On Jan. 5, the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) published a favorable advisory opinion regarding a nonprofit acute care hospital’s proposed shared savings program involving neurosurgeons of a multispecialty group who agreed to implement cost-reduction measures in designated surgical procedures performed at the medical center.

Under the proposed arrangement, the medical center intended to share with the participating neurosurgeons a percentage of its cost savings resulting from the cost-reduction measures implemented by the neurosurgeons over a three-year period. The advisory opinion focused on three stages of the arrangement in its factual analysis: (i) the development of the arrangement, (ii) key features of the implementation of the arrangement, and (iii) payments made under the arrangement.

Development of the Gainsharing Arrangement

To develop the arrangement, a program administrator (who was paid a fair market value fee that was not tied to cost savings or payments made to the multispecialty group) studied the historical practices of spinal fusion surgeries performed by the neurosurgeons and identified 34 cost-saving opportunities to be further developed and tracked by the parties to the arrangement. One cost-saving opportunity identified is the use of bone morphogenetic protein on an as-needed basis. During the development stage for this cost-saving opportunity and others, the neurosurgeons also reviewed guidelines published by the U.S. Food and Drug Administration and reviewed literature and clinical guidelines to determine whether cost-saving measures were clinically appropriate. Any cost-saving measure determined clinically inappropriate was excluded from the arrangement.

Key Features of the Implementation of the Gainsharing Arrangement

Key implementation features of the arrangement included safeguards to reduce the risk of abuse:

  1. Developing an oversight committee to collect, measure and analyze cost changes and evaluate utilization of cost-saving measures for patients
  2. Requiring certifications that no cost-saving measures would reduce or limit medically necessary services
  3. Prohibiting selection or withdrawal of specific patients from participation in the arrangement
  4. Requiring regular review by the program administrator of patient ages, case severity and payors included in the arrangement
  5. Ensuring patient-by-patient determinations of whether cost-saving measures were clinically appropriate
  6. Granting the program administrator the right to terminate any neurosurgeon from the arrangement for a material violation of the arrangement’s clinical or administrative guidelines
  7. Notifying patients of the neurosurgeon’s participation in the arrangement and of an opportunity to review the economics of the arrangement

Payments Made Under the Gainsharing Arrangement

At the end of every year in the three-year arrangement, cost savings were calculated separately for each cost-saving measure included in the arrangement. First, the program administrator calculated a “base year cost” by calculating the total cost during the 12-month period prior to the beginning of the arrangement for each product used in spinal surgery and dividing these total costs by the total number of units of that product used during spinal surgery. The base year costs were reset annually using the information from the then-previous 12-month period in the methodology discussed above. Second, the “performance year cost” was determined by calculating total costs for each product used in the performance year (i.e., the applicable year of the arrangement) and dividing these costs by the total number of products used in spinal surgery during the performance year. Third, the performance year cost was compared to the base year costs for each product to determine the “performance year savings.”

If the participating neurosurgeons’ total number of procedures payable by a federal healthcare program in a performance year exceeded the total number of like procedures in the applicable base year, no savings from the additional procedures were shared. Finally, the savings from each recommendation were added together for the applicable performance year. The medical center transferred 50 percent of these savings to a subsidiary, who (after deducting the fee paid to the program administrator) made separate payments to the multispecialty physician group that employed the participating neurosurgeons. The physician group distributed the amount it received on a per capita basis to the participating neurosurgeons.

OIG Analysis of the Gainsharing Arrangement

Since payments flow from the medical center to the neurosurgeons, the OIG noted that the arrangement potentially implicates Section 1128A9(b)(1) of the Social Security Act (Gainsharing CMP). The OIG believes that the monitoring and documentation noted above and the methodology used to calculate each performance year’s savings reduces the risk that the payments the medical center makes to the neurosurgeons will induce the neurosurgeons to reduce or limit medically necessary services to Medicare or Medicaid patients.

The OIG noted that in gainsharing arrangements, such as the arrangement described above, its typical concern under the Anti-Kickback Statute is that the payments a hospital makes to its surgeons for implementing cost-saving measures actually are payments to induce or reward the surgeon’s referrals or to attract referring physicians. However, due to the safeguards noted above, the OIG concluded that the proposed gainsharing arrangement presents a sufficiently low risk of fraud and abuse under the Anti-Kickback Statute.

While this advisory opinion provides only the requestor with actual protection under the Anti-Kickback Statute (and only the requestor may rely upon it), it may also provide useful guidance to the fraud and abuse analysis of similar product replacement programs. The advisory opinion also does not provide protection (i) under the federal Stark Law or any state laws or (ii) beyond the three-year arrangement contemplated in the factual description above. The full text of the opinion is available on the OIG’s website. For more information, please contact the authors.

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