it doesn’t sound so bad waiting for 90 days. But the problem is that anything can happen in those 90 days to disrupt the agent experience; FMOs can shut access to digital systems or hold back committed marketing capital (ask me how many agents have told us they’re owed money by their upline!). It’s equivalent to benching Ortiz when Ortiz says he wants to go play for the Yankees. Fortunately, FMOs are still incentivized for their agents to produce under them since they’re earning revenue, so this scenario rarely if ever happens. 

Tactic 2: Back-door contracting maneuvers 

With the end of one tactic comes the start of another. Lets say an agency submits an intent to transfer to move to another FMO, initiating a 90 day waiting period to move their contracts. While that transfer process is happening, there are still a number of retaliatory actions that FMO can take to hinder the agency’s move, sometimes destroying the agency in the process…

For example, if the FMO gets wind of an agency’s intent to move before the agency has notified the carrier, the FMO can for most carriers unilaterally dismantle the agency by downgrading that agency’s agency contract. By doing so, the FMO eliminates the relationship between the agency and its individual downline agents, so that when the agency declares its intent to move, there are no longer agents underneath it. And of course in that process, the FMO captures all the overrides that should be going to the agency and retains all of the producing agents. 

This (technically legal) move can effectively dismantle an agency, cause financial ruin for the agency principal, and make all the downline agents stranded with the bad actor FMO. Unfortunately, the agency may not even be aware that this is happening.

Tactic 3: Withholding Commissions

Despite their manipulativeness, the two tactics above are technically compliant and legal approaches to retaining agencies. Some FMOs push it a step further with monetary threats. 

Given that many carriers rely on FMOs to manage their commissions and Medicare Advantage pays monthly renewals, we’ve seen FMOs threaten to withhold commissions on prior business should the agency decide to leave. This is in flagrant violation of all contracts the FMO has with the carrier and their agencies and ruins an agent’s confidence in the system, but we’ve seen how certain FMOs use this particularly nasty negotiating tactic to retain agents. 

Unfortunately, we’ve seen all three tactics employed by the large FMOs who agents trust with their business. And when agents are mistreated, that trickles down to the client. 

Seeing this sort of behavior highlights just how important it is - for the sake of the whole industry -  to flip FMO to agent relationship on its head. We don't feel like agents should be forced to work with an FMO - they should want to. And it’s the FMO who should feel the pressure to earn agents’ business every day.

As private equity-backed consolidation reaches its end stages, we recommend that agents and agencies protect themselves from their FMOs in a few different ways:

  1. Require a signed pre-release agreement: this agreement states that the FMO must release the agency upon request immediately. The FMO cannot require the agency to wait 90 days. Here’s an example of the upfront release we provide to all our partners at Spark.
  2. Request a signed commission agreement: your agreement should say that the FMO must continue to pay level commissions (meaning they can’t change override rates on existing policies) as long as the carrier is paying them, regardless of whether the agency has moved to another FMO. Financial transparency is a pillar of the entire Spark business model. We spend the time to walk through every detail of our partnership agreements so our financial commitments are clear from the start.
  3. Require direct visibility into your contracting: make sure your FMO has a transparent system to show you the status of your contracts, and your agent contracts. The transparency enables you to use a “trust, but verify” relationship with your FMO.

We believe in a more open, transparent industry where FMOs and agents work together to provide the best possible experience for their clients, not one where FMOs use back-room deals and scare tactics to retain and horse-trade agents. If you have questions or concerns on any of these tactics or what you can do to protect yourself, don’t hesitate to reach out.

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