HHS' inspector general's office put the kibosh on so-called physician gain-sharing arrangements last week, saying they violate a law that prohibits paying doctors to limit care to Medicare and Medicaid patients.
To make it legal to use the latest strategy for bonding physicians to hospitals, Congress will have to amend the Social Security Act and grant regulators the authority to develop comprehensive rules, which could take years, the agency said.
In a five-page bulletin, the inspector general's office delivered bad news for hundreds of hospitals that are said to be poised to implement gain-sharing programs pending clearance by the inspector general's office and HCFA, which has yet to rule on gain-sharing.
It also spells likely doom for several dozen gain-sharing programs that are believed to be up and running.
The inspector general's office said hospitals will have to terminate existing gain-sharing arrangements, which typically reward physicians for reducing costs by paying them a percentage of savings, or resort to flat fees (See chart).
The advisory bulletin, posted July 8 on HHS' World Wide Web site, was a response to seven proposed gain-sharing programs submitted for review. While the agency acknowledged hospitals' "legitimate interest in enlisting physicians in their efforts to eliminate unnecessary costs," none of the proposed programs passed legal muster.
Hospital lawyers criticized the inspector general's broad interpretation of the statute but said there is little recourse.
"As a practical matter, I think people are going to have to accept this whether they like it or not and look for other solutions, such as legislation," said Jim Gaynor, a healthcare lawyer with McDermott, Will & Emery in Chicago. He has two clients that are beginning to implement gain-sharing programs.
Hospitals and physicians are unlikely to risk testing the statute, which could result in their exclusion from Medicare, Gaynor said.
Some providers might seek a court declaration that the practice is legal, lawyers said.
Hospital lawyers said the inspector general's office erred in equating reductions in costs with reductions in care. For example, standardizing equipment decreases expenses without affecting patient care.
The statute does not prohibit a payment to motivate physicians to eliminate unnecessary costs, which is at the heart of properly constructed gain-sharing programs, said Jim Wiehl, a healthcare lawyer in the St. Louis office of Sonnenschein, Nath & Rosenthal, based in Chicago.
His firm submitted requests for review of two gain-sharing programs, which received clearance from the Internal Revenue Service earlier this year (April 5, p. 12).
Wiehl added that the bulletin clashes with antitrust directives from the Federal Trade Commission and the U.S. Justice Department, which encourage providers to integrate care by creating joint efficiencies.
One surprise was the bulletin's statement that a growing number of clinical joint ventures in which physicians are owners could also violate the Social Security Act. Such specialty hospitals were granted exceptions under existing physician self-referral laws.
The inspector general's interpretation is that "no doctor can own stock in any hospital or hospital entity in which he or she practices, or in its parent company," Gaynor said.
Kevin Outterson, a Nashville healthcare lawyer with Memphis, Tenn.-based Baker, Donelson, Bearman & Caldwell, said there will be a scramble to terminate gain-sharing arrangements in the coming weeks.
"Consultants who have been selling these programs for the past year have been putting on their program outlines that you should consult with your lawyer, but basically these programs do comply (with federal law)," he said.
However, Outterson added that providers could opt to run gain-sharing programs through managed-care plans or Medicare risk programs.