Two recent opinions allow hospitals to assist independent physicians.

Recently, two advisory opinions from the Office of Inspector General ("OIG") of the Department of Health and Human Services allowed hospitals to assist financially independent physicians in ways previously thought to violate federal anti-kickback laws.

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* In a December 2004 opinion, the OIG stated that they would not prosecute a medical malpractice subsidy arrangement where a hospital offered financial assistance to two neurosurgeons.

* A month later in a January 2005 opinion, the OIG stated it would not prosecute a narrowly tailored gain-sharing arrangement between a hospital and a group of cardiovascular surgeons.

In issuing an advisory opinion, the OIG relies solely on the facts and information provided to them by the party requesting the opinion, and the OIG does not undertake its own independent investigation of the matter. As such, the official guidance is binding only on the party requesting the opinion and the OIG reserves the right to reconsider the questions and issues raised in the advisory opinion as the law changes or public interest requires.

Nevertheless, both of these opinions provide new and useful guidance to physicians involved with such issues.

Medical malpractice subsidy payments

In the first opinion, two neurosurgeons practicing together were experiencing extreme problems with decreased malpractice insurance availability and increased malpractice insurance premiums.

These two physicians practiced at the region's only acute care hospital offering neurosurgical services. After having malpractice insurance from the same carrier for seven years two weeks from their expiration date, the physicians learned that their coverage would not be renewed.

The physicians had been on a "claims-made" policy, so liability protection after the expiration of their current policy would require "tail coverage." Absent the two physicians entering retirement where the tail coverage premium would be waived, the tail coverage expense to remain in practice was quite large.

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Further, the cost of continuing coverage with the new carrier was substantially more than the historical cost of liability coverage with the previous carrier. Faced with these difficult circumstances, the physicians informed the hospital that they would both retire immediately unless the hospital subsidized their malpractice insurance expenses.

As the hospital functions as a hub for neurosurgical services for its own and several neighboring counties and had been unsuccessful in recruiting other neurosurgeons over the past two years, and because the neurosurgeons provided a substantial amount of care to Medicaid and indigent patients, the hospital agreed to enter into a subsidy arrangement.

Under the arrangement, the hospital agreed to subsidize:

* The entire cost of the tail coverage from the original carrier

* A portion of the increased premiums for the claims-made coverage from the new carrier

* Part of the costs of tail coverage from the new carrier

The physicians would still incur increased out-of-pocket expenses for their malpractice insurance, as the physicians paid the same historical cost and the premium subsidy covered only part of the current net increase in premiums.

Surgical cost reduction and gain-sharing

In the second example, an acute care hospital offering a broad range of inpatient and outpatient services, including cardiac surgery services, proposed an arrangement with their cardiac surgeons where the physicians would share in certain, limited cost savings that were directly attributable to specific changes the cardiac surgery group made in their operating room practice.

Generally, the surgical group agreed to curb the waste of medical resources by adopting such policies as "open as needed" for certain supplies, substitution of less costly items for items currently being used, and employing a product standardization regimen where medically appropriate.

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To ensure against an inappropriate reduction in services, the physicians recommended several safeguards. For instance, the arrangement would utilize objective historical and clinical measures reasonably related to the physicians' practice and the hospital's patient population to establish a "floor" beyond which no savings would accrue to the cardiac surgeons.

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Further, the cardiac surgeons, themselves certified that they would make individual, patient-by-patient determinations of the most appropriate procedure or medical device, and that the availability of the full range of cardiac devices and services would not be compromised by the product standardization regimen.

Finally, prior to distributing any gain-sharing to the physicians:

* The hospital will adjust the current year costs to account for any inappropriate reductions in the use of items beyond the estimated efficiency targets planned for in the initial agreement

* If the volume of procedures payable by a federal health care program in the current year exceeds the volume of like procedures payable by a federal health care program performed in the base year, no sharing of cost savings will be seen for the additional procedures

* To minimize steering of patients to other institutions, the patient population will be severity and age adjusted

* The aggregate payment to the cardiac surgery group will not exceed 50 percent of the projected cost savings identified by the hospital.

