Exasperated OIG Halts Gainsharing. Specialty Hospital Joint Ventures and Hospital Sponsored Risk Pools Also Jeopardized. Is Congress Listening?

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1 NUMBER 88 FROM THE LATHAM & WATKINS CORPORATE DEPARTMENT BULLETIN NO. 88 AUGUST 10,1999 In the face of the OIG s Advisory Bulletin, hospitals and physicians must promptly unwind gainsharing programs. Exasperated OIG Halts Gainsharing. Specialty Hospital Joint Ventures and Hospital Sponsored Risk Pools Also Jeopardized. Is Congress Listening? While acknowledging that some gainsharing plans may offer significant benefits with no adverse impact on patient care, OIG concludes gainsharing and other hospital/physician incentive plans are flatly prohibited by Civil Monetary Penalties Act. OIG says Congress must act. Introduction The OIG issued an apparent death knell to the burgeoning gainsharing industry. Sweeping aside gainsharing advisory opinion requests submitted by providers across the country, the OIG determined in a Special Advisory Bulletin issued on July 8, that Congress has prohibit[ted] any payment arrangement between a hospital and physicians that is intended to induce a reduction or limitation in services. In the face of the OIG s Advisory Bulletin, hospitals and physicians must promptly unwind gainsharing programs. The OIG suggested that it may not prosecute gainsharing arrangements that are terminated expeditiously in response to the Advisory Bulletin, if the arrangements have not violated any other statute or adversely affected patient care. CMP Law Over a decade ago, Congress adopted the Civil Monetary Penalties Act (the CMP Law), 1 authorizing monetary sanctions if a hospital: knowingly makes a payment, directly or indirectly, to a physician as an inducement to reduce or limit services provided to individuals who are entitled to benefits under [the Medicare and Medicaid programs] and who are under the direct care of a physician. A penalty of $2,000 may be imposed upon a hospital for each Medicare or Medicaid patient for which such a payment is made, as well as upon any physician who knowingly accepts such a payment. In 1983, Congress established the Medicare Prospective Payment System (PPS) to replace cost-based reimbursement of Medicare Part A hospital services. 2 The change in Medicare reimbursement methodology provided hospitals with financial incentives to reduce the cost of providing inpatient care, but did not provide similar incentives for physicians. The CMP Law was enacted in response to risks that inpatient services would be underprovided, as hospitals developed their own programs to align physicians financial incentives with cost cutting measures. While the CMP Law has been in effect since 1986, several factors have led to heightened interest in hospital/physician cost reduction incentive arrangements over the last several years, including:

2 Declining reimbursement for health care services generally; Prevalence of reimbursement methodologies by all payor classes, placing hospitals at risk for the cost of inpatient care (including per diem rates, case rates, and capitation); Lack of definitive guidance as to acceptable hospital/ physician incentive plans; and Congress 1996 mandate 3 that the OIG issue advisory opinions concerning fraud and abuse laws. Gainsharing and Hospital/Physician Risk Pool Arrangements The Advisory Bulletin specifically focuses on cost-reduction gainsharing programs. Such gainsharing programs feature hospital payments to treating physicians for cost reductions in a specific inpatient medical service. Typically payments are calculated as a percentage share of cost reductions actually realized. Like the cardiovascular cost reduction/quality improvement program recently approved by the IRS, 4 gainsharing programs often condition payments to physicians on satisfaction of quality of care criteria and an independent fair market value assessment. In determining that gainsharing programs violate the CMP Law per se, the OIG described offending hospital physician payments broadly: The payment need not be tied to an actual diminution in care, so long as the hospital knows that the payment may influence the physician to reduce or limit services to his or her patients. There is no requirement that the prohibited payment be tied to a specific patient or to a reduction in medically necessary care. In short, any hospital incentive plan that encourages physicians through payments to reduce or limit clinical services directly or indirectly violates the statute. Although the Advisory Bulletin specifically identifies only gainsharing arrangements and specialty hospital joint ventures (discussed below), the OIG s pronouncement also may jeopardize hospital/physician risk pool arrangements covering Federal Health Care Program managed care enrollees where the risk pool arrangements are not sponsored by managed care plans. According to the OIG, Congress drew a bright line between physician incentive arrangements maintained by Medicare risk based managed care plans and hospital sponsorship of such arrangements. In discussing the breadth of the CMP Law, the OIG specifically cites the evolution of the legislation from an original ban on physician incentives by both hospitals and Medicare managed care plans to a hospital only prohibition. The Advisory Bulletin emphasizes that the CMP Law now is comprised of two provisions address[ing] the same issues, with a stark difference: managed care plans may maintain