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Medicare hierarchies and contracting

Medicare hierarchies and contracting provides a review of the sales structure for independent agents, agencies and top of hierarchy (TOH) organizations.  This focuses on Medicare Advantage plans but the general concept applies to most product types.  However, commissions, override amounts and structures will vary.  We will also cover general carrier contracting for all levels including; independent agent, agencies, TOH.

Independent Medicare Advantage and PDP contracted agent

Independent agents are able to hold contracts with multiple carriers.  In some cases the agents are able to contract directly with insurance carriers or go through a hierarchy (upline).  Some carriers only allow agents to contract through an upline.

CMS max allowable compensation for MA and PDP (street commission)

Every year CMS sets the maximum allowable commission an independent agent can receive for Medicare Advantage sales.  The amounts listed as the max amount for a new MA sale and the max amount for a MA renewal. The renewal is half the initial amount.  The PDP commissions work the same way.   CMS breaks the states up into 4 groups.  The comp for each group is different. Groups are:

• CA and NJ:  Highest compensation
• CT, PA and DC:  2nd highest compensation
• National:  All other states not listed above and 3rd lowest compensation
• Puerto Rico and the U.S Virgin Islands:  Lowest compensation

Click here for the max commission amounts for 2023

Top of hierarchy organizations (Called FMO’s or NMO’s)

FMO’s and NMO’s are companies that contract with insurance carriers.  They receive compensation above what Medicare lists as the max compensation.   Both independent agents and agencies (more on agencies later) can contract through an FMO instead of direct with the insurance company.  Some insurance companies will only contract agents through an FMO.  The agent can access multiple insurance company contracts through the FMO.  In most cases, the agent is paid directly by the insurance company at the max allowable CMS compensation.  This is the case even though they contract through the FMO.  That means, the agent owns the book of business.  If they left the FMO for another FMO or went direct to an insurance carrier, their renewals and book of business would go with them.

The FMO receives an override (an set amount of money per sale)

When insurance agents sell a Medicare plan the FMO receives an override.  As a result, the more an agent sells the more overrides the FMO receives. The concept is designed to incent the FMO to help the agent sell more. This is done through training, contracting assistance, marketing programs, incentives, leads, agent services or a number of other value added programs. The FMO also receives overrides when cases renew.

If the FMO contracts an independent agent to receive commissions directly from the carrier, the agent receives the full CMS commission from the carrier. (Street commission direct pay)  The FMO will then receive the full override.  Override amounts can vary from carrier to carrier but we will use $125 as an example.  Every time the street agent sells a policy the FMO will receive a $125 override payment.  In most cases, the override is half the amount for renewal payments.

Medicare hierarchies and contracting:  Agencies under FMO’s

In many cases an independent agent will contract through a local agency or an agency with a contract level below the FMO level.  If this is the case, it is still common for agents to paid the full CMS commission directly from the insurance carriers.   In some cases the agents have the carriers pay the commission to the agency and then the agency pays it out to the agents.  This is called an LOA or commission assignment arrangement. (More on this later)

In general there are 3 levels of agencies under an FMO.  The level determines how much the agency will receive as an override.   Please note: overrides are one pool of money, they are not additional amounts above what the FMO receives.  When an FMO has an agency under them, they are giving up the portion of their override the agency is receiving.

Agency contract levels

GA-General Agent:

An agency at the general agent level receives a $50 override per sale.  The amount of override on the renewal is usually half of the initial override.  In most cases, the general agent needs to have at least 5 contracted and certified sub agents in order to get the GA level with any carrier.

MGA- Master General Agency:

Override of $75 per enrollment and half that amount upon cases renewing:   Minimum of 10 contracted and certified sub agents to have the MGA level

SGA-Senior General Agency:

Override of $100 per enrollment and half that amount upon cases renewing:  Minimum of 20 contracted and certified sub agents to have the SGA level.  This level also requires production minimums in addition to the min number of sub agents.

The amount of override paid to the agency under an FMO is deducted from the amount of override they would receive with a street agent only.   Example:  Street agent under an MGA agency that works through an FMO.   Agent get the max allowable commission paid directly from insurance carrier.  The MGA gets a $75 override and the FMO gets a $50 override (assuming the FMO was getting a $125 override)

Levels:

The agency levels are all splitting one pool of money for overrides. (assuming a $125 FMO override level)   If an FMO has a GA under them, the GA gets $50 and the FMO gets $75)  If an FMO has an SGA under them, the FMO gets $25 and the SGA gets $100.   If the SGA has a GA under them, the SGA gets $50 and the GA gets $50)

• FMO ($125)
• SGA ($100)
• MGA ($75)
• GA ($50)
• Street agent (gets full CMS commission paid directly from the insurance company regardless of how many agencies in hierarchy)
• Note:  PDP plans also have override payments but they are substantially less than MA plans

Medicare hierarchies and contracting: commission payment methods

Direct pay:  In most cases, independent agents are paid directly from the carrier.  This is often the case for agents appointed directly with a insurance company and also often the case when contracted through an upline. (FMO,SGA,MGA,GA) When an agent is set up as direct pay from the insurance carrier, the agent owns the book of business and the commissions.

LOA contract/Commission assignment

In some cases an agent will not have their commission paid directly to them.  The agent is writing the business but the insurance company is not paying the compensation direct to the agent but to another agent or  an entity/agency.  The agent or entity receiving the commissions are then paying the agent based on some type of agreed upon amount. The amount paid is usually an amount below the CMS maximum amount.

This is often the case for a w-2 agent writing business for a company or agency.  It can also be used for a 1099 agent when the upline is providing some type of value in exchange for a portion of the commission.   In this case, the writing agent does not own the book of business.  If they leave the upline, the commissions will continue to be paid to that upline at whatever terms and conditions had been agreed upon.

Medicare hierarchies and contracting: Contracting agencies and sub agents

Any agency cannot contract another agency under them at the same level.  For example, if an SGA wants to bring on another agency, the highest level the agency could be is an MGA. IN other words; they must be one level below the upline.

Having commissions paid to an entity:

Medicare Advantage and Part D commission can pay to an entity.  In order for the entity to be paid, it must hold an insurance license.  Further, the entity must have a listed principal (person) and that principal must be contracted and certified with any given carrier for the entity to be able to receive commissions

Individual person as an agency: 

An individual can be considered either a GA, MGA or SGA.  This is the case when they meet the minimum amount of sub agents required by a carrier. An individual they can be given an agency contract as an individual.  Having an entity with an insurance license is not a requirement for most insurance companies

Agency with producers (sub agents) in other states

In order for an agency to receive overrides in any given state, that agency must hold an insurance license in that state and be appointed and certified with that carrier.  This can be problematic when an agency brings on a producing agent that is licensed in states the agency is not licensed in.