Complying with physician gain-sharing restrictions

Healthcare Financial Management, May, 1998 by Patrick K. O'Hare

Many integrated delivery systems (IDSs) are deliberating whether to initiate gain-sharing programs. These arrangements, in brief, are designed to reward staff physicians with a portion of the cost savings hospitals realize when physicians use treatment protocols and other procedures to deliver high-quality care in the most cost-effective manner feasible. IDSs also are interested in gain-sharing programs as a means of preparing their constituent organizations for risk-based payment arrangements.

Typically, an IDS-physician gain-sharing arrangement measures physician and institutional performance against a baseline, with incentive payments keyed to meeting various predetermined economic and quality targets specific to various medical conditions. IDSs implementing such programs need to carefully structure them around four sets of interrelated legal requirements:

* The civil monetary penalty statute;

* Physician self-referral prohibitions;

* Fraud and abuse prohibitions; and,

* Private inurement, private benefit, and other provisions relevant to tax-exempt systems.

The Civil Monetary Penalty Statute

The civil monetary penalty statute prohibits a hospital from knowingly making a payment to a physician as an inducement to reduce or limit services provided to Medicare or Medicaid beneficiaries under the physician's personal care.(a) Because rewarding physicians for using defined treatment protocols could be seen as a means of inducing physicians to reduce the amount of healthcare resources expended during particular episodes of care, a gain-sharing program could create conditions that might violate this law. Both the hospital that makes the payment and the physician who receives the payment are subject to civil monetary penalties up to $2,000 for each patient for whom such payments are made.

IDSs designing a gain-sharing program can minimize their risk of violating the civil monetary penalty statute by carefully structuring their measurement criteria. For example, because the statute (as well as the proposed rule designed to implement it) deals with the reduction of services to individual patients, measurement criteria for gain-sharing payments should be based on aggregated costs for large groups of patients, including patients not covered by Medicare or Medicaid. An additional safeguard would be to include one or more quality indicators in the measurement criteria.

The Stark Physician Self-Referral Prohibition

A second restriction that could have an impact on gain-sharing arrangements is the law against physician self-referral, commonly known as Stark legislation.(b) The Stark legislation considers physicians who participate in gain-sharing programs as having compensation relationships with the hospitals sponsoring such programs. Unless the arrangement qualifies for one of the exceptions specified in the legislation, physicians are prohibited from making referrals to the hospital for inpatient or outpatient services, and from ordering ancillary tests and procedures considered "designated health services."

The most relevant exception to protect gain-sharing payments under the physician self-referral law is for personal services arrangements. To qualify for this exception, the gain-sharing contract must meet the following criteria contained in the proposed Stark regulations:(c)

* The contract must be written, executed by the parties, and specify the services to be performed;

* The contract must cover all services to be provided;

* Covered services may not exceed those necessary to accomplish the parties' business purpose;

* The contract's term must be for at least one year; and

* The contract must provide that the compensation be set in advance, not exceed fair market value, and not take into account the volume of referrals or other business between the parties.

The first four of these criteria are relatively easy for most gain-sharing arrangements to satisfy. The fifth criterion poses a problem, however, because the amount of compensation payable to any one physician under the gain-sharing formula cannot possibly be set in advance; rather, the payment, if any, will depend on the physician's performance as measured over a large group of patients. Many attorneys advise that organizations' gain-sharing arrangements can meet this criterion and qualify for the personal services Stark exception if the payment formula is set in advance (assuming an otherwise fair market amount and the use of a formula that is not based on referrals).

IDSs also should ensure that their gain-sharing arrangements do not violate the fifth criterion's prohibition against taking into account "the volume of referrals or other business." Satisfying this requirement will depend on the particular formula adopted; any formula that automatically increases payment when referrals increase is vulnerable to being found in noncompliance with the statute. Any doubts about a proposed program's compliance with the Stark provisions also could be resolved through a HCFA advisory opinion.(d)