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Gainsharing Client Alert


On February 4, 2005, the HHS OIG issued Advisory Opinion 05-01, approving a gainsharing plan between a hospital and a cardiac surgical group. This Advisory Opinion was followed, in rapid fire succession, by three additional Advisory Opinions on February 17, 2005, and two more Advisory Opinions on February 25, 2005 – all relating to gainsharing proposals involving hospitals and cardiology or cardiac surgical groups. Since Advisory Opinion 05-01 provides the key clarifications of the OIG’s view of gainsharing proposals – which are thereafter followed directly in the subsequent Opinions – we present below our analysis of Advisory Opinion 05-01.

Advisory Opinion 05-01 and its progeny all echo previous OIG concerns that gainsharing programs could lead to the “undertreatment” of federal healthcare program beneficiaries and/or provide illegal remuneration to physicians under the federal anti-kickback statute. Indeed, the OIG found that the specific proposal set forth in this Opinion constituted an improper inducement to physicians under the Civil Monetary Penalty Law (“CMPL”). The OIG found the proposal could also potentially result in illegal remuneration to the physicians’ referrals under the federal Anti-Kickback Statute. Nonetheless, the OIG found that sufficient safeguards were present in the proposal to determine that it would not impose sanctions against the parties under either law.

Providers contemplating future gainsharing endeavors should be somewhat pleased with the slight opening this Opinion presents. In our view, however, Advisory Opinion 05-01, along with the gainsharing opinions which follow, are flawed by the OIG’s own legal analysis. This legal analysis, based upon a misreading of the CMPL’s coverage, ultimately led the OIG through a legal reasoning process that fails to properly address the elements of the proposed gainsharing agreement against applicable law. As a result, we believe the OIG lost an opportunity to properly consider whether gainsharing arrangements focused only on savings related to the use of “items” or “devices” (rather than reductions in “services”) may properly be implemented without CMPL concerns. We believe that they can be, and that the OIG’s analysis of this issue and conclusion to the contrary is incorrect.

Despite the OIG’s flawed legal analysis, AO 05-01 is useful in its articulation to what gainsharing plan elements would be viewed favorably by the OIG in comparison to those plan elements which would cause the OIG significant concerns. While the OIG should certainly not be construed as the ultimate arbiter of what is “legal” and what is not (especially given its flawed legal reasoning in this particular case), hospitals and physicians intent on establishing future gainsharing relationships would be well advised to craft those relationships mindful of these distinctions.

I. The Gainsharing Proposal Under Consideration in Advisory Opinion 05-01

The facts underlying this Advisory Opinion are important in understanding the conclusions reached by the OIG. In the proposal, a Hospital sought to enter into a Gainsharing Arrangement (“Arrangement”) with a cardiac surgical group (“Surgical Group”) made up of cardiac surgeons, all of whom are members of the Hospital’s medical staff. Prior to developing the Arrangement, the Hospital retained an independent Program Administrator, who identified a number of specific operating room practices which could result in cost-saving opportunities. These cost saving opportunities were broken down into four categories, the first three of which deal with the use of items or devices, the last of which deals with the way in which services are provided:

1. Eleven recommendations relating to the opening of packaged items only as needed during a procedure.

2. Seven recommendations relating to the substitution, in whole or in part, of less costly items for those currently in use by the Surgical Group.

3. Five recommendations relating to product line standardization.

4. A recommendation that blood cross-matching be performed only as needed. (All patients would be typed and screened prior to the procedure, but a cross-match would be performed only when a transfusion was required.)

The Hospital proposed to enter into a one year Arrangement with the Surgical Group. Subject to the use of certain “minimum floors,” the Hospital would share with the Surgical Group fifty percent of the cost savings achieved by implementing the cost saving recommendations. The Hospital would make an aggregate payment to the Surgical Group, which would distribute its profits to each of its members on a per capita basis.

The Hospital certified to the OIG that none of these recommendations would result in an adverse impact upon the quality of patient care, based on the opinion of a medical expert. In addition, the OIG itself had the recommendations reviewed by an independent medical expert, as well as by a government medical expert. Each agreed that the proposed cost saving recommendations would not adversely affect patient care.

