Texas Authorities Investigating Mercer Human Resource Consulting

By Staff Report

Aug. 3, 2006

Mercer Human Resource Consulting is under investigation by Texas authorities for allegedly violating state laws by receiving rebates from insurance companies and for not disclosing commissions paid by insurance companies to Mercer’s parent organization, Marsh & McLennan Cos. 

The Texas Department of Insurance filed a notice July 11 saying it is considering disciplinary action against the company, which also operated as a life and health insurance counselor without a proper license, according to the notice. Mercer says the allegations in the letter are unfounded.

The investigation in Texas is partially attributable to a string of problems that has beset Marsh & McLennan since New York Attorney General Eliot Spitzer alleged that Marsh, the world’s largest insurance broker, had steered business to insurers in exchange for illegal payments. Marsh paid $850 million early last year to end the investigation without admitting wrongdoing, though several Marsh executives faced criminal charges and a handful pleaded guilty to criminal charges of fraud. 

It was through the investigation by Spitzer that Texas officials found payments totaling $125,000 paid to Marsh by the insurance companies whose business Mercer steered toward them. Such an arrangement constitutes fraud and creates a conflict of interest between Mercer and its client, says Robert Walt, an attorney for the Texas Department of Insurance.

The events leading to the Texas investigation began in 2000, when Mercer was hired by the Houston Independent School District to restructure the school system’s health benefits administration. 

During the next five years Mercer was paid more than $20 million to outsource the school system’s benefits. School officials, who are not under investigation, say they have saved money, but a portion of those savings came from $800,000 in rebates Mercer received from insurance companies. Though the rebates were passed on to the school district, receiving them is illegal in Texas, Walt says, as it is in several other states.

“To paraphrase, Mercer said to the HISD, ‘You will save beaucoup bucks if you go with us because you will get lower [insurance] rates’ ” and savings in the form of rebates, Walt says. 

Mercer also allegedly brokered deals between insurance companies and the school districts that it worked for, passing commissions from those deals to the schools, which saw the money as part of their savings. A competing insurance broker, Richardson-Eagle, complained to the Department of Insurance, saying such an arrangement was only possible because Mercer was foremost a fee-based consultant, not a broker, and so could afford to pass commissions on to its clients. In its notice, the Department of Insurance said Mercer violated state law by engaging “in an unfair method of competition.”

The Houston Independent School District also created a purchasing coalition with other nearby school districts. The other districts paid a fee to join the purchasing coalition in hopes of receiving lower insurance rates. But Texas insurance officials contend the plan was intentionally misleading because each school district is rated by health insurers separately and therefore cannot realize savings by joining purchasing coalitions. 

Nonetheless, officials from the other school districts in Dallas, Aldine and Katy have said the coalition saved them money.

A Mercer spokeswoman, Stacy Bronstein, wrote in an email that once the department of insurance “understands our arrangement with the school district, we are hopeful that they will conclude that we are in compliance and that the Department should be supporting, not challenging, a cooperative structure that saves money for the districts and their taxpayers.” 

The investigation in Texas has been a boon to plaintiffs in three civil lawsuits filed against Mercer by former employees of the school district and Richardson-Eagle, says Jim Reed, the plaintiff’s attorney in the cases. Reed is an attorney with Looper Reed & McGraw in Houston. Before the Department of Insurance issued its letter, one of Reed’s cases against Mercer was dismissed by a state court in pretrial summary judgment, a decision Reed is appealing.

“We believe the Texas Department of Insurance letter confirms every one of our allegations,” Reed says. 

Texas officials told Workforce Management that they are waiting to meet with an attorney representing Mercer before proceeding.

Jeremy Smerd


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