One More Setback For Gainsharing
Richard S. Saver
rsaver@central.uh.edu
August 27, 2004
A federal district court recently shut down a Medicare demonstration project in
New Jersey designed to experiment with gainsharing. The permanent injunction granted
in Robert Wood Johnson University Hospital v. Thompson1 represents the latest in a
series of legal problems confronting hospitals’ attempts to use gainsharing as a tool for
cost control and operational improvement.
What Is Gainsharing?
“Gainsharing”, a term of art borrowed from the business sector, refers to reward
and participation systems in which workers share financially in productivity
improvements achieved by their employer as a result of the workers’ contributions. The
practice originated in industrial manufacturing and gainsharing is now a common
business strategy in many sectors of the economy. Many Fortune 1000 firms, including
such venerable companies as General Electric, regularly use gainsharing programs with
their workforce.2
A hospital gainsharing program typically works as follows. Hospital management
identifies certain cost areas, such as operating room costs for cardiac surgery, in which
the institution hopes to improve productivity. The hospital then collaborates with
medical staff physicians in the affected cost areas, enlisting their help in developing new
reforms to improve the hospital’s productivity performance in the targeted service lines.
1
Civil Action No, 04-142, United States District Court, District of New Jersey (April 25, 2004), available
at 2004 U.S. Dist. LEXIS 8498.
2
See Dong-One Kim, Determinants of the Survival of Gainsharing Programs, 53 INDUS. & LAB. REL.
REV. 21 (1999).
The staff physicians are encouraged not only to propose new policies, such as scheduling
operating room times more efficiently or standardizing surgical equipment orders, but to
work with hospital management in implementing and monitoring the new reforms. If the
hospital experiences a reduction in costs for the designated areas, the physicians receive a
bonus, often based on some percentage of the cost-savings realized by the hospital. Thus,
physicians “share” in the “gain” experienced by the medical center. Many gainsharing
programs also condition payment of the bonus on the hospital satisfying other
independent quality measures in addition to improving productivity.
Legal Barriers
A civil monetary provision (CMP) of the federal Medicare/Medicaid statute poses
numerous problems for gainsharing programs. Under the CMP provision, fines of up to
$2000 may be imposed for each affected patient if a hospital knowingly makes a payment
to a physician as an inducement to limit services provided to a Medicare/Medicaid
patient.3 Physicians who knowingly receive such payments can also be penalized in the
same amount.4 Congress enacted the CMP in the mid-1980s when Medicare moved to
the prospective payment system, out of concern that hospitals paid on a prospective
payment basis would try to cut costs by paying their staff physicians to stint on patient
care.
To the extent a gainsharing bonus could be viewed as an inducement to a
physician to improve hospital productivity by reducing services to a Medicare or
Medicaid patient, it would run afoul of the CMP provision. Gainsharing programs also
raise potential problems under the federal healthcare Antikickback Statute and the federal
3
4
42 U.S.C. § 1320a-7a(b)
Id.
2
physician self-referral law (the so-called “Stark” law) because they involve payments
between hospitals and referring physicians.
However, it is the CMP provision that has posed the most direct problems for
gainsharing to date. Indeed, in a 1999 Special Advisory Bulletin, the Office of Inspector
General (OIG) of the Department of Health and Human Services (HHS) declared that
most hospital gainsharing programs were illegal per se because of the CMP provision.5
As a result of the 1999 Bulletin, many hospital gainsharing projects were abandoned.
The regulatory position on gainsharing seemingly changed two years later. In
January 2001, the OIG issued an advisory opinion giving limited blessing to a
gainsharing program developed by St. Joseph’s Hospital in Atlanta.6 The hospital had
contracted with cardiac surgeons to try to reduce operating room costs and promised the
physicians 50% of any cost-savings that accrued from their efforts. The OIG approved
the program, although it technically ran afoul of the CMP provision, because there was
solid support in the medical literature for some of the proposed productivity reforms,
such as reducing the dosage given to patients of an expensive anti-hemorrhage drug.7
Also, the OIG determined that there were appropriate safeguards in place to ensure
quality of care at the hospital. The 2001 Advisory Opinion seemingly opened the door to
gainsharing again, albeit on a much more limited scale.
