OIG Takes Aim At Hospital Gainsharing

Introduction
On July 8, 1999, the Office of the Inspector General of the Department of Health and Human Services ("OIG") issued a Special Advisory Bulletin on hospital-physician gainsharing arrangements. The Special Advisory Bulletin focuses on the law prohibiting any hospital from knowingly making a payment, directly or indirectly, to a physician as an inducement to reduce or limit services to Medicare or Medicaid patients under the physician's direct care. In the Special Advisory Bulletin, the OIG broadly interprets this prohibition and finds impermissible those gainsharing arrangements in which physicians receive a share of the savings to a hospital attributable to the physicians' efforts to control costs. While acknowledging the potential benefits of gainsharing, the OIG indicated that the clear statutory prohibition prevents it from providing any regulatory relief (through the advisory opinion process or otherwise) without a change in the law.

Gainsharing Programs, The Regulatory Landscape And Advisory Opinions
Since the institution of diagnostic related group (DRG) reimbursement under Medicare Part A, hospitals have had a direct incentive to control costs. Physicians, however, are paid separately under Medicare Part B and, therefore, do not have any financial motivation to reduce hospital costs. In fact, efforts by physicians to control hospital costs may be both time-consuming and income-limiting. Given the increasingly competitive market conditions and the downward pressure on reimbursement, hospitals, physicians, other providers and plans have been attempting to align incentives to increase efficiency in the delivery of health care. A broad range of gainsharing or incentive payment arrangements has evolved in response to these market pressures.

Although there is no fixed definition for gainsharing, the term is often used to refer to an arrangement in which a hospital rewards a physician for controlling costs by sharing any reduction in the hospital's costs of providing care attributable to the physician's efforts. In most arrangements, quality safeguards limit or eliminate payments to the physician if clinical care has been adversely affected.

While gainsharing arrangements may generate significant benefits, they also have raised a host of regulatory issues. In designing and implementing such programs, cautious providers consider the implications of: (1) the Anti-Kickback statute; (2) physician self-referral or Stark prohibitions; (3) the physician incentive plan laws and regulations; and (4) tax-exempt organization issues, such as private inurement.

Given the complexity of these laws, their ambiguities and the large number of unresolved issues, the legal parameters governing gainsharing programs have been difficult to define. In an effort to clarify the regulatory landscape, several proponents of gainsharing programs have sought guidance from the government as to the scope of the regulatory prohibitions.

For more than a year, government agencies have been peppered with questions and requests for rulings on gainsharing arrangements. In February of this year the Internal Revenue Service issued a private letter ruling approving a gainsharing arrangement between a tax-exempt hospital and certain cardiologists. The OIG has received several advisory opinion requests asking the agency to determine the propriety of proposed gainsharing arrangements under the Anti-Kickback statute and physician incentive plan law. Likewise, the Health Care Financing Administration (HCFA) has received several advisory opinion requests seeking interpretations of the Stark law as applied to gainsharing programs.

For over a year, the industry has been waiting for the OIG and HCFA to respond to these gainsharing advisory opinion requests. In issuing the Special Advisory Bulletin on hospital gainsharing, the OIG is apparently attempting both to dispose of the pending requests and to stake out a position that eliminates the need for it to respond to any further requests relating to hospital gainsharing arrangements. In a press release that accompanied the Special Advisory Bulletin, Inspector General June Gibbs Brown indicated that the OIG would no longer entertain advisory opinion requests related to hospital gainsharing proposals:

The Physician Incentive Plan Law And Gainsharing
The physician incentive plan law prohibits a hospital from knowingly making a payment, directly or indirectly, to a physician as an inducement to reduce or limit services to Medicare or Medicaid patients who are under the direct care of that physician. Physicians also are prohibited from knowingly accepting such payments. Hospitals or physicians who violate the statute are subject to civil money penalties of up to $2000 per patient covered by the prohibited payments.

More than four years ago, in December 1994, the OIG published a proposed rule implementing the hospital physician incentive plan law. The 1994 proposed rule reaffirms that the incentive plan prohibitions apply only to physicians having direct patient care responsibilities and indicates that incentive payments to such physicians that are either tied to overall costs of patient treatment or based on a patient's length of stay "without regard to how specific reductions are made, could be viewed as inducements to reduce patient services," and thus prohibited. The preamble to the proposed rule concludes:

In a stunning change of position, the OIG's Special Advisory Bulletin abandons the case-by-case approach described in the 1994 proposed rule with respect to hospital gainsharing arrangements. The OIG broadly interprets the hospital physician incentive plan law, concluding:

Focusing on gainsharing arrangements, the OIG finds that the plain language of the statute prohibits tying physician compensation for services intended to control or reduce hospital costs to reductions or limitations in items or services provided to the physician's patients. Thus, the OIG would prohibit virtually any hospital payment to physicians calculated based on cost savings related to the services furnished to patients under the physicians' care.

