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Public Contract Law Journal

Public Contract Law Journal Vol. 49, No. 1

Grasping Gainsharing: A Business Approach to American Health Care

Nicolette Taylor Elizabeth Cregan


  • Discusses the use of gainsharing contracts in the reimbursement of hospitals for medical expenses.
  • Analyzes contracts that provide for hospital reimbursement.
  • Examines legal and regulatory challenges associated with federal reimbursements to hospitals for patient care.
Grasping Gainsharing: A Business Approach to American Health Care

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Even as someone who knows health care quite well, I felt like an uneducated fool in this instance. What I found out as soon as my mother — Timothy Hoff
We’re pretending [health care] is not really a business, but it’s acting like a business . . . [and] [h]ealthcare businesses are getting — Jonathan Bush

I. Introduction

When people hear the term “hospital,” they often envision doctors and nurses caring for their patients, they see waiting rooms and hospital beds, and they imagine emergency rooms and operating tables. They may even hear the beeping of a heart monitor or feel the prick of a needle from a shot. When people hear the term “business,” they envision an entirely different setting. They likely picture men and women in suits or see conference rooms and offices with desks and laptops. They can probably hear the clicking of high heels or typing on a computer. When people hear the term “business,” they do not envision a hospital. Yet, the U.S. healthcare system has taken on a business identity.

This “business approach” adopted by U.S. hospitals adapts to the evergrowing financial challenges the U.S. health care system faces. The system wastes approximately $750 billion dollars a year, with the largest deficit stemming from unnecessary services, inefficient care, and excess administrative costs. Each year, per capita spending within the U.S. health care system continues to grow faster than the rest of the economy. This creates a strain on private and public health care budgets.To combat wasteful services and unnecessary procedures, many hospitals have adopted a business approach by implementing shared savings programs to improve productivity and quality and to reduce costs.Gainsharing models have emerged as a key business approach to address the ongoing health care financial challenges. Gainsharing is “an incentive plan in which employees or customers receive benefits directly as a result of cost-saving measures that they initiate or participate in.” Hospital gainsharing is rooted in the belief that “physicians are uniquely qualified to improve [both] quality and efficiency,” and it is designed to target many different areas of “small inefficiencies” in the field, thereby resulting in “substantial savings.”Gainsharing is a business strategy that encompasses group dynamics and the “fundamental human need for fairness.” But does a business strategy belong in a hospital when the hospital’s primary focus should be providing the best patient care?

This article engages with that question. Following this introduction in Part I, Part II of this article discusses what hospital gainsharing means, where it originated, and how it operates in a hospital setting. It recognizes that gainsharing programs are a newly implemented model and discusses the fact that it was not until 1988, and again in 1996, that the Health Care Financing Administration (HCFA), now known as the Centers for Medicare and Medicaid Services (CMS), started pilot programs “solicit[ing] bids from hospitals and their physicians to participate” in a type of gainsharing program.Next, Part II summarizes the law and agency opinions controlling hospital gainsharing and then discusses the obstacles gainsharing has overcome and the difficulties that remain today. It also explains the lack of protection and disorganization that make it so difficult to give gainsharing programs any structure, which ultimately restrains these programs from having a prevalent and positive impact on savings within our health care system.

Part III explores the path of today’s gainsharing programs and the positive results of models and programs that have been tested thus far. It details the progression of the New Jersey pilot program, Bundled Payments for Care Improvement program, and the Comprehensive Care for Joint Replacement model. Then, Part IV concentrates on the limitations of gainsharing and the negative effects this business model has had on hospitals, patients, and physicians. The specific concerns about gainsharing vary from role to role, but ultimately the consensus is that each participant must feel confident in the program for it to be successful. Part V proposes new legislation specifying mandatory safeguards that each and every gainsharing program must follow. It critiques and amends safeguards commonly approved by the U.S. Department of Health and Human Services (HHS), Office of Inspector General (OIG) in advisory opinions, recommends additional safeguards, and highlights the problems that will still need to be resolved and monitored even with mandatory safeguards in place.

Many models of gainsharing have been introduced in to the U.S. health care system. Despite its growing popularity, gainsharing is controversial because of the risk that hospitals and physicians will put the value of money before their patients’ needs and the quality of care. With gainsharing’s rapid growth, mandatory safeguards must be in place to (1) protect the patients, hospitals, and physicians; and (2) create a structure that can be measured and can set a basis to improve upon in order to achieve optimal results.

II. What is Gainsharing?

Gainsharing is “a group, operation, or facility-wide reward system that can improve productivity, efficiency, and innovation by developing and better using human capital.”Gainsharing reduces expenses in order to improve financial performance. “The basic concept of gainsharing [in a hospital setting] is that hospitals and physicians work together to save money.” Physicians take steps to save hospitals money; then the hospitals, due to the physicians’ efforts and results, “share the savings with [the] physicians.”

