OGC Op. No. 09-07-06

The Office of General Counsel issued the following opinion on July 29, 2009 representing the position of the New York State Insurance Department.

Re: Medigap and Exhaustion of Medicare Hospital Inpatient Coverage

Question Presented:

Absent a negotiated rate payment contract between ABC Insurer (the “insurer”) and AAA Medical Center (the “hospital”), was the insurer obligated to pay for the charges incurred by the hospital in excess of the Medicare rate during the time the hospitalization of an insured exceeded his Medicare-covered hospitalization days and lifetime reserve days?

Conclusion:

Yes. Section 52.22 (d)(5)(iii) of the New York Comp. Codes R. & Regs tit. 11, Pt. 52 (Regulation 62), and the policy language contained in the insured’s Medicare Supplement Insurance Plan I (“Medigap Plan I”), state that upon exhaustion of Medicare hospital inpatient coverage, including the lifetime reserve days, the insurer “must pay coverage of 100 percent of the costs incurred for hospitalization expenses.” Nothing, however, precludes the hospital and insurer from negotiating with each other about the rate to be paid for non-Medicare covered expenses.

Facts:

The insured was enrolled in the insurer’s Medicare Supplement Insurance Plan I (“Medigap Plan I”), effective May 1, 1994. Medigap Plan I comes within the meaning of “Medicare supplement insurance,” which 11 NYCRR §52.11 defines as follows:

(a) Medicare supplement insurance [a/k/a “Medigap plan”] is an individual or group policy or certificate of accident and health insurance which is advertised, marketed or designed primarily as a supplement to reimbursements under Medicare for the hospital, medical or surgical expenses of persons eligible for Medicare.

The insured’s policy provides the following in its schedule of benefits for hospital stays:

The insured was hospitalized at AAA Medical Center from May 19, 2006 to August 31, 2006. The insured’s hospitalization exceeded his Medicare-covered hospitalization days and lifetime reserve days. According to Medigap Plan I’s schedule of benefits, after all the lifetime reserve days have been exhausted (“post-Medicare hospitalization benefits”), the “insurer” pays “100% of the cost incurred for hospitalization expenses of the kind covered by Medicare and recognized as medically necessary by Medicare . . . .”

Analysis:

N.Y. Ins. Law § 3218 (McKinney 2006) is germane to the inquiry. That statute requires the Superintendent of Insurance to promulgate regulations to establish minimum standards for Medicare supplemental insurance policies (commonly known as “Medigap plans”). Regulation 62 sets forth the minimum standards for the form, content and sale of health insurance, including Medigap plans. Indeed, 11 NYCRR §52.22 (d)(5)(iii) (Regulation 62), which is relevant to the inquiry, requires Medigap Plans A-J to include the following as “core” benefits:

(i) coverage of Part A Medicare eligible expenses for hospitalization to the extent not covered by Medicare from the 61st day through the 90th day in any Medicare benefit period;

(ii) coverage of Part A Medicare eligible expenses incurred for hospitalization to the extent not covered by Medicare for each Medicare lifetime inpatient reserve day used.

(iii) upon exhaustion of Medicare hospital inpatient coverage, including the lifetime reserve days, coverage of 100 percent of the costs incurred for hospitalization expenses of the kind covered by Medicare, subject to a lifetime maximum of an additional 365 days…. (Emphasis supplied).

The insurer interprets 11 NYCRR §52.22 (d)(5)(iii) to mean that it is only required to reimburse the hospital at the Medicare rate, not the full cost as charged by the hospital. To support of its position, the insurer cites several cases that interpret the phrase “Medicare eligible expense” or “Medicare Part A eligible expense” to refer to the Medicare rate: Vencor, Inc. v. Standard Life and Accident Insurance Company, 317 F.3d 629 (6th Cir. 2003); Vencor, Inc. v. National States Insurance Company, 303 F.3d 1024 (9th Cir. 2002); and Vencor Hospitals v. Blue Cross Blue Shield of Rhode Island, 284 F.3d 1174 (11th Cir. 2002).¹ These cases, however, are inapposite, because neither 11 NYCRR §52.22 (d)(5)(iii) nor the corresponding benefit set forth in the insured’s Medigap Plan I refers to “Medicare eligible expenses.” Indeed, 11 NYCRR § 52.22(d)(5)(iii) and the policy refer to “coverage of 100 percent of the costs incurred for hospitalization expenses of the kind covered by Medicare” (emphasis added).

