Interest is growing in "gainsharing" arrangements that pay physicians to help hospitals run better. But in practice, such deals are riddled with legal land mines.
That may be one reason the much-hyped concept is relatively uncommon, says Craig Nelson, senior manager for healthcare consulting in the Dallas office of Ernst & Young. Nelson says he is familiar with roughly 50 gainsharing arrangements nationwide, designed by various firms. He says he expects the agreements to become more common as the legal issues involved are sorted out.
Gainsharing agreements typically cover high-cost services, such as orthopedic implants and cardiac procedures, where improving hospital operations can offer big payoffs in terms of reduced per-case costs and better patient care.
Physicians reap some of the gain as compensation for their time and the professional expertise they bring to process improvement.
Hospitals that pursue such deals can be large or small, teaching or community, experts say. But they all share a need to align the interests of independent physicians more closely with their own goals.
Because of the financial incentives, such deals are complex, which is why they are getting hard reviews from industry regulators at HCFA and the Internal Revenue Service. Attorneys watching the matter say HCFA is expected shortly to issue formal guidance as to the type of agreements it considers appropriate.
Like all financial agreements between doctors and hospitals, gainsharing deals must not run afoul of federal and state fraud-and-abuse laws, as well as the statutes governing hospital tax exemptions. Perhaps the biggest factor in meeting those rules is making sure the compensation physicians receive reflects a fair market value for their services, experts say.
Under the federal laws known as Stark I and Stark II, physicians can't profit from referring patients to particular facilities. Meanwhile, not-for-profit hospitals and health systems must ensure gainsharing arrangements don't threaten their tax exemptions, which bar them from operating for the benefit of doctors and other private individuals. Because one goal of gainsharing is to reduce costs and divide the resulting gains among participants, legally the deals must be viewed as compensation arrangements.
"Any variable pay is always, to a certain extent, gainsharing," says Gordon Hawthorne, a senior consultant in the Dallas office of the Hay Group. "The angst now is around the fact that we want to engage physicians in clinical improvement, which creates new money on the side of hospitals."
Hawthorne reports "high-level interest" in gainsharing from doctors and hospitals but little activity to date because of the legal complexity.
"What we're buying," he says, "is intellectual capacity from physicians. It makes all the sense in the world. In my opinion, this is at the core of restructuring healthcare."
Proponents say better patient care is the main goal of gainsharing. And one necessary legal protection for doctors and hospitals is tying actual physician payments to quality, Nelson says.
Ernst & Young has crafted eight gainsharing arrangements, now in place for at least a year, and is implementing others, Nelson says. He declined to identify the participants because of confidentiality agreements.
In the Ernst & Young program, physicians sign a professional services agreement to consult with their hospital on process improvement. For example, orthopedists might meet to evaluate the offerings of several implant vendors in order to select one as a primary supplier and negotiate lower prices. If the program works, they would be compensated for their time.
Of course, if per-case costs don't drop, the physicians don't get any financial reward. If costs do drop, the savings are set aside in an "eligible payment fund." Provided certain quality goals are met, the fund will reimburse physicians for their consulting services at the end of a 12-month period. The reimbursement will reflect previously negotiated hourly rates, usually $75 to $300, depending on the market, Nelson says.
But no money will be paid out if the doctors don't hit quality indicators associated with each DRG in the gainsharing agreement. The quality indicator could be a designated patient satisfaction score or a more concrete measure of quality, such as how many days after knee surgery a patient can climb stairs. To receive reimbursement from the fund, physicians also must clearly document that they rendered actual services with specific outcomes.
What's more, agreements usually designate 60% to 70% of the reduced expenses for the hospital, Nelson says. And for legal reasons, physician payments often are capped either at a flat dollar amount, such as $30,000 to $40,000 per doctor, or as a percentage of total cost savings.
But for physicians, the attraction of gainsharing isn't just money, Nelson says. It also gives them influence over the environment in which they practice. "Motivating physicians is not just about paying them," he says. "It is about creating a very good practice environment."
Thomas Mallory, M.D., an orthopedic surgeon at Grant Medical Center in Columbus, Ohio, agrees. Mallory is director of Joint Implant Surgeons, an eight-physician group that consults with the management company that runs Grant's implant services. He says practice environment is the arrangement's primary attraction.
"The orthopedic surgeon enjoys economies of scale, including the ability to directly affect cost by creating practice guidelines and negotiating for prosthetics," Mallory says. "The physician has direct input as to what needs improvement and what needs monitoring."
Mallory doesn't call the agreement at Grant "gainsharing." He distinguishes it as "facility management," which he says is a more sophisticated type of hospital-physician relationship. The key difference is a management agreement between OrthoExcel, a subsidiary of Nashville-based OrthoLink, and the hospital.