II. OIG Analysis Under the Civil Monetary Penalty Law

In its analysis of the Arrangement under the CMPL, the OIG acknowledged that properly structured cost savings arrangements can serve legitimate business and medical purposes. The OIG noted, however, that the CMPL specifically prohibits “reductions or limitations of direct patient care services provided to federal health care program beneficiaries” (emphasis added) (see 42 U.S.C. § 1320a-7a(b).1
At this point, however, the OIG’s legal analysis of the CMPL’s statutory coverage and its application of the law to the proposal becomes confusing and flawed. Extracting several paragraphs of text word-for-word from an earlier 2001 Advisory Opinion involving a very similar gainsharing proposal (Advisory Opinion 01-01),2 the OIG several times inaccurately cites to the CMPL’s actual language. Instead, the OIG mistakenly asserts that the CMPL prohibits direct or indirect payments that would serve “as an inducement to limit items or services to Medicare or Medicaid beneficiaries under (the) physician’s direct care.” In fact, the CMPL covers only inducements that limit services – not items.3

The OIG’s inaccurate insertion of the phrase “items or” in its citation to the CMPL ultimately leads the OIG to focus its analysis of the proposed Arrangement not simply on whether “service” reductions were to be induced, but also upon the legally irrelevant question of whether the physicians’ use of items was to be affected by the proposal. Of course, because significant portions of the Arrangement do involve activities related to the use of items, the OIG’s improper insertion of the term “items” into the actual statutory language of § 1320a-7a(b)(1)-(2) causes the OIG to erroneously conclude that the CMPL applies to all aspects of the Arrangement – including those portions of the gainsharing proposal involving the use of items. In fact, the CMPL simply does not apply, by its very language, to such activities.
Based upon this improperly expanded scope of the CMPL’s statutory coverage, the OIG concluded that the entire Arrangement (except for the packaging/unpackaging of surgical items) “clearly implicates the CMPL” because in the OIG’s words, the Arrangement involves an inducement to “reduce or limit the current medical practice” at the Hospital. Application of this standard – “current medical practice” – also comprises a statutory test found nowhere in the CMPL. The use of this continued standard does, however, conveniently serve to blur the analytical line between “service”-based and “item”-based cost reduction incentives.

At the end of this tortured path of legal reasoning, the OIG finally – and properly – warns that the CMPL is “always violated” by a gainsharing proposal when incentives to reduce the service level are present – even if the service level, after the incentives are applied, remains at or above an acceptable medical standard. We agree with this legal conclusion, but note that the reduction in items proposed by the sponsors is not illegal under the CMPL. We also note with some irony, that in this proposal under consideration no less than three medical experts – two of the OIG’s own choosing – concluded that the initiatives proposed would not affect the quality of care provided. We conclude, therefore, that the OIG’s effort to apply the CMPL to the Arrangement under consideration is not legally supportable, and that gainsharing efforts based upon the use of items – not services – ought to fall outside the scope of the CMPL and the OIG’s authority.

While the OIG’s analytical approach in Advisory Opinion 05-01 is, at best, confusing – even flawed – the Opinion is helpful to the extent that the OIG signals what factors in the Arrangement were helpful in the OIG’s determination not to impose sanctions on the parties under the CMPL:

1. The specific cost saving actions and resulting savings were clearly and separately identified. This transparency permitted later review to determine whether any adverse impact arose from the reduction of medical services, and for accountability under the tort system.

2. Credible medical support existed that the implementation of the recommendations would not adversely affect patient care (there would also be a periodic review of the Arrangement’s impact on clinical care).

3. Payments to the Surgical Group would be based on all surgeries, regardless of the identity of the payor and not disproportionately performed on patients who are Federal health care beneficiaries. Furthermore, the payments would be based on actual acquisition costs and not on any accounting conventions.

4. Since it utilized objective historical and clinical measures to establish baseline thresholds beyond which the Surgical Group would not receive any payments, the Arrangement protected against the inappropriate reduction in services.

5. The Arrangement would not restrict the availability of cardiac devices but sought savings through inherent clinical and fiscal value.

6. Written disclosures of the Agreement and the opportunity to review the cost saving recommendations would be provided to affected patients by both the Hospital and Surgical Group prior to admission, if practicable, and if not practicable pre-admission, prior to obtaining consent to surgery.

7. The financial incentives were reasonably limited in time and amount.

8. Any incentive for an individual surgeon to generate disproportionate cost savings was diminished by the Group’s distribution of profits to individual cardiac surgeons on a per capita basis.

