A Sighting from The Catbird Seat
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Texas Department of Insurance
Legal & Compliance, Mail Code 110-1A
333 Guadalupe ● P. O. Box 149104, Austin, Texas 78714-9104
(512) 305-7239 ● (512) 475-1772 (Fax) ● www.tdi.state.tx.us
July 11, 2006
Mercer Human Resource Consulting of Texas, Inc. CERTIFIED MAIL
1000 Main St., Suite 2900 NO. 7005 0390 0004 8445 8070
Houston, Texas 77002 RETURN RECEIPT REQUESTED
Mercer Human Resource Consulting, Inc. CERTIFIED MAIL
777 S. Figueroa St., Suite 2000 NO. 7005 0390 0004 8445 8087
Los Angeles, California 90017 RETURN RECEIPT REQUESTED
Thomas J. Bond CERTIFIED MAIL
AKIN, GUMP, STRAUSS, HAUSER & FELD NO. 7005 0390 0004 8445 8094
300 West 6th St., Suite 2100 RETURN RECEIPT REQUESTED
Austin, Texas 78701-2916
RE: NOTICE OF INTENTION TO INSTITUTE DISCIPLINARY ACTION
TDI CASE NO. 46966
Dear Sirs:
This letter is to inform you that this agency is considering institution of disciplinary action against Mercer Human Resource Consulting of Texas, Inc., and Mercer Human Resource Consulting, Inc. under the provisions of the Texas Insurance Code and the Texas Administrative Code because your conduct appears to be in violation of said Codes.
Mercer Human Resource Consulting of Texas, Inc. holds a General Life, Accident and Health License issued by the Texas Department of Insurance (“TDI”) on November 21, 1978. Mercer Human Resource Consulting, Inc. holds a non-resident Life, Accident and Health License issued by TDI on April 17, 2003.
The allegations against Human Resource Consulting of Texas, Inc. and Mercer Human Resource Consulting, Inc., hereinafter collectively referred to as “Mercer,” are as follows:
Health and Welfare Benefits Consulting and Administration Agreement
On April 12, 2000, Houston Independent School District (“HISD”), through Superintendent Dr. Roderick Paige, sent a letter to Arthur L. Dickerson, Jr., Health Care and Group Benefits Practice Leader of Mercer’s Houston office, authorizing Mercer and a subcontractor, ADP, to begin a welfare benefits administration and strategic outsourcing initiative. A copy of this letter was sent to Leonard Sturm as Deputy Superintendent of Finance and Business Services for HISD, Philip Tenenbaum of Mercer and Ben Harrison of ADP.
On June 1, 2000, Mercer and HISD executed the Health and Welfare Benefits Consulting and Administration Agreement (the “Agreement”). In the Agreement, Mercer agreed to act as the agent for HISD for the purpose of providing comprehensive health and welfare benefit consulting and benefits administration outsourcing services for certain health and welfare benefit plans, including medical, dental, drug, mental health and all other welfare plans, such as Life/AD&D, STD, LTD, cancer and hospital indemnity. Under this Agreement, Mercer was to assist HISD in purchasing insurance for its employees at the best possible value and to reduce the overall costs of HISD’s insurance programs. The initial term of this Agreement was to end on March 31, 2001 and automatically renew on its anniversary date for a maximum of two additional one year terms. The contract has since been renewed, with certain changes, and, unless renewed, is scheduled to expire in 2007.
This contract is between Mercer and HISD. There have been numerous amendments and addendums added to this contract, but the general guiding principles will be explored below. The contract sets up the outsourcing of HISD’s benefits program to Mercer who will have complete control on the competitive bid process. HISD pays Mercer a significant consulting fee for this service.
According to HISD, HISD essentially eliminated its benefits department and hired Mercer to run the entire program. The oversight of the benefits program falls under HISD’s Office of the Chief Financial Officer. Mercer, with help from sub contractors, runs the entire program, from the online enrollment of 20,000 employees, the payroll deduction, the call center for employee questions, and the maintenance of the enrollees’ records. All programs, though separately contracted, are managed by Mercer with oversight from HISD.
According to Mercer, the purpose of the Agreement is to outsource purchasing and administration of HISD’s benefit programs to professionals rather than that function being performed by HISD’s own staff or through a variety of vendors providing individual products. Acting under the authority granted in that Agreement, Mercer issues or supervises the process for issuing requests for proposals (“RFPs”) for insurance coverage for HISD’s employees and analyzed the responses.
