In a December 24, 2008 memorandum, the Centers for Medicare and Medicaid Services (CMS) established caps on the commissions that Medicare private plan sponsors (Sponsors) may pay agents and brokers for 2009 enrollments in Medicare Advantage (MA) and Prescription Drug (PDP) plans.

The caps prohibit Sponsors from paying more than $50 for an initial enrollment in a PDP product sold in any region, and more than $400 for an initial enrollment in an MA product sold in most areas. The only exceptions are for MA products sold in (a) Connecticut, Pennsylvania and the District of Columbia, where the maximum commission is $450, and (b) California and New Jersey, where the maximum commission is $500.

Because commissions for 2009 must be based on renewal rates (see NGE Health Law Alert, “Modified MA & Part D Broker Compensation Rules Effective Now” (Nov. 11, 2008)*), most payments to agents and brokers in 2009 will not exceed $25 per enrollment in PDP products and $200 ($225 in Connecticut, Pennsylvania and the District of Columbia and $250 in California and New Jersey) per enrollment in MA products.

Affected Sponsors

According to CMS, the caps require half of PDP Sponsors and 30% of MA Sponsors to revise their broker compensation schedules. Affected Sponsors are to be “separately notified with instructions on revising their schedules.”

Fair Market Value Determination

CMS used data that Sponsors reported last November to determine “the national cut-off for [the] fair market values” of agent and broker compensation. CMS found that a single cap was appropriate on commissions for PDP products in all geographic regions. Regional variations in fair market value of agent and broker compensation resulted in CMS setting the higher caps on commissions for MA products sold in Connecticut, Pennsylvania, the District of Columbia, California and New Jersey.

CMS’s caps set the ceiling on agent and broker compensation for PDP and MA plan sales — CMS will view Sponsors that pay higher commissions as out of compliance with Medicare requirements. Moreover, Sponsors paying commissions in excess of what CMS considers “fair market value” may face scrutiny under the Anti-Kickback Statute from the Office of Inspector General of the Department of Health and Human Services or the Department of Justice for apparently paying prohibited “remuneration” — the amount in excess of CMS’s caps — to “induce” agents and brokers to generate Medicare business for the Sponsors.

CMS’s caps also may set the floor for commissions. CMS’s establishment of “acceptable” commission rates gives agents and brokers a clearly defined level of compensation, which likely will pressure Sponsors to pay the CMS-sanctioned commissions. Thus, CMS’s maximum commissions may well also become the minimum commissions for MA and PDP product sales.

2009 Commission Payments

CMS’s Medicare Rules amendments published last November require Sponsors to pay agents and brokers 50% of the first, or “initial,” year commission for a beneficiary’s enrollment in each of five “renewal” years, creating a six-year compensation cycle. The November amendments deem 2009 to be a “renewal” year, permitting Sponsors to pay agents and brokers only the renewal commission. A Sponsor must adjust the compensation to an agent or broker in 2009 to the “initial” year commission if — and only if — (a) the Sponsor determines that the beneficiary whom the agent or broker enrolled had first become eligible for Medicare in 2009 (e.g., when first turning 65) or (b) CMS — not the agent, broker or Sponsor — determines that the beneficiary whom the agent or broker enrolled is new to the MA or PDP program.

Caps Inapplicable to Employer Groups, Employed Agents

CMS’s caps do not apply to agent or broker sales of employer group MA and PDP products. Nor do the caps apply to sales by agents or brokers who are a Sponsor’s employees. CMS considers a sales representative who sells exclusively for a single sponsor to be the Sponsor’s “employee” if the representative receives “a set salary in addition to any compensation tied to volume of sales.”