The Advisory Opinion also identified features of gainsharing plans that, in the opinion of the OIG, remain troubling. To the OIG, these features present substantial risks to Federal health care program patients and, if included in a gainsharing plan, are likely to lead to abuse:

  • No demonstrable direct connection between the individual actions and in the reduction of hospital out-of pocket costs (and the resulting gainsharing payment).
  • Lack of specificity in the identification of actions that would lead to savings
  • Insufficient safeguards against the risk that other unidentified actions, such as early discharges, might actually account for the savings.
    Questionable validity and statistical significance of quality of care indicators.
  • No independent verification of important aspects of the proposed agreement (e.g. cost savings, quality of care, etc.)

III. OIG Analysis Under The Anti-Kickback Statute

With respect to the Anti-Kickback law, the OIG correctly concludes that no safe harbors were applicable to the proposed Arrangement. The OIG determined, instead, that the Arrangement could result in illegal remuneration to the physicians, if the requisite malevolent intent were present. The OIG was concerned that the Arrangement could encourage the surgeons to admit Federal health care program patients to the Hospital, since the surgeons would receive a share of the Hospital’s payments, depending on the cost savings. Nonetheless, the following factors were found compelling by the OIG in reaching its decision not to impose administrative sanctions under the Anti-Kickback law:

1. The terms of the Arrangement would minimize the likelihood of increased referrals, either from new or current Members of the Hospital’s Medical Staff since only the Surgical Group was affected.

2. The Arrangement would not reward other referring physicians (e.g., cardiologists) who refer to the Surgical Group.

3. The Arrangement specifically identified the particular actions that would generate cost savings and payments and was limited both as to its duration (one year) and in the amount of the payment. Insofar as certain of the cost saving recommendations carried potential increased liability risk for the surgeons, the payments would not unreasonably compensate them for such risks. (The OIG did caution that cost saving arrangements that were more generalized or were multi-year could lead to a different conclusion.)

IV. Ramifications For Future Gainsharing Initiatives

To be clear – and contrary to the OIG’s recitation of the law – the CMPL under which the Arrangement was reviewed only prohibits inducements that limit the provision of services. The law does not relate to inducements involving the use of “items,” or “devices.” Contradicting the OIG’s conclusion, the CMPL also does not focus on changes in physicians’ “medical practices,” whatever that phrase may mean. Relying on thee incorrect legal premises, the OIG’s application of the law to the facts in this Advisory Opinion, and its progeny, is flawed. Had the OIG limited its review solely to the question of whether the Arrangement in Advisory Opinion 05-01 improperly induced physicians to limit services, we believe the OIG would not have been able to find that significant portions of the CMPL would be violated by the inducements under consideration. In so applying the statute, however, the OIG would have been forced to concede that cost savings arrangements involving “items” or “devices” were not covered by the CMPL, thus limiting its own review and enforcement authority.

Its questionable legal reasoning aside, the OIG’s analysis in Advisory Opinion 05-01 does present important details regarding the OIG’s views as to what constitutes proper and improper gainsharing activities. Clearly, arrangements that cannot assure that the quality of care will not be adversely impacted, as well as relationships that are based upon generalized or overall cost savings (without very specific well-articulated cost reduction measures) would be considered suspect by the OIG. In contrast, the more focused the initiative, whether measured in terms of the physicians involved, practice areas affected, the parameters of cost savings measures involved, duration etc., the greater likelihood that the proposal would pass OIG muster. Fully, and in conflict with the OIG’s legal reasoning, we continue to believe that protocols based on cost savings relating only to items or devices – as opposed to service reductions – fall outside the CMPL’s scope and, as a result, outside the IG’s statutory jurisdiction (although the Anti-Kickback statute could remain of concern in some circumstances).

In any event, at a minimum, Advisory Opinion 05-01 and its progeny hold the door open to very specifically targeted gainsharing initiatives while warning potential participants that those arrangements will need to be very carefully structured to avoid potential prosecutorial risks. All six Advisory Opinion can be found at


1 The OIG also noted, but did not address in its Opinion, the potential issue of private inurement and private benefit facing non-profit hospitals under the Internal Revenue Code. The OIG also did not address potential Stark Law issues.

2 The same extracted paragraphs are found in the other gainsharing Opinions as well.

3 “Items” and “devices” are considered distinct from “services” in the Medicare statute. See e.g., 42 U.S.C. § 1320-7a(i)(3). In virtually all other contexts, “items and services” are identified as separate and distinct concepts. See e.g., 42 U.S.C. § 1320a-7b(b), the antikickback statute. The CMPL, however, does not mention “items” at all.

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