Physician-hospital gainsharing arrangements

By John R. Washlick, Esq.

Within only weeks after the Internal Revenue Service (IRS) gave the green light to certain gainsharing programs, the Office of Inspector General (OIG) of the Department of Health and Human Services issued a Special Advisory Bulletin (SAB) essentially outlawing traditional gainsharing programs.

The SAB addressed the application of the civil monetary penalties (CMP) provisions under the Social Security Act. The CMP prohibits a hospital from knowingly making a payment, directly or indirectly, to individual physicians as an inducement to reduce or limit services that are medically necessary to Medicare or Medicaid beneficiaries. A civil monetary penalty of up to $2000 per Medicare patient may be imposed on any physician who “knowingly accepts such payment” or hospital that knowingly makes such a payment.

Gainsharing programs have long been used in other industries and now are beginning to receive more attention by health care systems as they search for creative ways to secure the loyalty of referring physicians. While there is no fixed definition, “gainsharing” is a commonly used term to describe a variety of compensation arrangements that are designed to align the economic incentives of hospitals and physicians to provide cost effective care and to share in the resultant cost savings either through some combination of a percentage payment, hourly fee or fixed fee. Where Medicare dollars are fixed under a prospective payment system, a hospital will typically share a portion of its Medicare Part A cost savings with the participating physicians.

From the hospital’s perspective, gainsharing programs are aimed at lowering hospital costs, improving operational efficiencies and improving the quality of patient care through the standardization of procedures and medical protocols. The key advantage to participating physicians is the opportunity to share in an extra pool of money by some pre-approved measure (e.g., improvement of operating margin, meeting expense targets, satisfying quality assurance objectives, etc.).

Despite these benefits, gainsharing models also have a number of inherent shortcomings that may limit their effectiveness if employed as the only incentive arrangement. One obvious limitation is that the success of a gainsharing program is dependent on participating physicians changing their practice behavior. Other limitations are that not all specialists can participate in a gainsharing bonus program, they generally require sophisticated (expensive) accounting systems to track the cost savings and measure the improved quality of care, and such programs are not designed to encourage physicians to refer business to the health care system or to increase system revenues. In consequence, a successful integration strategy should consider implementing other financial incentive models to complement or replace a gainsharing program.

The question that needs to be resolved now is whether gainsharing programs can be designed or existing programs be untangled to comply with the OIG SAB or, alternatively, in light of the OIG’s position, whether existing or contemplated programs should be abandoned altogether.

With regard to gainsharing programs already implemented by hospitals and physicians, the OIG has indicated that in exercising its enforcement discretion, and in the absence of evidence that a gainsharing arrangement has violated any other statutes or adversely affected patient care, it will take into consideration whether such an arrangement was “terminated expeditiously” following publication of the SAB. That enforcement discretion includes seeking civil money penalties. Thus, the bad news with respect to traditional gainsharing arrangements that are already in place is that they should be unwound immediately. The fact that these arrangements are contractual should not impose a risk that any party to the arrangement will refuse to terminate the arrangement or threaten a breach of contract action against any other party who wishes to dissolve the relationship because the sanctions imposed under the CMP apply to both hospitals and physicians.

It is important to keep in mind that there is nothing in the SAB that per se prohibits hospitals and physicians from working together to reduce unnecessary hospital costs. In fact, the OIG specifically recognizes that hospitals have a legitimate interest in enlisting physicians in their efforts to eliminate unnecessary costs.

What is prohibited, however, is hospitals paying physicians a share of hospital-based savings resulting from limiting necessary medical services. In consequence, gainsharing arrangements should structure financial incentives broadly to reward physicians for the efficiencies they create.

For example, the OIG suggests that hospitals and physicians may enter into personal services contracts where hospitals pay physicians based on a fixed fee (rather than a percentage of cost savings) that is fair market value of services rendered rather than a share of cost savings to achieve many of the following objectives:

• Substituting lower cost but equally effective medical supplies, items or devices.