A. Gainsharing’s Path to Hospitals

Gainsharing was not originally used in hospitals; instead, it originated in the manufacturing sector. Its long history can be traced back to the 1930s, when Joseph Scanlon designed the Scanlon Plan.The Scanlon Plan was an agreement among several failing steel factories that their employees would practice shared cost savings, and the factories would in turn share a portion of the cost savings with the employees.In early manufacturing programs, manufacturing businesses used incentive systems, which were individualized and not based on the business savings as a whole.Several problems arose through these incentive systems, including high administrative costs, competition between workers, and wage inequality. These incentive systems thus became a major source of grievance for employees. To combat these problems, manufacturers began to implement plant-wide gainsharing that paid plant-wide bonuses for performance improvements.Under this model, all of the manufacturing employees took measures to save the entire plant money and thus increased productivity; the plant then shared its gains as bonuses for all employees.“[T]he increased use of automation and other advances in manufacturing technology” helped end the trend of individual incentives and began a trend to motivate employees with plant-wide goals.Gainsharing has now made its way into multiple types of industries, including “manufacturing, retail, nonprofit, government, distribution, telecommunication, financial services, [and] hospitality.”Given gainsharing’s success in other industries, it was only a matter of time before it made the transition into hospitals.

B. Gainsharing in Hospitals

The U.S. Department of Health and Human Services, Office of Inspector General (OIG) “defines [hospital] gainsharing as an arrangement by which hospitals and other health care organizations promote standardization and more efficient use of expensive supplies in order to cut costs.”“[A] percentage of the resulting cost savings is then distributed among the physicians who helped generate those savings.” Hospital gainsharing differs slightly from gainsharing in a manufacturing setting but maintains the same business idea. Hospitals often do not implement gainsharing on a hospital-wide basis, but instead tailor it to physicians in a particular specialty, such as orthopedics or cardiology.There is no uniform, standard definition or example of gainsharing.Rather, there are a wide range of programs that cater to the needs of each hospital. When a hospital decides to implement gainsharing, its goal usually is to reduce hospital costs while still “meeting quality of care standards.” These programs offer incentives and reward physicians for their effort in helping the hospital reduce costs. Gainsharing can incentivize the appropriate use of imaging and testing services, the prescribing of therapies that are both effective and the least costly, the use of outpatient services rather than inpatient services, and the provision of disease management services that can be safely maintained in an “ambulatory setting or at home.”Gainsharing may also involve the consideration of purchasing programs, in which hospitals reduce the costs of devices, implants, drugs, and supplies. Improving physicians’ efficiency, reducing patients’ hospital length of stay, and “controlling resource utilization” can all reduce hospital costs.

Gainsharing may stem from bundle payments.Traditional fee-for-service insurance, such as Medicare and Medicaid, often reimburses the hospital, physician, or anesthesiologist for a surgery or treatment they provide.Under a bundle payment model, the payer has a pre-arranged price (based on historical costs) for the “episode” of health care. “Providers who exceed the pre-arranged reimbursement for the episode bear [that] financial responsibility,” but if the provider falls below the given threshold, that extra money remains with the hospital. “This is intended to encourage standardized, cost-effective care decisions.”Bundled payment systems incentivize doctors to participate in cost savings.

Hospitals generally use one of three models to reimburse physicians through gainsharing: (1) physicians are paid “a percentage of the dollar savings” achieved by the hospital; (2) hospitals reimburse a physician’s time by an “hourly or flat rate payment”; or (3) some gainsharing programs allow for employees to receive bonuses. Direct monetary incentives are not the only form of rewards that physicians can receive through gainsharing. Some programs provide incentives “in the form of increased hospital space, financial support for specific programs” that benefit the physician, or “hospital payments to cover physician start-up costs.”

C. Mechanics of Gainsharing

For physicians to reap the benefits of gainsharing, they must meet a number of requirements. Most often, physicians’ costs must fall below a specific priced threshold.Often, if the participant’s costs fall below the threshold, the physicians receive a bonus because they ultimately helped the hospital save money.But, the participants also assume risk for expenditures above the established threshold, in which case the bonus could be withheld. When a hospital exceeds the target price of an episode of care, it is “financially responsible for the difference between” the threshold and the actual spending.Thus, in gainsharing, physicians share the rewards, and they also share the losses.

Given the breadth of opportunity to formulate a gainsharing program, the requirements the physicians must meet can vary widely and can depend on terms negotiated by the hospital with providers like Medicare. For instance, in determining savings to be shared with orthopedic surgeons, hospitals can look beyond savings on orthopedic devices and include broader savings associated with the entire episode of care. This could include inpatient hospital services received during the length of stay and whether or not the patient must be readmitted.

Quality is another requirement that the hospital and physicians must meet. Under some programs, physicians are required to report statistics on three quality measurements: (1) hospital inpatient quality; (2) “inpatient mortality rates”; and (3) seven-day and thirty-day readmissions.

Gainsharing programs are complicated and often vary among hospitals because there is no formal definition for the term “gainsharing.” Because a gainsharing system can take on so many different characteristics, it is incredibly difficult both to set rules and standards for a system and to monitor it. Currently, no mandatory laws regulate hospital gainsharing specifically.Gainsharing has a plethora of positive possibilities, but its monitoring challenges raise concerns that the incentives inherent in the system could lead to “less-than-adequate or [less-than]-appropriate evidence-based care, inducement by hospitals for increased physician referrals, and physician self-referral.” These benefits and concerns are addressed throughout the remainder of this article.

D. The Current Laws and Regulations That Govern Gainsharing Programs

Gainsharing must be carefully implemented to avoid violating federal laws that are currently in place to protect against health care abuse. The major laws controlling gainsharing are the Civil Monetary Penalties Law (CMPL), the Anti-Kickback Statute,and the Physician Self-Referral Law (Stark Law).However, the OIG has issued advisory opinions that have blurred the lines regarding what these laws prohibit and require. This section of the article addresses those laws and the simultaneous obstacles and guidance that they create for hospitals implementing a gainsharing program.

First, the CMPL prohibits a hospital from “knowingly mak[ing] a payment, directly or indirectly, to a physician as an inducement to reduce or limit services” to a Medicare or Medicaid beneficiary. Because gainsharing programs often involve both Medicare and Medicaid, gainsharing could potentially be categorized as inducement to “reduce” a medical service within the meaning of the statute.On April 16, 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) was signed into law. Under this law, the CMPL is only triggered if there is a reduction or limitation in “medically necessary” services to Medicare or Medicaid beneficiaries — but “medically necessary” is not defined in the statute.Because “medically necessary” is not defined, hospitals have found it necessary to adopt safeguards or “safe harbors” in order to not violate the CMPL.

Second, the Anti-Kickback Statute makes it a criminal offense to “knowingly and willfully” offer, pay, solicit, or receive any remuneration to induce referrals of items or services “for which payment may be made . . . under a [f]ederal health care program.” This raises the question of whether any gainsharing income paid to physicians amounts to a kickback under the statute. Violations of the Anti-Kickback Statute are punishable by a maximum fine of $25,000, imprisonment up to five years, or both, and exclusion from federal health care programs.The OIG may also initiate administrative proceedings to impose civil monetary penalties on violators under the CMPL. There are safe harbors that programs can meet to avoid violation and the subsequent liability, but gainsharing programs may not always meet all of those safe harbor requirements.

Third, the Stark Law prohibits physicians from referring patients to an entity “for the furnishing of [certain] designated health services” if the physician has a financial relationship with the entity, unless the relationship meets an enumerated exception. To comply with the Stark Law, gainsharing compensation must be consistent with fair market value and not vary in proportion to the volume or value of referrals.

Lastly, hospitals must navigate the OIG’s advisory opinions. In 1996, the Fraud and Abuse Control Program “authorized the OIG to provide guidance to the health care industry [in order to further] prevent fraud and abuse, and to promote the highest level of [hospital, insurance, and physician] ethical and lawful conduct.” In 1999, the OIG took notice of gainsharing programs in general, perhaps because of the CMS pilot program that assessed the financial achievability of gainsharing principles. The OIG issued an advisory bulletin that stated that these gainsharing programs “in most forms [are] illegal under the [CMP] provisions of the Social Security Act.” But in 2001, the OIG issued a favorable advisory opinion stating that, although the OIG had previously indicated that the gainsharing program reviewed by the CMS may violate the CMPL in theory, the OIG would exercise its discretion in this instance and not penalize the gainsharing program at issue due to the multiple safeguards that the hospital had in place. Since its 2001 advisory opinion, the OIG has issued fifteen more advisory opinions about gainsharing, with the most recent published on January 5, 2018. In each of these opinions, the OIG found that the gainsharing program put forth for approval could potentially violate federal law. However, in its January 2001 advisory opinion, for example, the OIG decided not to impose administrative sanctions in light of the safeguards implemented by the requestors:

The OIG will not proceed against the [r]equestors with respect to any action that is part of the [p]roposed [a]rrangement taken in good faith reliance upon this advisory opinion as long as all of the material facts have been fully, completely, and accurately presented, and the [p]roposed [a]rrangement in practice comports with the information provided.

It is important to understand that the OIG’s advisory opinions are not laws or mandatory standards that every gainsharing program must follow. Rather, they are an approval of specific gainsharing programs that have been proposed to the OIG and that the OIG has determined provide sufficient protection from health care abuse. Obtaining an OIG opinion is not always mandatory, but obtaining and relying in good faith on an OIG opinion can provide protection against future repercussions. Only one court has ruled that “any gainsharing program will violate the [CMPL]” without approval by the OIG “through the advisory opinion process.” This is a difficult obstacle for a court to set because the OIG process is long and enduring and makes it extremely strenuous for a hospital to implement a program.

These three federal laws and the multiple advisory opinions demonstrate the uncertainty regarding the legality of gainsharing programs. For gainsharing to be most effective, there must be a standard set of rules and regulations for hospitals to follow. This would help eliminate the daunting OIG approval process and prevent risk to patients.

III. Paving the Path for Gainsharing: Benefits of Gainsharing & Its Ever-Growing Presence

Gainsharing in hospitals has increased immensely over the last decade, especially since 2006, when “large-scale gainsharing . . . was successfully deployed in hospitals caring for Medicare, Medicaid, and commercially insured populations in [many] states.” The rapid growth is a result of gainsharing’s advantages and positive results, which are discussed below. Part III of this article highlights the positive impacts of gainsharing programs and investigates models that have been and are currently being tested in the health care system.

A. Positive Impacts

Gainsharing has made its way into a variety of fields because it has consistently generated positive results. As previously stated, the U.S. health care system wastes a tremendous amount of money each year, and hospitals have attempted to use traditional methods of cost savings with only “limited success in aligning the goals of hospitals and physicians.” Gainsharing is designed to have physicians and hospitals working together to obtain the same goal and obtaining the rewards.

The financial rewards are not the only advantages of gainsharing programs. Many features have made it an appealing alternative to traditional cost savings methods. Gainsharing programs allow for the employees of a hospital to be involved in important hospital decisions, thereby catering to both the hospital and physicians and aligning their goals. The funding for the payout to physicians is from savings generated by the gainsharing plan, and, if the hospital’s savings goals are not achieved, there is no payout to physicians. This helps prevent additional costs. Business consultants have said that gainsharing programs foster “a culture of continuous improvement,” enhance “employee focus,” and increase “the feeling of ownership and accountability” among hospital employees. These positive characteristics have presented themselves in multiple models throughout hospitals in the United States.

B. Progression of Gainsharing Models

Gainsharing is adaptable to both large-scale and small-scale implementation, in both profit and not-for-profit hospitals. Gainsharing often stems from bundled payment systems. To demonstrate the effects of gainsharing and its growth, this section of the article addresses three bundle payment programs.

1. New Jersey Pilot Program

An early example of successful gainsharing is the New Jersey Hospital Association(NJHA).The NJHA approached the Healthcare Financing Administration with a gainsharing proposal, and, after getting approval, it began working with Applied Medical Software (AMS) in 2003 to establish a physician and hospital gainsharing program model. The original attempt to implement a program was hindered by legal obstacles. Luckily, in 2003, the Medicare Modernization Act was passed, giving authority to the CMS to implement limited gainsharing models; the NJHA then reapplied to participate and won approval.

The program included twelve New Jersey Hospitals and 1,300 physicians on staff at participating hospitals. The base year was 2007, and the benchmark for performance was the “lowest [twenty-fifth] percentile cost per case. . . .” For physicians to receive incentive distributions, their performance in the demonstration was required to fall within a given threshold. Measures were also taken to evaluate and consider the quality of patient out- comes and post-acute care.

The New Jersey gainsharing pilot results were positive, and “the success . . . prompted federal officials to expand the pilot through [the] CMS’s [B]undled [P]ayment” [I]nitiative, which is discussed below. From the second half of 2009 until the end of 2011, the program saw 125,569 Medicare fee-for-service admissions, and “[t]he savings, compared to the base year” of 2007, totaled $89,454,394. From 2009 until 2012, participating hospitals were estimated to have lowered their costs anywhere between eleven and twenty percent. Results from one particular hospital that participated in the New Jersey model can be seen in Figure 1. Approximately eighty-five percent of its admitted patients were seeing physicians who participated in the early periods of the project.

Figure 1

The New Jersey gainsharing pilot ended in 2012, but, after the Affordable Care Act (ACA) was passed in 2010, the CMS established four models for bundled payments trials. “Model 1” was based on the New Jersey program, demonstrating that the CMS took notice of its success.

2. Bundled Payments for Care Improvement

The success of the New Jersey pilot gainsharing program and the ACA helped initiate bundled payment programs. The Bundled Payments for Care Improvement (BPCI) Initiative was authorized under the ACA and passed under the Obama administration. The goal of the BPCI Initiative is “to test innovative delivery arrangements to reduce federal spending while [simultaneously heightening] the quality of care.”

The CMS “specifically authorizes” the use of gainsharing under the BPCI Initiative; it sees gainsharing as “a tool to support care redesign” and man- dates that gainsharing payments be “tied to actual changes in behavior and/ or increases in quality.” While the BPCI Initiative was originally a three-year program, several of its models were extended until September 30, 2018. In 2016, the Lewin Group released a report finding that the Initiative had thus far resulted in savings for orthopedic surgery. The Acting Principal Deputy Administrator and Chief Medical Officer for the CMS reported that such early results were “encouraging: orthopedic surgery bundles, in particular, have shown promising results on cost and quality in the first two years of the [I]nitiative.” The report, prepared for the CMS, found that Medicare payments for hospitalization within a ninety-day post discharge decreased approximately $864 per episode for orthopedic surgery. These findings were mollified within the report, however. The report stated that “[i]t is . . . too soon to tell whether the portion of the BPCI [I]nitiative focused on lower-extremity joint replacement is actually improving care and achieving savings for the Medicare program.”

Despite the uncertainty of definitively positive results, the BPCI Initiative has grown immensely since the program began. “As of July 1, 2018, the BPCI [I]nitiative has 1025 participants.” This early success has led to the expansion of the program discussed below, the Comprehensive Care for Joint Replacement (CJR) model.

3. Comprehensive Care for Joint Replacement Model

In April 2016, the CMS implemented the CJR model as a mandatory bundled payment system, directly based on the BPCI “Model 2.” It “builds on les- sons learned from the early experience” with the BPCI Initiative and includes more than 800 hospitals in 67 metropolitan areas.

Though the CJR model is based on the BPCI Initiative, it differs in several ways. The CJR model uses average regional spending to determine the “target episode price,” as opposed to the BPCI Initiative, which uses the hospital’s own spending to define the “target episode spending.” Under the CJR model, hospitals are evaluated annually and become eligible to earn a reconciliation payment if they achieve spending below the target price and meet quality performance thresholds on three required quality measures. A reconciliation payment is “the difference between the target price and actual episode spending, up to a specified cap (‘stop-gain limit’).” If hospitals exceed the target price, they are “financially responsible for the difference between the target price and actual episode spending.”

The CJR model is still in its early stages, but, regardless, these types of programs are clearly increasing and doing so without specific legal guidelines. Because no mandatory legal standards guide gainsharing programs, some gainsharing models have experimented with different techniques that, in some cases, have had negative effects on hospitals, patients, and physicians. Part IV examines those flaws in gainsharing programs.

IV. Limitations of Hospital Reimbursement Gainsharing Programs

With the continuous promotion of gainsharing in hospitals and the implementation of programs like the BPCI Initiative and the CJR model, hospitals are increasingly intrigued by gainsharing results for reduced healthcare spending. These gainsharing programs have produced many promising outcomes. But with benefits often come limitations, and both must be considered. Part IV examines the limitations of hospital gainsharing and their effect on patients, hospitals, and physicians.

A. Concerns for Hospitals

One major concern for hospitals is that the most recent bundle payment program, the CJR model, “unintentionally penalize[s]” hospitals for treating medically complex patients. This is because hospitals that treat patients with relatively more complex medical problems will have a more difficult time keeping their spending below the target price. When identifying a “complex” patient, physicians consider simple characteristics such as age, gender, and comorbidity, in addition to more complex characteristics such as anesthesia class and functional mental status. Even during the rulemaking period for the CJR model, many comments that were submitted identified this problem of complexity, and individuals testified about their concerns that, if there are no adjustments for hospital case complexity, the hospitals that treat complex patients, as well as the patients themselves, could be penalized. In other words, if a hospital treats more medically complex patients, that hospital is more likely to receive less money in refund payments. This is likely because complex patients may take more time to recover or have higher health risks. Therefore, the hospital is more vulnerable to falling short of the cost savings requirements under the bundle payment criteria.

These concerns are real. In 2016, health care and medical scholars from the University of Michigan conducted a study using Medicare claims for individuals in Michigan “who underwent lower extremity joint replacement.” The researchers examined the association between (1) average risk scores, which are calculated based on considerations like patient complexity, sex, and age; and (2) “the estimated reconciliation payments that hospitals would receive.” The researchers compared these two factors in two different scenarios. In the first scenario, which was aligned with the BPCI Initiative model, the researchers used “the hospital’s own . . . spending to define target episode spending.” Target episode spending is the threshold amount of money allot- ted to the hospital for a given procedure and its recovery. In the second scenario, which was aligned with the CJR model, the researchers used the average regional spending to determine the target episode price.

The study’s findings revealed that the method in which the target price is determined will have a “significant impact” on the likelihood of hospitals falling below the given threshold and physicians receiving their bonuses. In the BPCI scenario, where the target prices were set using hospital historic spending, the researchers did not identify a “significant association” between the refund payments and the risk scores; instead, they observed “relative [year- to-year] consistency . . . of patient complexity within hospitals.” In the CJR scenario, where the target prices were set at a regional benchmark, there was a statistically “significant inverse association between [the] reconciliation payments and . . . [the] risk scores.” The findings demonstrated that the methods of the CJR program “led to reduced reconciliation payments [for] hospitals that treat medically complex patients.”

These statistics raise the concern that moving toward a regional pricing scheme will deter hospitals and physicians from treating medically complex patients. Therefore, treatment could become more about the savings and rewards that hospitals and physicians are receiving, rather than the actual care for the patient. Laws have been passed “to prevent physician inducement to reduce or limit services to patients.” Hospital-based target pricing is not a mandatory requirement for gainsharing models. Legislation must be put in place to provide efficient parameters that will prevent future models from having this adverse effect on hospitals and physicians treating complex patients.

B. Concerns for Patients and Families

A second concern related to patient complexity is that complex patients will be mistreated and will not receive the quality of care they deserve. One eye-opening complaint is that bundle payments cause treatment to feel more like “a health care assembly line than coordinated care.”

In one compelling story, Timothy Hoff relates that his mother’s dementia was not taken into consideration when she became a part of a gainsharing program in New York. His mother had difficulty with mobility due to low bone density and dementia, and she suffered a fall that fractured her left hip.

