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Gain sharing revisited.

Physician executives have looked with interest at recently approved gain sharing agreements between hospitals and physician groups. In the past, these agreements were strictly prohibited.

There are no standard definitions of gain sharing. Gain sharing is understood to mean a financial arrangement between a hospital and physician where a hospital gives the physician a percentage of cost savings generated by the physician's cost reduction and enhanced productivity efforts.

Gain sharing always involves two parties--a hospital and a physician (or physician groups). Agreements between other parties do not fall within a gain sharing analysis. In addition, the employment status of the physician is irrelevant. The relationship solely involves a physician who performs patient care services at a hospital using hospital equipment and supplies.

OIG jurisdiction

The Office of the Inspector General is authorized by a variety of federal statutes to investigate both private and federally funded health care fraud (present policies restrict the investigative focus to cases of fraud affecting federally funded programs).

Historically, the OIG flatly prohibited all gain sharing agreements. (1) However, the OIG recently issued advisory opinions approving gain sharing agreements between hospitals and physician groups.

The OIG policy now recognizes that "proposed gain sharing, arrangements could increase efficiency and reduced waste, but must be scrutinized for:

* Stinting on patient care

* "Cherry picking" healthy patients and steering sicker (and more costly) patients to hospitals that do not offer such arrangements

* Payments in exchange for patient referrals

* Unfair competition (a "race to the bottom") among hospitals offering cost savings programs to foster physician loyalty and to attract more referrals." (2)

With this in mind, the OIG analyzes proposed agreements against the civil monetary penalty (CMP) statute and anti-kickback statute. Compliance with the Stark Law is under the jurisdiction of the Centers for Medicare and Medicaid Services and therefore not addressed in the OIG advisory opinions. The CMP, anti-kickback and Stark laws all serve to limit the scope of gain sharing agreements.

CMP limitations

The CMP provisions of the Social Security Act prohibit payments by hospitals to physicians that may induce physicians to reduce or limit items or services furnished to Medicare and Medicaid beneficiaries. (3)

Hospitals may be fined a CMP of $2,000 per patient for violations. In addition, hospitals are susceptible to a penalty of $50,000 for each act and not more than three times the total amount of the remuneration offered paid solicited or received. (4)

Congress enacted this legislation when hospital payment was changed from a cost system to a prospective payment system over fears of inappropriate reduction or limitation in beneficiary services. Typical features of gain sharing schemes that would violate the CMP statutes include:

* There is no demonstrable direct connection between individual actions and any reduction in the hospital's out-of-pocket costs (and any corresponding "gain sharing" payment).

* The individual actions that would give rise to the savings are not identified with specificity.

* There are insufficient safeguards against the risk that other, unidentified actions, such as premature hospital discharges, might actually account for any "savings."

* The quality of care indicators are of questionable validity and statistical significance.

* There is no independent verification of cost savings, quality of care indicators, or other essential aspects of the arrangement. (5)

Anti-kickback limitations

The anti-kickback statute prohibits purposeful remuneration to induce or reward referrals of items or services payable by a federal health care program. Parties on both sides of an impermissible kickback transaction are liable. "Remuneration" includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. (6)

HHS promulgated safe harbor regulations that define practices that are not subject to the anti-kickback statute as the practices would be unlikely to result in fraud or abuse. The exception applicable to gain sharing agreements is the personal service safe harbor.

The personal services safe harbor requires that the aggregate compensation paid for the services be set in advance and consistent with fair market value in arm's-length transactions. (7)

Stark limitations

The Stark (physician self-referral) Law prohibits physicians from referring designated health services (DHS) to entities in which they have a financial interest. (8)

Since inpatient and outpatient hospital services are DHS, gain sharing arrangements are a per se violation of the Stark Law. Similar to the anti-kickback safe harbors, Stark exceptions to the law may cure the transaction in question. (9)

Stark exceptions that could apply to gain sharing arrangements include the personal services, fair market value, indirect compensation, and academic medical center exceptions. Each exception, however, requires that the compensation not vary with the volume of referrals. CMS has jurisdiction over the Stark advisory process. (10)


OIG advisory opinion process

Before analyzing the recently approved gain sharing agreements, it is necessary to understand the advisory opinion process. An OIG advisory opinion is a legal opinion issued by the OIG to a party about its fraud and abuse authorities to the party's proposed business arrangement.

An OIG advisory opinion is legally binding on HHS and the requesting party. A party that receives a favorable advisory opinion is protected from OIG administrative sanctions if the arrangement is conducted in accordance with the submitted facts. However, it is important to note that other parties cannot rely on advisory opinions to avoid sanctions even for identical arrangements. (11)

Most advisory opinion requests seek guidance regarding the anti-kickback statute or safe harbor regulations. However, the OIG may also issue advisory opinions regarding the exclusion authorities, the civil monetary penalty authorities and the criminal penalties.

Advisory opinions are not issued for hypothetical situations, general questions of interpretation, activities in which the party requesting the advisory opinion is not, and does not plan to be, involved or applications of the Stark law.

Opinions about the Stark law come within the jurisdiction of CMS, which issues separate advisory opinions on whether an arrangement would involve the prohibited physician self-referral under the Stark law.

Again it deserves repeating that advisory opinions are binding only on the individuals or entities that have requested them and only requestors may rely on an advisory opinion. The OIG applies legal standards to a set of facts involving certain known persons. These known persons have provided specific statements about key factual issues.

