Cost Efficiency Must Survive, Even if the Gainsharing Does Not, as appeared in Keynotes on Heath Care

As appeared in Keynotes on Heath Care, a publication of the Association of American Medical Colleges, October 1999.

Douglas A. Hastings

When U.S. auto-makers confronted a severe challenge from their Japanese competitors in producing lower-cost automobiles, they couldn't succeed in meeting the challenge until they'd begun to produce cars that were perceived by American consumers as both cost-efficient and of good quality. The current "gainsharing" conundrum in health care evokes the same sort of challenge. The government's recent pronouncement on gainsharing is causing people to ask whether efforts to eliminate waste and duplication should now be stopped in the name of patient protection.

While many important quality initiatives are underway — and federal and state legislatures are working to promote quality and "managed care reform" — few, if any, legislators, regulators, or commentators are arguing publicly in favor of less cost efficiency. The presumption in regard to policy is that cost efficiency in health care delivery must be continued, and enhanced, even as quality initiatives proceed. Many would argue that in fact "cost" and "quality" are in conflict, but are complementary. True cost efficiency should result in higher quality care.

The challenge presented by the gainsharing debate, then, is to figure out how to enforce the Civil Money Penalty (CMP) statute, without outlawing cost efficiency-i.e., how to steer clear of "throwing out the bath water," Presumably, the solution lies in effective clinical innovation and integration, involving the cooperative efforts of physicians and hospitals, which, it can be demonstrated, do not result in inappropriate reduction of services to patients. Academic medical centers are positioned to be leaders in clinical innovation and integration, and the ability to exercise that leadership needs to be protected.

The starting point for a rational assessment of the HHS Office of Inspector General's (OIG's) Special Advisory Bulletin is not to overreact. Parties involved in joint venture and managed-care risk arrangement are best advised to continue to analyze such arrangements under the panoply of applicable laws and regulations, including the CMP statute, and not radically alter their analysis solely in response to the Special Advisory Bulletin.

With regard to medical-director agreements, departmental management agreements, and other personal services-type arrangements, parties should review these arrangements to assess the degree to which (if any) compensation is based on percentage-of -cost-savings methodologies. Even in those areas, however, the Special Advisory Bulletin is little more than one solo voice in a jungle of voices that assessment of the legal risk entailed in such arrangements.

Implications for Medical Schools and Teaching Hospitals

For academic medical centers, there are some very important implications. The various component parts of academic medical centers — teaching hospitals, medical schools, and faculty practice plans — allocate and transfer funds among themselves for various teaching and clinical purposes. The extent to which the Special Advisory Bulletin affects such allocations and transfers much now be reviewed, as well as the potential chilling effect it might have on future clinical innovations. The good news is that the Special Advisory Bulletin does not comment on such transfers, and would only implicate specific arrangements involving improper "incentives" to reduce care. As a general matter, such transfers do not create per se legal concerns under the various applicable regulatory schemes, including the anti-kickback law, the Stark law, the exempt organizations tax laws, and the CMP statue. Rather, it is the end use of the money that the regulators are concerned about.

The Special Advisory Bulletin clearly states, however, the OIG's position that pure percentage-of-cost-savings gainsharing programs in fee-for-service medicine are outlawed by the CMP statue. In essence, what the OIG has done is interpret the CMP Statute as equating cost savings with reduction in patient care. In other words, the OIG thinks that any cost-saving initiative that involves hospital payments to physicians automatically creates incentives to reduce care and is thus illegal — even if there is no actual reduction in medically necessary care. The implication is that the OIG sees "cost" and "quality" as being inevitably in conflict. Whether a legislative solution to this conundrum is possible, as the OIG has suggested, remains to be seen.

Enforcement of OIG Policy

This raises an obvious issue regarding consistency in health care enforcement policy. The IRS has approved a "gainsharing" proposal, relying largely on expected improvements in "cost-effective utilization of hospital resources" and "the delivery of efficient patient care." The antitrust enforcement agencies, in their 1996 Statement of Antitrust Enforcement Policy in Health Care, allow physicians and hospitals to integrate clinically, to diminish any antitrust problems in their network activities. Specifically, the agencies state that evidence of such integration may include programs "establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care."

Are we now to understand that while the FTC and DOJ encourage such behavior, and the IRS approves it, the OIG may find it illegal? Perhaps the solution to this illogical consequence resides in a simple, more direct reading of the CMP Statute, coupled with a better definition of "gainsharing" — or, even better, abandoning that notion in exchange for a better understanding and acceptance of the importance of cost efficiency.

Gainsharing has come to connote, for the OIG, the potential for the improper sharing of "gain" resulting from inappropriate incentives. The OIG's expressed concern about gainsharing is its potential to function as an incentive for reduction or limitation of services to patients, even in the context of arrangements that the agency otherwise openly acknowledges could be deemed to be of high quality and beneficial to patients. The definition of gainsharing by the OIG in its Special Advisory Bulletin is "an arrangement in which a hospital gives physicians a percentage share of any reduction in the hospital's costs for patient care attributable in part to the physician's efforts."

A first step would be for health care providers to define "cost efficiency" efforts as clinically innovative initiatives that involve hospitals and physicians working cooperatively to enhance quality while efficiently managing costs. A better case could then be made that "cost efficiency" programs do not run afoul of the CMP statute, even as the OIG has interpreted that statute in its Special Advisory Bulletin.

In other words, let's not try to legalize "gainsharing." Instead, let's try to protect the legality of enhancing quality, while efficiently managing costs, through all available and appropriate means. Indeed, as the OIG states in the Special Advisory Bulletin: "Obviously, a reduction in health care costs that does not adversely affect the quality of health care provided to patients is in the best interests of the nation's health care system."

At a time when virtually all health care providers are struggling financially — or at least facing more difficult financial challenges then ever — it does not behoove society to impose obstacles to clinical innovations that can lead to greater cost efficiency and higher quality in care. Every signal from every purchaser of health care, including the biggest single purchaser — the federal government — says that this is so. Most regulatory agencies are in accord as well.

Historically, duplicative and unnecessary care has been rightly denounced as "waste." This concern about waste was one of the factors that originally prompted passage of the Stark law and the anti-kickback law. No one should oppose eliminating "waste," just as no one should oppose eliminating "fraud." It is understandable that the OIG felt that it could not, in one specific ruling or opinion, "bless" all gainsharing programs.

So, let us hope that there will soon be some intelligent resolution to the mixed messages that the several agencies or the government are currently sending in regard to cost-savings, which will thereby relegate the conundrums surrounding "gainsharing" to history.

Please feel free to contact Douglas Hastings at 202/861-0900 in the firm's Washington office if you have any questions or comments. Mr. Hastings' e-mail address is [email protected].

This publication is provided by Epstein Becker & Green, P.C. for general information purposes; it is not and should not be used as a substitute for legal advice.