costs attributable to his or her efforts,hospitals anticipate that the physician willpractice more effective medicine.”

Why is there a Renewed Focus onGainsharing?In February last year, the OIG issued sixadvisory opinions addressing specifichospital-physician gainsharingarrangements. These opinions—targetingcardiology and cardiovascular services atfour hospitals—made it possible for thehospitals to reward physicians financiallyfor helping the organizations achieve costreductions.

With respect to these six opinions, theOIG declared it would not imposeadministrative sanctions because ofsafeguards that were incorporated into thearrangements. The safeguards addressconcerns regarding gainsharing’spotentially adverse impact on quality ofpatient care and potential payments toinduce referrals.

Yet, the OIG had previously expressedsignificant concerns about the risks posedby gainsharing. In 1999, it issued a specialadvisory bulletin on gainsharing, warningthat it violated the Civil MonetaryPenalties statute prohibiting hospitalsfrom offering payments to physicians thateither directly or indirectly encouragedthem to reduce or limit care forMedicaid/Medicare patients. Thisdevelopment summarily halted allgainsharing practices for the followingtwo years.

By 2001, however, the OIG softened itsposition through its advisory opinionpermitting a limited gainsharing

BACK TOBASICSHospitals are reconsidering gainsharing arrangements

with physicians after the Office of the InspectorGeneral (OIG) issued several formal advisory opinions

last year indicating that specific gainsharing practices would notviolate federal law if properly administered.

the transition to standardized, lessexpensive, clinically equivalent devices—can save organizations a significantamount of money. Such changes aretypically described as “quick wins”because of the immediate and favorableeffect the adjustments can have on anorganization’s bottom line.

While hospitals are constantly lookingfor ways to reduce costs, especially supplycosts (where, for instance, cardiac devicescan cost thousands of dollars), physiciansin the typical business model have noreason to choose less expensive devices.Physicians are paid on a fee schedule,whereas hospitals receive a fixed amountfrom Medicare and sometimes otherpayers for each patient regardless of theactual cost of treating that patient.

The ability to link financial reward to amore conscientious use of suppliestranslates into a mutually beneficialsituation: hospitals save money, whilephysicians, responsible for those savings,reap a reward for their commitment tocost reduction. As Lewis Morris, chiefcounsel to the Inspector General in theU.S. Department of Health & HumanServices stated in his testimony to theHouse Committee on Ways and Meanslast October, “By giving the physician ashare of any reduction in the hospital’s

Hospital-Physician Gainsharing

1B y R o s e m a r y G r a n d u s k y,D i r e c t o r , a n d K a t h y

K r o n e n b e r g , D i r e c t o r ,N a v i g a n t C o n s u l t i n g , I n c .

In order to strengthen physicianrelations, improve loyalty and reducecosts, hospitals are making a proactiveeffort to align their own economic andfinancial interests with those of theirmedical staffs. Aligning these financialinterests improves communication andtrust between the two groups, whohistorically have tended to operate froman “us versus them” perspective.

Over the years, hospitals have sharedsavings with physicians by investing aportion of those savings in equipmentpurchases or continuing educationseminars, or funding educationalprograms for nursing staff. While this mayencourage physicians’ support of thehospital, it is not gainsharing because thephysicians do not receive a directfinancial benefit from such programs.

What is Gainsharing?The OIG defines gainsharing as anarrangement by which hospitals and otherhealth care organizations promotestandardization and more efficient use ofexpensive supplies in order to cut costs; apercentage of the resulting cost savings isthen distributed among the physicianswho helped generate those savings.

From the supply chain perspective,reduced use of supplies—combined with

involving their non-for-profit status.All six gainsharing arrangements

approved by the OIG apply to acute carehospitals and to one or more physiciangroups (either cardiologists or cardiacsurgeons). In each gainsharingarrangement, the participation of anoutside independent “programadministrator” to collect data and developthe one-year-long gainsharing programswas a feature that contributed to thesuccess of the arrangement and helpedaddress the OIG’s concerns.

Under these arrangements, physicianscan earn up to 50 percent of the costsavings achieved in a single year. Topreclude any conflict of interest, theprogram administrator, who also monitorsthe program, is paid a fixed monthly feenot tied to any cost savings attributable tothe program.

arrangement under the Civil MonetaryPenalties law and the antikickback law.

In its most recent advisory opinions,the OIG indicated that properly structuredarrangements under which cost savingsare shared can serve legitimate businessand medical purposes. Lewis Morris’testimony indicated that the OIG remainsconcerned that such arrangements could:limit patient care; lead to “cherry picking”healthy patients and steering sicker, moreexpensive patients to other hospitals;result in payments in exchange for patientreferrals; or lead to unfair competitionamong hospitals based on theirgainsharing programs.

Still, the ruling is significant for not-for-profit hospitals as they havehistorically been limited by regulationsgoverning fraud and physician self-referrals to hospitals, in addition to issues

S u c c e s s f u l P h y s i c i a n -H o s p i t a l R e l a t i o n s h i p s

Traditionally, the challenge to find the“right” relationship between hospitals andphysicians has been a constant struggle.

But when physicians have an economicinterest, it is easier to get their attention,according to Jon Soderholm, president ofAvera Heart Hospital, Sioux Falls, S.D.“There is a significant difference whenphysicians have ‘skin in the game,’” hesays. “In most [hospital] relationships, thephysician isn’t an equal partner. When aphysician is an equal partner and hasequal input into decisions being made, itis very powerful. In many hospitals, youonly hear ‘I need’ from physicians;however, when the decision-making andinfluence are shared, then you begin tohear ‘We need.’”

The 1999 report by the Institute ofMedicine, To Err Is Human, as well ascountless other research studies, point tostandardization as the critical element inimproving quality of care and costreduction. Soderholm predicts, “Theinstitutions that are going to be successfulin the future are the institutions that aregoing to take the most variance out of thesystem. When you take variation out ofthe system, you drive your quality up anddrive your costs down.”

One way of eliminating variation in thesystem is to ensure that the hospital’sinterests and the physician’s interests arealigned; gainsharing offers thisopportunity.

Gainsharing SafeguardsHowever, the OIG has given only caution-ary approval for specific gainsharingarrangements that it believes providesufficient protection from abuse. (See“OIG-Approved Gainsharing Safeguards”on the left-hand side of this page.)

In the absence of such safeguards, theOIG has found that nearly all gainsharingcases violate the Civil Monetary Penaltiesstatute and improperly induce physiciansto reduce or limit items or servicesfurnished to their Medicare and Medicaidpatients. However, the proposedgainsharing arrangements in the advisoryopinions contained sufficient safeguardsto prevent the imposition of sanctions.“The most important thing to take from

OIG-Approved Gainsharing Safeguards

1. Programs will be transparent, with clearly identified cost-saving actions and

resulting savings that allow for public scrutiny and individual physician

accountability.

2. The physicians will offer credible medical support for the position that the

cost-saving recommendations would not adversely affect patient care.

3. Payments will be based on all procedures, regardless of payer, and savings

that result from procedures related to federal health care programs are subject to a

cap.

4. Procedures to which the cost-saving program applies will not be performed

disproportionately on federal health care program beneficiaries or a generally

healthier mix of patients.

5. Each cost-saving mechanism will be tracked separately to preclude shifting

cost savings.

6. Objective historical and clinical measures will be used as benchmarks to

protect against inappropriate service reductions.

7. After the arrangement is implemented, individual physicians will have

discretionary judgment to select cardiac devices to use for specific patients.

8. The program is of a limited, one-year duration. (It is unclear as to whether the

OIG will approve multiyear programs. In a footnote to the advisory opinions, the OIG

indicated that “any renewal or extension of the Proposed Arrangement should

incorporate updated base year costs.”)

9. The hospital and the physician groups involved in the gainsharing program will

provide written disclosures of their participation in the cost saving measures about

arrangements for patients whose care may be affected.

10. Financial incentives will be limited to a reasonable duration and monetary

amount.

11. Participating physician groups will distribute their profits on a per capita

basis, thus restricting the incentive for individual physicians to generate

disproportionate cost savings through these programs.

these new advisory opinions is that legaland effective gainsharing programs can bestructured,” says Tom Dutton, a partner withthe international law firm Jones Day. “Thekey is to structure the program in a mannerthat tracks the safeguards that the OIG hasdescribed in the advisory opinions.”

Gainsharing PracticesAll of the 2005 OIG advisory opinionsaddressed arrangements to manage patientcare and related costs between hospitalsand either cardiac surgeons (with respectto cardiac surgery programs) orcardiologists (with respect to cardiaccatheterization laboratory services). Thecost-saving measures in the OIG-approvedarrangements included:

1. Opening packaged items (e.g.,surgical trays) only as needed during aprocedure

2. Performing blood cross-matchingonly as needed

3. Substituting less costly items, suchas a knee-high sequential compressiondevice for items currently being used,such as a thigh-high sequentialcompression device, which provides thesame level of effectiveness.

4. Product standardization of certaincardiac devices where medicallyappropriate (e.g., stents)

5. Limiting the use of certain vascularclosure devices to an “as needed” basis.

Any gainsharing arrangementconsidered by the hospital should bereviewed by outside legal counsel.Additionally, the hospital should obtain anadvisory opinion from the OIG beforeimplementing a gainsharing program, sinceone court opinion has held that anygainsharing program will violate the CivilMonetary Penalties statute unless it hasbeen approved by the OIG through theadvisory opinion process. Larry Ellis,senior vice president for cardiovascularservices for Sisters of Charity ProvidenceHospital, Columbia, S.C., says, “We wouldnever have considered moving forward witha gainsharing program without first makingsure we were in compliance with all stateand federal laws and without the advisoryletter from the OIG, which basically gave usapproval to proceed.”

Gainsharing Features to AvoidBoard members should also be aware that

there are aspects of gainsharing programsto avoid. For instance, it is inappropriateto pay incentive rewards in the followingcases:

• Where there is no direct,demonstrable connection betweenindividual actions and any reduction in ahospital’s out-of-pocket costs

• If individual actions would result inunspecified savings

• If there are insufficient safeguardsagainst the risk that other actions, such asincreases in patient volume or prematurehospital discharges, might actuallyaccount for any savings

• If quality of care indicators are ofquestionable validity and statisticalsignificance

• When there is no independentverification of cost savings, quality of

care indicators or other essential aspectsof the arrangement.

The Future of GainsharingAlthough gainsharing agreementsbetween physicians and hospitals are nolonger strictly prohibited by the OIG,boards must nevertheless continue toapproach the subject with caution. Andwhile recent opinions indicate that thegainsharing door is opening, trusteesshould not assume that implementing againsharing program will be easy.

According to Dutton, “To date, therehas been a lot of talk and very little actionsurrounding gainsharing programs.” Hesays this is because, notwithstanding therecent OIG opinions, hospitals remainconcerned about: potentially significantconsulting, information systems and legal

The Board’s Role in Developing a Gainsharing Program

The board’s role in the process of developing a gainsharing program is to act assteward of the hospital, to ask the right questions and hold management responsiblefor implementing a solid gainsharing plan. Some of the questions a board membershould ask include:

• What are the specific objectives for proceeding with this program? What arethe clinical goals (e.g., to reduce length of stay, increase formulary compliance orproduct standardization)? What are the cost-savings goals?

• What other models are there for aligning hospital and physician interests?What are the pros and cons of each?

• What other hospitals or health systems have implemented gainsharingprograms, and has someone from our organization talked to them about theirexperiences?

• Is there adequate physician representation and involvement in the process?Have all physicians signed a conflict-of-interest statement? Is there a process inplace to update the conflict-of-interest statement annually?

• Is there an implementation plan in place with clearly defined action steps,accountabilities, costs and time frames? Does the hospital have clear expectationsof the physicians? What is the estimated cost of implementing a program?

• Who is providing legal counsel? (Make sure that approval by the OIG is alsoincluded in the timeline, recognizing that sometimes OIG review can take up to ayear and a half.)

• Will the hospital use a consultant to help with the process? (Hospitals oftenfind it helpful to seek outside help to walk them through the process.)

• Who will provide the software to track costs? (Again, hospitals may find that itis easier to contract with an outside vendor to ensure complete objectivity and dataintegrity. This is also a way to gain physicians’ confidence.)

While board members have a lot on their plates, they should expect to receive atleast quarterly updates on the gainsharing program’s development. Once theprogram is implemented, quarterly updates should be provided on its cost savingsand the progress made in reaching the goals.

implementation costs; the uncertaintyregarding re-basing cost targets in thesecond year, which could limit thehospital’s anticipated cost reductions; andthe long delay that the OIG advisoryopinion process likely represents.

Even if the path is cleared, gainsharingstill may not be the best solution for everyorganization. Says Ellis: “I think it isdifferent for all facilities, and I don’tknow if gainsharing is going to work forevery hospital.” He adds, “Providence ismore of a specialty cardiovascular facility.We have the largest open-heart program inSouth Carolina. Based on our volumes,gainsharing makes a lot of sense. Butgainsharing may not make sense in auniversity setting, in a hospital where thephysicians are employees, or in smallerfacilities.”