Legal analysis

Traditionally arrangements like these, to assist with medical malpractice premiums and to share hospital cost savings, are seen as ways hospitals may induce physicians to refer patients to the hospital's facility. These inducements often are characterized as Federal anti-kickback violations.

As can be readily seen, such arrangements are designed to align incentives by offering physicians a malpractice insurance subsidy or a portion of a hospital's cost savings in exchange for continuing to practice and refer patients or implementing cost saving strategies.

The federal anti-kickback statute prohibits the payment, receipt, offering or solicitation of remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for:

* Referring an individual to a person or entity for the furnishing or arranging for the furnishing of any item or service paid in whole or part by a federal health care program

* Purchasing, leasing, ordering or arranging for or recommending the purchasing, leasing, or ordering of any goods, facility, service or item paid for in whole or part by a federal health care program. (1)

Remuneration has been interpreted as a catch-all category that includes any type of cash or in-kind benefit.

Because of the potential breadth of the anti-kickback statute, Congress ordered the OIG to promulgate regulations that create safe harbors for certain financial arrangements. If a financial arrangement complies with all the requirements of a safe harbor, the OIG will not prosecute the arrangement regardless of the specific intent of the parties.

It should be kept in mind that failure to meet the requirements of a safe harbor does not necessarily mean that an arrangement violates the anti-kickback statute; it simply means that the transaction could be challenged by the OIG. In the event of such challenge, the OIG would look at all facts and circumstances to determine whether the arrangement violates the statute.

Regarding the first example, the OIG historically has been concerned that a hospital's subsidy of malpractice insurance premiums for physician referral sources potentially implicates the anti-kickback statute because those payments may be used to influence referrals.

Further, there is particular concern where such subsidies are offered in a conditional or selective manner that reflects referrals from the subsidized practitioners.

Nevertheless, in agreeing not to prosecute the physicians and hospital, the OIG reasoned that the potential for prohibited referrals was low because:

* The subsidy arrangement was implemented as a temporary and urgent measure to prevent a gap in the local availability of needed services

* As not all increased expenses were subsidized, the arrangement was structured so as to prevent a significant financial windfall for the physicians

* The physicians were required to continue full call coverage, maintain a full-time practice, and furnish Medicaid and indigent services

* There was no requirement for the physicians to refer patients to or generate business for the hospital

In the second example of gain-sharing, the OIG stated its concerns regarding "cherry picking" healthy patients while steering sicker patients to other institutions. In addition, the OIG was concerned about possible unfair competition among hospitals offering cost-saving programs to foster physician loyalty and to attract more referrals.

Notwithstanding those concerns, in agreeing not to prosecute the physicians and hospital the OIG reasoned that:

* The specific cost-saving actions and resultant savings were clearly and separately identified so as to allow for specific, measurable accountability

* There was credible medical support for the position that implementation of the recommendations will not adversely affect patient care

* The cost-savings distributions to the physicians are based on all surgeries regardless of the patients' insurance coverage

* The program contains protections against inappropriate reductions in services by utilizing objective historical and clinical measures to establish baseline thresholds beyond which no savings accrue to the physicians

* The financial incentives in the agreement are limited in duration and amount.

While it's important to remember that advisory opinions are binding only on the person or facility officially contacting the OIG for such guidance, nevertheless, it is common for health attorneys to look to these opinions for guidance as to how the federal government will treat similar arrangements.

Reference:

1. A violation of the anti-kickback statute is a felony and can result in a $25,000 fine, imprisonment for not more than five years, or both. In addition, a violation could result in exclusion from participation in any federal health care program. Further, the 1997 amendments to the civil money penalty law allows for the administrative imposition of civil monetary penalties for a violation of the anti-kickback statute. Such civil monetary penalties could be in the amount of $50,000 plus damages of three times the total remuneration offered, paid, solicited or received per violation without regard to whether a portion of such remuneration was offered, paid, solicited or received for a lawful purpose.

By Timothy McIntire, MD, JD, MBA, CPE, FACPE 

Timothy McIntire, MD, JD, MBA, CPE, FACPE, is an attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. He is based in Nashville, Tenn., and his primary focus is defense law for physicians and health care organizations. He can be reached at 615-726-5620 or [e-mail]