physician incentive plans but hospitals cannot. Congress has permitted only managed care sponsored incentive plans that do not induce the reduction of medically necessary care to individual patients and [do] not place physicians at substantial financial risk for services not provided by the physicians (emphasis added). OIG Confounded The OIG went to remarkable lengths in the Advisory Bulletin to acknowledge the potential benefits of gainsharing arrangements, stating obviously, a reduction in health care costs that does not adversely affect the quality of the health care provided to patients is in the best interest of the nation s health care system. The agency even granted that: hospitals have a legitimate interest in enlisting physicians in their efforts to eliminate unnecessary costs, including substituting lower cost but equally effective medical supplies, items or devices; re-engineering hospital surgical and medical procedures; reducing utilization of medically unnecessary ancillary services; and reducing unnecessary lengths of stay. At least with respect to federal health care programs, however, the only clearly permissible hospital cost cutting payments to physicians will do nothing to align provider incentives. 5 The Advisory Bulletin allows only personal services agreements where hospitals pay physicians a fixed, fair market value fee for services rendered. For example, a hospital may pay a medical director to develop and administer policies and procedures that will reduce the cost of providing clinical services. However, a hospital may not pay the physicians who implement those same policies and procedures, for producing lower hospital costs through their rendering of patient care. 6 The Advisory Bulletin concludes that other hospital/physician incentives pose a high risk of abuse, and require ongoing oversight both as to quality of care and fraud. The Advisory Bulletin defers to Congress for clear, uniform, enforceable and independently verifiable standards BULLETIN NO AUGUST 10, 1999

3 applicable to all affected providers. The OIG directs parties desiring to implement hospital/physician incentive plans to seek legislative relief from the CMP Law, concluding that the Department of Health and Human Services has no authority to promulgate regulations permitting such arrangements. In calling for legislative relief, the Advisory Bulletin signals a dramatic about-face from the CMP regulations proposed by the OIG in Then, the OIG refused to specify criteria for an acceptable hospital/physician incentive plan. The OIG originally concluded that hospital/physician incentive plans should be reviewed on a case by case basis. In the Advisory Bulletin, the OIG now concludes that case by case determinations... are an inadequate and inequitable substitute for comprehensive and uniform regulation in this area. Confounded Providers The OIG s disenchantment with advisory opinions will continue to frustrate health care provider organizations. Congress enacts complex and broadly applicable statutes designed to prevent abuse in Federal Health Care Programs, directing the OIG to implement the law through regulation and advisory opinions. The OIG, on the other hand, responds in this Advisory Bulletin that it has neither the resources nor the expertise to police [hospital/physician incentive plans,] and will not issue advisory opinions reviewing these arrangements. Specialty Hospital Joint Ventures Assailed The OIG also used the Advisory Bulletin to criticize specialty hospital joint ventures (e.g., cardiology, orthopedic and maternity hospitals). These ventures are structured to take advantage of the whole hospital exception under the Stark Law, 8 targeting physician investors who are in a position to refer. Although these joint ventures usually don t include any specific gainsharing or hospital/physician incentive plan, the agency concluded that specialty hospital joint ventures nevertheless may violate the CMP Law. The OIG provided no discussion or analysis concerning the circumstances in which such ventures might violate the law. Rather, the Advisory Bulletin implies that the mere fact of ownership (i.e., participation in profits) improperly incentivizes a physician investor to reduce or limit patient care provided at the joint ventured hospital. The OIG s comments concerning whole hospital joint ventures will be controversial, given that the 1989 Stark Law whole hospital exception providing for physician investment in entire hospitals was enacted after the CMP Law. Arguably, an equity interest in and of itself should not result in an inducement to reduce or limit patient services within the meaning of the CMP Law. If this were the intent of Congress, it stands to reason that the Stark Law whole hospital exception would not have been promulgated. Moreover, there does not appear to be any reason to limit concern over physician investment to specialty hospitals. An investor-physician in a general acute care hospital would have the same interest in reducing or limiting services in order to increase profits. The OIG s comments concerning CMP Law implications of specialty hospital joint ventures are consistent with the agency s general hostility towards physician participation in whole hospital ventures. The OIG has informed at least one major hospital operator that it views physician whole hospital joint ventures as violative of the Federal Anti-Kickback Statute, notwithstanding the Stark Law green light. Gainsharing Covering Services to Medicare/Medicaid Beneficiaries Gainsharing Excluding Medicare/Medicaid Beneficiaries Hospital Sponsored Risk Pools Covering Medicare/Medicaid Enrollees Specialty Hospital Physician Joint Ventures Non-Treating Physicians Personal Services Contracts/Flat Fee Banned Questionable Permitted BULLETIN NO AUGUST 10, 1999