Boards are urged to stay informed forcontinued developments in gainsharing.Experience is very limited, since the OIGhas only issued the six recent advisoriesand one previous advisory opinion in2001; however, that number may rise ashospitals and physicians continue to seekoptions to align their interests for thefuture. When structured properly,gainsharing arrangements have thepotential to decrease hospital and systemsupply costs and increase efficiency andquality.

Despite the obvious work involved andthe long-term commitment hospitals mustmake to receive OIG approval,gainsharing does offer a unique set ofrewards for hospitals and physicianswilling to work together.

Dutton believes that possible pendinglegislation could have a significant effecton gainsharing. “Congress has recentlybecome more aware of the merits ofgainsharing from the Medicare PaymentAdvisory Commission (MEDPAC) reportin March 2005.

“If Congress approves gainsharing,”says Dutton, “then administratively it willbecome simpler to implement becauseyou would not have to receive an advisoryopinion from the OIG. And, it willbecome clearer what you can and cannotdo with these programs. If this happens,gainsharing could really take off.”

For Additional Reading1. OIG Advisory Opinions Nos. 05-01-

05-06. http://oig.hhs.gov/fraud/advisory-opinions/opinions.html2. Testimony of Lewis Morris, ChiefCounsel to the Inspector General, U.S.Department of Health & Human Services;House Committee on Ways and Means;Subcommittee on Health; Hearing Oct. 7,2005. http://oig.hhs.gov/testimony/docs/

Case Study for Success: Sisters of Charity Providence Health System

The Sisters of Charity Providence Hospital (SCPH), part of the Sisters of Charity ofSt. Augustine Health System (CSA), is a 322-bed acute care hospital in Columbia,S.C. The hospital is one of only four to have received the Office of Inspector General’s (OIG) approval last year for its two gainsharing programs, one forcardiovascular surgery and one for cardiology.

SCPH was already successful in working with its medical staff on costreductions. The organization had been benchmarking its performance against that ofits peers and sharing this information with the board and medical staff. In the late1980s and early 1990s, its physicians had worked closely with the hospital onnumerous issues that had an impact on cost and quality, such as utilization andproduct selection. At the time, the hospital was struggling with new technology,such as cardiac stents, which allowed physicians to provide clinical innovation, butat a premium price. During the mid-1990s, as these demands continued to grow,SCPH began to talk with consultants about ways to move forward, but because ofthe legal ramifications of the Stark amendments, it was impossible to proceed. Inaddition, there was the question of how quality would be affected.

According to Larry Ellis, senior vice president for SCPH’s cardiovascular services,in 2002 the hospital began working with Joane Goodroe, president and CEO ofGoodroe Healthcare Solutions LLC, Atlanta. Goodroe had worked with St. Joseph’sHospital in Atlanta to help the organization achieve the first gainsharing approvalfrom the OIG in 2001. SCPH’s management knew this model had worked and lookedto St. Joseph’s for advice. The board received regular updates, and the executivecommittee was deeply involved in several of the discussions. When the time cameto make a decision, management and the board reviewed a list of pros and cons.The board knew the health care industry was struggling with the escalating cost ofsupplies and new technology. At the same time, it was important to maketechnology available to patients, strengthen quality of care and achieve desiredoutcomes. One of the safeguards favorably looked upon by the OIG is a system tomonitor clinical outcomes for surgery. This software allowed SCPH to track a supplyitem from a patient, to a physician, and to an outcome. For example, if a cardiaccatheter was substituted for one offered by a different manufacturer and wasdeemed therapeutically equivalent by the medical staff, then physicians could seethe cost and efficacy data related to that change.

The gainsharing program began last year, involving 57 cardiologists on staff andhas already achieved several million dollars of savings. “What’s important for boardsto realize,” says Ellis, “is that any time you can align a hospital and its physicians inthe right direction, you are in a win-win situation. In our organization, we were ableto lower our costs, and the patients, physicians and the hospital benefited from theeffort.” While Ellis concedes the organization may re-evaluate the program in thenext several years as the health care marketplace changes, he says, “I’m veryexcited about what we are doing.”

2005/ Gainsharing10-07-05.pdf3. ABA Health eSource, November 2005,“The New Gainsharing—Has AnythingReally Changed?” www.abanet.org/health/esource/vol2no3/dean.html 4. BNA’s Health Care Fraud Report, June 8, 2005, “Gainsharing: RegulatoryBreakthrough, but Challenges Remain.” Ω

Created from original content in Trustee Magazine March 2006 Vol. 59 No. 3©Copyright by Health Forum Inc. All rights reserved. For electronic use only–not for reprint purpose.