Executive Summary

In recently issued, virtually identical Advisory Opinions Nos. 14-07 and 14-08, the Department of Health and Human Services Office of the Inspector General (“OIG”) opined that licensed insurers offering Medigap policies to Medicare beneficiaries may contract with preferred hospital organization network hospitals for discounted Medicare inpatient deductibles and, in turn, issue premium credits to beneficiary policyholders without violating the Anti-Kickback Statute or the Civil Monetary Penalties Law provision prohibiting inducements to beneficiaries.  The favorable opinions found here and here provide valuable insight into how OIG views certain arrangements but only insulate the requesting parties (“Requestor”) from investigation, administrative penalties and sanctions.

Factual Background of Proposed Arrangement

The Requestor, a licensed offeror of insurance products including Medigap policies, proposes to contract with a preferred hospital organization (“PPO”) in which the participating hospitals (“Network Hospitals”) would agree to discount Medicare inpatient deductibles incurred by the Requestor’s Medigap policy holders (“Policyholders”) up to 100%.  These inpatient deductibles otherwise would be covered by the Requestor under the Medigap policies.  The Requestor, in turn, would return a portion of the realized savings by providing a premium credit of $100 off the next renewal premium to Policyholders who use the Network Hospitals for inpatient services.  However, if a Policyholder were to choose a non-Network Hospital for an inpatient admission, the Requestor would pay the entire inpatient deductible pursuant to the terms of the Medigap policy.

The discounts would only apply to the Medicare Part A inpatient hospital deductibles and not apply to any other cost-sharing amounts.  The Requestor would also pay the PPO a fee for administrative services each time a Network Hospital agrees to discount its inpatient deductibles.

The savings realized by the Requestor under the Proposed Arrangement would be reflected in the annual experience reports (which reflect loss ratios) that the Requestor files with the various state insurance departments.  These savings would then be taken into account in each state’s insurance rate review and approval process.

Analysis Under the Anti-Kickback Statute 

OIG scrutinized the facts of the Proposed Arrangement and concluded that the Arrangement likely implicated the Anti-Kickback Statute (“AKS”).  First, the discounted Medicare inpatient deductibles, a type of waiver of Medicare cost-sharing amounts, could constitute prohibited remuneration under the AKS.  Second, relief of a financial obligation also could constitute a prohibited kickback.  Third, passing back a portion of savings in the form of premium credits to any Policyholder who has an inpatient stay at a Network Hospital could implicate the AKS.  According to OIG, the Proposed Arrangement would not qualify for protection under either the AKS safe harbor for waivers of beneficiary coinsurance and deductible amounts or the AKS safe harbor for reduced premium amounts offered by health plans.  However, for a number of reasons, OIG concluded that the Proposed Arrangement presents a sufficiently low risk of fraud or abuse under the AKS.

First, OIG determined that neither the discounts nor the premium credits would increase or affect per-service Medicare payments.  Rather, the payments for Part A inpatient services are fixed and are unaffected by beneficiary cost-sharing.

Second, because the discounts would be invisible to Policyholders, they would be unlikely to influence the Policyholders to increase their utilization of Network Hospitals.  This is because the discounts apply only to the portion of the individual’s cost-sharing obligations that the individual’s supplemental insurance ordinarily covers.  OIG affirmed its longstanding position that the waiver of fees for inpatient services is unlikely to result in significant increases in utilization.

Third, OIG reasoned that any risk that the program as a whole unfairly affects competition among the PPO hospitals is mitigated because the PPO’s hospital network would be open to any accredited, Medicare-certified hospital that meets the requirements of applicable state laws.

Fourth, Policyholders’ physicians and surgeons whose medical judgment potentially could be influenced by kickbacks would receive no remuneration, and the Policyholder would remain free to go to any Network Hospital without incurring any additional out-of-pocket expense.

The last fact that mitigated any risk from OIG’s perspective was the transparency with which the program would operate.  That is, the Requestor would make clear to Policyholders that they have the freedom to choose any hospital whether within or outside of the PPO without incurring additional liability or a penalty.

Analysis Under the Civil Monetary Penalties Law

After reviewing the facts, OIG decided that the premium credits offered under the Proposed Arrangement implicate the Civil Monetary Penalties Law’s (“CMPL”) prohibition on providing inducements to beneficiaries.  The premium credits offered by the Requestor could induce Policyholders to select Network Hospitals over other hospitals.

OIG noted, however, that the term “remuneration” as defined under the CMPL permits differentials in coinsurance and deductible amounts as a part of benefit plan design so long as the differentials (or discounts) are properly disclosed to affected parties. OIG reasoned that the premium credit, while not technically a differential in coinsurance or deductible amount, has substantially the same purpose as a differential in a coinsurance or deductible amount.  Further, the Proposed Arrangement has the potential to lower Medigap costs for Policyholders who select Network Hospitals without increasing costs to those who select non-Network Hospitals.  Moreover, because savings realized from the Proposed Arrangement would be reported to state insurance rate-setting regulators, the Proposed Arrangement has the potential to lower costs for all Policyholders.  Accordingly, OIG would not impose administrative sanctions under the CMPL.

Practical Takeaways

Advisory Opinions Nos. 14-07 and 14-08 do not break new ground.  Indeed, OIG issued three very similar advisory opinions in 2010 (AOs Nos. 10-01, 10-02 and 10-03).  Please click here for details.  The type of arrangement described here continues to be low risk under the AKS and CMPL, so long as parties incorporate the fraud and abuse protections identified by OIG.