State rules online discount contracts violate law

The Legal Division of the California State Department of Consumer Affairs (DCA) has released a legal opinion concluding that a contractual arrangement between a health care professional and an Internet marketing service offering online discounts for medical services violates state law.

Online marketing companies, such as Groupon and Living Social, contract with businesses to promote discounted products and services to potential customers. The online company determines the customers to whom the offer is actually promoted. In order to take advantage of the discounted service, the customer must provide advanced payment directly to the online company, which typically deducts a percentage as its contracted fee and remits the balance of the payment to the business. 

The DCA was asked to analyze the following question: “Does it constitute a violation of Business and Professions Code section 650 when a health care professional shares the advertised fee for services with an Internet marketer that promotes the services to prospective patients who in turn must (1) commit to an advanced purchase of the health care service through the Internet marketing company, and (2) wait for a predetermined volume of purchases to occur through the Internet company, in order to receive the advertised discount?”

Section 650 prohibits a health care practitioner from offering or accepting anything of value as compensation or inducement for the referral of patients. However, the law also specifies that the payment or receipt of consideration for services other than the referral of patients is not unlawful if the consideration is commensurate with the value of the services furnished. Therefore, the DCA had to determine whether Internet marketing services such as Groupon and Living Social are compensated by participating health care providers for referral of patients or advertising services.

The DCA defined the phrase “referral of patients,” as used in section 650, to mean “the directing of a patient to a health care practitioner by someone other than the patient or the practitioner who will provide services for the patient.” Noting that Groupon independently, and in its sole discretion, determines the potential customers to whom the health care practitioner’s offer is actually promoted, the DCA determined that this method of selection of patients constitutes a referral under section 650.

The legislature enacted section 650 in part to prevent any relationship where patient referrals are induced by considerations other than the best interests of the patient. According to the legal opinion, the contractual relationship between the Internet marketing service and the health care provider violates section 650 because the Internet marketer’s compensation is linked to the number of patients who purchase the coupon. “As a result, referrals are not premised upon the needs and best interests of the patients, but rather is based upon economic considerations,” the legal opinion stated.

It additionally explains, “… prospective patients must often pay the third-party Internet marketer the full cost of the service to be performed in advance of any consultation or examination with the health care provider. Such an arrangement cannot be said to be in the best interest of the patient.”

At the CDA House of Delegates meeting in November, the House voted in favor of modifying the CDA Code of Ethics to include an advisory opinion on split fees in advertising and marketing services. CDA Judicial Council Chair Robert Kiger, DDS, observed, “The conclusions reached by the [DCA] are generally consistent with the new advisory opinion in the CDA Code of Ethics.” 

Advisory opinion 11.A.1. states in relevant part, “The prohibition against a dentist’s accepting or tendering rebates or split fees applies to business dealings between dentists and any third party, not just other dentists. Thus, a dentist who pays for advertising or marketing services by sharing a specified portion of the professional fees collected from prospective or actual patients with the vendor providing the advertising or marketing services is engaged in fee splitting. The prohibition against fee splitting is also applicable to the marketing of dental treatments or procedures via ‘social coupons’ if the business arrangement between the dentist and the concern providing the marketing services for that treatment or those procedures allows the issuing company to collect the fee from the prospective patient, retain a defined percentage or portion of the revenue collected as payment for the coupon marketing service provided to the dentist and remit to the dentist the remainder of the amount collected.”

To view the “Rebates, Split Fees and Other Fee Arrangements” section of the CDA Code of Ethics, visit cda.org/about-cda/cda-code-of-ethics.