Under the Agreement, Mercer’s welfare benefit consulting includes general consulting, performance management, wellness oriented consulting, prescription drug management, vendor management, relative value systems analysis, geocentric mapping systems, work/life consulting, RFP preparation, consultation, and management for benefit services, benefit actuarial services, and benefits static web design, development and implementation. Regarding the RFP process, Mercer does the following:
Meet with key stakeholder to define RFP objective
Establish value equation with key stakeholders
Draft a customized RFP
Review custom draft with client and make appropriate revisions
Identify desired vendors based on selection criteria
Clean data to assure efficient RFP process
Release electronic RFP
Manage RFP process
Ascertain financial costs
Negotiate with vendors based on RFP results
Revise clean data
Determine two or three finalists based on client criteria and utilizing negotiating leverage
Conduct and supervise finalist site visits if necessary
Present recommendations of winner/losers
Work with key stakeholders for approval
Make required changes based on management feedback
Work to secure board management approval
Under the Agreement, Mercer’s benefits communication program includes planning and project management, employee benefits attitudinal survey, outsourcing benefits administration communication, open enrollment worksheet, annual enrollment communication, wellness care and benefits use modification and communication, development and implementation of web/IVR systems, develop member education materials, and retirement planning.
Under the Agreement, Mercer’s health management program services include the following: (1) review and identification of Client’s high volume disease states; (2) target high volume/cost diseases; (3) develop member education materials including video presentation via access to Client’s studio for any and all communications; (4) assessment and implementation of interventions based on disease states; and (5) assessment and implementation of wellness and life style health improvement programs.
For all of these services, Mercer receives a strict “fee for service,” also know as a “consulting fee” from HISD. According to documentation received by the Department, HISD paid at least $20,527,350.00 to Mercer for consulting and administrative fees between January 2000 and April, 2005.
Tex. Ins. Code Ann. § 4052.001 defines a life and health insurance counselor as follows:
§ 4052.001. Definition
In this chapter, "life and health insurance counselor" means a person who:
(1) for compensation, offers to examine or examines a life, accident, or health insurance policy, a health benefit plan, or an annuity or pure endowment contract to give advice or other information regarding:
(A) the policy, plan, or contract terms, conditions, benefits, coverage, or premiums; or
(B) the advisability of:
(i) changing, exchanging, converting, replacing, surrendering, continuing, or rejecting a policy, plan, or contract; or
(ii) accepting or procuring a policy, plan, or contract from an insurer or health benefit plan issuer; or
(2) in any public manner:
(A) uses as a title:
(i) "insurance adviser";
(ii) "insurance analyst";
(iii) "insurance counselor";
(iv) "insurance specialist";
(v) "policyholders' adviser";
(vi) "policyholders' counselor"; or
(vii) any other similar title; or
(B) uses any other title indicating that the person gives or is engaged in the business of giving advice or other information to an insured, a beneficiary, or any other person having an interest in a life, accident, or health nsurance policy, a health benefit plan, or an annuity or pure endowment contract.
Individuals who do any of the acts described above must be licensed by TDI as a Life and Health Insurance Counselor, unless they fit within any exemption set out in Tex. Ins. Code Ann. § 4052.004. Mercer does not hold a Life and Health Insurance Counselor’s License and does not fit within any such exemption.
Interlocal Contract for the Health and Welfare Benefits Consulting and Benefit Administration Outsourcing Program
Since 2001, HISD, with the assistance of Mercer, has marketed this concept (the Agreement) to other school districts, which in turn has generated revenue for HISD that has allowed it to recapture its original investment to set up the program, to manage the program, and to further profit. This is done through interlocal contracts entered between HISD and other Texas independent school districts pursuant to Tex. Educ. Code Ann. § 44.031. There are usually amendments and addendums added to the Interlocal contract, but in general the new independent school district pays HISD for bringing them into the program. HISD then pays Mercer a consulting fee for the services performed.
In its marketing, HISD claims that it holds down benefits costs for other school districts because they are able to take advantage of the benefits program HISD has already set up and to avoid the costs associated with the RFP or competitive bidding processes. According to HISD, it and Mercer, will continue to market this program to other ISDs across the country. To TDI’s knowledge, there currently are four (4) participating independent school districts in the program: Dallas, Aldine, Katy and St. Louis, Missouri.
Through the interlocal contracts, the Texas ISDs pay HISD, and HISD, in turn, pays the appropriate contractors, such as Mercer. St. Louis ISD pays the contractors directly and also pays a fee to HISD. According to HISD, the other ISDs are able to join with HISD and, together, use collective buying power to get better benefit rates than they could have gotten alone. However, because each ISD is separately rated by carriers, those ISDs do not receive lower benefit rates by being incorporated into a larger group.
The effect of HISD’s interlocal contracts with other ISDs is to circumvent the competitive bid process regarding insurance products. The result is that Mercer is ultimately behind the scene controlling the decisions which affect thousands of policyholders in several ISDs. Both Mercer and HISD are profiting from this arrangement.
Rebating
The Agreement further requires Mercer to use any commissions that are paid to it to offset the Consulting Fee otherwise payable to Mercer by HISD. Specifically, Paragraph 2.1A in the original Agreement states:
Consultant acknowledges that the Agreement is a strict “fee for services” arrangement, and as such Consultant acknowledges its duty to disclose any “Gifts” under Section 19 herein. Any gift received by Consultant from third parties in connection with the performance of the services will be disclosed to the Client and, to the extent permitted by law, used to offset the Consulting Fee otherwise payable to Consultant.