The New Jersey Demonstration and the Resulting Lawsuit
More recently, eight New Jersey hospitals tried to launch a limited gainsharing
initiative. The Centers for Medicaid and Medicaid Services (CMS) approved a three-year
5
See Special Advisory Bulletin on Gainsharing Arrangements and CMPs for Hospital Payments to
Physicians to Reduce or Limit Services to Beneficiaries, 64 Fed. Reg. 37985 (July 14, 1999).
6
See OIG Advisory Op. No. 01-1 (2001).
7
Id.
3
pilot gainsharing program developed by the New Jersey Hospital Association, with the
initial launch starting in early 2004. Under the demonstration, physicians stood to earn
bonuses of up to 25% more in Medicare fees if hospital operating efficiencies improved
over the measurement period.8
However, the gainsharing demonstration was barely underway before legal
problems arose. Four area hospitals left out of the demonstration sued to stop its
development, alleging that they would be put at an competitive disadvantage because
physicians would likely increase referrals of patients to the demonstration hospitals,
eroding the patient base of the plaintiff-hospitals. The plaintiffs alleged that the
demonstration lacked proper legal authority and that it violated, among other laws, the
Antikickback Statute and the CMP provision.
The Court’s Ruling and Injunction
Ironically, the plaintiff-hospitals did not want to end the demonstration altogether.
Their goal was simply to expand it to other hospitals and physicians in the area so that all
would be on a level playing field.9 However, the federal district judge went much
further, placing a permanent injunction on the New Jersey experiment.
The court found that the demonstration project violated the CMP provision on its
face, as the physicians stood to earn a financial bonus for reducing costs (and therefore
services in the court’s view) to Medicare patients. The court also stated that the
participating hospitals were well aware of the problems posed by the CMP provision,
especially in light of the 1999 OIG Bulletin. In contrast to St. Joseph’s Hospital in
Atlanta, which sought and obtained the favorable 2001 OIG Advisory Opinion for its
8
9
See Cinda Becker, Pilot Crashes, MODERN HEALTHCARE, April 19, 2004, at 6-7.
Id.
4
gainsharing program, the New Jersey hospitals did not go this route. This was a fatal
problem, according to the court, because the Secretary of HHS is powerless to waive the
CMP under the Secretary’s general demonstration authority.
Although the ruling applies only to the New Jersey pilot program, the opinion
does not bode well for other hospitals and physicians interested in gainsharing. The court
seemed unwilling to defer to CMS’ agency judgment that the demonstration had
appropriate safeguards and that Medicare patients could benefit from the initiative
through lower costs and/or improved quality of care because of greater hospital-physician
collaboration through gainsharing activities. The court seemed to suggest that such
arguments were irrelevant in light of the clear prohibitions contained within the CMP on
hospitals paying physicians to reduce services. In short, the court concluded that the
CMP left little wiggle room, as it “takes aim at curtailing the diminution of patient care
and services for the sake of increased profits or reduced losses – the very goal and/or the
inevitable result of the Demonstration Project.”10
The full impact of Robert Wood Johnson University Hospital v. Thompson
remains to be seen. However, the case suggests that hospitals trying to gainshare without
advance approval from the OIG will run into serious problems if challenged Moreover,
it must be remembered that obtaining such approval from the OIG is no easy task. The
OIG Advisory Opinion process is a time-consuming, costly, and haphazard process for
many hospitals to follow. Further, the very cautious approach followed by the OIG in its
2001 Advisory Opinion indicates that the OIG remains suspicious of many gainsharing
plans and that the OIG is not disposed to grant many, if any, other favorable approvals.
10
Robert Wood Johnson University Hospital v. Thompson, Civil Action No, 04-142, United States District
Court, District of New Jersey (April 25, 2004), available at 2004 U.S. Dist. LEXIS 8498.
5
Thus, unless there are regulatory or statutory changes to address the CMP provision
directly, the viability of hospital gainsharing programs remains much in doubt.
6