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At all relevant times, the Healthcare Financing
Administration (HCFA) of the U.S. Department of Health, Education
and Welfare (or its predecessor agencies) administered the
Medicare system of reimbursement. During the mid-1970's,
existing Medicare regulations did not address reimbursement of
premiums payable to captive insurance companies. Medical industry
efforts, however, eventually resulted in the promulgation of
specific regulations during 1979 which allowed reimbursement of
liability premiums charged related entities by limited purpose or
captive insurance companies, provided that appropriate regulatory
standards were met. The Medicare standards ultimately adopted
included requirements that the captive insurer be recognized as
an insurance company by an appropriate Government and be operated
in accordance with the jurisdiction's laws, that premiums be
determined according to actuarial standards, that only reasonable
premium costs be reimbursable, and that the arrangement represent
a prudent business decision. Compliance with those requirements
was monitored through comprehensive annual audits.
From 1981 through 1983, Medicare reimbursement to hospitals
for providing covered treatment was made on the basis of the
hospitals' direct costs and allocated indirect costs, including
premiums paid for qualifying general and professional liability
insurance (malpractice insurance). Beginning in 1983, and over a
4-year transition period, a significant part of Medicare
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Last modified: May 25, 2011