4 Investor owned specialty hospital companies will have heightened securities disclosure burdens in addressing the Advisory Bulletin s criticism of physician joint ventures. In addition, the OIG s comments may be useful to competitors of specialty hospitals who seek to challenge physician joint ventures under unfair competition theories. How Did We Get Here? Proposed CMP Regulations The recent proliferation of hospital/physician incentive plans running up to the Advisory Bulletin can be traced back to the OIG s commentary to the 1994 proposed CMP Law regulations. Rather than clarifying departmental policy with respect to the OIG s CMP assessment authorities, as intended, 9 the proposed regulations actually muddied the waters. The preamble suggested that it may be possible to structure acceptable hospital/physician incentive programs under the 1986 CMP Law. The OIG stated that the precise structure and application of a physician incentive plan would ultimately determine whether CMPs would be assessed against a hospital or physician. The proposed regulations closely tracked the language and scope of the underlying statutory provision, and the OIG expressly declined to promulgate regulations specifying criteria for an acceptable hospital/physician incentive plan. GAO Report The OIG, however, prominently cited recommendations contained in a 1986 report by the General Accounting Office (GAO) 10 appearing to provide at least general guidance as to acceptable hospital/physician incentive plans. The GAO reviewed a number of incentive plans adopted in response to PPS. The cited GAO report highlighted several general characteristics or aspects of physician incentive plans that, individually or collectively, have tended to give physicians an incentive to reduce quality of care to program beneficiaries. The GAO, however, did not advocate an outright ban on all hospital/physician incentive programs. Instead, the report recommended that hospital/physician incentive programs include the following characteristics:...the OIG s pronouncement also may jeopardize certain hospital/ physician risk pool arrangements covering Federal Health Care Program managed care enrollees... a) Plan payments should be based on the cost performance of a group of physicians rather than by individual physicians; b) Plan payments should be based over a relatively long period of time (e.g., over a one year period, as opposed to a single month or quarter); c) Incentive payments should not be based on the hospital s profits resulting from treating any individual patient (emphasis added); and d) Any physician payment system of this type by a hospital should include a strong program of utilization and quality of care review. 11 Even in describing incentive plans that the 1994 proposed regulations found to be problematic, the OIG appeared to leave the door open to hospital/physician incentive plans that might be acceptable. For example, the OIG indicated that incentive payments made to physicians that are tied to overall costs of patient treatment or on a patient s length of stay without regard to how specific reductions are made could be viewed as an inducement to reduce patient services and could thus subject the hospital and physicians to CMPs. Specific examples of clearly permissible incentive arrangements in the proposed regulations, however, were extremely narrow. The OIG approved, for example, programs designed to reward the timely review of medical records. Ultimately, the OIG stated in 1994 that it would determine whether a hospital/physician incentive plan violated the CMP Law on a case-by-case basis considering specific intent of the parties, and acceptability. Medicare Managed Care Exemptions from the CMP Law Prior to 1990, managed care plans (HMOs) were subject to the same CMP Law provisions as hospitals, imposing sanctions against certain physician incentive payments. The Omnibus Budget Reconciliation Act of 1990 (OBRA 90), however, repealed these limitations as to HMOs and en- BULLETIN NO AUGUST 10, 1999

5 acted requirements regulating HMO physician incentive plans (HMO Incentive Plans). 12 Under the provisions of OBRA 90, HMOs are required to: a) Refrain from operating a plan that directly or indirectly makes specific payments to a physician or physician group as an inducement to limit or reduce medically necessary services to a specific individual enrolled with the organization (emphasis added); 13 b) Disclose to HCFA their physician incentive plan arrangements; and c) In instances where a physician incentive plan places a physician or physician group at substantial risk (as defined by regulation) for services provided by the physicians under contract, provide contracting physicians with adequate and appropriate stop-loss protection (under standards prescribed by regulation) and conduct enrollee surveys of both current and former enrollees to assess the degree of access to and satisfaction with quality of care. Final regulations applicable to HMO Incentive Plans were published in 1996, specifying disclosure requirements, criteria for determining substantial financial risk, specific requirements for such substantial financial risk incentive plans, prohibitions on certain physician payments and penalties for noncompliance. 