The Office of Inspector General Revives Gainsharing

April 24, 2002

Gainsharing refers to arrangements through which hospitals provide physicians with a share of hospital cost savings attributable to changes in the physicians' behavior.

Hospitals are under intense pressure to control costs. Since physicians are paid separately from hospitals, they generally do not share the hospitals' passion for cost control. Gainsharing arrangements seek to encourage physicians to be cost conscious by offering them a share in cost savings in exchange for identifying and implementing cost-saving strategies.

In the late 1990s, gainsharing gathered significant momentum. Numerous hospitals had either implemented or were actively considering implementing gainsharing arrangements. This came to a screeching halt in July 1999 when the Office of Inspector General ("OIG") issued a Special Advisory Bulletin which effectively barred most gainsharing arrangements. Through this Bulletin, OIG concluded that gainsharing was inconsistent with certain prohibitions applicable to the Medicare and Medicaid programs: (1) a section of the Social Security Act which prohibits hospitals from making direct or indirect payments to induce a physician to reduce or limit services to Medicare or Medicaid beneficiaries, and (2) the anti-kickback rule which prohibits the payment or receipt of any remuneration in return for patient referrals.

Given the conclusory, strident and unbending language of this Special Advisory Bulletin, hospitals had little choice but to abandon gainsharing. In addition, a revitalization of gainsharing did not appear promising, as OIG took the position that Congress would have to amend underlying statutes before OIG could approve such arrangements.

Recent Developments
Through an Advisory Opinion issued on January 11, 2001, OIG unexpectedly offered new hope; it stated that it would exercise its discretion so as not to challenge a proposed gainsharing program developed by St. Joseph's Hospital of Atlanta and a group of cardiac surgeons. OIG held firm to its conviction that this program, like all gainsharing arrangements, was in technical violation of the Medicare prohibitions discussed above. However, OIG found that St. Joseph's had developed enough safeguards into its arrangement so as to minimize the fraud and abuse risks which most troubled OIG, i.e., scrimping on patient care, cherry-picking healthy patients and buying physician loyalty and referrals.

This opinion should be a boon for the development of similar gainsharing arrangements. Of most importance is OIG's implicit recognition and validation of gainsharing programs as valuable cost-saving devices despite their inability to technically comply with various Medicare rules.

OIG was careful to note that it has no authority to issue an opinion regarding the propriety of St. Joseph’s gainsharing arrangement under the Stark legislation. It has long been recognized that gainsharing arrangements do not neatly fit within any of the exceptions to Stark; hence, this will always be an area of uncertainty. However, given OIG's reconciliation of the St. Joseph's program with other legal impediments, it is reasonable to assume that it will withstand scrutiny under Stark.

What Does This Opinion Mean to Hospitals and Physicians?
After having effectively killed gainsharing less than two years ago, OIG has now acknowledged that, at least under certain circumstances, these programs can proceed. Hospitals which abandoned gainsharing after the July 1999 Bulletin would be well advised to revisit gainsharing if they believe that gainsharing can be an effective method to control costs and align incentives. An appropriate starting point would be a thorough review and understanding of OIG's 1999 Special Advisory Bulletin and its January 2001 Advisory Opinion. Armed with this information and working closely with counsel, hospitals should be able to craft effective and meaningful gainsharing programs. However, a note of caution is in order. OIG is proceeding very slowly and carefully in this area. Therefore, unless and until OIG more openly embraces gainsharing, it may be prudent to secure a favorable advisory opinion from it before proceeding.

For more information, please contact mstadler@cohenlaw.com.