Gainsharing: A cost-reduction strategy that may be back - hospitals regulation aims at helping finances - Statistical Data Included

Healthcare Financial Management, Jan, 2002 by Max Reynolds

The HHS Office of Inspector General (OIG) seemingly has reversed its formerly unwavering prohibition on gainsharing arrangements. In Advisory Opinion 01-1, the OIG approved an arrangement between a hospital and a physician group targeted at reducing operating expenses as long as they adopted appropriate safeguards to protect against Federal healthcare-program fraud and abuse. With similar approval, hospitals could take advantage of this opportunity to enter into their own gainsharing arrangements with physicians. There are, however, limitations that should be considered when structuring any preliminary gainsharing initiatives. Several Federal laws already exist that define and restrict gainsharing arrangements.

The Federal government may have provided hospitals with a significant opportunity to bolster their profits. In a seeming reversal of its prior position, the HHS Office of Inspector General (OIG) recently suggested that it would permit the use of properly structured gainsharing arrangements to reduce hospital operating costs. This opinion could not have come at a better time for administrators of financially ailing hospitals. The new opportunities afforded by possible gainsharing could provide additional net revenue to implement strategies to ensure the long-term financial health of the organization, such as funding of equipment purchases, facility renovation or expansion, service-line development, and clinician recruitment and retention. Those who choose to employ gainsharing to reduce hospital operating costs, however, must ensure that such arrangements comply with myriad Federal laws.

Financial Pressures on Hospitals

Average total margins for U.S. hospitals declined from 5.8 percent in 1995 to 2.8 percent in 1999, and the proportion of U.S. hospitals with a negative total margin increased from 20.7 to 36.7 percent over the same period. Neither urban nor rural facilities were spared from this decrease.

Hospitals cannot hope that increased revenue alone will rectify their problems. Margins on private-pay contracts long have served to subsidize indigent care as well as lower, or even negative, margins sustained under the Medicare and Medicaid programs. However, they no longer are large enough to do so. Hospital operating revenues have suffered as a result. Current political initiatives to enact a prescription-drug benefit likely will preclude any substantial increase in payments to providers. In addition, due to the recent retrenchment in the financial markets, nonoperating revenues, which reached historically high levels between 1997 and 1999, may be meager at best.

Any substantial improvement in hospital financial performance must include major cost-reduction initiatives, particularly reductions in operating expenses. To reduce operational expenditures substantially in coming years, hospitals need to identify a way to align physician financial incentives with those of the hospital in a manner that ensures quality of care while reducing expensive resource utilization. Gainsharing is a proven tool for accomplishing this objective.

What Is Gainsharing?

Although gainsharing arrangements take numerous forms, they most often relate to services furnished within a single clinical specialty (eg, cardiac surgery or oncology) and are executed directly between a hospital and one of the following individuals or groups:

* One or more individual physicians providing service in the clinical specialty;

* One or more group practices composed exclusively of physicians furnishing care in the clinical specialty at the hospital; or

* A single entity representing all staff or employed physicians furnishing care in the clinical specialty at the hospital.

Gainsharing arrangements typically include several common elements. The hospital contracts with participating independent consultants or physicians to analyze current operational practices within the clinical specialty. These practices include supply use, equipment use, operating-room use, ancillary-service use, formulary restrictions, clinical protocols, nonphysician staffing, scheduling of procedures, bed-use review, and discharge assessment.

The physicians also are expected to comply with standard policies, procedures, and protocols that reflect best practices as determined by clinical consultants. These best practices are reviewed and revised, as necessary, by physicians practicing in the clinical specialty to ensure that they are consistent with quality care. Any reduction in operating costs in the clinical specialty is documented by the hospital over a specified period after implementation of the best practices. The hospital then monitors whether the participating physicians meet mutually agreed-upon, objective benchmarks called quality safeguards for quality of care and patient satisfaction. Finally, if such quality safeguards are met, the participating physicians are paid a fixed percentage of the reduction in operating costs associated with implementation of the best practices.