Car dealers have end of the month sales. Grocery stores offer coupons. Real estate agents negotiate on commissions. In many industries, sales incentives are common. Whether giving a spiff for the referral of business is allowed depends on the profession. For example, a real estate agent may only share a commission with another licensee. A physician may not share her fee with a referring source. An insurance agent may not pay a spiff to a policyholder. The following discusses some general “ins and outs” of these laws.
INSURANCE
Minnesota Anti-Rebate Insurance Law. Minnesota Statutes §72A.08, subd. 1 prohibits an agent from “offer[ing] to pay or allow directly or indirectly or by means of any device or artifice, as inducements to insurance…any valuable consideration or inducement not specified in the policy contract of insurance.” The statute contains an exemption for promotional advertising of $25 or less if the gift is not conditioned on the purchase of insurance. Subdivision 3 of the statute limits the fine to “not less than $60 nor more than $200,” but does not elaborate on how the fine is calculated (e.g., whether the fine is per promotion, per recipient of the marketing offer, etc.)
Minn. Stat. §72A.20, subd. 10 also specifically prohibits rebates paid in connection with the sale of life insurance, annuities, or accident and health insurance.
Over the past few years, the Minnesota Department of Commerce has become increasingly aggressive about enforcing this law as it relates to agents who offer contests on their websites with prizes that exceed $25—even though the agent did not tie the winnings to the offer or purchase of insurance or to obtaining an insurance quote.
The History of Insurance Rebating. After the Civil War, the insurance industry greatly expanded, in large part because insurance agencies engaged in aggressive marketing strategies. These strategies included the payment of large rebates to consumers. Insurance companies in turn would pay the agencies higher commissions, from which the rebates were paid to policyholders. This created an incentive for disreputable agents to misrepresent the projected dividend returns of a policy or ignore exclusions in policies. At one point, insurance companies front-loaded higher commissions in the early years of a policy—at a loss for the insurer—based on the hope the policyholder would retain the policy so that it became profitable in later years. Policyholders, however, did not wait for policies to age; instead, they would drop coverage in favor of a new policy sold by an agent offering a high rebate from an even higher commission. To stabilize the industry, state governments began to outlaw rebates. New York was the first state to do so in 1889. By 1895, 21 states had anti-rebate statutes.
In the modern era, anti-rebate laws were rarely enforced. Agents and companies steered clear of egregious violations, and policyholders who were offered rebates happily accepted the rebate. Since no one complained, the violation came to light only if a third person learned about it. Prior to the internet, sports tickets, golf games, lunches, and holiday gifts escaped much scrutiny. With internet marketing, however, some competitors now troll social media and report to the Minnesota Department of Commerce agency websites and social media postings that reflect violations of the anti-rebate law, with the most common complaints being about prize drawings and contests in which a gift is given to the person whose name is randomly selected from a drawing.
Arguments for Anti-Rebate Laws. The primary argument in support of these laws is that policyholders ultimately pay the price of the rebate. That is, proponents of the laws argue that the rebate comes from the commission which in turn comes from the premium which in turn is paid by the policyholder. Some policyholders get the rebate and some do not. Yet, all policyholders pay the same premium for the same risk. Another argument made by proponents is that rebating can lead to financial instability of insurers that aggressively pay out high commissions with the knowledge and expectation that consumers will respond favorably to the rebate.
Arguments Against Anti-Rebate Laws. Opponents of rebate laws argue that, at least as to commercial insurance, mid- to large-size policyholders already bypass anti-rebate laws by simply hiring the agent to buy coverage on a “net premium” basis (the “gross premium” being the net premium plus the commission) and then paying the agent directly.
Current Status. Anti-rebate laws have been invalidated by some courts in some industries. The Florida Supreme Court nullified that state’s insurance rebate law. In California, an anti-rebate law was repealed. It is doubtful that anyone will challenge the anti-rebate law in Minnesota because the penalty of “not less than $60 and not more than $200” is hardly worth hiring a lawyer to challenge the statute.
MEDICINE
Federal Antikickback Statutes. There are federal laws that prohibit referral fees in medicine.
Federal law makes it illegal for referring doctors to receive fees for referring patients or for interpreting medical test results.
Doctors may not refer their Medicare or Medicaid patients to a Designated Health Service (“DHS”) in which the doctor or her immediate family has a financial interest. The term “DHS” includes, among others, clinical laboratory services, physical therapy services, occupational therapy services, outpatient speech-language and pathology services, radiology and certain other imaging services, radiation therapy services and supplies, durable medical equipment and supplies, parenteral nutrients, equipment, and supplies, prosthetics, orthotics, and prosthetic devices and supplies, home health services, outpatient prescription drugs, and inpatient and outpatient hospital services.