Further, the Supreme Court of Wisconsin recently interpreted a Medigap policy provision to require the insurer to reimburse a hospital at the full cost charged by the hospital and not the Medicare rate. See Froedtert Memorial Lutheran Hospital, Inc. v. National States Insurance Company, Case No. 2007AP934 (May 13, 2009). In Froedtert, the policy stated “If maximum benefits have been paid under Medicare for in-patient hospital expense, including the lifetime reserve days, we will pay all further expense incurred for hospital confinement that would have been covered by Medicare Part A.”

In arguing that it is liable only for the Medicare rate, the insurer also cites a 1998 model regulation of the NAIC, which it claims applies to New York Medicare supplemental insurance policies. The NAIC model regulation reads in pertinent part as follows:

Upon exhaustion of the Medicare hospital inpatient coverage, including the lifetime reserve days, coverage of the Medicare Part A eligible expenses for hospitalization paid at the diagnostic [sic] related group (DRG) day outlier per diem or other appropriate standard of payment, subject to a lifetime maximum benefit of an additional 365 days.

The insurer also cites a bulletin issued by CMS, which interprets the NAIC model policy provision to limit the insurer’s liability to the Medicare rate. See Medigap Insurer’s Payment Responsibilities under the Long-term Care Hospital PPS, Program Memorandum: Insurance Commissioners, Insurance Issuers (CMS April 2003).

But the insurer’s reliance on the NAIC model and the CMS memo is misplaced. Although CMS oversees the Medicare and Medicaid programs, New York has primary authority to regulate Medicare supplemental insurance policies pursuant to its state regulatory plan approved by the Secretary of Health and Human Services (HHS). 42 U.S.C. § 1395ss (b)(1) provides that a state regulatory program may be approved by the Secretary of HHS if, inter alia, the program “provides for the application and enforcement of standards with respect to such policies equal to or more stringent than the NAIC Model [regulation]. . . .” (emphasis supplied). The Secretary of HHS first approved Regulation 62 in 1992, and has subsequently approved the regulation when the Superintendent made changes to the regulation not relevant to the present inquiry.

By its clear terms, 11 NYCRR § 52.22 (d)(5)(iii) is more stringent than the 1998 NAIC model regulation, because it requires an insurer pay 100% of the cost for post-Medicare expenses. The insurer therefore here must pay the charges that the hospital has billed, in full and without cost to the insured. However, to the extent it is customary for hospitals and insurers to negotiate directly with each other over the rate to be paid for hospitalization costs not covered by Medicare, nothing in the Insurance Law or regulations promulgated thereunder prevent the insurer from negotiating directly with the hospital to reach a mutually satisfactory settlement on post-Medicare expenses, without cost to the insured.

For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.

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¹ In Vencor, Inc. v. Standard Life and Accident Insurance Company, 317 F.3d 629, 636 (6th Cir. 2003), the policy language provided that the post-Medicare hospitalization benefit available to the insured, subject to a lifetime maximum of 365 days, would be a “daily benefit equal to 100% of the Medicare eligible expense” incurred (emphasis added). In Vencor, Inc. v. National States Insurance Company, 303 F.3d 1024, 1029 (9th Cir. 2002), the policy language provided that the post-Medicare hospitalization benefit available to the insured, subject to a lifetime maximum of 365 days, would be “coverage of the Medicare Part A eligible expenses for hospital confinement to the same extent as would have been covered by Medicare…” (emphasis added). In Vencor Hospitals v. Blue Cross Blue Shield of Rhode Island, 284 F.3d 1174 (11th Cir. 2002), the policy language provided that the post-Medicare benefit hospitalization available to the insured, subject to a lifetime maximum of 365 days, would be “ninety percent (90%) of all Medicare part A Eligible Expenses for hospitalization not covered by Medicare…” (emphasis added).