14 With respect to the specific prohibited physician payments, the preamble to the final HMO Incentive Plan regulations makes clear that the statute does not prohibit payments under an HMO Incentive Plan that have an indirect effect of reducing medically necessary services. Accordingly, bonuses and payments based upon aggregate patient utilization levels are permitted. Next Steps Participants in any hospital/physician incentive program should consult with legal counsel immediately to determine which arrangements must be terminated. Legal review should include the following arrangements: hospital/physician gainsharing programs, hospital compensation arrangements with treating physicians, and hospital/physician joint ventures. Providers engaged in physician/hospital specialty joint ventures who have not sought advisory opinions should reconsider their regulatory posture. The OIG clearly identifies these ventures as enforcement targets. The wait-and-see approach taken by most specialty hospital joint ventures with respect to fraud and abuse law enforcement is becoming increasingly untenable. Venture participants should consider actions that will reduce the regulatory uncertainties presented by their business plan. Providers and payors should redouble efforts to lobby for more realism in regulation of provider to provider financial relationships. As Congress continues efforts to reduce costs in Federal Health Care Programs through direct reimbursement limitations, payment methodologies that place providers at risk and the expansion of managed care, regulatory reform should remove unnessary restrictions on bona fide efforts to achieve efficiency in health care delivery. The American Hospital Association is currently pursuing legislation that would address the OIG s plaintive call for Congressional action on hospital/physician incentive plans. Because of the heightened public concern over physician financial incentives to reduce care, strong grass roots support from the provider and payor communities will be necessary to enact remedial legislation. Legislation should recognize the continued blurring of lines between payors and providers and move towards allowing the type of incentive arrangements that can be maintained by Medicare managed care plans. The HMO Incentive Plan regulations provide the starting point. As the OIG indicates, the critical inquiry is whether the arrangements have adequate and accurate measures of quality of care that would provide assurance that there is no adverse impact on patient-care. We would be pleased to assist your organization s efforts to address hospital/physician incentive programs in light of the Advisory Bulletin. hospital sponsored risk pools, BULLETIN NO AUGUST 10, 1999

6 Endnotes 1 Section 1128A(b)(1) of the Social Security Act (42 U.S.C. 1320a-7a(b)). 2 Public Law Social Security Amendments of The Fraud and Abuse Control Program, established by the Health Insurance Portability and Accountability Act of Unpublished IRS Gainsharing Private Letter Ruling available at 5 Raising Productivity and Real Wages Through Gainsharing; Hattiangadi/Employment Policy Foundation, March There is some ambiguity created by the Advisory Bulletin s approval of fixed fee personal services agreements. The Advisory Bulletin does not expand upon the types of personal services agreements that are permissible. In reading the 1994 proposed CMP Law regulations in light of the Advisory Bulletin, however, it is clear that the method of payment will not be dispositive. The OIG is interpreting the CMP Law as prohibiting any payment arrangement between a hospital and physicians that is intended to induce a reduction or limitation in services. This would include fixed fee payments to treating physicians to achieve budgeted costs savings in a hospital department, however measured Fed. Reg (proposed Dec. 1, 1994) U.S.C. 1395nn(d)(3) Fed Reg /1/ Medicare: Physician Incentive Payments by Hospitals Could Lead to Abuse (GAO/HRD , July 22, 1986). 11 Id. 12 Repeal of the broadly worded prohibition with respect to HMOs was necessary to avoid jeopardizing capitation and risk pool arrangements that are critical components in HMO provider reimbursement methodologies. 13 Note that the prohibition applicable to HMOs is much narrower than the broadly stated CMP Law prohibition applicable to hospital/physician incentive plans. The HMO regulation focuses on payments designed to reduce medically necessary services, while the CMP Law proscribes hospital payments intended to reduce any services to Medicare or Medicaid beneficiaries CFR Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed to the right or the attorney whom you normally consult. Copyright 1999 by Latham & Watkins C HICAGO n L OS ANGELES n N EW JERSE ERSEY N EW YORK n O RANGE COUNTY n S AN DIEGO S AN FRANCISCO n S ILICON VALLEY WASHINGTON ASHINGTON,, D.C. n H ONG KONG n L ONDON M OSCOW n SINGAPORE n T OKYO If you have any questions about this Client Alert, please contact any of the attorneys listed at the right: CHICAGO James A. Cherney (312) LOS ANGELES Daniel K. Settelmayer Bruce J. Shih L. Susan McGinnis (213) NEW JERSEY/ NEW YORK Herve Gouraige (973) (212) ORANGE COUNTY Alan W. Pettis (714) SAN DIEGO Barbara L. Cammarata (619) SAN FRANCISCO/ SILICON VALLEY Paul R. DeMuro Jerry Peters (415) WASHINGTON, D.C. Stuart S. Kurlander W. Andrew H. Gantt, III (202) BULLETIN NO AUGUST 10, 1999