The penalties for violating federal anti-kickback statutes can be quite severe. Violations of the Medicare and Medicaid Patient Protection Act of 1987 are a felony, and a defendant may face fines of up to $25,000 and imprisonment for up to 5 years.
AMA Code of Medical Ethics 11.3.4. Physicians may not accept:
Payment of any kind from any source for referring a patient, other than distributions of a health care organization’s revenues as permitted by law.
Payment of any kind from any source for prescribing a specific drug, product, or service.
Payment for services relating to the care of a patient from any health care facility/organization to which the physician has referred the patient.
Payment for referring a patient to a research study.
The Accountable Care Act. The federal Accountable Care Act muddies the waters with the creation of physician/hospital networks. Accountable Care Organizations (“ACOs”) try to keep referrals within the ACO. In 2011, the Centers for Medicare and Medicaid Services (CMS) granted waivers of fee splitting prohibitions and self-referral prohibitions and legalized the transfer of insurance corporation financial risk to mini-ACO corporations and their gatekeepers. The players split the profits.
Minnesota Antikickback Law. Minnesota law prohibits “fee splitting.” It defines “fee splitting” as follows:
Paying, offering to pay, receiving, or agreeing to receive, a commission, rebate, or remuneration, directly or indirectly, primarily for the referral of patients or the prescription of drugs or devices.
Dividing fees with another physician or a professional corporation, unless the division is in proportion to the services provided and the responsibility assumed by each professional and the physician has disclosed the terms of the division.
Referring a patient to any health care provider in which the referring physician has a "financial or economic interest," as defined in section, unless the physician has disclosed the physician's financial or economic interest.
Dispensing for profit any drug or device unless the physician has disclosed the physician's own profit interest.
The statute permits (1) the distribution of revenues from a partnership, group practice, nonprofit corporation, or professional corporation to its partners, shareholders, members, or employees if the revenues consist only of fees for services performed by the physician or under a physician's direct supervision, and (2) the division or distribution of prepaid or capitated health care premiums, or fee-for-service withhold amounts paid under contracts established under other state law.
The law firm of Swanson Hatch, P.A. represents businesses and licensed professionals in legal compliance, regulatory enforcement matters, and litigation, among other things. Former Minnesota Attorneys General Lori Swanson and Mike Hatch have decades of legal experience in the application of state laws to businesses and regulated professionals. Prior to her twelve years as Minnesota Attorney General, Lori Swanson previously served as Solicitor General and Deputy Attorney General of the State of Minnesota and chaired the Federal Reserve Board’s Consumer Advisory Council in Washington, D.C. Before he became Attorney General, Mike Hatch previously served as Commissioner of the Minnesota Department of Commerce for eight years, where he was the primary regulator of the insurance, real estate, mortgage, banking, and financial industries in Minnesota. Lori Swanson can be reached at lswanson@swansonhatch.com, or at 612-315-3037. Mike Hatch can be reached at mhatch@swansonhatch.com, or at 612-315-3037. The firm’s website is www.swansonhatch.com.
REAL ESTATE
The Real Estate Settlement Procedures Act. The federal Real Estate Settlement Procedures Act (“RESPA”) is a broad statute governing real estate transactions. One of its stated purposes is "the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services. It states:
No person shall give, and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
There are three elements to an illegal kickback: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a referral of a real estate settlement service.
In general, “Real Estate Settlement Services” include any service provided in connection with a real estate settlement including, but not limited to, the following:
Origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of such loans).
Rendering of services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender).
Provision of any services related to the origination, processing, or funding of a federally related mortgage loan.
Provision of title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies.
Rendering of services by an attorney.
Preparation of documents, including notarization, delivery, and recordation.
Rendering of credit reports and appraisals.
Rendering of inspections, including inspections required by applicable law or any inspections required by the sales contract or mortgage documents prior to transfer of title.
Conducting a settlement by a settlement agent and any related services.
Provision of services involving mortgage insurance.
Provision of services involving hazard, flood, or other casualty insurance (“Homeowner’s insurance”) or homeowner’s warranties.
Provision of services involving mortgage life, disability, or similar insurance designed to pay a mortgage loan upon disability or death of a borrower, but only if such insurance is required by the lender as a condition of the loan.
Provision of services involving real property taxes or any other assessments or charges on the real property.
Rendering of services by a real estate agent or real estate broker; and
Provision of any other services for which a settlement service provider requires a borrower or seller to pay.
