A program administrator engaged by the Hospital conducted a study of the historic practices at the Hospital’s cardiac surgery department. The study resulted in 19 recommended cost saving actions in the Surgeon Group’s operating room practices to curb the inappropriate use or waste of medical supplies. The recommendations covered the following three areas:

• "Open as needed" – Fourteen recommended actions involved opening only as needed certain packaged items potentially useful during a surgical procedure, such as surgical trays or comparable supplies. One "open as needed" recommendation involved not opening disposable components of the cell saver unit until a patient experiences excessive bleeding. According to the Requestors, the resulting delay in cell saver readiness should not exceed two to five minutes and would not adversely affect patient care.
• "Substitution" – Four recommendations consisted of the substitution, in whole or in part, of less costly items for the items currently being used by the surgeons in connection with surgical procedures.
• "Aprotinin use" – The final suggested action would limit the use of Aprotinin, a medication currently given to many surgical patients pre-operatively to prevent hemorrhaging, only to patients that are at higher risk of pre-operative hemorrhage as indicated by objective clinical standards.

1. Payment

In exchange for following the recommendations, the Hospital proposed to pay the Surgeon Group 50 percent of the cost savings achieved by implementing the recommendations over a period of one year. Cost savings would be calculated separately for each recommendation by subtracting the actual costs incurred from costs during an historical base year. The Hospital proposed to make an aggregate payment to the Surgeon Group based on the cost savings formula. The Surgeon Group, in turn, was to distribute its profits on a per capita basis to each of its member surgeons.

To protect against inappropriate reductions in services, no additional sharing of cost savings would accrue if the surgeons’ utilization patterns for certain items potentially affected by the Proposed Arrangement fall below established thresholds. Under the Proposed Arrangement, the following additional limitations were to apply to the payment to the Surgeon Group:

• No additional sharing of cost savings would accrue if the volume of procedures payable by a federal health care program in the year covered by the gainsharing program exceeds the volume of procedures payable by a federal health care program in the base year.
• To minimize the surgeons’ financial incentives to steer more costly patients to other hospitals, a Hospital-Surgeon Group committee would monitor the case severity, ages, and payors of the patient population, and could terminate a surgeon from participation in the Proposed Arrangement for significant changes from historical measures.
• The aggregate payment to the Surgeon Group will not exceed 50 percent of the projected cost savings identified in the study.

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

Section 1128A(b) establishes CMPs against a hospital that knowingly makes a payment to a physician as an inducement to reduce or limit items or services to Medicare or Medicaid beneficiaries, and against a physician who receives such a payment. Applying this law to the Proposed Arrangement, the OIG reasoned that, to the extent that the recommendations result in an insubstantial time delay to open a package of supplies readily available in the operating room, the "open as needed" surgical tray recommendations would not even implicate Section 1128A(b) because those recommendations would not perceptibly limit or reduce the provision of items or services to patients.

According to the OIG, however, the disposable cell saver recommendations would limit or reduce the provision of items or services to patients because of the time delay to open and attach the components to the machine. In addition, the other recommendations regarding the substitution of less costly items and the use of Aprotinin constitute an inducement to reduce or limit the current medical practice at the Hospital. Therefore, the cell saver components and the substitution and use of Aprotinin recommendations do implicate Section 1128A(b).

Nevertheless, the OIG stated that it would not impose sanctions under Section 1128A(b) because sufficient safeguards were included in the Proposed Arrangement. Those safeguards include:

• The specific cost-saving actions and resulting savings are clearly and separately identified, permitting public scrutiny and individual physician accountability for any adverse effects of the Proposed Arrangement.
• The Requestors have credible medical support that the implementation of their recommendations will not adversely affect patient care.
• The payments are based on all surgeries, regardless of the patients’ insurance coverage, and are subject to a cap on payment for federal health care programs.
• Objective historical and clinical measures establish the baseline thresholds to protect against inappropriate reductions in service.
• Patients will receive written disclosure of the Proposed Arrangement.
• The financial incentives are reasonably limited in duration and amount.
• The Surgeon Group distributes its profits to its members on a per capita basis, which mitigates any incentive for an individual surgeon to generate disproportionate cost savings.