Hoff has worked, studied, and taught in the health care field but says that he was not prepared for what his family was about to face. A surgeon performed a partial hip replacement on his mother, and immediately after the surgery, his mother entered a “quick-moving assembly line.” His mother was a part of a pilot gainsharing program. Just one day after her surgery, she was pressured to get up and move around, and Hoff and his siblings had to quickly decide on an appropriate rehabilitation hospital to move her to once the hospital provided for a discharge window of only a few days. Because she was a part of a gainsharing pilot program, she was a financial risk to the hospital if she were to stay for a longer period of time than the hospital had calculated; the family thus felt pressure from the hospital to get her through rehab and move out. Hoff’s mother’s dementia made her a challenging patient, and she was not able to move quickly through the rehab stage. It seemed as though the care teams and physicians were not taking her condition into account, and Hoff and his family were consequently forced to fight for their mother to be given proper care that was not compromised by the gainsharing program.

Stories like Hoff’s suggest that gainsharing programs are having unintended consequences on patients. Instead of treating patients individually based on their unique needs, hospitals are treating them as a number or statistic. Looking at only the numbers, one will see a positive result from gainsharing programs because money is being saved. But, for some patients and family members, gainsharing is having a negative impact, and they have to fight to make sure adequate care is provided to the complex patient.

For gainsharing to be successful, it must be regulated, and it cannot have an adverse effect on complex patients. Proper legal reform could set standards to prevent gainsharing programs from making the crucial mistake of ignoring patient complexity.

C. Concerns for Physicians

When looking at gainsharing from a physician’s perspective, there are a number of concerns that differ from those of hospitals and patients. Physicians are the backbones of gainsharing programs because they “are the central focus of each patient’s care and are in the best position to improve care while reducing cost.” Managed Care Organizations (MCOs) and networking companies have been largely demonstrative of the large cost of health care, but these organizations have not demonstrated an improvement in quality, thus indicating that they are not the most effective leaders in the shift to bundle payments. MCOs only have a relationship with a patient for a few days, whereas physicians have regular face-to-face relationships with patients that can last for months, years, or even decades. Gainsharing can pose a variety of concerns for physicians, perhaps because of those longer-lasting relationships that they tend to establish with patients.

First, gainsharing could possibly “sway even the most altruistic, high-minded surgeon to put financial gain above benefits to their patients.” Both physicians and government regulators are concerned about this.

Another physician concern is that their unfamiliarity with any substituted medical instruments and implants that they may be required to use in the program will be associated with them performing lower-quality procedures. An alternative suggestion to avoid the problem of substituted supplies is for hospitals use a “collaborative strategy” in which products are selected by rank-and-file nurses and physicians, rather than purchasing managers who are only concerned about costs. This method could be used for supplies beyond instruments and implants, including drapes, gowns, masks, and gloves. In addition, quality can be just as much of a vital factor when it comes to cost savings and price reduction — for example, Dr. Dwight Tyndall recalls seeing health systems switch to lower quality gloves but then ending up buying twice as many. This anecdote shows that using better quality products can produce cost savings over time.

Time is another concern for physicians. Many are concerned that after hospitals have successfully reduced costs, the “target prices will be lowered and the opportunity for savings will diminish.” In a gainsharing program where physicians change their supplies to another brand of implants, instruments, or devices that saves the hospital money, and the physician shares in the financial benefit, what is the effect after the savings have already been realized? Physicians want a program that can guarantee earnings over the long term. It is important to have regulations that will protect the physicians participating in these programs.

The physician “determines the indications for surgery . . . , performs the surgery,” and bears the risk of medical malpractice. For gainsharing to be successful, there must be communication between the physician and the hospitals. The hospitals must be willing to listen to physician suggestions. This, in turn, will allow for better leadership once gainsharing is implemented. Morale and confidence in the gainsharing program is important, and the entire medical staff must understand the parameters and be on board. Mandatory safeguards must be implemented to ensure education on the subject of gainsharing and protect the physicians from the concerns discussed above.

V. Recommendations

The legal guidelines currently controlling hospital gainsharing are inconsistent, inefficient, and difficult for the government to enforce and for hospitals to adhere to. Gainsharing programs may violate the Anti-Kickback Statute and must follow specific guidelines to comply with the CMPLand the Stark Law. A program can only have complete security and protection from legal challenges if it goes through the long and expensive process of receiving OIG approval. Even if the OIG deems a program to possibly be in violation of a law, it often chooses to not take enforcement action because of specific safeguards a gainsharing program has in place. Thousands of physicians currently participate in gainsharing programs, and not all programs have been approved through OIG advisory opinions.

Part V of the article proposes amendments to the existing legal framework that will protect hospitals, patients, and physicians. The proposal is broken into two parts. The first section proposes revisions to the framework established by the OIG’s advisory opinions. It also critiques current safeguards commonly approved by the OIG in advisory opinions. The second section proposes new mandatory safeguards not addressed by the OIG, but necessary for optimal results. Each of these recommendations recognizes concerns that will remain within gainsharing programs and will need to be continuously researched even with the proposed mandatory safeguards in place.