Minnesota law. Minnesota statutes state the following:
In connection with a real estate or business opportunity transaction, a real estate broker or real estate salesperson shall not offer, pay, or give, and a person shall not accept, any compensation or other thing of value from a real estate broker or real estate salesperson by way of commission-splitting, rebate, referral fees, finder's fees, or otherwise.
The statute generally permits fee splitting between licensees, however. It also states that apartment dwellers may receive up to one month’s free rent for referring renters to the owner of the complex.
MORTGAGE LENDERS
RESPA, the federal law referred to above, prohibits the payment of a referral fee on any transaction involving a single home up to quadraplex homes. Referral fees are permitted for commercial business transactions.
FINANCIAL ADVISORS
Federal Law. A financial advisor is generally not permitted by federal law from paying a referral fee to a third party for soliciting clients if they follow the rules of the Securities and Exchange Commission (SEC). The investor and financial advisor must have a written agreement that specifies the arrangement between the financial advisor and the referring source.
State Law. It is unclear whether a person who receives a referral fee from a financial advisor must be licensed as such under Minnesota statutes.
CONCLUSION
Referrals occur in every profession. Ideally, referrals are based on the good faith belief that the referred specialist is well-suitable and qualified to handle the client or patient’s problem. Policymakers prohibit referral fees in many regulated professions out of concern that the financial inducement clouds the judgment of the person making the referral. In reality, even with prohibitions on referral fees, many referrals are based on social relationships between the professionals rather than professional competency.
Many of the laws described above are complex, subject to interpretation, and dependent on the facts. For questions about whether particular conduct is permissible or violative of the laws, readers of this article should consult with their attorneys.
***
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415 612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
Car dealers have end of the month sales. Grocery stores offer coupons. Real estate agents negotiate on commissions. In many industries, sales incentives are common. Whether giving a spiff for the referral of business is allowed depends on the profession. For example, a real estate agent may only share a commission with another licensee. A physician may not share her fee with a referring source. An insurance agent may not pay a spiff to a policyholder. The following discusses some general “ins and outs” of these laws.
Minnesota Anti-Rebate Insurance Law. Minnesota Statutes §72A.08, subd. 1 prohibits an agent from “offer[ing] to pay or allow directly or indirectly or by means of any device or artifice, as inducements to insurance…any valuable consideration or inducement not specified in the policy contract of insurance.” The statute contains an exemption for promotional advertising of $25 or less if the gift is not conditioned on the purchase of insurance. Subdivision 3 of the statute limits the fine to “not less than $60 nor more than $200,” but does not elaborate on how the fine is calculated (e.g., whether the fine is per promotion, per recipient of the marketing offer, etc.)
Minn. Stat. §72A.20, subd. 10 also specifically prohibits rebates paid in connection with the sale of life insurance, annuities, or accident and health insurance.
Over the past few years, the Minnesota Department of Commerce has become increasingly aggressive about enforcing this law as it relates to agents who offer contests on their websites with prizes that exceed $25—even though the agent did not tie the winnings to the offer or purchase of insurance or to obtaining an insurance quote.
The History of Insurance Rebating. After the Civil War, the insurance industry greatly expanded, in large part because insurance agencies engaged in aggressive marketing strategies. These strategies included the payment of large rebates to consumers. Insurance companies in turn would pay the agencies higher commissions, from which the rebates were paid to policyholders. This created an incentive for disreputable agents to misrepresent the projected dividend returns of a policy or ignore exclusions in policies. At one point, insurance companies front-loaded higher commissions in the early years of a policy—at a loss for the insurer—based on the hope the policyholder would retain the policy so that it became profitable in later years. Policyholders, however, did not wait for policies to age; instead, they would drop coverage in favor of a new policy sold by an agent offering a high rebate from an even higher commission. To stabilize the industry, state governments began to outlaw rebates. New York was the first state to do so in 1889. By 1895, 21 states had anti-rebate statutes.
In the modern era, anti-rebate laws were rarely enforced. Agents and companies steered clear of egregious violations, and policyholders who were offered rebates happily accepted the rebate. Since no one complained, the violation came to light only if a third person learned about it. Prior to the internet, sports tickets, golf games, lunches, and holiday gifts escaped much scrutiny. With internet marketing, however, some competitors now troll social media and report to the Minnesota Department of Commerce agency websites and social media postings that reflect violations of the anti-rebate law, with the most common complaints being about prize drawings and contests in which a gift is given to the person whose name is randomly selected from a drawing.
Arguments for Anti-Rebate Laws. The primary argument in support of these laws is that policyholders ultimately pay the price of the rebate. That is, proponents of the laws argue that the rebate comes from the commission which in turn comes from the premium which in turn is paid by the policyholder. Some policyholders get the rebate and some do not. Yet, all policyholders pay the same premium for the same risk. Another argument made by proponents is that rebating can lead to financial instability of insurers that aggressively pay out high commissions with the knowledge and expectation that consumers will respond favorably to the rebate.
Arguments Against Anti-Rebate Laws. Opponents of rebate laws argue that, at least as to commercial insurance, mid- to large-size policyholders already bypass anti-rebate laws by simply hiring the agent to buy coverage on a “net premium” basis (the “gross premium” being the net premium plus the commission) and then paying the agent directly.
Current Status. Anti-rebate laws have been invalidated by some courts in some industries. The Florida Supreme Court nullified that state’s insurance rebate law. In California, an anti-rebate law was repealed. It is doubtful that anyone will challenge the anti-rebate law in Minnesota because the penalty of “not less than $60 and not more than $200” is hardly worth hiring a lawyer to challenge the statute.
Federal Antikickback Statutes. There are federal laws that prohibit referral fees in medicine.
AMA Code of Medical Ethics 11.3.4. Physicians may not accept:
The Accountable Care Act. The federal Accountable Care Act muddies the waters with the creation of physician/hospital networks. Accountable Care Organizations (“ACOs”) try to keep referrals within the ACO. In 2011, the Centers for Medicare and Medicaid Services (CMS) granted waivers of fee splitting prohibitions and self-referral prohibitions and legalized the transfer of insurance corporation financial risk to mini-ACO corporations and their gatekeepers. The players split the profits.
Minnesota Antikickback Law. Minnesota law prohibits “fee splitting.” It defines “fee splitting” as follows:
- Paying, offering to pay, receiving, or agreeing to receive, a commission, rebate, or remuneration, directly or indirectly, primarily for the referral of patients or the prescription of drugs or devices.
- Dividing fees with another physician or a professional corporation, unless the division is in proportion to the services provided and the responsibility assumed by each professional and the physician has disclosed the terms of the division.
- Referring a patient to any health care provider in which the referring physician has a "financial or economic interest," as defined in section, unless the physician has disclosed the physician's financial or economic interest.
- Dispensing for profit any drug or device unless the physician has disclosed the physician's own profit interest.
The statute permits (1) the distribution of revenues from a partnership, group practice, nonprofit corporation, or professional corporation to its partners, shareholders, members, or employees if the revenues consist only of fees for services performed by the physician or under a physician's direct supervision, and (2) the division or distribution of prepaid or capitated health care premiums, or fee-for-service withhold amounts paid under contracts established under other state law.The Real Estate Settlement Procedures Act. The federal Real Estate Settlement Procedures Act (“RESPA”) is a broad statute governing real estate transactions. One of its stated purposes is "the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services. It states:
No person shall give, and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
There are three elements to an illegal kickback: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a referral of a real estate settlement service.
In general, “Real Estate Settlement Services” include any service provided in connection with a real estate settlement including, but not limited to, the following:
Minnesota law. Minnesota statutes state the following:
In connection with a real estate or business opportunity transaction, a real estate broker or real estate salesperson shall not offer, pay, or give, and a person shall not accept, any compensation or other thing of value from a real estate broker or real estate salesperson by way of commission-splitting, rebate, referral fees, finder's fees, or otherwise.
The statute generally permits fee splitting between licensees, however. It also states that apartment dwellers may receive up to one month’s free rent for referring renters to the owner of the complex.
RESPA, the federal law referred to above, prohibits the payment of a referral fee on any transaction involving a single home up to quadraplex homes. Referral fees are permitted for commercial business transactions.
Federal Law. A financial advisor is generally not permitted by federal law from paying a referral fee to a third party for soliciting clients if they follow the rules of the Securities and Exchange Commission (SEC). The investor and financial advisor must have a written agreement that specifies the arrangement between the financial advisor and the referring source.
State Law. It is unclear whether a person who receives a referral fee from a financial advisor must be licensed as such under Minnesota statutes.
Referrals occur in every profession. Ideally, referrals are based on the good faith belief that the referred specialist is well-suitable and qualified to handle the client or patient’s problem. Policymakers prohibit referral fees in many regulated professions out of concern that the financial inducement clouds the judgment of the person making the referral. In reality, even with prohibitions on referral fees, many referrals are based on social relationships between the professionals rather than professional competency.
Many of the laws described above are complex, subject to interpretation, and dependent on the facts. For questions about whether particular conduct is permissible or violative of the laws, readers of this article should consult with their attorneys.
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415
612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
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Swanson | Hatch, P.A.
431 S. 7th Street, Suite #2545
Minneapolis, MN 55415
612-315-3037
www.swansonhatch.com