The OIG asserts that its position is an exercise of discretion and is consistent with its 1999 Special Advisory Bulletin on "Gainsharing Arrangements and CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries." In the OIG’s view, the Proposed Arrangement differs from other "gainsharing" arrangements that were the subject of the OIG’s warning in the Special Advisory Bulletin. Whereas many "gainsharing" plans pay physicians a percentage of generalized cost savings not tied to specific, identifiable cost-lowering activities, the Proposed Arrangement sets out the specific actions to be taken and ties the remuneration to the actual, verifiable cost savings attributable to those actions. The OIG identified the following features of gainsharing plans that heighten the risk that payments will lead to inappropriate reductions or limitations of services:

• No demonstrable direct connection between individual actions and any reduction in the hospital’s out-of-pocket costs (and any corresponding "gainsharing" payment).
• No specific identification of the individual cost saving actions.
• Insufficient safeguards against the risk that other unidentified actions, such as premature hospital discharges, might actually account for any "savings."
• Questionable validity and statistical significance of quality of care indicators.
• No independent verification of cost savings, quality of care indicators, or other essential aspects of the arrangement.

The features of the Proposed Arrangement, the safeguards identified by the OIG, and the OIG’s enumeration of features that would heighten the risk of a violation provide useful guidance for the structuring of other hospital-physician gainsharing agreements without sanction under Section 1128A(b) of the Act.

1. The Anti-Kickback Statute

The anti-kickback statute, Section 1128B(b) of the Act, makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce referrals of items or services reimbursable by any federal health care program. The OIG has promulgated safe harbor regulations that define practices that are not subject to the anti-kickback statute because such practices would be unlikely to result in fraud or abuse. See 42 C.F.R. § 1001.952. The personal services and management contracts safe harbor, 42 C.F.R. § 1001.952(d), potentially applies to the Proposed Arrangement. The safe harbor requires, among other things, that the aggregate compensation paid for the services be set in advance and consistent with fair market value in an arms-length transactions, 42 C.F.R. § 1001.952(d)(5). The compensation to the Surgeon Group under the Proposed Arrangement would not be set in advance because the payment will be paid on a percentage basis, however.

The OIG expressed concerned that the Proposed Arrangement could be used to disguise remuneration from the Hospital to reward or induce referrals by the Surgeon Group. Surgeons might admit federal health care program patients to the Hospital to receive not only their Medicare Part B professional fee, but also a share of the Hospital’s payment for cost savings. Although the OIG indicated that the Proposed Arrangement could result in illegal remuneration if the requisite intent to induce referrals were present, the OIG declared that it would not impose sanctions because of the existence of safeguards and circumstances that reduce the likelihood that the arrangement will be used to attract referring physicians or to increase referrals from existing physicians. These safeguards and circumstances include:

• Limitation of participation in the Proposed Arrangement to surgeons already on the Hospital’s medical staff to prevent enticing other physicians to change referral patterns.
• Capping, based on the prior year’s admissions, the potential savings to be derived from procedures for federal health care program beneficiaries.
• Limiting the contract term to one year to reduce any incentive to switch facilities, and monitoring admissions for changes in severity, age, or payer.
• Lack of risk that the Proposed Arrangement will be used to reward cardiologists or other physicians who refer patients to the Surgeon Group or its surgeons, because the Surgeon Group is the sole participant and is composed entirely of cardiac surgeons.
• Setting out with specificity the particular actions that will generate the cost savings on which payments will be based.
• Identification of specific changes in practice that are within the responsibility of the surgeons, and for which the surgeons have liability exposure, which form the basis for the compensation.
• Limitation of the amount (through the aggregate cap), duration (through the limited contract term) and scope (because the total savings that can be achieved from the implementation of any one recommendation are limited by appropriate utilization levels) of the payments.

1. CONCLUSION

In light of the Opinion, hospitals and physicians may renew their interest in structuring "gainsharing" arrangements. Although concerns regarding adverse affects on patient care and the potential for disguised payments for referrals remain, the OIG now appears willing to refrain from seeking sanctions against certain gainsharing agreements. Parties exploring the development of these arrangements should recognize, however, that any such arrangements, like the Proposed Arrangement, will have to be carefully and narrowly structured for legitimate business and medical purposes. In some cases, hospitals and physicians who plan to participate in a gainsharing agreement may want to consider requesting advisory opinions to seek a determination that their particular gainsharing arrangement does not violate Section 1128A(b)(1) and (2) of the Act, the anti-kickback statute and the Stark physician self-referral law.

Endnotes

1. The Internal Revenue Service’s ("IRS") income tax regulations in connection with section 501(c)(3) of the Internal Revenue Code limits a tax-exempt organization’s conferring of private inurement and private benefit. See Rev. Rul. 69-383, 1969-2 C.B. 113. In early 1999, the IRS 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.
2. 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], an
   (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 or a payment describe in paragraph (1) shall be subject, in addition to 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.
3. See Reed Smith’s Client Memo entitled "OIG Issues Special Advisory Bulletin on Hospital-Physician ‘Gainsharing’" (July 19, 1999). The Bulletin is available on the OIG Internet 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.
4. The anti-kickback statute provides:
   Whoever knowingly and willfully offers or pays [or solicits or receives] any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person—to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony.