1. INTRODUCTION

On July 8, 1999, the Office of Inspector General ("OIG") of the Department of Health and Human Services issued a Special Advisory Bulletin (the "Bulletin") in which it concluded that so-called "gainsharing" arrangements between hospitals and physicians clearly violate Section 1128A(b)(1) and (2) of the Social Security Act (42 U.S.C. § 1320a-7a(b)(1) & (2)). Section 1128A(b)(1) imposes civil money penalties on hospitals that make payments to reduce or limit care to Medicare or Medicaid patients, and Section 1128A(b)(2) imposes civil money penalties on physicians receiving such payments. Recently, gainsharing arrangements had been touted as a means to enable hospitals, many under increasing financial pressure, to control costs by aligning physicians’ economic interests with those of a hospital to provide care more efficiently. The text of the guidance is available on the OIG Internet home page (http://www.hhs.gov/progorg/oig/frdalrt/gainsh.htm), and in the Federal Register (64 Fed. Reg. 37985 (July 14, 1999)), or you can obtain it from our office.

In the Bulletin, the OIG acknowledged hospitals’ legitimate interest in enlisting physicians to help eliminate unnecessary hospital costs, but concluded that it had no authority under current law to allow such gainsharing arrangements. The Bulletin suggested that hospitals and physicians should promptly terminate existing gainsharing programs or else be subject to an increased likelihood of enforcement action. The Bulletin did not address the legality of gainsharing arrangements under the federal Anti-Kickback Statute or the Stark physician self-referral law; however, in a footnote, the OIG did indicate that gainsharing arrangements may also implicate those laws. Further, the Bulletin specifically suggested that some physician joint ventures (even those structured to comply with the Stark law) may violate Section 1128A(b)(1), and the OIG’s analysis set forth in the Bulletin also raises questions about the legality of some physician incentive arrangements that the parties may not have characterized as "gainsharing."

2. BACKGROUND

"Gainsharing" is a term used to refer generally to a variety of types of financial arrangements between hospitals and physicians that are intended to encourage the physicians to deliver quality care in a cost-effective manner. Typically, the hospital and the physicians enter into an agreement that allows the physicians to receive some portion of the cost savings realized by the hospital as the result of changes in the physicians’ manner of delivering care to hospital patients. Often, quality benchmarks must also be attained in order for the physicians to earn the incentive payments. Additionally, some programs have provided that the payments would not be made unless an independent third party appraisal firm opines that the payments constitute reasonable compensation for the services provided by the physicians to the hospital.

In the past several years, hospitals and physicians have become more interested in gainsharing arrangements as both have felt the increasing financial effects of decreasing payments from government health programs and managed care organizations. From the perspective of the hospitals, many of which are paid on a prospective payment basis for Medicare inpatients regardless of the hospitals’ actual costs in treating the patients, gainsharing held out the possibility of reducing hospital costs that are incurred based on the treatment decisions of independent physicians. From the physicians’ perspective, gainsharing payments reflected potential additional revenue for cost-containment services. Other constituencies, such as patients’ rights groups and hospitals’ vendors of services, items and devices, have also been interested in the potential impact of gainsharing arrangements.

Several potential legal impediments to the implementation of gainsharing arrangements have been identified. In addition to the civil money penalty provisions of Section 1128A(b), concerns have been raised as to whether such programs can be compliant with (1) the Anti-Kickback Statute applicable to federal health care programs, (2) the Stark physician self-referral law, and (3) the prohibitions on private inurement applicable to tax-exempt hospital organizations. Because of the uncertainty as to the application of these laws to gainsharing arrangements, requests to applicable regulatory authorities for rulings on the legality of these arrangements have been made. Within the last several months, the Internal Revenue Service issued two unpublished private letter rulings in which it concluded that, in each case, the gainsharing program described therein between a tax-exempt hospital and a physician group would not adversely affect the hospital’s tax-exempt status. In addition, the OIG reportedly received seven requests for advisory opinions seeking a determination that particular gainsharing arrangements would not violate the Anti-Kickback Statute, and the Health Care Financing Administration ("HCFA") has reportedly received five requests for advisory opinions that gainsharing arrangements would not violate the Stark law.

3. OIG ANALYSIS IN THE BULLETIN
1. Violation of Section 1128A(b)

The OIG concluded in the Bulletin that gainsharing arrangements in which hospitals reward physicians’ efforts to reduce hospital costs with a share of hospital-based clinical savings are clearly prohibited by Section 1128A(b). Section 1128A(b) provides, in relevant part:

(b) Payments to induce reduction or limitation of services

(1) If a hospital or a critical access hospital knowingly makes a payment, directly or indirectly, to a physician as an inducement to reduce or limit services provided with respect to individuals who -

(A) are entitled to benefits under part A or part B of [the Medicare program] or to medical assistance under a State plan approved under [the Medicaid program], and

(B) are under the direct care of the physician, the hospital or a critical access hospital shall be subject, in addition to any other penalties that may be prescribed by law, to a civil money penalty of not more than $2,000 for each such individual with respect to whom the payment is made.

(2) Any physician who knowingly accepts receipt of a payment described in paragraph (1) shall be subject, in addition to any other penalties that may be prescribed by law, to a civil money penalty of not more than $2,000 for each individual described in such paragraph with respect to whom the payment is made.

