On August 16, the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) issued a favorable Advisory Opinion regarding an arrangement between a Medicare Supplemental Health Insurance (“Medigap”) plan and a preferred hospital organization (PHO). The arrangement in question incentivized Medigap policyholders to seek inpatient care from hospitals that participated in the PHO network. It involved three different streams of remuneration, which implicated the federal Anti-Kickback Statute (AKS) and civil monetary penalties for beneficiary inducement.

First, policyholders received a discount on their inpatient deductibles under Medicare Part A if they obtained services from a hospital that participated in the PHO. Second, policyholders also received a $100 credit for their inpatient stays at a network hospital, which could be applied to their next premium payment under the Medigap plan. OIG concluded that the discount and premium posed a minimal risk of fraud and abuse for the following reasons:

  • They were unlikely to result in overutilization of healthcare services or increased costs to federal healthcare programs. The Medigap plan was financially responsible for healthcare costs incurred by its policyholders, so it is in the plan’s financial interest to ensure appropriate utilization and costs of healthcare services. The policyholders were also unlikely to be incentivized to overutilize inpatient services because, as represented by the Medigap plan, patients typically do not control whether they are admitted as an inpatient to a hospital. The credit was also unlikely to induce the patients because it was provided as a credit on future premium payments as opposed to an affirmative payment (via check or cash deposit) that the policyholder could use for whatever they see fit.
  • The potential for patient harm was minimal. The discount program applied uniformly to all policyholders and was not limited by discriminatory criteria (such as length of stay or health condition). Moreover, patients were free to choose a non-network hospital without any increase in their cost-sharing obligations with the Medigap plan.
  • The arrangement was also unlikely to have a significant impact on competition, mainly because (i) Medigap was not advertising the arrangement to potential new policyholders and (ii) all hospitals were eligible to participate in the PHO network and the Medigap discount program as long as they were properly licensed and Medicare-certified and agreed to the discount for inpatient services.

Finally, the third revenue stream under this arrangement was a monthly service fee that the Medigap plan paid to the PHO network for performing certain administrative services, including establishing the hospital network and arranging for the discount on inpatient services. The administrative fee was a percentage-based fee by which the PHO received a percentage of the aggregate savings that the Medigap plan realized in any given month from its policyholders under the inpatient discount program. OIG determined that this fee structure did not fall under the AKS safe harbor for personal services and management contracts because the safe harbor requires that the methodology for calculating the fee not be determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. Here, the fee varied based on the number of policyholders admitted for inpatient hospital stays and the amount of the discount applied for their inpatient services deductibles. Nonetheless, OIG concluded that the fee structure did not present a substantial risk of fraud and abuse because (i) the parties certified that it was consistent with fair market value, and (ii) the arrangement is distinguishable from arrangements where the fee is based on referrals and other business generated under federal healthcare programs. In this case, the fee was based on savings rather than revenue, thereby presenting a low risk of overutilization of federal healthcare services or increased costs to federal healthcare programs.

Based on its analysis, OIG concluded that it would not impose administrative sanctions under the AKS or civil monetary penalties for beneficiary inducement.