To Heap or Not To Heap – Managing Cash Flow in Medicare Agencies

By Matthew J. Cornish | Managing Director, Solomon Partners

Managing cash flow is crucial for Medicare agencies, especially during high-volume periods like open enrollment. This Q&A provides valuable insights into heap commissions, a strategy that can help agencies maintain positive cash flow by offering a larger up-front commission payment in lieu of future renewal commissions. Understanding this topic is essential for those currently involved or looking to invest in the insurance industry, as it can significantly impact business operations and financial stability.

Q: What are heap commissions?

A: In insurance broadly, agencies that sell insurance products can choose to receive level annual premiums or opt for a “heap commission structure.”

With the heap structure, agencies receive a larger portion of the commission the year of initial policy sale, with smaller or no commissions paid for renewal premiums.

Heaped commissions are common in areas such as voluntary benefits and life insurance, where a higher initial commission is used to incentivize salespeople and cover the up-front costs of marketing and enrollment. Access to this commission structure within Medicare is not always offered, but it can be built via a strong relationship with a dedicated partner.

Q: Why would insurance agencies want to heap commissions?

A: Policy acquisition costs and agent commission payments are materially borne up front and can be a considerable cash flow burden during the high-volume open enrollment period, commonly called OEP.

In addition, there can be a few months of lag time on initial carrier commission payments to brokers for “bound policies,” which refers to when the insurance coverage is activated. This cash flow timing discrepancy can place significant stress on working capital and overall business operations. Leveraging a heap program where a larger one-time commission is paid in a timely fashion is one tool agencies can use to remain cash flow-positive during OEP.

Q: What is the difference between a commission advance and a heap?

A: Field Marketing Organizations, Independent Marketing Organizations, and third-party administrators that serve as bridges between insurance agents and insurance carriers can provide an advance on future commission streams to help agencies manage the high cash burn of OEP.

This commission advance is similar to a revolving line of credit. Agencies are generally charged a market interest rate or a fee on these advances. The key difference in this model versus a heap payment is that the agency retains the long tail of renewal commissions, administration fees, and marketing co-op dollars instead of selling these rights in exchange for a one-time payment.

Q: Who can provide a heap commission structure, and why would companies employ this strategy?

A: Specialty financing entities and select uplines can provide a structure for a one-time heap payment, especially for agency partners that drive significant volume.

Cash flow management is a key piece of ensuring a successful Medicare business. Heap payments on a portion of an agency’s book of business can help to bridge cash flow conversion when an agency is growing quickly.

In the long run, a mature, active book of policies with minimal heap exposure is the best way to retain 100% of the economics, which helps to drive consistent, growing, annual recurring revenue and earnings.

Q: How can Solomon Partners help?

A: We are active in the insurance brokerage and distribution sectors for both capital-raising and M&A. We pride ourselves on providing independent, unbiased advice to our clients to drive successful outcomes throughout all stages of growth and market cycles.