Gainsharing is llegal; Fixed Rate Contracts OK


On July 8, 1999 the Office of Inspector General (the “OIG”) of the Department of Health and Human Services issued a special advisory bulletin which declared that hospital-physician gainsharing arrangements are illegal. Gainsharing arrangements involve a hospital splitting part of its revenues with physicians based on cost-savings generated by physicians.

In contrast, the bulletin appears to clear the way for personal service contracts with physicians for the performance of specific services. We view the bulletin as a welcome invitation for hospitals and physicians to cooperate with carefully tailored contracts in which the physicians are paid a fixed, fair market value fee in exchange for services targeted at maintaining and improving overall quality and service while lowering health care costs. The OIG expressly states:

“We note, however, that hospitals may align incentives with physicians to achieve cost savings through means that do not violate [the law] . . . . For example, hospitals and physicians may enter into personal services contracts where hospitals pay physicians based on a fixed fee that is fair market value for services rendered, rather than a percentage of cost savings.”

Our March 1999 Healthcare Newsletter was devoted to these types of physician-hospital partnerships. We have successfully structured such transactions as “Centers for Excellence” arrangements.

The OIG determined that gainsharing arrangements are “clearly prohibited” under the civil monetary penalty statute. This statute, in part, prohibits hospitals from knowingly making payments directly or indirectly to physicians as an inducement to limit services to Medicare and Medicaid beneficiaries under the physicians’ care. The OIG bulletin does not address the issue of whether gainsharing arrangements violate the Stark or Anti-Kickback Laws. However, it raises that concern by stating that both laws may also be implicated by gainsharing arrangements.

The bulletin also cautions that certain types of hospital physician clinical joint ventures may be illegal. OIG lists jointly-owned freestanding specialty hospitals (e.g., heart, orthopedic and maternity hospitals) and arrangements in which high revenue lines of services (e.g., cardiology or cardiac surgery) of an existing hospital are legally reorganized as a separate, jointly owned hospital. The OIG states that these types of ventures may induce physician-investors to reduce services to patients through participation in profits generated by costs savings in clinical care.

The OIG does not mention ambulatory surgery or other outpatient service centers as violations of the civil monetary penalty statute. The implication is that while these ventures must be carefully structured to comply with the Stark and Anti-Kickback Laws, the OIG does not believe the structures themselves violate the civil monetary statute.

While the OIG does recognize that gainsharing arrangements could have many beneficial effects, the bulletin makes it clear that such arrangements are illegal under current law. The OIG states that a change in the law would be required for gainsharing arrangements to be permissible. While it is impossible to predict whether any change will be forthcoming, it is unlikely that Congress will make any change in the near future because the change necessary to make gainsharing arrangements legal would be sweeping and might inadvertently permit certain abusive and undesirable conduct as well.

The bulletin also raises major concerns for physicians and hospitals already in as many as 100 reported existing gainsharing arrangements. The OIG states that non-compliant programs will be subject to civil monetary penalties of up to $2,000 per patient. The bulletin urges physicians and hospitals to expeditiously terminate existing gainsharing arrangements noting that the OIG will take into consideration the speed with which such programs are terminated “in exercising its enforcement discretion.”

The bulletin has left no room for gainsharing arrangements. Additionally, joint venture single-specialty hospitals are highly suspect. Existing arrangements must be terminated and future discussions should be avoided. However, fixed payment service contracts between physicians and hospitals targeted at maintaining and improving overall quality and service while lowering health care costs are expressly approved in the bulletin. Other ventures, such as jointly-owned ambulatory surgery and outpatient service centers, are also still viable. We are optimistic that the bulletin has set the stage for a new era for physician-hospital relationships and would be happy to discuss this with you.