A. Revisions to OIG Approved Safeguards

1. Disclosure of the Gainsharing Program

Many OIG-approved programs contain the safeguard that disclosure of a gain- sharing program “must be made to the patient before he or she is admitted to the [m]edical [c]enter. If pre-admission disclosure is impracticable, however, the disclosure must be made before the patient consents to surgery.” The extent of this disclosure is not enough. This article proposes that disclosure be made before the patient’s surgery to both the patient and the patient’s family — with the patient’s consent — and then again after the procedure has taken place. Upon a patient’s request, the hospital should also be required to provide the patient with material detailing the applicabe cost saving measures.The Department of Health and Human Services (HHS) would be responsible for providing guidance as to this disclosure. Often, a patient is in pain or a surgery must take place immediately, and the patient does not have the time or the ability to be educated about gainsharing programs. Thus, it should fall to the hospital to provide a patient with this crucial information.

The major concern surrounding disclosure is the patient’s mental ability to understand gainsharing. Patients are often older and may have conditions, such as dementia, that prevent them from understanding the complexity of gainsharing. The same goes for patients who are intellectually disabled. If a patient is unable to understand the parameters of gainsharing, she would not be able to discern whether her quality of care is being diminished and when she must “fight back,” so to speak. For this reason, the mandatory safeguard must also include disclosure to family members. The hospital must adequately monitor its gainsharing programs as well as the safeguards surrounding the programs, which are addressed below.

2. Oversight Committees

The OIG in its advisory opinions has also approved of gainsharing programs that use “oversight committee[s].” This article proposes that programs instead use an administrator whose sole job is to oversee gainsharing programs. When a hospital implements a gainsharing program, it is important to have a staff member knowledgeable on the subject who has the ability to oversee its progress and take disciplinary action when necessary. Under this article’s proposal, the gainsharing administrator would have this duty and authority.

The one major concern surrounding this safeguard is the following: how can programs prevent a hospital from putting added pressure on the administrator to report positive results? This could be prevented by making the administrator a third party, such as an HHS employee. Outsourcing would help to eliminate the added pressures from the hospitals.

3. Monitoring and Documentation

A third common OIG-approved safeguard is adequate monitoring and documentation of both patient treatment and the costs of procedures. This monitoring and documentation safeguard must be expanded. Under the proposed mandatory safeguard, a disincentive for discharging should be added to gainsharing programs as a result of the monitoring and documentation. Using monitoring, documentation, and historical numbers to create a threshold would create a bright-line standard for a physician’s quality of care. For example, if a hospital implements a gainsharing program, in order to discharge a patient earlier for cost savings, that patient’s medical stats or charts must meet a certain threshold. For this to be possible, monitoring and documentation of the patient’s improving health is necessary. To set the threshold, hospitals will first need to use historical statistics, and the threshold may be adjusted once the safeguards are in place and positive results become apparent. If the patient’s health stats or health quality fall below the given thresh- old, the patient may not be discharged. If a physician continually fails to meet this quality of care level, then he or she will not receive the gainsharing kickback.

Practicality is the greatest concern surrounding this safeguard for two reasons. First, it would be difficult for one person, or even a group of people, to oversee every chart for every patient. Second, there is no existing formula to determine what the exact quality of care must be to allow for discharge. These numbers are difficult to produce and are often determined on a subjective standard. To perfect this safeguard there will need to be continuous research into best practices for discharging patients. Nonetheless, having a disincentive for discharging, even if it begins at a minimal standard, will protect patients more than the current standard.

4. Creditable Medical Support

Hospitals using gainsharing programs often choose different methods of cost savings. To ensure that the cost saving methods will not negatively impact the patient, the OIG has approved of programs that “conducted an evaluation and clinical review” of the medical products the hospital plans to substitute for older, costlier products. The products, devices, and supplies that are regularly available to physicians must remain available throughout the program. That way, physicians have the ability to use their best medical judgment on whether or not the cost-reduction product would be just as beneficial for the patient.

This proposed mandatory safeguard aligns with several of those suggested in the OIG advisory opinions, and this article proposes that it be made a mandatory safeguard under this article’s recommended amendments to the existing legal framework. This gives the physician discretion to use his or her medical judgment and protects the patient against possible complications. Implementing this safeguard may in fact allow the gainsharing program to be as efficient as possible. However, this proposal is not without concerns. The greatest concern is determining what qualifies as an equivalent substitution of a medical product. When substituting products, devices, and supplies, many factors other than the initial effect on the patient must be taken into account, including quality versus quantity and the physician’s experience using the product.

5. Protection Against Physician “Cherry Picking”

The OIG advisory opinions also commonly approve of programs that provide a safeguard to combat physician “cherry-picking,” a term referring to a situation where physicians choose or refer a patient specifically because of the hospital’s gainsharing program and the complexity of the patient. These safeguards may limit the program to physicians already on medical staff and may not allow the aggregate payment made to the physicians to exceed fifty percent of the projected cost savings. Under this article’s proposed amendment to the current legal framework, this safeguard would be made mandatory because hospitals and patients can be unintentionally penalized without it. Without this safeguard, hospitals could potentially use their gainsharing programs to recruit physicians, and physicians could use the gainsharing program to discriminate against complex patients.

Even with this safeguard in place, money still ultimately controls the incentive for physician participation. This concern will remain throughout every gainsharing program, and it remains important to continue to research and discover new ways to measure quality of care and create a mandatory care threshold. When money is involved as an incentive, ethical concerns will remain.

