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In recent advisory opinions, the U.S. Department of Health and Human Services Office of Inspector General (OIG) approved several gainsharing arrangements between hospitals and physicians. The recent advisory opinions indicate that gainsharing programs constructed with the safeguards described by the OIG can be a viable option for mutually beneficial hospital/physician joint ventures. Although the recent opinions deal with gainsharing programs available to cardiologists and cardiac surgeons, other practice areas (such as orthopedic surgery, neurosurgery, oncology, obstetrics and urology) are potential hospital gainsharing partners.

What is Gainsharing?

"Gainsharing" provides payments to physicians of a portion of the hospital's cost savings from implementing modifications in care delivery in order to increase efficiency and quality, reduce waste, and thereby increase a hospital's profitability. Hospitals are under significant financial pressure to reduce costs, in part because of the effect of managed care and the DRG system of Medicare reimbursement. Gainsharing arrangements are designed to align physician incentives with those of hospitals. Hospital departments with the highest patient volume and the greatest number of procedures are prime targets for gainsharing arrangements because modification of physician behavior in these departments present the greatest possibility for improving a hospital's profitability.

The OIG Advisory Opinions

Gainsharing gained popularity in the 1990s until the OIG released a 1999 Special Advisory Bulletin warning hospitals that the Civil Monetary Penalties statute makes it illegal for a hospital to make payments directly or indirectly to a physician to reduce or limit items or services to Medicare or Medicaid patients. The recent advisory opinions (Opinion Nos. 05-01, 05-02, 05-03, 05-04, 05-05 and 05-06) indicate that the OIG has backed away from that position. In all of the recent opinions, a hospital conducted a study of the historic practices in its cardiac surgery or cardiology departments and identified practices that would generate cost-savings, if implemented, including:

• Opening Packaged Items Only as Needed. Packaged items, such as a surgical tray or comparable supplies, would be opened only as needed during a procedure
• Blood Cross-Matching. All patients would be typed and screened prior to the procedure, with a cross-match performed only when a patient required transfusion
• Substitution of Less Costly Supplies. Less costly items would be substituted for the items currently being used by the surgeons
• Product Standardization. Certain products, where medically appropriate, would be utilized to reduce overall product cost

Each hospital proposed a gainsharing arrangement in which it would share with one or more cardiology groups or cardiac surgery groups a percentage of the savings arising from implementation of the measures identified in the study. Depending on their specific program, the hospitals would save $600,000 to $4 million annually, with the physicians reaping up to half of the savings. The OIG noted that the proposed arrangements would constitute improper payments to induce reduction or limitation of services in violation of the Civil Monetary Penalties law and would potentially generate prohibited remuneration under the Anti-Kickback Statute if the intent to induce or reward referrals were present. Nevertheless, the OIG approved the proposals, in part because of the presence of the following safeguards:

• Limited Duration and Amount. The financial incentives would be reasonably limited in duration and amount. For example, each proposal is limited to one year although subject to renewal for additional years. Payments to the physician groups would be 50 percent of the difference between the hospital's adjusted current year costs and its base year costs, with the aggregate physician payments limited to 50 percent of the projected cost-savings identified in the study.
• Specific Cost-saving Identified. Each proposal clearly and separately identified specific cost-saving actions and resulting savings
• No Adverse Effect on Patient Care. The requestors offered credible medical support that the cost-saving measures would not adversely affect patient care
• All Payor Application. The gainsharing payments would not be limited to procedures reimbursed by Medicare, but instead would be based on all applicable categories of procedures, regardless of payor
• Baseline Thresholds Established. The arrangements would protect against inappropriate reductions in services by using objective historical and clinical measures to establish baseline thresholds beyond which no savings would accrue to the physicians
• No Diminution in Product Choice. While product standardization would be encouraged, physicians would make a patient-by-patient determination and choose the most appropriate cardiac device from among the same selection of devices as before
• Written Disclosures. The hospital and the physician groups would provide written patient disclosures describing the arrangement
• No Inappropriate "Steering." A hospital committee would monitor the case severity, ages and payors of the affected patients to ensure that participating doctors were not steering costly patients to other hospitals. If a physician's case mix shows a significant change from historical measures, the physician would be terminated from the program.
• No Shifting of Cost-savings. Cost-savings would be calculated separately for each recommendation, which would preclude shifting of cost-savings and assure that the savings generated by utilization beyond a set target would not be credited to the physician group

The OIG contrasted the safeguards in the proposed arrangement to other proposals that increase the risk that payments will lead to limitations or reductions of services. These problematic arrangements have the following characteristics:

• Relationship of Reduced Costs to Physician Actions. There is no connection between individual actions and a reduction in the hospital's costs
• Non-Specific Cost-savings. The individual actions that would result in cost-savings are not identified with specificity
• Insufficient Safeguards. There are insufficient safeguards against the risk that other actions (such as premature hospital discharges) might account for any savings
• No Substantiation of Quality of Care. The quality of care indicators are of questionable validity
• No Independent Verification. There is no independent verification of cost-savings or quality of care

The OIG decided not to impose sanctions in the recent opinions because:

• Safeguards Implemented. The safeguards of the proposed arrangements reduce the likelihood that the cost-savings program would attract referring physicians or increase referrals from existing physicians
• Structure of the Arrangement. The structures of the proposed arrangements eliminate the risk that the arrangements would be used to reward physicians or others who refer patients since savings would be distributed to physicians on a per capita basis
• Cost-Savings Specificity and Reasonableness. The proposed arrangements set out with specificity the particular actions that would generate the cost-savings and the savings appeared reasonable

Conclusion

The recent advisory opinions hold the door open to very specifically targeted gainsharing initiatives while warning potential participants that those arrangements will need to be very carefully structured to avoid potential prosecutorial risks. The opinions offer a blueprint of what safeguards the OIG will require before approving a gainsharing program, and may present an opportunity for physicians to earn ancillary income or increase profits, while at the same time implementing cost-savings programs that benefit patients. In considering gainsharing programs, hospitals should be able to show:

• A demonstrable direct connection between individual action and any reduction in the hospital's out-of-pocket costs
• Specific cost-savings that would be generated by identifiable individual actions
• Sufficient safeguards against the risk that other unidentified actions, such as premature hospital discharges, might actually account for the savings
• Quality of care indicators are utilized and are valid and statistically significant
• Independent verification of cost-savings, quality of care indicators, and other aspects of the arrangement

Although not discussed in any of the advisory opinions, a hospital considering a gainsharing program should also perform a Stark analysis. Generally, in assessing these types of relationships, hospitals would be wise to tie their gainsharing plans to either the personal service exception or to the fair market value exception. The personal service exception requires that any payment made to the physician or physician group must be made at fair market value and must be considered reasonable compensation. In addition, such arrangements would have to be documented in writing for a period of one year and not tied to the volume or value of referrals. While the majority of advisory opinions to date assess whether or not the Anti-Kickback Statute may be implicated, there is an advisory opinion process under Stark that may also be utilized. However, it is important to note that the OIG, like the IRS, generally will not conduct fair market value analysis and, thus, it would be important to obtain an independent qualified appraisal of fair market value to support any payments made to physicians. Given the considerable safeguards that the OIG has found important in gainsharing arrangements, hospitals should remain cautious and consult with legal counsel and consider obtaining an advisory opinion prior to pursuing such arrangements.

If you require our assistance or have any questions please contact Michael Dowell at mdowell@tocounsel.com or the lawyer in the firm who generally handles your health care legal matters.