The contract establishes a clear line of authority for implementing process-improvement suggestions, which is where many more basic gainsharing arrangements fail, Mallory says.
The management company is, in fact, responsible for all the direct costs of care associated with orthopedics, and it will absorb the losses if costs exceed its management fee, says Dick D'enbeau, president of OrthoExcel. Like Mallory, D'enbeau is not comfortable identifying OrthoExcel's arrangement as gainsharing unless it is clearly understood that the management company acts as a buffer between the physicians and the hospital.
The physicians work under actual job descriptions and document the services they provide. The management company, not the hospital, pays physicians for their consulting services, D'enbeau says.
Mallory and other Grant physicians founded OrthoExcel several years ago to manage Grant's orthopedics department. OrthoLink bought the program in June and is extending it to several other sites.
It is not known how many agreements similar to Grant's exist.
Richard Siehl of the Columbus office of Baker & Hostetler, which set up the Grant relationship, doesn't mind identifying the program as a form of gainsharing as long as the details are understood. The distinction made by Mallory and D'enbeau reflects some of the legal controversies surrounding gainsharing. Other practitioners prefer the term "value-sharing," which they believe better captures the programs' emphasis on reducing costs -- instead of increasing revenues -- and improving quality.
For example, at Grant, quality indicators such as patient satisfaction are routinely measured and reported to the physicians, D'enbeau says. "This is not about getting a little money," he says. "This is about how patients are cared for in the hospital."
Most hospitals already are trying to reduce costs by establishing best practices and standardizing supplies for better prices. Technology vendors often offer consulting services to help them, sometimes in a risk-sharing relationship.
Siehl says the latest deals are "recognition that very little is done in a hospital without a doctors' order."
Doctors considering a facility management agreement similar to Grant's, or another form of gainsharing, must make sure they actually can reduce hospital costs, he says. Among the factors to consider are what proportion of a hospital's procedures they perform and how much data they have on real costs. At Grant, for example, the physicians had a long-standing management agreement, which was restructured to give them full financial responsibility for the department two years ago and then was carried on by OrthoExcel. "You don't want to go in cold," Siehl says.
Legally, the first areas to review are Stark I and Stark II, which govern physician relationships with organizations in which they have a financial stake, Siehl says. The Stark laws outline the types of deals considered OK under the law. Next, state and federal fraud-and-abuse laws, which aren't so clear-cut, must be reviewed.
At Grant, Siehl says key legal protections include:
Siehl says the IRS has reviewed the Grant arrangement and did not have questions, as far as he knows. "This is not some wild-eyed experiment," he says. Still, he warns, "you don't do this at home," meaning doctors should seek qualified legal advice and proceed cautiously.
Meanwhile, Grant's corporate parent, Columbus-based Ohio Health System, is preparing a gainsharing pilot separate from the OrthoExcel arrangement. The program, which is expected to begin shortly, will cover orthopedics at the system's other Columbus hospital, Riverside Methodist, and cardiology at both facilities. The program does not involve a management company as an intermediary, and the hospital will carry out doctors' process-improvement recommendations.
The health system selected orthopedics and cardiology because HCFA has tested different payment methods for those services and seems comfortable with experiments there, says Stephen Baez, associate medical director for quality at Riverside Methodist. If the pilot appears successful after three to six months, Baez says he hopes it can be expanded to other areas.
Under the pilot, Riverside and Grant will track reductions in costs per case for individual physicians. At the end of a year, physicians enrolled in the pilot will get an undetermined percentage of the gains, reflecting their participation in process-improvement efforts and their reductions in per-case costs.
Regrettably, physicians who are already comparatively efficient will benefit less, but the health system decided a variable gainsharing rate would be unworkable, Baez says.
Improving quality is the main goal, he says. In each area, four to six quality measures, such as readmission rates and patient satisfaction, will be tracked. Process-improvement teams are in place to carry out physician recommendations. "The hospital knows and understands it cannot achieve true process improvement without buy-in and leadership from physicians," Baez says. "Historically, (such efforts) have been voluntary, and the physician has participated mightily."
But as managed care puts more pressure on their incomes, why should physicians come together and "do the hard work of deciding we're going to use these two or three vendors" just to lower the hospital's costs? Baez asks. He says it's not fair to ask physicians to work for free.
Adds Mallory, the Grant orthopedist: "We don't do that in any other economy. Why do we expect physicians to go to the hospital (with their ideas) without being compensated for the professional experience and insights they contribute?"
Lisa Scott is a Chicago-based freelance writer who focuses on healthcare business.