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A Better Partnership


May 2006
May 01, 2006

Gainsharing: Cutting Hospital Costs Benefits Everyone

Hospitals are always looking at ways to cut unnecessary costs. One way of achieving significant cost saving that has recently begun drawing attention is "gainsharing."

What is gainsharing? Gainsharing is a generic term for an arrangement under which a hospital offers cash incentives to physicians to help the hospital save money. Usually, the hospital and physicians agree on an incentive program under which the hospital will measure the amount it saves because of the physicians' actions, and will share some of the money saved with the physicians.

The result is a win-win success for both the hospital and the participating physicians. Because hospital costs are ultimately passed on to health insurers and employers, these outside parties also win from well-executed gainsharing arrangements.

Here is an example of how such an arrangement might work. The example relates to a hospital's use of cardiac stents. Medicare does not reimburse separately for stents; instead, the cost of stents gets bundled into the hospital's overall Medicare flat-fee per-patient reimbursement for procedures that use stents. Thus, a hospital has every incentive to be cost-conscious about stents. Medicare does not give physicians that same incentive.

Suppose, though, that the surgeons in a hospital jointly agree that they will all use one common type of stent for appropriate cardiac procedures, rather than each physician's insisting that the hospital keep a stock of varying but clinically equivalent stents.

Just by itself, that joint decision can lead to significant savings for the hospital. For example, the stent's vendor might offer a significant discount because of the hospital's volume purchase. When that stent inventory decision is coupled with other cost-saving measures that doctors can control (such as careful use by physicians of the hospital's expensive consumable supplies, for example), the bottom-line savings for the hospital can be large.

Understandably, then, the hospital would like to offer physicians an incentive to achieve such savings.

Until recently, though, the federal government has forbidden hospitals to share such cost savings with the physicians who help bring them about. Such arrangements were thought to violate the federal antikickback statute, which prohibits payments by a hospital to physicians that would encourage referrals of Medicare patients.

The good news here is that in recent months, Medicare's Office of Inspector General (which enforces the antikickback statute) has reversed its opposition to gainsharing. Under appropriate circumstances, the OIG appears ready to approve gainsharing arrangements.

There are several safeguards that a gainsharing program will need to have in order to get OIG approval. Chief among them are the following:

  • The physicians' cost-saving actions and the resulting hospital savings must be clear and objectively measurable.

  • Cost-saving actions must not compromise patient care. Objective historic clinical benchmarks must be used to protect against inappropriate reductions in patient care.

  • The existence of the gainsharing program must be disclosed in writing to patients.

  • Financial incentives for physicians must be reasonable in amount.

  • The gainsharing program must be of limited duration, generally to one year (though replacement gainsharing programs may be instituted in later years).

Before implementing a gainsharing program, both the hospital and the physicians will need to get advance OIG approval. However, a community's insurers and employers may want to encourage a hospital and its physicians to establish a lawful gainsharing arrangement, to save considerable costs for the community.

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Richard L. Bouma is a partner with Warner Norcross & Judd LLP and has represented health care providers for twenty years on health law issues. He regularly advises clients concerning billing compliance, Medicare and Medicaid reimbursement, HIPAA privacy regulation, as well as transactional and contract issues. Rich is the former Chair of the Firm's Health Law Practice Group and a member of the Firm's HIPAA Task Force. Rich may be reached in the Grand Rapids office at 616.752.2159. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Metro Detroit, Holland and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.

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