One of the more interesting techniques implemented in recent years for establishing hospital cost-control through hospital-physician relationships has been gainsharing. While the physician incentive arrangement can take many forms, common elements of a gainsharing agreement include a hospital paying physicians for designing and implementing a program to control the costs and improve the quality of specified medical services provided to hospital inpatients. While not yet widespread, a significant number of hospitals nationwide adopted or were considering implementing gainsharing programs. However, a recent Special Advisory Bulletin from the federal Department of Health and Human Services Office of Inspector General (OIG) has brought these programs to an untimely end and has squarely placed the responsibility of rationalizing health care economics back into the unwilling hands of Congress.

Under some gainsharing contracts, achievement of economic and quality performance targets results in certain fixed payments by the hospital to the physicians; in other models, physicians share in a percentage of the cost reductions achieved (subject to satisfaction of quality assurance standards). The contractual arrangement typically is benchmarked against a base year and requires physicians to provide reports to the hospital on their economic and quality initiatives. For example, reductions in average length of stay from the base year that are accompanied by no increase in readmissions or morbidity and mortality could result in a payment to the physicians.

From a hospital administrator’s or physician’s perspective, a potential gainsharing arrangement was both a significant undertaking and a powerful tool for alignment of hospital and physician interests. The potential alignment of interests follows naturally if the correct criteria are selected and the program is well structured. A win-win scenario results as the patients receive demonstrably better care, the hospital reduces costs, and the physicians deliver better care for additional compensation. This type of project, however, is rather involved and requires significant up-front time and monetary expense to review the historical performance, select the appropriate criteria and payment structure, seek legal counsel on the regulatory issues involved, and deal with the political and other issues involved in implementation of the arrangement.

As experienced hospital administrators, physicians, medical group management, and attorneys know, putting a successful gainsharing program in place was a little like taking a Sunday stroll through a minefield. In addition to the economic and political issues presented, most of the current health care regulatory structures were implicated. Participants were well advised to consider the effects of (a) the antikickback statute; (b) the physician incentive plan law; (c) physician self-referral (Stark) laws; and, if applicable, (d) nonprofit tax-exempt organization restrictions, including private inurement.

Of particular interest, the physician incentive plan law is intended to limit payments to physicians that induce or result in the reduction of care to Medicare or Medicaid patients. Under rules proposed by the OIG in December 1994 for hospital-physician incentive plans, the OIG indicated that, while it could give general guidance, a case-by-case review would be necessary to determine the acceptability of hospital-physician incentive plans. The health care industry, charting a course between the Scylla of overutilization and the Charybdis of underutilization, ventured forth to establish initial gainsharing programs, while seeking the advice and approval of the

OIG and the Health Care Financing Administration (HCFA) on the health care regulatory issues, and of the Internal Revenue Service (IRS) to determine their acceptability on the tax-related issues. Even with increasing media attention to the gainsharing structure, no answer or clarification regarding these requests came from either the OIG or HCFA for more than a year.

The assumption that no news is good news was reinforced earlier this year when the IRS issued a private letter ruling that approved a gainsharing arrangement between a tax-exempt hospital and some cardiologists. The momentum of the gainsharing bandwagon then accelerated, as many in the industry assumed that there had been some coordination between the IRS and the OIG and HCFA. Gainsharing, while still complex, appeared to have received its first blessing.

Alas, many of us in the health care industry returned this year from our July 4 holiday to find the OIG had, indeed, also been celebrating its independence. On July 8, 1999, the OIG issued a Special Advisory Bulletin on hospital-physician gainsharing arrangements. The bulletin broadly interprets the hospital-physician plan law (which is part of the Civil Money Penalty statute or CMP) and alerts hospitals and physicians that the OIG considers hospital-physician gainsharing programs to be prohibited by federal law and subject to civil money penalties. After analyzing congressional intent, the OIG banned any payment arrangement between hospitals and physicians that is intended to induce a reduction or limitation in services if such payment comes from hospital-based cost savings. In a surprising change of perspective and without prior warning, the OIG abandoned entirely the case-by-case approach promulgated under the 1994 rule.

While striking to the heart of the gainsharing concept, the OIG bulletin and accompanying press release did note that “appropriately structured gainsharing arrangements may offer significant benefits where there is no adverse impact on the quality of care received by patients.” Nonetheless, the OIG determined that its hands were tied by reason of prior congressional actions, leaving it without the ability to issue regulations allowing gainsharing, and that parties interested in pursuing gainsharing arrangements should seek legislative relief. The Special Bulletin also was used by the OIG to address a number of other unrelated issues, many of which also sent shock waves through the industry. One side comment even called into question the ability to participate in shared risk arrangements under managed care, although a later communication from the OIG lifted the sword of Damocles away from shared risk pools.

After the July earthquake from the OIG, one is left to wonder as to what remains of gainsharing. The OIG charitably indicated that it would not pursue enforcement action against hospitals that expeditiously terminated their existing gainsharing programs. The industry has moved to comply, and physicians that remain involved in gainsharing programs should consult with experienced health care regulatory counsel. A small opportunity remains for physicians to be compensated on a fair market value hourly basis for consulting with hospitals on cost reductions, but the physicians may not participate in any of the cost savings that they create. With the sweeping breadth of the OIG interpretation of the physician incentive plan law, innovation in cost control by hospitals and physicians has been severely chilled.

An effort is being made within the industry to coordinate action in Congress that could result in gainsharing being resurrected. Interested physicians should contact their congressional representatives or their physician organization representatives. Otherwise, to misappropriate an eloquent elegy, we will find ourselves saying, “Gainsharing, we hardly even knew thee.”

Note: The OIG press release and Special Advisory Bulletin may be found on the Internet at and, respectively.


Eric A. Klein, JD, is a founder and partner of Klein & Martin, a Los Angeles?based health care transactional law firm.