AAOS Bulletin - February, 2006

Gainsharing: What, how, why and why not?

By David A. Halsey, MD

Hospitals, physicians, the federal government, businesses—particularly insurance companies—and individual consumers are all looking for ways to reduce the cost of health care. One of these cost-reduction mechanisms is a gainsharing arrangement. But what is gainsharing and what impact could it have on orthopaedics?

What is gainsharing?

Although there is no uniform definition of gainsharing, the concept generally refers to an arrangement in which hospitals and physicians share in any cost savings achieved through greater efficiencies and physicians’ efforts. Either directly or indirectly, physicians control 70 percent to 80 percent of hospital spending.

Gainsharing arrangements include: 1) More efficient purchasing of supplies and materials, either by switching to less-expensive products or by combining purchases or limiting suppliers to achieve quantitative discounts; 2) Departmental budgeting or adherence to protocols; 3) Managed care; 4) Joint ventures between hospitals and physicians for ancillary services; and 5) Case management programs

Efficient purchasing programs usually involve an agreement between the hospitals and physicians regarding drugs, devices and supplies. Hospitals can achieve some cost savings by pooling orders for common supplies, following a specific drug formulary and selecting devices from an agreed-upon, limited number of suppliers. Participating physicians receive a percentage of these savings. Physicians provide input to the initial agreement, thus retaining some measure of control.

Under the “buy-a-protocol” arrangement, the hospital pays physicians a fixed hourly rate to attend meetings where they review the relevant literature and develop cost-saving protocols. The hospital may also pay an incentive bonus (percentage of predefined cost savings) if target goals are met. Some hospitals base their arrangements on departmental budgets; physicians receive a negotiated percentage of any cost savings below the defined, budgeted departmental costs.

Managed care arrangements involving gainsharing may use a global capitation agreement under which hospitals and physicians offer their joint services. The surplus capitation amounts (savings in the total patient care budget) are shared with the physicians on a predetermined percentage split.

The growth of joint ventures between hospitals and physicians may also be considered gainsharing arrangements. Under these arrangements, the hospital spins off a department or service line to a joint venture that is owned by hospital and interested physicians. Profit or loss is shared in relation to the owner’s interest.

Finally, some gainsharing arrangements are based on case management. Physicians and hospitals jointly develop case management guidelines for specific conditions, and physicians serve as co-case managers. Doctors are paid an hourly fee for guideline development as well as a case management fee, on a per-case basis.

History of gainsharing activities

Gainsharing arrangements premiered in the late 1980s, primarily as a strategy to control the costs of cardiac surgery. But in July 1999, the Office of the Inspector General (OIG) in the U.S. Department of Health and Human Services (HHS) issued a Special Advisory Bulletin, asserting that gainsharing arrangements could be construed as reducing services and might violate anti-kickback and physician self-referral laws. This effectively dampened interest in gainsharing.

Early in 2005, however, the OIG released six advisory opinions approving hospital-physician gainsharing arrangements. The advisory opinions stated that all of the arrangements would involve an improper payment to physicians to limit or reduce services under the Civil Monetary Penalties statute and could be in violation of state and federal anti-kickback statutes and self-referral laws. However, the OIG concluded that it would not take enforcement action because the programs had built-in safeguards and a limited term length.

The approved arrangements are transparent and require that patients be informed of the program. They also require documented medical propriety and an ongoing medical review of outcomes. Finally, they place a ceiling on how much doctors could receive in realized savings.

Based on these OIG letters, any application for gainsharing approval should:

• Establish that gainsharing payments are compensation for actual cost-reduction services

• Prohibit any hidden payments for physicians who provide a high volume or value of referrals

• Prevent patient steering and over-utilization

Problems in gainsharing

Inherent in any gainsharing agreement is a potential violation of state and federal anti-kickback laws, as well as federal self-referral laws (Stark II). Therefore, any aggregate compensation payable under a gainsharing agreement must be set in advance, be consistent with fair market value and not determined by volume or value of referrals.

The Stark law prohibits physicians from referring Medicare and Medicaid patients for the provision of certain “designated health services” to an entity with which the physician has a financial relationship. Many states have enacted similar laws, and state statutes may apply to all services, regardless of payer class.

Other problems arise from issues concerning tax-exempt organizations (not-for-profit hospitals) and inurement rules. Tax-exempt organizations must serve the public interest rather than private interest. Therefore, any private benefit must be incidental, both qualitatively and quantitatively, to the organization’s public purpose. Inurement rules prohibit granting private inurement or excess benefits to individuals; gainsharing arrangements could be construed as impermissible private inurement.

Last, but certainly not least, are the ethical concerns related to gainsharing arrangements. Many physicians feel that gainsharing is acceptable only if it does not lower quality of care. They fear that pressures to use lower-cost devices could result in lower quality.

David A. Halsey, MD, is chair of the AAOS Council on Health Policy and Practice. He can be reached at david.halsey@cvosm.org

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