Two recent opinions allow hospitals to assist independent physicians

Physician Executive, May-June, 2005 by Timothy McIntire

Recently, two advisory opinions from the Office of Inspector General ("OIG") of the Department of Health and Human Services allowed hospitals to assist financially independent physicians in ways previously thought to violate federal anti-kickback laws.

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* In a December 2004 opinion, the OIG stated that they would not prosecute a medical malpractice subsidy arrangement where a hospital offered financial assistance to two neurosurgeons.

* A month later in a January 2005 opinion, the OIG stated it would not prosecute a narrowly tailored gain-sharing arrangement between a hospital and a group of cardiovascular surgeons.

In issuing an advisory opinion, the OIG relies solely on the facts and information provided to them by the party requesting the opinion, and the OIG does not undertake its own independent investigation of the matter. As such, the official guidance is binding only on the party requesting the opinion and the OIG reserves the right to reconsider the questions and issues raised in the advisory opinion as the law changes or public interest requires.

Nevertheless, both of these opinions provide new and useful guidance to physicians involved with such issues.

Medical malpractice subsidy payments

In the first opinion, two neurosurgeons practicing together were experiencing extreme problems with decreased malpractice insurance availability and increased malpractice insurance premiums.

These two physicians practiced at the region's only acute care hospital offering neurosurgical services. After having malpractice insurance from the same carrier for seven years two weeks from their expiration date, the physicians learned that their coverage would not be renewed.

The physicians had been on a "claims-made" policy, so liability protection after the expiration of their current policy would require "tail coverage." Absent the two physicians entering retirement where the tail coverage premium would be waived, the tail coverage expense to remain in practice was quite large.

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Further, the cost of continuing coverage with the new carrier was substantially more than the historical cost of liability coverage with the previous carrier. Faced with these difficult circumstances, the physicians informed the hospital that they would both retire immediately unless the hospital subsidized their malpractice insurance expenses.

As the hospital functions as a hub for neurosurgical services for its own and several neighboring counties and had been unsuccessful in recruiting other neurosurgeons over the past two years, and because the neurosurgeons provided a substantial amount of care to Medicaid and indigent patients, the hospital agreed to enter into a subsidy arrangement.

Under the arrangement, the hospital agreed to subsidize:

* The entire cost of the tail coverage from the original carrier

* A portion of the increased premiums for the claims-made coverage from the new carrier

* Part of the costs of tail coverage from the new carrier

The physicians would still incur increased out-of-pocket expenses for their malpractice insurance, as the physicians paid the same historical cost and the premium subsidy covered only part of the current net increase in premiums.

Surgical cost reduction and gain-sharing

In the second example, an acute care hospital offering a broad range of inpatient and outpatient services, including cardiac surgery services, proposed an arrangement with their cardiac surgeons where the physicians would share in certain, limited cost savings that were directly attributable to specific changes the cardiac surgery group made in their operating room practice.

Generally, the surgical group agreed to curb the waste of medical resources by adopting such policies as "open as needed" for certain supplies, substitution of less costly items for items currently being used, and employing a product standardization regimen where medically appropriate.

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To ensure against an inappropriate reduction in services, the physicians recommended several safeguards. For instance, the arrangement would utilize objective historical and clinical measures reasonably related to the physicians' practice and the hospital's patient population to establish a "floor" beyond which no savings would accrue to the cardiac surgeons.

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Further, the cardiac surgeons, themselves certified that they would make individual, patient-by-patient determinations of the most appropriate procedure or medical device, and that the availability of the full range of cardiac devices and services would not be compromised by the product standardization regimen.

Finally, prior to distributing any gain-sharing to the physicians:

* The hospital will adjust the current year costs to account for any inappropriate reductions in the use of items beyond the estimated efficiency targets planned for in the initial agreement

* If the volume of procedures payable by a federal health care program in the current year exceeds the volume of like procedures payable by a federal health care program performed in the base year, no sharing of cost savings will be seen for the additional procedures