On January 14, 2008, the Office of Inspector General for the Department of Health and Human Services (OIG) posted two new Advisory Opinions approving gainsharing arrangements between hospitals and physician groups designed to cut costs. This continues the OIG’s three-year trend of approving narrowly-tailored gainsharing arrangements. Despite the OIG’s trend, however, it is still unclear whether gainsharing arrangements will be widely implemented by hospitals
in the future.

Advisory Opinion Nos. 07-21 and 07-22 address gainsharing arrangements between a hospital and a group of cardiac surgeons and between a hospital and a group of anesthesiologists, respectively. The arrangements are nearly identical to each other and are nearly identical to the gainsharing arrangements previously approved by the OIG. Both arrangements involve the implementation of several cost-saving measures, such as physicians using "open as needed" surgical supplies, substituting less-costly items for the items currently being used by physicians and standardizing the use of certain devices where medically appropriate. In return for the physicians’ cost-saving efforts, the hospital will pay the physician group 50% of the annual cost savings achieved, which is the entire compensation paid to the physician group under the gainsharing arrangement.

Although the OIG acknowledged that there is some risk that the arrangements "could constitute an improper payment to induce a reduction or limitation of services" and "could potentially generate prohibitive remuneration under the Anti-Kickback Statute," the OIG would not impose administrative sanctions on the requesting parties in connection with the arrangements. As to the Civil Monetary Penalty provisions of sections 1128A(b)(1)-(2) of the Social Security Act, the OIG noted that the arrangements contained several safeguards to protect against an inappropriate reduction in services to patients warranting sanctions, including, but not limited to, the following:

Separately-Identified Cost Savings:Cost-saving actions were clearly and separately identified, which promotes "transparency."

  • No Adverse Effect on Patient Care:There was credible medical support for the position that the cost-savings recommendations would not adversely affect patient care.
  • Cost-Savings Measures Are Applied Fairly:The payments were "based on all surgeries regardless of the patient’s insurance coverage."
  • No Inappropriate Reduction in Services:The "arrangement protected against inappropriate reduction in services by utilizing objective historical and clinical measures to establish baseline thresholds" beyond which no savings accrue.
  • Same Devices Still Available:Despite product standardization, physicians are supposed to have the same selection of medical devices available as before.
  • Written Disclosures to Patients:The hospital and physician group provided written disclosures regarding the arrangement to patients whose care may be affected.
  • Reasonable Limitations on Duration & Amount:The payments to physicians were calculated annually and equaled only 50% of the savings, which was deemed reasonable.
  • Per Capita Profit Distribution:The cost-savings were distributed to physician group members on a per capita basis, which mitigates the incentive for an individual physician to generate disproportionate cost savings.

As to the Anti-Kickback Statute, the OIG likewise found that the arrangements did not warrant sanctions because the arrangements had certain features and safeguards that reduced the risk of anti-kickback violations, including, but not limited to, the following: 

  • Limited to Physicians Currently On Staff:Only physicians already on the medical staff were allowed to participate, which limits the likelihood of attracting other physicians.
  • Savings Cap:The potential savings derived from procedures for federal health care program beneficiaries were capped based on the prior year’s admissions of federal health care program beneficiaries.
  • Payment Term Limited to One Year:The contract year for which payments were calculated was limited to one year, reducing the incentive to switch facilities.
  • Limited Participation in the Gainsharing Arrangement: The participating physician group consisted solely of one type of physician (e.g., cardiac surgeons), which reduced the risk that the arrangement might have been used to reward referrals.
  • Specifically-Defined Cost Savings:Costs savings were specifically defined.
  • Reasonable Payments:The OIG concluded that sharing 50% of cost savings was a reasonable payment in the proposed arrangements, but might not be for other arrangements.

Although these latest Advisory Opinions confirm that the OIG continues to favor the implementation of narrow gainsharing arrangements as a means to reduce health care costs, these arrangements may not yet be gaining much traction in the health care industry. CMS, however, will soon be conducting its own testing of gainsharing arrangements during its impending three-year gainsharing demonstration program authorized by the Deficit Reduction Act of 2005. Accordingly, the next few years may give us a better indication of the fate of these arrangements. Stay tuned.