On April 1, 2003, HISD and Mercer finalized a new Agreement. The only significant change between the old and new Agreement is Paragraph 2.1, which deals with fee for services for Mercer. Subsection C discusses commissions received by Mercer. Specifically, the provision states:
In the event that Consultant receives any commissions or other payments from insurance companies, brokers or other third parties for insurance coverage obtained for Client or otherwise arising from services provided under this Agreement, such commissions or other payments shall be disclosed to Client, and they shall be deducted from the total monthly fees for services provided for in this Agreement.
In this new Agreement, Mercer and HISD specifically refer to commissions received by Mercer; whereas, in the old Agreement, commissions would be handled under the “gifts” provision.
Thus, under either the old or new Agreement, if Mercer receives any commissions or other payments from insurance companies, brokers or other third parties for insurance coverage obtained for HISD or otherwise arising from services provided under the Agreement, such commissions or other payments shall be disclosed to HISD, and they shall be deducted from the total monthly fees for services provided for in the Agreement.
These provisions allow Mercer to rebate valuable consideration or inducements to HISD. The Department is aware of at least three insurance products which have been purchased by HISD and included commissions to Mercer. Mercer received commissions in 2001 and 2002 from Hartford Life Insurance Company in connection with a life insurance product. In 2002, Mercer received commissions from Aetna Health, Inc. on a health care product. In 2002, Mercer received commissions from Hyatt Legal Services on a prepaid legal services product.
As a result of these agreements, Mercer rebated $793,880 in valuable consideration or inducements to HISD between 2001 and 2003, and unknown amounts to the other ISDs.
Additionally, Marsh and McClennan Companies, Inc., Mercer’s parent company, received $61,586 in contingent commissions/overrides from insurers for HISD business placed with those carriers between 2001-2003 as well as $63,183 in contingent commissions/overrides for DISD business placed with carriers during the same period. While these monies do not appear to have been rebated to HISD or DISD, neither were the commissions disclosed to the ISDs.
By rebating valuable consideration or inducements not specified in the insurance contract, Mercer maintained an unfair competitive advantage over other agents. Mercer had little economic need for such commissions, given its lucrative consulting business and its parent company’s secretive receipt of contingent commissions. Thus, it could easily rebate commissions and place itself in a superior position to agents who could not forego commissions.
The conduct above, if proven true, constitutes grounds for the imposition of sanctions against Mercer’s General Life, Accident and Health Licenses because both have:
wilfully violated an insurance law of this state, as contemplated by Tex. Ins. Code Ann. § 4005.101(b)(1);
violated Tex. Ins. Code Ann. § 4052.051 by acting as a Life and Health Insurance Counselor without being properly licensed.
engaged in fraudulent or dishonest acts or practices, as contemplated in Tex. Ins. Code Ann. § 4005.101(b)(5);
engaged in an unfair method of competition or an unfair or deceptive act or practice in the business of insurance by entering into agreements with one or more entities which allow it, directly or indirectly, to rebate commissions or other valuable consideration or inducement to those entities, in violation of Tex. Ins. Code Ann. § 541.056 and 4005.053(c)(1);
engaged in an unfair method of competition or an unfair or deceptive act or practice in the business of insurance by misrepresenting an insurance contract by failing to state a material fact, that it’s parent company was receiving contingent commissions, necessary to make other statements made not misleading, considering the circumstances under which the statements were made, in violation of Tex. Ins. Code Ann. § 541.061(2);
engaged in an unfair method of competition or an unfair or deceptive act or practice in the business of insurance by making a statement in a manner that would mislead a reasonably prudent person to a false conclusion of a material fact, in violation of Tex. Ins. Code Ann. § 541.061(3);
violated Tex. Ins. Code Ann. § 4005.053(c)(1) by paying to a person who is not an agent a rebate of premium payable, a commission or other valuable consideration or inducement that is not specified in the insurance policy;
violated Tex. Ins. Code Ann. § 4005.054 by receiving a commission or other consideration for services as an agent and receiving an additional fee for those services provided to the same client; and
Tex. Ins. Code Ann. §§ 82.051—82.053 and 4005.101—4005.103 provide the penalties for the conduct alleged above, which include revocation of the General Life, Accident and Health Licenses currently held by Mercer.
You have the right under Tex. Gov’t Code Ann. § 2001.054(c) to show that you have not violated the above cited provisions of the Texas Insurance Code and that the allegations set forth are not true. Should you wish to exercise this opportunity, you or your attorney should contact me at the address or telephone number below within fifteen (15) days of the date of this letter to set up a conference or otherwise respond to the allegations set out above. Should you fail to demonstrate compliance with all the requirements of the law for retention of your General Life, Accident and Health License, a hearing may be set to consider appropriate action, including revocation of said license and other penalties provided by law.
Sincerely,
Robert S. Walt
Staff Attorney, Enforcement Section
Legal and Compliance Division, MC110-1A
Texas Department of Insurance
P. O. Box 149104
Austin, Texas 78714-9104.
State Bar of Texas No: 20811050
(512) 305-7332
(512) 475-1772 (Fax)
cc: Deea Western, Team Leader, Agent Licensing