A common question in the context of Medicare Advantage (“MA”) distribution and compensation is how agents and brokers may be compensated for commissions and administrative payments and whether, and to what extent, referral fees are allowed for MA enrollments. This Article provides a broad overview of federal regulation on that subject. Of course, compliance personnel should consult with regulatory counsel on the specific circumstances related to these issues to determine what kind of payment is being made and the full extent to which it may be limited by the most recent regulations and guidance.
1. Statutory Authority & Touchstone
On July 15, 2008, the Medicare Improvements for Patients and Providers Act (“MIPPA”) became law. MIPPA created Section 1851(j)(2)(D) of the Social Security Act (42 U.S.C. § 1395w-21), which relates to prohibitions and limitations on the conduct of certain MA activities, with Subsection (D) specifically relating to limitations in respect of compensation. Subsection (D) states as follows:
The use of compensation other than as provided under guidelines established by the Secretary. Such guidelines shall ensure that the use of compensation creates incentives for agents and brokers to enroll individuals in the MA plan that is intended to best meet their health care needs.
That language provides a useful statutory touchstone upon which to base interpretation of the implementing regulations on MA agent and broker compensation: compensation should create “incentives for agents and brokers to enroll individuals in the MA plan that is intended to best meet their health care needs.” On September 18, 2008, CMS established regulations, including 42 C.F.R. § 422.2274, governing MA plan compensation structures targeted to ensure that agents and brokers are guided by that touchstone.
2. The Scope of the Implementing Regulations: 42 C.F.R. § 422.2274
As stated above, MA plan agent and broker payments are governed by 42 C.F.R. § 422.2274. The introductory text of Section 422.2274 provides key scoping language worthy of prefatory note. That introductory language states as follows:
If an MA organization uses agents and brokers to sell its Medicare plans, the requirements in paragraphs (a) through (e) of this section are applicable. If an MA organization makes payments to third parties, the requirements in paragraph (f) of this section are applicable.
For reference, MA Organization is defined under Section 422.2 to mean a “public or private entity organized and licensed by a State as a risk-bearing entity (with the exception of provider-sponsored organizations receiving waivers) that is certified by CMS as meeting the MA contract requirements.”
As an overview, Subsection 422.2274(a) contains the applicable definitions for Section 422.2274, Subsection (b) sets forth certain agent and broker requirements (such as those relating to licensure), Subsection (c) sets forth specific requirements for MA Organization oversight of downstream entities, and Subsections (d), (e), and (f) regulate payments by an MA Organization to an agent or broker. Those Subsections (d), (e), and (f) are the focus of this Article.
3. Subsection 422.2274(d) “Compensation” Payments
Subsection 422.2274(d) regulates the payment of “compensation” to agents and brokers by an MA Organization. Compensation is defined to include “monetary or non-monetary remuneration of any kind relating to the sale or renewal of a plan or product offered by an MA organization including, but not limited to the following: (A) Commissions; (B) Bonuses; (C) Gifts; (D) [and] Prizes or Awards,” and to exclude the following: “(A) Payment of fees to comply with State appointment laws, training, certification, and testing costs; (B) Reimbursement for mileage to, and from, appointments with beneficiaries; [and] (C) Reimbursement for actual costs associated with beneficiary sales appointments such as venue rent, snacks, and materials.”
There are two key rules within Subsection 422.2274(d). The first is in Subsection (d)(2), which caps initial enrollment year compensation paid from an MA Organization to agents and brokers. Subsection (d)(2) states, “For each enrollment in an initial enrollment year, MA organizations may pay compensation at or below FMV.” The term “FMV” as used in this subsection does not refer to the general “fair market value” standard; rather, it is a defined term under 422.2274 used to reference the regulatory-mandated caps on compensation paid from a MA Organization to an agent or broker. “FMV” is defined under Subsection 422.2274 as follows:
Fair market value (FMV) means, for purposes of evaluating agent or broker compensation under the requirements of this section only, the amount that CMS determines could reasonably be expected to be paid for an enrollment or continued enrollment into an MA plan. Beginning January 1, 2021, the national FMV is $539, the FMV for Connecticut, Pennsylvania, and the District of Columbia is $607, the FMV for California and New Jersey is $672, and the FMV for Puerto Rico and the U.S. Virgin Islands is $370. For subsequent years, FMV is calculated by adding the current year FMV and the product of the current year FMV and MA Growth Percentage for aged and disabled beneficiaries, which is published for each year in the rate announcement issued pursuant to § 422.312.
The second key rule within Subsection 422.2274(d) is in Subsection (d)(3), which caps renewal year compensation. It states, “MA plans may pay compensation at an amount up to 50 percent of FMV.” Therefore, initial year compensation paid to an agent or broker is capped at the geographically-applicable FMV amount, and renewal year compensation is capped at fifty percent of that amount.
4. Subsection 422.2274(e) “Administrative” Payments
Subsection 422.2274(e) regulates payments to agents and brokers “other than compensation” – otherwise referred to as “administrative payments.” Subsection (e) includes two key rules, the first of which states that “Payments made for services other than enrollment of beneficiaries (for example, training, customer service, agent recruitment, operational overhead, or assistance with completion of health risk assessments) must not exceed the value of those services in the marketplace.” There is limited guidance as to how an MA Organization should calculate the value of administrative services in the marketplace.
The second key rule is found in Subsection (e)(2), which states, “Administrative payments can be based on enrollment provided payments are at or below the value of those services in the marketplace.” The main function of Subsection (e)(2) appears to be to extend the rule in Subsection (e)(1) to administrative payments that are “based on enrollment,” and to apply the same standard to such payments.
5. Subsection 422.2274(f) “Referral” Payments
Subsection 422.2274(f) states, “payments may be made to individuals for the referral (including a recommendation, provision, or other means of referring beneficiaries) to an agent, broker or other entity for potential enrollment into a plan.” Generally, the distinguishing factor between a commission and a referral fee is the relationship of the payment to the success of the sale. That principle appears to extend to the structure of Section 422.2274, with Subsection (d) regulating “compensation” paid based on the success of an agent or broker’s sale of an MA plan, and with Subsection (f) regulating payments made for the mere referral of a potential enrollee (without taking into consideration whether the enrollment occurs).
Though the factual analysis relating to whether a transaction is a payment for a “referral” or “compensation” for a sale, the rule in respect of referral fees is very straightforward. It states, “The payment may not exceed $100 for a referral into an MA or MA–PD plan and $25 for a referral into a PDP plan.”
The discussion above provides only a brief overview of the three types of payments regulated by Section 422.2274. Of course, in analyzing the compliance of any payment under the MA regulations, compliance personnel should consult with their regulatory counsel.
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