Proceed carefully with gain-sharing deals

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted April 4, 2005.

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A cardiology group recently contacted me regarding a proposed gain-sharing agreement with a hospital. The group has had a long relationship with the hospital and was interested in exploring cost-saving methods that would enhance patient care and ultimately benefit the hospital's bottom line. In return for complying with the proposed cost-saving measures, the hospital proposed to pay the group a percentage of the realized cost savings.

Gain-sharing agreements usually occur when hospitals provide financial incentives to physicians who cooperate to cut costs and improve efficiency. Under a gain-sharing agreement, physicians are paid on the basis of efficiencies that are introduced to a hospital department.

The big problem with gain-sharing agreements, though, is that the Office of Inspector General has generally cautioned against them. The OIG has warned that the arrangements can trigger the anti-kickback and Stark regulations and cause scrutiny of a tax-exempt hospital's status.

So why didn't I just tell the cardiology group to forget about a gain-sharing deal?

It's because the OIG recently issued advisory opinions approving two gain-sharing arrangements. While OIG opinions technically only apply to the individual case under review, they do give guidance as to what sort of contract language is permissible, and what is not.

The first OIG advisory opinion dealt with a proposed arrangement in which a hospital would share, with a group of cardiologists, the first-year cost savings expected to result from a strategy to reduce the wasteful use of medical supplies in the cardiac catheterization lab. The second opinion was a similar case, except that the physicians were cardiac surgeons, and the target for waste reduction was the operating room.

The key areas of cost savings for the hospitals in both opinions were product standardization and product substitution, as well as limiting the use of certain products to an "open as needed" basis.

The OIG approved both arrangements, though it stated that the advisory opinions do not indicate a change in its opinion about gain-sharing arrangements. So why exceptions in these cases? In a nutshell, it's because the OIG believed the deals would not reduce medical services for financial reasons, nor would they reward doctors for referrals to their hospitals.

In the case sent to me, the hospital conducted a utilization review of surgeries and practice patterns in its cardiac catheterization lab. Based upon the review, the hospital identified specific cost-saving opportunities and developed a report that was reviewed by both the hospital and cardiologists for medical appropriateness.

The report identified proposed cost-saving methods that included standardizing equipment used by the cardiologists. It also identified how certain nonclinical items could be substituted by less costly items.

I included specific language in the agreement ensuring that the cardiologists would not be restricted from selecting devices other than the agreed-upon standardized devices if the cardiologist determined that such devices were needed. I also drafted language providing that the economies gained will result from clinical and fiscal value and not from restricting the availability of devices or adversely impacting the quality of patient care.

Under the proposed agreement, the hospital will pay the group a percentage of the cost savings achieved by implementing the recommendations for one year. This payment will constitute the entire gain-sharing compensation paid to the group for services performed under the agreement.

In light of the two recent OIG advisory opinions, I also ensured that the hospital will make an aggregate payment to the cardiology group, which distributes its profits to each of its members on a per capita basis, and that such payment to the group will be subject to the following limitations:

  • If the volume of procedures for Medicare and Medicaid patients in the current year exceeds volume of like procedures performed for Medicare and Medicaid patients in the base year, there will be no sharing of cost savings for the additional procedures.
  • To minimize the cardiologists' financial incentive to steer more costly patients to other hospitals, the case severity, ages, and payer source of the patients treated under the gain-sharing agreement will be monitored by a committee composed of representatives from the hospital and group, which will use generally-accepted standards for its review. If there are significant changes from the base year, the cardiologists at issue will be precluded from participating in the agreement.
  • The aggregate payment to the cardiology group will not exceed 50% of the projected cost savings identified in the hospital's report.

If you are thinking about entering into a gain-sharing agreement with a hospital, make sure you keep in mind these OIG advisory opinions and the anti-kickback statute. Gain sharing can happen, but it must be constructed in a very careful way to make sure that it doesn't violate federal law, and that it also does not deny patients what they need.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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External links

Office of the Inspector General Advisory Opinion 05-05 approving a gain-sharing agreement between a hospital and a group of cardiologists, Feb. 18, in pdf (link)

OIG Advisory Opinion 05-06 approving a gain-sharing agreement between a hospital and a group of cardiac surgeons, Feb. 18, in pdf (link)

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