New Jersey court derails Medicare incentive pay project

A federal court in New Jersey put the brakes on a Medicare demonstration project that would have let physicians and hospitals work together to cut health care costs -- while still preserving quality -- and then share in the savings.

The eight New Jersey hospitals chosen for the "Hospital Performance-Based Incentives Demonstration" had lined up physicians to participate. Doctors and hospitals would cut spending through such activities as developing more efficient ways of doing medical and surgical procedures and preventing Medicare patients from getting duplicative services.

The New Jersey Hospital Assn., which applied to test the program, estimated that savings could amount to as much as 25% of Medicare Part B fees at each hospital. Based on the savings, the hospitals would make incentive payments to physicians as a reward for a combination of high quality and efficient care. These awards would be similar to incentives managed care organizations pay.

Three New Jersey hospitals, each part of the Robert Wood Johnson Health System, that were not chosen to participate in the pilot program sued Dept. of Health and Human Services Secretary Tommy G. Thompson and other government officials in federal court to expand the project.

"Our goal in bringing this case wasn't to end the demonstration project, but to expand it to other hospitals and doctors throughout the state, improve its design and protect nonparticipating hospitals from an adverse economic impact," said Harvey A. Holzberg, president of Robert Wood Johnson University Hospital in New Brunswick and president of the Robert Wood Johnson Health System.

But the U.S. District Court for the District of New Jersey ruled in late April that the program could not go forward because of concerns that the arrangement violated the 1986 federal civil monetary penalties statute.

The law prohibits hospitals from making a payment, directly or indirectly, to influence a physician to reduce or limit services to Medicare and Medicaid beneficiaries under the physician's direct care. The law also makes it clear that physicians cannot receive that type of payment.

That's "the very goal and/or inevitable result of the demonstration project," the court said. "Therefore, the demonstration project violates the CMP, and its further implementation will be enjoined."

The Centers for Medicare & Medicaid Services, which approved the program, noted that the objective is to reduce services without "sacrificing the quality of patient care." But the court said a 1999 HHS Office of Inspector General advisory bulletin on the CMP law underscores that "no combination of features could guarantee such plans would not be subject to abuse."

"Although the secretary now guarantees that the quality of care will not be adversely affected by the financial incentives designed to promote cost efficiency, such a guarantee was previously found by Congress as untenable," the ruling states.

CMS officials should have required the hospitals and physicians to get a full OIG advisory opinion to make sure that the project would not trigger sanctions for violating the CMP law, the judges wrote.

Holding out hope

Spokesmen for the New Jersey Hospital Assn. and CMS said they were reviewing the court's decision to determine their next step.

NJHA spokesman Ron Czajkowski said the opinion leaves open the possibility that the program could go forward if the OIG were to review it and waive any concerns that the arrangement could violate the CMP. The OIG reviewed the original proposal and gave it preliminary approval. But it looks as if the court wants a more thorough OIG review, he said.

The demonstration project's supporters hope it ultimately can take place. "The public could have benefited, the hospitals could have benefited and doctors could have benefited," said Michael Kalison, chair of New Jersey-based Applied Medical Software Inc., which was behind the concept and design. "I'm hopeful that working together with CMS and the OIG, we can address the court's concerns."

Medical Society of New Jersey President Mark T. Olesnicky, MD, said physicians were looking forward to seeing how the project performed. "Anything that could provide patients with good care and save costs is something we support," he said.

Czajkowski added: "We thought there was huge potential here not only for New Jersey, but for the whole country."