HHS OIG OKs Incentive Arrangements for Hospital Services in MediGap Product

On December 3, 2007, the Office of Inspector General of the Department of Health and Human Services (“OIG”) gave favorable advisory opinion guidance to a mutual life insurance company (“Company”) offering Medicare Supplement Health Insurance (“Medigap”) policies in nearly 50 states who is arranging for preferred provider hospitals to give a 100% discount on Medicare Part A deductibles and to pass along some of the resulting savings to policyholders through a premium credit.

Under the Company’s proposal, the Company and contracting preferred provider organizations (“PPOs”) would agree to give the Company’s policyholders access to the PPOs’ preferred hospital network. If a policyholder is admitted to a preferred network hospital, the hospitals would forego collection of Part A Medicare deductibles. In contrast, for services at non-PPO hospitals, the Company would be responsible for paying the deductible amounts. Under the arrangement, therefore, the Company would receive a discount of up to 100% on the Medicare inpatient deductible – otherwise covered by the Medigap plan – incurred by its policyholders at network hospitals. The Company further proposed to return a portion of the discount to any policyholder that utilized a preferred network hospital, by crediting the policyholder $100 off their next renewal premium. The Company would announce the added feature to its policyholders in plan and marketing materials, in addition to identifying participating hospitals on policy documents and membership cards. The Company would also reflect any savings under the proposed arrangement in annual experience exhibits filed with the state insurance departments that regulate premium rates charged by Medigap insurers.

The OIG advisory opinion letter concluded that, based on the information provided by the Company, the proposal did not constitute improper remuneration under the Social Security Act or a violation of Federal anti-kickback statute that would warrant imposition of civil monetary penalties or administrative sanctions on the Company. The OIG found the proposal not only presented a low risk of fraud or abuse, but also had the potential to lower Medigap costs for all policyholders.

The OIG first examined the discounts offered on the inpatient deductibles by the network hospitals and concluded they presented a low risk of fraud or abuse. The OIG reasoned that: 1) the waivers would not increase or affect per service Medicare payments; 2) the discounts would be invisible to patients and should not increase utilization; 3) the arrangement would not unfairly affect competition among hospitals, since network participation was open to hospitals willing to accept the applicable terms; and 4) the arrangement would not likely affect the professional medical judgment of physicians or surgeons.

The OIG then examined the $100 premium credit for inpatient stays and concluded that, though they could implicate statutory proscriptions because earning them depended on use of particular providers, the premium credits also presented a low risk of fraud or abuse. The OIG concluded that although the premium credit could be scrutinized as a prohibited inducement to beneficiaries, it was akin to conduct within the statutory exception permitting differentials in coinsurance and deductible amounts as part of a benefit plan design, and therefore was not objectionable.

Finally, the OIG supported its decision from a policy standpoint, reasoning that the proposal could lower Medigap costs for the Company’s policyholders who selected network hospitals and possibly lower Medigap costs for all policyholders because any savings realized would be reported to state insurance rate-setting regulators.

A copy of the advisory opinion is available at: http://oig.hhs.gov/fraud/docs/advisoryopinions/2007/AdvOpn07-15A.pdf

This material is made available for information purposes only, and should not be relied upon to resolve specific legal questions.