Gainsharing Opportunities Expand for Physicians and Hospitals

If the health care industry has been waiting for express governmental approval of gainsharing, the OIG’s recent advisory opinions on the topic are at least a small step in that direction. In no fewer than six separate advisory opinions issued earlier this year the OIG sent a clear message that some precise and well-crafted gainsharing arrangements will pass legal muster. Despite this encouragement from the regulators, a number of structural and accounting barriers to a successful gainsharing program remain. At first blush, gainsharing seems like an all-around winning recipe for encouraging efficiencies in hospital patient care. Most gainsharing programs involve a contractual arrangement in which a hospital agrees to share cost savings with a physician or medical group to the extent that their practice patterns reduce the hospital’s costs. The hospital thereby reduces the cost of medical care at its facility while the physicians benefit financially by adjusting their clinical practices in a manner that promotes efficiency. Patients may, in the long run, benefit through the adoption of a thoughtful cost-saving strategy that serves to lower the cost of hospital goods and services without increasing clinical risk.

The OIG believes itself constrained by federal law from providing an across the board blessing for the concept of gainsharing. The OIG commented in a Special Advisory Bulletin published in 1999 that “appropriately structured” gainsharing arrangements may offer “significant benefits” with no adverse impact on quality of care. However, the OIG also noted in 1999 and reaffirmed in 2005 that the Hospital Physician Incentive Plan (“Hospital PIP”) statute (Section 1128A(b) of the Social Security Act) technically prohibits such arrangements and that Congressional action is necessary to grant significant regulatory relief from its restrictions.

The OIG has adopted a very literal and expansive interpretation of Hospital PIP statute and so far has declined to issue regulations to define gainsharing plans that it considers acceptable. Instead, the OIG has elected to review gainsharing plans on a case-by-case basis pursuant to its advisory opinion process to determine whether particular arrangements violate the intent of Hospital PIP law, or alternatively, pose such minimal risk of abuse that the OIG will decline to prosecute the proposed program. The advisory opinion process allows the OIG to offer carefully circumscribed relief from technical violations of Hospital PIP statute in situations in which the OIG believes prosecution is not in the public interest. Unfortunately, the advisory opinion process is subject to detailed regulation and requires many months to successfully complete with no guarantee of eventual approval. Any meaningful deviation from facts submitted to the OIG may be cause for later prosecution, invalidating the benefits of the ruling. The advisory opinion process also lacks precedential value, meaning that other parties cannot cite an earlier ruling to bind the OIG to the same favorable outcome based upon the same essential facts.

Even if not useful as precedent, the uniformity of the OIG’s approach to gainsharing in its six opinions on the topic this year suggests that the odds of obtaining a favorable opinion are good if participants are willing and able to devote the time and resources necessary to compile the data required to justify the arrangement.

All of the gainsharing advisory opinions involved a cardiac surgery or cardiac catheterization program. In each case, the OIG stated that the reviewed arrangement technically violated the Hospital PIP law but included sufficient safeguards against abuse as to avoid prosecution.

In each instance, a neutral Program Administrator conducted a departmental study that measured specific cost factors within the hospital on an historical basis for use as a baseline for rewarding physicians’ future conduct. Each arrangement provided for continued use of the Program Administrator on a prospective basis to measure physician achievements in light of defined objectives. The proposed cost saving measures bear marked similarities in structure from program to program, with extreme specificity critical in each instance.

Cardiac surgery programs entailed the following cost-saving measures:

• Substituting less expensive products where the replacement product did not impact quality of care
• Opening certain surgical kits and comparable sealed supplies only when needed in the course of the surgery
• Ordering blood cross-matching only when a patient required a transfusion in the course of a procedure
• Standardizing the cardiac devices used in the course of surgery

In the case of cardiac catheterization programs, the cost-saving measures included the following:

• Standardizing the cardiac devices used
• Using certain vascular closure devices only “as needed” for inpatient coronary interventional and diagnostic procedures
• Substituting less expensive products where the replacement product did not impact quality of care

In general, the OIG stated that each of these measures technically violated Hospital PIP statute because they provided for compensation intended to induce physicians to limit care to Medicare or Medicaid beneficiaries. Only the “open as needed” recommendation for surgical trays and the substitution of products in cardiac surgery cases, were deemed not to implicate the statute because neither of these measures curtailed patient care.

