Green light for gainsharing arrangements?

Gainsharing is an arrangement in which physicians work with hospitals to share the profits associated with reducing wasteful spending. Historically, the Office of the Inspector General ("OIG") has taken the position that gainsharing in the fee-for-service arena is prohibited under various federal statutes. Recently, however, the OIG has softened its position and has concluded that certain gainsharing arrangements are permissible. Expansion of gainsharing will present significant opportunities for cost savings to the nation's beleaguered hospitals.

Under Medicare, hospitals are paid pursuant to a predetermined flat rate based on a patient's diagnosis or the "diagnostic related group" scheme. Because physicians are paid under a separate scheme, hospitals bear all the costs associated with inpatient care, leaving administrators scrambling to reduce costs and increase efficiency. Gainsharing arrangements seek to align hospital and physician interests by providing incentives to physicians to perform hospital procedures in the most efficient manner, thereby reducing a hospital's expenses.

The OIG's Historical Treatment of Gainsharing

Unfortunately, six years ago, the OIG reined in most hospital/physician gainsharing arrangements with its July 1999 Special Advisory Bulletin ("SAB"), Gainsharing Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries. The SAB announced that gainsharing arrangements between hospitals and physicians in connection with the fee-for-service federal reimbursement program implicate the civil money penalty ("CMP") portion of the Social Security Act (the "Act"). The CMP prohibits any critical access hospital from knowingly making payments directly or indirectly to physicians as an inducement to reduce or limit services to Medicare and Medicaid beneficiaries under the physician's care. Hospitals and physicians are subject to a $2,000 penalty per patient covered, by such payments. The SAB also concluded that gainsharing arrangements implicate potential violations of the illegal remunerations ("Anti-Kickback") and physician self-referral ("Stark") sections of the Act. The OIG's legitimate concerns include: Scrimping on patient care, cherry-picking healthy patients and steering sicker (more costly) patients to hospitals that don't offer such arrangements, payment for patient referrals, and unfair competition among hospitals offering cost-saving programs to foster physician loyalty and attract more referrals.

This article is limited to an analysis of the OIG's treatment of recent gainsharing arrangements with respect to the CMP. While gainsharing arrangements can be structured to avoid violations of Anti-Kickback, Stark and similar state statutes, readers are advised to conduct a thorough analysis of these laws prior to entering, into any gainsharing arrangement.

Structuring Gainsharing Arrangements

The OIG's analysis of six gainsharing arrangements was published in six separate advisory opinions, one in 2001 and five in 2005 (collectively, the "Advisory Opinions"). In each case a hospital had rigorously studied the historic practices of its cardiac surgery department or cardiac catheterization laboratory and identified multiple cost-saving procedures (29 in one case) that were approved by the participating cardiology/surgery group(s). Together, the parties certified to the OIG that implementation of such procedures would not adversely impact the quality of patient care. The proposed arrangements included standardizing devices available for use in certain procedures, thus reducing costs through economies of scale. Each hospital had also engaged a program administrator to collect data and analyze and manage the proposed arrangement on a going forward basis. Moreover, each proposal identified the manner in which the group would share in cost savings, such as capping payments through pre-designated ceilings above which savings would not accrue. Additionally, savings would be paid directly to a group rather than individual physicians.

In each Advisory Opinion, the OIG concluded that, for the most part, the gainsharing arrangements violated the CMP. Nonetheless, the OIG stated that it would not exercise its prosecutorial discretion because eight consistently identified factors that reduced the potential for fraud and abuse while ensuring quality of care existed within each proposal. The following eight factors can be used as guidelines in structuring gainsharing arrangements to minimize the threat of OIG prosecution. Readers are advised, however, that these factors are not intended as an exhaustive list of safeguards to minimize scrutiny by the OIG, and are encouraged to seek the advice of legal counsel before engaging in any gainsharing arrangement.

1. The specific cost-saving actions and resulting savings must be clearly and separately identified. The gainsharing arrangement must be transparent to allow for public scrutiny and individual physician accountability for any adverse effects, including any difference in treatment among patients based on non-clinical indicators. The transparency of the incentives for specific actions and procedures also facilitates accountability through the medical-legal professional liability system.

2. The participants of a gainsharing arrangement should have credible medical support for the position that implementation of any gainsharing recommendations will not adversely affect patient care, accompanied by periodic review by the participants to confirm the absence of adverse impact on care.

3. The payments under the arrangement should be based on all procedures regardless of the patient's insurance coverage, subject to the cap on payment for federal health care program procedures, and should not be disproportionately performed on federal health care program beneficiaries. Additionally, the cost savings should be calculated on the hospital's actual out-of-pocket acquisition costs, not on accounting conventions.

4. The gainsharing arrangement should protect against inappropriate reductions in services by utilizing objective historical and clinical measures to establish baseline thresholds beyond which no savings accrue to the physician group. The baseline measures must be reasonably related to the hospital's or comparable hospitals' practices and patient populations. Safeguards should be action-specific and not simply be based on isolated patient outcome data unrelated to the specific changes in practices.

5. Product standardization plans are permissible so long as the full range of devices historically used at the facility are made available and accessible to physicians when their use is deemed to be clinically indicated. The gainsharing arrangement should be designed to produce savings through inherent clinical and fiscal value and not by restricting the availability of devices.

6. Hospitals and participating physician groups should make available written disclosures of their involvement in a gainsharing arrangement to patients whose care may be affected by such arrangement, allowing affected patients an opportunity to review the cost-saving recommendations prior to hospital admission (or prior to consenting to a procedure where pre-admission consent is impracticable).

7. The arrangement should be limited to one year and financial incentives should be reasonably limited in duration and amount through the use of ceilings for designated items and services above which reimbursement will not occur.

8. Distribution of the group's profits to its members on a per capita basis can mitigate the incentive for an individual member to generate disproportionate cost savings, thereby reducing the risk of motivating physicians to trade patient safety for savings.

Hospitals, physicians, patients and payors all stand to gain when programs can be developed that substantially eliminate waste and improve overall efficiency while simultaneously safeguarding the quality of patient care. However, it is important to remember that the eight factors mentioned above are merely suggestions for components that should be included when structuring gainsharing arrangements to help minimize the threat of OIG prosecution. Hospitals and physicians should also remember to analyze any programs under the Anti-Kickback statute, Stark and applicable state laws. The OIG's guidance through its advisory opinion process gives reason for hope that such programs will enhance our collective ability to reduce the nation s healthcare costs.

Patricia M. Kosich is an associate in ECJ's Corporate and Health Care Departments. Ms. Kosich's areas of practice include health care law, mergers and acquisitions and general business law. You can contact Ms. Kosich at 310.281.6337 or [e-mail].

Randall S. Leff is a partner in ECJ's Litigation, Health Care and Employment Law Departments. His practice areas include business litigation, health care, employment law and real property law. Mr. Leff also specializes in antitrust and corporate dissolution litigation. In addition, he has considerable experience representing financial institutions, developers, medical groups and independent practice associations. Mr. Leff can be reached at 310.281.6368 or [e-mail].