Since the hospital prospective payment system ("PPS") was introduced in the mid-1980s, hospitals have been trying to develop a means by which they can align their financial incentives with those of their physicians. PPS limits hospitals to a fixed reimbursement amount based on diagnosis, with some adjustment based on the resources used by the patients under certain limited circumstances. However, physicians remain reimbursed based on a fee schedule, so that the more they do, the more they get paid. Therefore, physicians do not have the same incentives to limit costs for treatment that hospitals do. Other health care providers; including nursing homes, dialysis facilities, ambulatory surgery centers, and managed care plans, now share with hospitals that discrepancy in incentives. These providers are struggling to find a way to align their incentives with those of their physicians.
One method that is currently enjoying a significant amount of interest is something called "gainsharing" or "disease management" programs. These programs are intended to give physicians a stake in controlling the entity's costs through financial incentives. This appears, at first glance, to be a natural reaction to the problem of divergent incentives. In any industry other than health care, a gainsharing program would be simple to implement. However, the health care industry, because of its highly regulated environment, presents special challenges for implementing gainsharing programs.
The first of these challenges is the Stark law. The Stark law prohibits physicians who have a financial relationship with an entity from referring patients for certain types of services to that entity. A gainsharing relationship would clearly be considered a financial relationship falling within the Stark law. Consequently, any hospital or other entity that provides designated health services must find an applicable exception.
The only exception that has the potential to validate a gainsharing arrangement under the Stark law is the personal services exception. The personal services exception requires that physician compensation be fixed in advance. At this time, a gainsharing arrangement would not meet this requirement, since a gainsharing program retrospectively grants financial rewards to physicians who meet cost containment goals. However, the Health Care Financing Administration ("HCFA") is currently addressing gainsharing arrangements as they relate to the Stark law in at least one advisory opinion. It is our understanding that this advisory opinion may permit a fixed formula to be used to satisfy the requirements of the personal services exception, rather than requiring that the total compensation be fixed in advance, so long as the formula does not take into account the volume or value of the physicians' referrals. If this occurs, it would become much less difficult to draft a gainsharing agreement that is acceptable to the government.
The second regulatory hurdles are the state and federal antikickback laws that prohibit entities from providing any form of remuneration to physicians in exchange for referrals. If the compensation paid to physicians in a gainsharing program varies with the volume or value of referrals, the federal and/or state antikickback statutes may be violated. In addition, under the anti-kickback laws, the compensation paid to the physician must be the fair market value for the services he or she renders in assisting the entity in controlling its costs.
There is also a personal services exception to the anti-kickback statute. This exception is similar to the personal services exception under the Stark law, except that it requires that the aggregate compensation of the physicians be fixed in advance. A gainsharing arrangement, which by definition grants physicians varying financial rewards according to their ability to limit costs, would not fit into that safe harbor to the anti-kickback statute. Although the arrangement's failure to fall within a safe harbor does not mean that the gainsharing arrangement is prohibited, it does mean that the arrangement must be carefully structured to avoid violating the antikickback statutes.
Another regulatory hurdle that is unique to hospitals is a provision in the civil monetary penalty statute that prohibits hospitals from directly or indirectly inducing physicians to limit the services provided to Medicare and Medicaid beneficiaries. A gainsharing program could have that effect. Nonetheless, the legislative history of that law and the Office of Inspector General's ("OIG") comments in proposed regulations promulgated pursuant to that law, appear to suggest that gainsharing programs would not be per se prohibited, so long as they have a strong quality component to ensure that medically necessary services are being delivered, and that the gainsharing program contains certain other critical safeguards.
A final regulatory hurdle applies only to tax-exempt organizations. Tax-exempt organizations are prohibited from granting private inurement or excess benefits to individuals. Gainsharing arrangements could be construed as impermissible private inurement. Whether they are or not depends on many factors, including how the relationship is structured, the control mechanisms put into the program, and whether the amount paid to the physician, as with the antikickback statute, is fair market value.
Based on the few materials published by the government that provide any guidance into the possible structuring of the gainsharing program, there are a few factors that appear relatively clear. First, the compensation must not vary with the volume or value of a physician's referrals. Second, the compensation paid must reflect fair market value. Third, the program should not reward physicians for limiting services to individual patients. Fourth, the compensation should not be physician-specific, but should be based on the performance of a pool of physicians over an extended period of time.
It is our understanding that HCFA does not want to put unreasonable obstacles in front of gainsharing arrangements and that HCFA does believe that, under the right circumstances, gainsharing programs could be useful. This may be because, if providers can lower their costs, HCFA may be able to reduce reimbursement to those providers in the future. Nonetheless, because this result is far from certain, HCFA's apparent open-mindedness towards gainsharing arrangements may present a window of opportunity for providers.
It is also our understanding that the OIG is preparing one or more advisory opinions regarding gainsharing arrangements pursuant to the Stark law and the anti-kickback laws. We do not expect to see either the Stark or the anti-kickback statute advisory opinions published before the next few months.
Because of the regulatory hurdles that gainsharing arrangements confront, providers who are considering implementing them, or physicians interested in participating in them, should seek qualified legal counsel to carefully review any gainsharing arrangement for compliance with applicable federal and state law.