The Chairman of the Parliamentary Select Committee on Health, David Hinchcliffe MP, has accused Norwich Union of potentially enticing NHS doctors and nurses into accepting bribes.
He said the insurer's Fair and Square policy could lengthen hospital waiting lists because it offers clients a cash incentive to use the NHS.
He added that NHS nurses could be tempted to collude with patients to help prolong their stay in hospital.
Hinchcliffe is calling on the insurance company to withdraw the policy which pays patients £250 a day for every day spent in NHS hospital.
But Norwich Union has strongly rebutted Hinchcliffe's allegations, claiming they were unfounded.
The row spilled on to the national airwaves last week when it was covered on Radio 4's Today programme.
"Offering monetary rewards of this nature leaves the NHS wide open to collusion in terms of admissions," Hinchcliffe said on the show.
"Where there is nearly £2,000 a week on offer to patients to occupy a bed, I can see NHS staff in some instances being involved in effective bribery to obtain these admissions."
Fair and Square offers policyholders the option of taking immediate treatment at a private hospital or £250 a night money back if they decide to be treated at an NHS hospital instead.
Norwich Union spokeswoman Louise Zucchi said that eight out of ten Fair and Square customers will opt to go private and, if not, the company was able to spot malingerers.
"We know the usual length of hospital stay for each condition, and if this is exceeded we investigate," she said.
"We also have complete faith in the integrity of NHS doctors and nurses and do not believe they would get involved in any kind of collusion."
Zucchi added that there was nothing new about the cash back option, which has existed for ten years.
The only difference is that it has been made the selling point of this policy.