OIG "Yellow Lights" Gainsharing and Pay for Performance

Pay for performance and other programs designed to align hospital and physician incentives are trumpeted by both the government and industry pundits as essential to improving outcomes and increasing the efficiency of the health care system. The implementation of such programs, however, has historically been thwarted by a number of regulatory challenges. The Office of the Inspector General (OIG) of the Department of Health and Human Services took a positive step towards reconciling the regulatory limitations and the public policy goals in two Advisory Opinions issued on Oct. 14, 2008.

The first Advisory Opinion (AO 08-15) addresses a gainsharing arrangement between a hospital and two cardiology groups relating to the operations of a cardiac cath lab. The second Opinion (AO 08-16) analyzes a pay for performance program involving a hospital and a newly formed physician entity sponsored by a commercial payor.

On the one hand, both Advisory Opinions were favorable and both send positive signals to the industry concerning efforts to align hospital and physician incentives to control costs and increase quality. On the other hand, both opinions are replete with safeguards and caveats. Both involve an independent third party in the design and oversight of the programs and, most importantly, both leave several regulatory issues unanswered.

The Advisory Opinions pave the way for hospitals and physicians to engage in certain carefully crafted pay for performance and gainsharing programs. The light has turned from red to yellow, but it's clearly not green.

Cardiac gainsharing arrangement

In the first Advisory Opinion, the OIG blesses an arrangement where a hospital proposes to share with two cardiology groups 50 percent of the hospital's savings derived from the physicians' adoption of certain measures. These measures are specifically defined. Most of them relate to either the standardized use of medical devices and supplies or to the reduction of inappropriate use of the same during designated cardiac catheterization procedures. The hospital agrees to pay each physician group a share of the cost savings directly attributable to that group's performance over a three-year period. The groups agree to distribute the payments on a per capita basis.

To develop the gainsharing program, the hospital hired an administrator who undertook a study of historic costs and identified 30 savings opportunities. These opportunities were reviewed for medical appropriateness, and specific safeguards were adopted to prevent the economic incentives from affecting either the quality of care or the referral patterns of the participating physicians.

The OIG analyzed the proposed gainsharing arrangement under the civil money penalty (CMP) prohibition on hospital payments to a physician as an inducement to reduce or limit items or services to Medicare or Medicaid beneficiaries under the physician's direct care. The OIG found that the proposed gainsharing arrangement implicated the CMP because the payments might induce the physicians to reduce or limit care. The OIG noted that the CMP prohibition is triggered even if the program induces physicians to limit unnecessary care.

Despite the CMP prohibition, the OIG choose to exercise its discretion not to impose sanctions based on the structure of the gainsharing program and the extensive built-in safeguards. While the OIG has approved a number of other gainsharing arrangements, this opinion was noteworthy because it involved a multi-year program, and the agency appears to suggest that gainsharing programs that include the right safeguards may not violate the CMP. If the goal is to encourage such programs, the agency should be more specific about what criteria a gainsharing program must include and whether an Advisory Opinion is required in all instances.

The first Advisory Opinion also addresses the implications of the cardiac gainsharing program under the federal anti-kickback statute and concludes that the program poses a low risk of fraud or abuse. The OIG does not address the federal Stark Law analysis of the program. The Stark Law is the province of the Centers for Medicare & Medicaid Services (CMS) and that agency has not issued an opinion on the proposed gainsharing plan. This is a significant omission given the breadth of the Stark prohibition and the potentially significant exposure that can arise out of a Stark violation. CMS recently proposed a Stark gainsharing exception but the viability of the proposed cardiac gainsharing program remains unclear under existing law.

Pay for performance

In the second Advisory Opinion the OIG addresses a pay for performance program involving a hospital, a physician organization and a commercial payor. The hospital participates in a pay for performance program implemented by a private insurer under which the hospital may earn a bonus of up to 4 percent of its base compensation from the insurer if the hospital meets certain standards of quality and efficiency.

The hospital proposes to share the portion of the bonus compensation attributable to achieving certain quality standards with a newly formed physician entity. Any qualified physician who has been a member of the hospital's medical staff for at least one year is eligible to join the physician entity. The hospital enters into a professional services agreement with the physician entity for an initial three-year term.

Under this agreement, the physician entity will undertake various tasks to ensure that the quality targets are achieved. The physician entity will distribute the funds it receives from the hospital to its members on a per capita basis.

The quality measures in the program are taken from the Quality Measures Manual published by the Joint Commission. According to the OIG the manual "represents the joint efforts of CMS and the Joint Commission to publish a uniform set of quality measures." To determine compliance with the quality measures for purposes of calculating the bonus, all of the hospital's inpatients having a designated condition or procedure are counted, including Medicare and Medicaid beneficiaries. The payments under the agreement between the hospital and the physician entity are subject to a number of safeguards to ensure that the payments do not compromise care or increase patient referrals to the hospital.

The OIG concludes that the pay for performance program potentially violates both the CMP and anti-kickback statutes, but given the safeguards in place the agency will exercise its discretion not to impose sanctions. The Advisory Opinion notes that the program payments originate from a private payor and that the CMP applies only to hospital payments that may reduce services to Medicare or Medicaid patients.

The CMP is triggered, however, because the quality measures are calculated based on the care provided to all hospital inpatients including Medicare and Medicaid beneficiaries. If the pay for performance program was sponsored by the payor, as opposed to the hospital, there is a reasonable argument that the CMP would not apply. Instead, a payor directed arrangement would arguably be subject to the health plan physician incentive plan requirements.

Perhaps the most disappointing aspect of the second Advisory Opinion is the OIG's determination that the quality measures might implicate the CMP by inducing physicians to reduce or limit services to government program enrollees. The OIG acknowledges that quality targets that do not potentially induce the reduction or limitation of care do not implicate the CMP. However, the quality targets in the proposed program did not meet this test. Given the source of the quality measures in the program at issue (CMS approved quality measures), the OIG's interpretation of the CMP seems overly rigid and will likely impede the development of pay for performance programs.

Consistent with the gainsharing Advisory Opinion, the OIG does not address the viability of the pay for performance program under the federal Stark Law. CMS has provided limited guidance in this area. No exceptions have been proposed and no Stark Advisory Opinions on pay for performance have been issued. This lack of guidance creates regulatory risks. Programs that are exclusively focused on quality should pass muster. The difficulty will be determining when the government might construe a quality measure as potentially inducing physicians to reduce or limit care or reduce costs. If this line is crossed, the pay for performance program will face risks under both CMP and the Stark Law.

The OIG Advisory Opinions on gainsharing and pay for performance are a positive signal to those interested in aligning incentives and promoting quality. However, given the government's interest in increasing efficiency in health care and its public endorsement of pay for performance, the OIG and CMS should be encouraged to provide more specific guidance to assist the health care industry in promoting these goals.¹

FOOTNOTES

1 Hospitals or other providers considering gainsharing or pay for performance programs should also consider state law issues raised by such arrangements.