• Reengineering hospital surgical and medical procedures.

• Reducing utilization of medically unnecessary ancillary services.

• Reducing unnecessary lengths of stay.

As a practical matter, however, it is difficult to ascertain how a fixed fee arrangement can be implemented to achieve the desired results and at the same time incentivize the participating physicians to change their behavior. At best, an arrangement that is based on a fixed fee can only compensate the physicians for personal services actually rendered, such as serving on hospital committees and the like. Such arrangements may be well intended but they will not be effective in changing physician behavior where it will have the greatest impact on the institution’s bottom line.

In light of the SAB, any model based on sharing cost savings with participating physicians will be undertaken at the peril of all of the participants, including one that is based on a fixed fee for personal services. Indeed, the SAB specifically states that the OIG cannot provide any regulatory relief from the CMP prohibition absent further authorizing legislation.

On August 27, 1999, the OIG released a letter addressing the applicability of the CMP to hospital-physician incentive plans for Medicare and Medicaid beneficiaries enrolled in managed care plans. The OIG concluded that hospital/incentive plans that are limited to Medicare or Medicaid beneficiaries enrolled in risk-based managed care programs, including Medicare + Choice plans, are not subject to the CMP. The Social Security Act permits such incentive plans so long as the managed care plans do not induce the reduction of medically necessary care to individual patients. In consequence, if such plans include any revenue sharing based on saved costs similar to that described in the SAB, the OIG could attack such plans alleging that such payments constitute an inducement to reduce medically necessary care.

Traditional hospital/physician gainsharing arrangements may be permissible under a full-risk contract where the payor is a managed care company and Medicare and Medicaid dollars are not involved. Also, if a gainsharing arrangement is between a risk management company and the participating physicians, a gainsharing arrangement based on shared savings may be appropriate so long as the arrangement does not rely on Medicare and Medicaid reimbursement.

The OIG also noted in the SAB that it will be scrutinizing clinical joint ventures between hospitals, including both freestanding speciality hospitals (e.g., heart, orthopedic or maternity hospitals) and high revenue generating units or services (e.g., cardiology) of an existing hospital that is restructured or legally incorporated as a separate hospital, and physicians to determine if they violate the CMP provisions of the Social Security Act. The joint ventures targeted by the OIG are characterized as typically marketed only to a physician in a position to refer patients to the venture and structured to take advantage of the exception in the physician self-referral law for physician investments in “whole hospitals.” According to the OIG, these ventures may induce investor-physicians to reduce services to patients through participation in profits generated by cost savings in clinical care. In addition, the OIG believes such arrangements may also violate the anti-kickback statute.

The OIG SAB did not address the legality of gainsharing agreements under the anti-kickback or Stark anti-referral statute, but in a footnote to the SAB, the OIG noted that gainsharing arrangements may also implicate the anti-kickback statute and the physician self-referral prohibitions. In addition, if a hospital is an organization exempt from federal income tax as an organization described in Section 501(c)(3) of the Internal Revenue Code, the gainsharing program must be carefully structured to insure the organization’s continued tax-exempt status.

Gainsharing programs should never be considered a substitute for other incentive compensation arrangements customarily offered by hospitals. It is just one model to achieve physician integration. A successful integration strategy should consider implementing other financial incentive models to complement a gainsharing arrangement. How aggressive a health care system wants to be in implementing an integration strategy should depend primarily on how susceptible the system is to specialist defection. The OIG has indicated that it will not issue any positive advisory rulings regarding gainsharing arrangements, regardless of the social merits of any particular gainsharing arrangements. Any party wishing to pursue a gainsharing program where physicians will be rewarded with a percentage of cost savings is advised by the OIG to seek legislative relief.

John R. Washlick, Esq., is a partner in the Healthcare Practice Group at Morgan, Lewis & Bockius LLP in Philadelphia.