B. Proposed Additional Safeguards

1. Education Program

Education is an important and necessary safeguard that is not addressed in the OIG-approved programs. Under the proposed safeguards, everyone involved in a gainsharing program must attend continued education classes about gainsharing. With gainsharing’s fast-growing pace and the need for continued research, it is important for physicians to stay educated on the subject in order to provide protection to themselves and to their patients. For a gainsharing program to reach its maximum potential, everyone involved must understand the goals, risks, and consequences of participating in a gainsharing program. It is important that those involved are accepting of the program. Under this article’s proposal, HHS would provide gainsharing education classes that all hospital staff involved in a gainsharing program would be required to attend.

This program would thoroughly educate participants on what gainsharing is, the risks that will be faced by staff if they choose to participate, and the specific measures the hospital is taking in order to increase cost savings. It would also provide an emphasis on quality of care and how it will be measured. Physicians are the source that drives the success of a gainsharing program. Therefore, making sure that they and their colleagues are knowledgeable about the program is central to helping the program succeed.

The implementation of a mandatory education program creates multiple concerns. First, how do we ensure that each education program is taught efficiently? Sometimes the success of a gainsharing program, or the enthusiasm to participate in one, rides on the individual who is presenting the program. Second, there is no uniform standard or single model that gainsharing follows. So, how does the health care system create an education program tailored to each hospital’s individual needs? If a gainsharing program does not properly assess what is needed for a “well-tailored design,” then the pro- gram will most likely fail. Lastly, a mandatory education program will be an added cost. Will this defeat the ultimate purpose of cost savings? And what do smaller, private, and rural hospitals do if they cannot afford the education system? This could create an added burden and contribute to the competitive aspect of physician recruiting.

2. Patient and Peer Review

Another mandatory safeguard that is not stated in the OIG advisory opinions — but that this article recommends implementing — is patient and peer review. Each hospital should administer optional surveys to patients of gainsharing programs and require mandatory peer review of physicians. It is important that the hospital spends time reviewing the data because the hospital needs to measure both cost savings and the standard of care their patients are receiving in order to gauge whether their gainsharing program formula is truly successful. The surveys must be administered after discharge and rehabilitation has been completed, and the peer review must be given on a quarterly basis. Consequently, the evaluation should be conducted often and with consistency.

The difficulty with patient surveys is that only certain types of people tend to take surveys. Another difficulty is that a patient may also take into account irrelevant factors when providing feedback via a survey, such as whether she liked the food she received or whether she thought that her bed was comfortable. This could sway statistics. Peer review will allow for a more educated review, but there is always the fear that physicians pressure the medical staff reviewing them to produce positive reviews. If the physicians regularly work with those giving the review, then this could create an uncomfortable work environment.

3. Target Episode Spending

To ultimately protect the quality of care, the final proposal in this article is a mandatory safeguard that creates a universal method of determining target episode spending. The OIG, in its advisory opinions, has not taken a strong enough stance to protect against the use of inadequate historical numbers in determining target episode spending. Based on the information gathered from the BPCI and CJR models, target episode spending must be deter- mined by the hospital’s own spending and not on a regional scale. As stated above, studies have revealed that the method of determining target price will have an impact on whether or not a hospital meets its gainsharing goals. When the target prices are set using hospital historic spending, they reflect the relative year-to-year consistency of patient complexity within hospitals. This protects patients because the historical numbers used to create the threshold that the gainsharing program must meet are specifically tailored to a hospital.

To further perfect the target episode spending figure, hospitals must also reset their base each year based on statistics from the previous year. This safe- guard was approved in the most recent gainsharing advisory opinion issued by the OIG, and it eliminates the concerns for multiple-year gainsharing arrangements. Under this proposal, hospitals would no longer be able to carry over savings from previous years that could result in unlawful kickbacks; this, in turn, creates more accurate statistics, thereby protecting the patients.

The concerns regarding quality of care are not eliminated with mandatory target spending. The concern remains that hospitals will continue to be punished for the acceptance of complex patients. Moreover, it is impossible to predict the exact types of patients a hospital will admit each year and the types of complications that may occur. Regardless, target episode spending is a necessary preventative action and can help to achieve the goal of cost savings and better-quality care.

VI. Conculsion

Hospital gainsharing is a business model, and its use is rapidly growing in the U.S. healthcare system. On the one hand, it has shown consistent rates of success in saving health costs and decreasing waste, and several programs have gained government agency approval. On the other hand, gainsharing is not without negative consequences. Statistically, while gainsharing leads to a decrease in health costs, there have been instances in which it has decreased the quality of care. This poses a threat to hospitals, patients, and physicians. The current legal identity surrounding gainsharing is unacceptable, as it provides neither adequate protection nor concrete legal parameters that allow gainsharing to move in a safe and successful progression. Mandatory safeguards — as proposed in this article — will ensure protection until legislators take a clear stance on the subject. The OIG has approved common safeguards, and this article both agrees with and critiques them, but also recognizes that a significant amount of more research must follow, even once the proposed mandatory safeguards are in place.