Despite broad technical violations, the OIG elected not to impose administrative sanctions against any of these gainsharing programs because all included significant safeguards:

• Transparency. Program mechanics permit clear identification of specific cost-saving measures and resulting savings. In each instance, the hospital and physicians shared equally in identified savings as compared to historical practices.
• Credible Medical Support. The parties offered credible medical support to demonstrate that the arrangement would not adversely impact clinical care. Promised periodic updates of the review were also important.
• Uniform Application Subject to Federal Cap. The measure for savings included all surgeries, regardless of patients’ insurance coverage. In addition, the programs excluded shared cost savings to the extent that procedures payable by the Medicare and Medicaid programs in the measured year exceeded the volume of like procedures performed during the base year. The measurement of savings by reference to actual acquisition costs rather than an abstract accounting formulation was also persuasive.
• Protection Against Inappropriate Reductions. The programs each used objective historic and clinical measures to establish baselines beyond which no savings benefits would accrue to the physicians, thereby removing the incentive to implement cost-saving measures where inappropriate.
• Written Disclosure. The hospital and physicians would make written disclosure (and presumably consent) to the arrangement to patients before their admission to the hospital. Where impracticable prior to admission, the parties would make disclosure prior to obtaining surgical consent.
• Reasonableness in Amount. The financial incentives were deemed reasonable in amount and duration.
• Per Capita Distribution of Profits. In each case, the contracting the physician group agreed to distribute profits from the arrangement on a per capita basis. As a result, no single physician was incentivized by personal productivity to seek excessive remuneration from the Program.

With its customary thoroughness, the OIG also described the hallmarks of gainsharing plans that posed the risk of inappropriate reductions of limitations of services and were thus subject to prosecution. These included (i) no demonstrable connection between compensable physician conduct and reduction in hospital out of pocket costs; (ii) overly general descriptions of individual physician actions; (iii) insufficient safeguards that other hospital actions, rather than actions taken by the physicians, would account for savings; (iv) quality of care indicators of dubious validity and significance; and (v) no independent verification of cost savings, quality of care indicators or other essential aspects of the arrangement.

The OIG also commented that gainsharing arrangements technically violated the federal anti-kickback statute, which prohibits the payment of remuneration in exchange for referrals. Again, the OIG indicated that it would decline to prosecute any of the six cases, but for the following reasons: (i) the arrangements applies only to contracting group members, and was not a hidden recruitment device; (ii) the structure of the arrangements eliminated the risk of reward to physicians who referred to members of the physician group under review; and (iii) the relative specificity of the proposed arrangement.

Finally, the OIG commented that gainsharing arrangements also implicated the Stark law, which generally prohibits referrals by physicians to a hospital with which they have a financial relationship, except where an exception to the statute applies. However, the OIG declined to comment on that statute because it lay outside the OIG’s authority. It may be noteworthy, however, that the OIG went so far as to comment that it was “not unreasonable” for physicians to receive compensation for increased risk for proposed changes in practice, perhaps signaling the at least the possibility that one or more Stark exceptions linked to reasonable compensation may apply to gainsharing arrangements.

Earlier this year, MedPAC recommended that Congress change the current law to allow for gainsharing arrangements. The Hospital Fair Competition Act (S.1002) introduced in May included provisions that would eliminate the Stark and Civil Monetary Penalty law issues and require CMS to authorize certain gainsharing arrangements. Many proponents of the moratorium on the development of Specialty Hospitals, which recently expired, believe that gainsharing is a better alternative to allow physicians to financially benefit from cost savings. In the absence of clearer legislative direction, proposed gainsharing arrangements should be constructed consistent with the criteria described in prior advisory opinions and should be formally submitted as a request for an advisory opinion to the Department of HHS.

The Health Law practice at Davis Wright Tremaine is nationally known and serves clients from across the nation. If the Hospital Fair Competition Act of 2005 is enacted, it will have significant effect on DRG reimbursement, joint venture options and gainsharing opportunities. Our Health Law practice has working groups dedicated to areas of special interest enabling us well equipped to help clients navigate these changing waters.

Our Payment and Accreditation Group assists a variety of clients, including, community hospitals, physicians, nursing homes, ancillary providers and academic medical centers. We advise these clients on payment and accreditation matters, including obtaining coverage for new services and products, securing provider status, resolving payment disputes, assisting with audits, conducting internal investigations and advising on compliance issues.

Our Joint Ventures Group works with a wide variety of clients on joint ventures involving hospitals, physicians, pharmacies, long-term-care and ancillary providers and management companies of various types. We strive to help our clients structure these ventures in a way that maximizes business potential while limiting the regulatory risks.