While broadly interpreting the physician incentive plan statute, the Special Advisory Bulletin acknowledges the benefits of gainsharing and the practical need to encourage physicians to control hospital costs. In an effort to reconcile its legal analysis with the laudable goals of appropriately structured gainsharing arrangements, the OIG indicates that hospitals may pay physicians for reducing costs if the physicians are paid a fair market fixed fee for their services rather than a percentage of the cost savings achieved. It is difficult, however, to reconcile the OIG's strident interpretation of the physician incentive plan statute with its wholesale approval of a hospital's efforts to align cost incentives with physicians through fixed-fee arrangements.

Clinical Joint Ventures
In a surprising detour from its discussion of more traditional gainsharing arrangements, the Special Advisory Bulletin addresses the potential application of the hospital physician incentive plan law to clinical joint ventures, such as physician-owned specialty hospitals. The OIG acknowledges that the Stark self-referral law allows physicians to own all or part of a hospital. Expressing concern that hospitals might offer investment opportunities in specialty hospitals to physicians in a position to make referrals, the OIG indicates that such arrangements may violate the hospital physician incentive plan law because the profits generated by cost savings may induce investor-physicians to reduce services to patients.

Although the comments of the OIG seem to contemplate physician ownership in a specialty hospital arising as a result of a joint venture with an existing hospital, the OIG provides no criteria for determining when physician ownership is appropriate and when it is not. Clearly the potential for increasing profits by decreasing costs exists in any enterprise. If that potential alone is enough to violate the hospital physician incentive plan law, then physician ownership of any hospital is prohibited. Given that Congress created a specific exception under the Stark law for physician ownership in hospitals, it seems unlikely that Congress intended the hospital physician incentive plan law to flatly prohibit such ownership.

Existing Programs And Enforcement
At the conclusion of the Special Advisory Bulletin, the OIG acknowledges that several hospitals may already have gainsharing programs in place. Such hospitals are directed not to seek an OIG advisory opinion but rather to appeal to Congress for legislative relief. With respect to enforcement actions against such hospitals, in the absence of evidence that a gainsharing arrangement has violated other statutes or adversely affected patient care, the OIG stated that it would take into consideration in exercising its enforcement discretion whether the arrangement was "terminated expeditiously" following publication the Bulletin in the Federal Register.

Practical Implications And Unanswered Questions
The OIG's broad interpretation of the hospital physician incentive plan law as articulated in the Special Advisory Bulletin appears to significantly reduce the range of incentive or gainsharing compensation plans available to hospitals. Arrangements that do not implicate the hospital physician incentive plan law, however, remain viable. Thus, non hospital programs, programs that exclude Medicare and Medicaid beneficiaries, as well as those that apply only to physicians who do not have responsibility for direct patient care may pass muster if the other regulatory hurdles are cleared. Programs that reward physicians based on quality, patient satisfaction or other criteria not relating to the quantity or cost of the clinical services provided also should be acceptable.

It should also be noted that the OIG's broad interpretation of the physician incentive plan law, may raise questions with respect to a large number of hospital-physician relationships that are not traditionally viewed as gainsharing. The OIG's comments should be considered in reviewing incentive compensation provisions in

• physician employment agreements,
• medical director contracts,
• management services agreements, and
• hospital-physician management joint ventures.

For example, hospitals should consider reviewing their arrangements with employed physicians if compensation is linked to efficiency or criteria that reflect the cost of delivering care. Similarly, if a hospital pays its medical directors based in part on their ability to control department costs, the arrangements should be reviewed in light of the OIG's recent comments.

The Special Advisory Bulletin also potentially raises issues concerning the propriety of hospital managed care contracting arrangements. For example, in instances where a hospital accepts risk for both institutional and professional services, risk pools are typically established. The funds in such risk pools are shared with participating physicians based on factors relating to costs and utilization. When Medicare or Medicaid managed care plans are involved, the physician incentive plan law applicable to health plans regulates these risk pool distributions. Even if these arrangements pass muster under the rules applicable to health plans, however, the OIG's broad interpretation of the hospital physician incentive plan law could be read to undermine a hospital's ability to participate in risk pools that reward physicians based on utilization. Further guidance from the regulators on this issue is needed.