Because each opinion applies to specific individuals or entities in specific situations, no third parties are bound by, nor may they legally rely on an advisory opinion.

Cardiology and cardiac surgery proposed agreements

This brings us to the OIG's opinions issued on February 18, 2005. Three opinions were directed to arrangements between hospitals and cardiology groups, and three were directed to hospitals and cardiac surgery groups. (12)

The OIG grouped the cost savings in the cardiac surgery proposed arrangements into four categories.

1. Open-as-needed items

2. Use-as-needed items

3. Product substitution recommendations

4. Product standardization

An independent program administrator would collect and analyze the data and the hospital would pay the physician group 50 percent of the cost savings for a period of one year.

The OIG divided the cardiology proposed arrangements into two categories. The first consisted of 10 product standardization recommendations. The second included two recommendations for limiting the use of certain vascular closure devices to an "as-needed" basis for coronary interventional procedures and diagnostic procedures.

Similar to the cardiac surgery proposed agreement, an independent program administrator would collect and analyze the data and the hospitals would pay the physician groups 50 percent of the cost savings for a period of one year.

CMP analysis -- Violation but no sanctions

In the surgery group proposed arrangements, the OIG concluded that the CMP would apply to the limitations on use of certain surgical supplies and product standardization.

Likewise, the cardiology proposed arrangement standardization of devices and limitations on the use of vascular closure devices would constitute an inducement to reduce or limit the current medical practice at the hospital and trigger the CMP.

However in all five proposed arrangements, a combination of several features provides sufficient safeguards so that the OIG would not seek sanctions.

The OIG reasoned that the clearly and separately cost-saving actions, supported by credible medical evidence, would not adversely affect patient care. In addition, the payments were based on all procedures regardless of the patients' insurance coverage (subject to the cap on payment for federal health care program procedures) and were reasonably limited in duration and amount.

Inappropriate reductions in services were further safeguarded by using objective historical and clinical measures to establish baseline thresholds beyond which no savings accrue to the physicians.

The product standardizations assured continued physician choice, further protecting against inappropriate reductions in services. In addition, the proposed arrangements provided written disclosures to patients with an opportunity to review the cost savings recommendations.

Finally, the physician profits would be distributed to group members on a per capita basis. As such, any incentive for an individual physician to generate disproportionate cost savings is mitigated.

Anti-kickback analysis -- Violation but no sanctions

The OIG was concerned that the proposed arrangement could be used to disguise remuneration from the hospital to reward or induce referrals by both the cardiology and surgical groups.

Specifically, the proposed arrangements could encourage the physicians to admit federal health care program patients to the hospital. The more procedures a physician performs at the hospitals, the more money he or she is likely to receive under the proposed arrangements.

The proposed arrangements would not fit in the safe harbor because both the cardiology and the surgical groups are paid on a percentage basis, so the compensation would not be set in advance. The OIG believed the proposed arrangements could result in illegal remuneration if the requisite intent to induce referrals were present; however, the OIG would not impose sanctions due to the safeguards of the proposed arrangements.

First, the circumstances and safeguards of the proposed arrangement reduce the likelihood that the arrangement will be used to attract referring physicians or to increase referrals from existing physicians. Participation is limited to the physicians in the proposed arrangements. The savings are capped and limited to one year.

Second, the structure of the proposed arrangements eliminates the risk of rewarding referring physicians to the cardiology and surgery groups. The cardiology and surgery groups are the sole participants in the proposed arrangements.

Third, the proposed arrangements specifically set out the particular actions that will generate the cost savings on which the payments are based. They would be limited in amount, duration and scope.

Christopher Spevak, MD, MPH, MBA, JD, is the physician director of government relations for the MidAtlantic Permanente Medical Group and a clinical associate clinical professor of anesthesia at Georgetown University Medical Center. He may reached by e-mail at


This article contains the advice, opinions, statements and views of the author and does not necessarily represent the advice, opinions, statements or views of Georgetown University Medical Center, the Mid-Atlantic Permanente Medical Group, PA, or its physicians. The content of this article is provided solely for informational purposes; it is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax, career and/or other professional advisors.


1. Special Advisory Bulletin: Gain sharing Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries Accessed 8/15/05

2. OIG Advisory Opinion 05-06 Accessed 8/15/05

3. 42 U.S.C. [section]1320a-7a(b)(1).

4. 42 U.S.C. [section]1320a-7a(b)(7).

5. OIG Advisory Opinion 05-04 Accessed 8/15/05

6. 42 U.S.C [section] 1128B(b)

7. 42 C.F.R. [section] 1001.952.

8. 42 U.S.C [section]1877

9. 42 CFR [section][section] 411, 424

10. 42 C.F.R. [section][section] 411.370-.389

11. OIG Fraud Prevention and Detection/Advisory Opinions FAQ Accessed 8/15/05

12. OIG Fraud Prevention and Detection/Advisory Opinions 05-01 through 05-06 Accessed 8/15/05

By Christopher Spevak, MD, MPH, MBA, JD

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Title Annotation:Regulations of office of inspector general
Author:Spevak, Christopher
Publication:Physician Executive
Date:Mar 1, 2006
Previous Article:Look what's happened to medical ethics: broader horizons, updated ideas, fresh language.
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