The OIG observed that the statutory proscription is very broad, and that it can be violated even where a payment is not tied to an actual diminution in care, even where a payment is not made with respect to a specific patient, and even where the payment does not reduce medically necessary care.

In support of its conclusion, the OIG summarized the history of Section 1128A(b), and particularly observed that the provision, originally enacted as part of the Omnibus Budget Reconciliation Act of 1986, initially applied to payments both by hospitals and by managed care plans. However, as part of the Omnibus Budget Reconciliation Act of 1990, Congress thereafter amended the provision to eliminate managed care organizations from the proscription, and enacted a new Section 1876(i)(8) of the Social Security Act (42 U.S.C. § 1395mm(i)(8)). The new provision allows managed care organizations to implement physician incentive plans that do not include the reduction of medically necessary care to individual patients and do not place the physician at substantial financial risk for services not provided by the physician. The OIG saw in this history a clear congressional intent to allow incentives to physicians by managed care organizations but to disallow similar incentives by hospitals.

2. Broad General Pronouncement

Many in the industry have been awaiting the issuance of advisory opinions from the OIG on gainsharing programs, which would have assessed whether the particular programs described in the advisory opinion requests violate the Anti-Kickback Statute. Rather than proceeding with the advisory opinions, the OIG elected instead to issue, through the Bulletin, a broad and general pronouncement concluding that all gainsharing programs in which hospitals share cost savings with physicians are prohibited. In justifying the decision not to analyze individual gainsharing programs through the advisory opinion process, the OIG commented that (1) it has issued advisory opinions only with respect to arrangements that involve minimal risk of fraud or abuse, and it considers gainsharing arrangements to involve a high risk of abuse; (2) gainsharing arrangements will require ongoing oversight both as to quality of care and fraud that is not available through the advisory opinion process; and (3) case-by-case determinations on gainsharing programs are an inadequate and inequitable substitute for comprehensive and uniform regulation in this area.

3. Expeditious Termination

For those hospitals and physicians that are parties to existing gainsharing programs, the OIG encouraged their expeditious termination following the publication of the Bulletin in the Federal Register (which took place on July 14, 1999). In the Bulletin, the OIG said that, assuming that an existing arrangement does not violate any other statutes or adversely affect patient care, the OIG would take into consideration whether the arrangement was terminated expeditiously in exercising its enforcement discretion.

4. Legitimate Interest; Legislative Relief; Permitted Arrangements

Although the OIG concluded that gainsharing arrangements violate Section 1128A(b), the OIG did acknowledge that some appropriately structured gainsharing arrangements might offer significant benefits where there is no adverse impact on the quality of care received by patients. In particular, the OIG recognized that hospitals have a legitimate interest in enlisting physicians to help eliminate unnecessary costs that do not affect the quality of patient care, such as by substituting less costly but equally effective medical supplies, items or devices; re-engineering hospital surgical and medical procedures; reducing utilization of medically unnecessary ancillary services; and reducing unnecessary lengths of stay. The OIG also recognized that the nation’s health care system generally is benefited by appropriate cost reductions.

Despite the recognized potential benefits from gainsharing arrangements, the OIG concluded that the plain language of Section 1128A(b) prohibits such arrangements. Accordingly, the OIG determined that, in contrast with its authority to regulate physician incentive plans offered by managed care organizations, it does not have the regulatory authority to allow any gainsharing programs offered to physicians by hospitals. The OIG suggested that parties interested in pursuing gainsharing programs should therefore seek legislative relief.

Although clearly ruling against gainsharing arrangements that involve the payment of a portion of a hospital’s cost savings to physicians, the OIG did indicate that some arrangements between hospitals and physicians designed to reduce hospital costs could be implemented without a violation of Section 1128A(b). As an example, the OIG identified personal services agreements where a hospital pays physicians based on a fixed fee that is consistent with fair market value for the services rendered, rather than based on a percentage of cost savings.

5. Application to Joint Ventures and Other Arrangements

The OIG extended its comments beyond arrangements traditionally regarded as gainsharing. In one section of the Bulletin, the OIG raises questions as to whether certain joint ventures involving physician investors may violate Section 1128A(b) by inducing the physicians to reduce services through their participation in profits generated by cost savings in clinical care. According to the OIG, the joint ventures that may involve a violation of Section 1128A(b), which the OIG says are typically marketed only to physicians in a position to refer patients, include freestanding specialty hospitals for heart, orthopedic or maternity care, and high revenue generating units or services of an existing hospital that are reorganized as a separate hospital, such as cardiology or cardiac surgery. The OIG acknowledged that these joint venture arrangements might be structured to comply fully with the Stark exception for physician investments in whole hospitals, but nevertheless violate Section 1128A(b).

4. CONCLUSION

In light of the clear and definitive ruling from the OIG, hospitals and physicians should reexamine their arrangements to assess whether they create incentives to reduce or limit services in violation of Section 1128A(b). To the extent that they do, such arrangements should be promptly restructured or terminated. In addition, hospitals and physicians may want to consider the OIG’s invitation to seek legislative action to allow gainsharing arrangements that produce the legitimate benefits that the OIG recognized, but include safeguards from the abuse about which the OIG is concerned.

Please do not hesitate to contact Karl A. Thallner, Jr. (215-851-8171) or any other member of the Reed Smith health care group with whom you work if you would like additional information on the Bulletin or physician incentive arrangements generally.