OIG Approves Proposal to Use a Preferred Hospital Network by Medicare Supplemental Health Insurance Insurers

Printed in the Legal Intelligencer, December 6, 2016
Written by: Vasilios J. (Bill) Kalogredis*

On October 27, 2016, the Department of Health and Human Services Office of the Inspector General (“OIG”) issued Advisory Opinion 16-11 which stated that the OIG would not impose sanctions against a licensed offeror of Medicare Supplemental Health Insurance, or Medigap policies (“Requestor”) who proposed to participate in an arrangement (“Proposed Arrangement”) with a preferred hospital organization (“PHO”), which enters into contracts with hospitals throughout the country (“Network Hospitals”).

Under the Proposed Arrangement, Network Hospitals would provide discounts of up to 100 percent on Medicare inpatient deductibles incurred by Requestor’s Madigap plan policyholders (“Policyholders”) that otherwise would be covered by Requestor. The discounts would apply only to the Medicare Part A inpatient hospital deductibles covered by the Medigap plans, and not to any other cost-sharing amounts. The Network Hospitals would provide no other benefit to Requestor or the Policyholders as part of the Proposed Arrangement. Each time Requestor receives this discount from a Network Hospital, Requestor would pay the PHO a fee for administrative services. Additionally, a premium credit of $100 would be provided to Policyholders who use a Network Hospital for an inpatient stay.

This Advisory Opinion is of significance because the OIG held that the Proposed Arrangement would not constitute grounds for the imposition of sanctions under the civil monetary penalty provision prohibiting inducements/ remuneration to beneficiaries under Section 1128A(a)(5) of the Social Security Act (the “Act”) or the exclusion authority in Section 1128(b)(7) of the Act, of the civil monetary penalty provision of Section 1128A(a)(7), as those sections relate to the commission of acts described in Section 1128B(b), the Federal Anti-Kickback Statute (“AKS”).

The definition of remuneration for purposes of Section 1128A(a)(5) of the Act includes an exception for differentials in coinsurance and deductible amounts as part of a benefit plan design, as long as the differentials are properly disclosed to affected parties and meet certain other applicable requirements. See Section 1128A(i)(6)(C) of the Act. This exception permits benefit plan designs under which plan enrollees pay different cost-sharing amounts depending on whether, for example, they use network or non-network providers.

AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a Federal health care program. See Section 1128B(b) of Act. Where remuneration is paid purposefully to induce or reward referrals of items or services payable by a Federal health care program, AKS is violated. By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction. For purposes of AKS, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind.

In its review of the Proposed Arrangement, the OIG made clear that waivers of Medicare cost-sharing can constitute prohibited remuneration under AKS. The OIG closely examined the two aspects of the Proposed Arrangement: 1) Discounts on Inpatient Deductibles, and 2) Premium Credits. The OIG noted the following critical features of the two aspects of the Proposed Arrangement:

            1)         Discounts on Inpatient Deductibles: the Proposed Arrangement would allow Requestor to contract with Network Hospitals and under these contracts, Network Hospitals would provide discounts of up to 100 percent on Medicare inpatient deductibles incurred by Requestor’s Policyholders. If a Policyholder were to be admitted to a hospital other than a Network Hospital, Requestor would pay the full Part A hospital deductible, as provided under the applicable Medigap plan. The OIG found that the Discounts on Inpatient Deductible component of Proposed Arrangement represented a low risk of fraud or abuse:

  • The discounts would not affect per-service Medicare payments, which are fixed under Part A.
  • The discounts would be effectively invisible to patients, and therefore will have no impact on utilization.
  • The competition among hospitals would not be affected because the option to participate in the PHO network is open to any Medicare-certified hospital that meets state law requirements.
  • Professional judgment will not be affected because the physicians receive no remuneration and patients are free to choose their hospital without incurring any additional expenses based on their choice.
  • The Proposed Arrangement would be transparent to Policyholders who would be told they have the freedom to choose any hospital without incurring additional liability or penalty. The OIG has long held that the waiver of fees for inpatient services is unlikely to result in significant increases in utilization.

2)         Premium Credits: Requestor would return a portion of the savings resulting from the Proposed Arrangement directly to any Policyholder who has an inpatient stay at a Network Hospital in the form of a $100 credit off the Policyholder’s next renewal premium. This feature of the Proposed Arrangement would be announced to Policyholders in an initial notification letter and a program identification card containing an icon indicating the participation of the plan in the network. Policyholders would also receive information biannually regarding the participation of Network Hospitals. Policyholders would receive clear written notice that a non-network hospital would have no effect on a Policyholder’s liability for any costs. The OIG found that the Premium Credits component of Proposed Arrangement also represented a low risk of fraud or abuse:

  • The Proposed Arrangement had the potential to lower Medigap costs to Policyholders utilizing Network Hospitals without creating increased costs for those utilizing non-network hospitals.
  • Since the savings would be reported to the state rate setting regulators, the Proposed Arrangement could result in lower costs for all Policyholders.

In sum, the OIG Advisory Opinion No. 16-11 concludes that the OIG would not impose sanctions under the Act or AKS for this type of arrangement because the Proposed Arrangement, as presented by the Requestor, would not create an increased risk of fraud or abuse. To the contrary, the Proposed Arrangement will facilitate cost savings for Policyholders while still allowing patients to freely choose their medical providers.

To read the OIG Advisory Opinion 16-11, visit:

Written by: Vasilios J. (Bill) Kalogredis*, Esquire is Chairman of Lamb McErlane’s newly formed Health Law Department. Bill has been practicing health law for over 40 years, representing exclusively physicians, dentists, group practices, other health care professionals and health care-related entities.

*Katherine (Katie) E. LaDow, Esquire also contributed to this article. Katie is an associate with Lamb McErlane PC in the litigation department. She concentrates her practice in the areas of state civil litigation, family law and health law.

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