Four New Jersey hospitals that have successfully shot down a high-flying but limited experiment in physician "gain-sharing" may also have shot themselves in the foot.
In response to a lawsuit filed earlier this year by the four excluded hospitals, U.S. District Judge John Bissell in Newark, N.J., last week said he would place a permanent injunction on a demonstration project launched in January by the CMS and the New Jersey Hospital Association. The judge's written opinion had not been issued by deadline last week, but he ordered the program to be immediately shut down.
The three-year demonstration project, which was years in development, aimed, by offering cash bonus payments to doctors who contained costs, to align the competing economic interests of hospitals and physicians. For hospitals the issue has long been an irksome and counteractive feature of the Medicare program (Dec. 1, 2003, p. 6). Though the CMS limited the program to eight New Jersey hospitals, the ruling sent shock waves that may affect all hospitals that were deliberating creative ways to bring doctors on board to help contain costs and widen hospitals' thin Medicare profit margins. CMS officials had said that if the project proved successful, it could be expanded nationally.
"It's a huge disappointment. We're surprised by the court's ruling," said Michael Maron, president and chief executive officer of 318-bed Holy Name Hospital in Teaneck, which was in the midst of rolling out the program with its physicians. "In an era where we are trying to improve healthcare, any effort to squash experimentation is foolhardy. It's counterproductive to what the entire health system needs."
The lawsuit marked a victory for three hospitals in the Robert Wood Johnson Health System in New Brunswick, which had complained that their exclusion from the project created an uneven playing field that favored a select group of hospitals (Feb. 9, p. 12). Two weeks before the ruling, the three plaintiffs-flagship 482-bed Robert Wood Johnson University Hospital in New Brunswick, 140-bed Robert Wood Johnson University Hospital at Rahway and 204-bed Robert Wood Johnson University Hospital at Hamilton-were joined by 155-bed St. Francis Medical Center in Trenton.
Officials at Robert Wood Johnson declined to be interviewed in the absence of a written opinion from the judge, but issued a written statement.
The state hospital association, which had unsuccess-fully tried to join the case as a defendant, likewise only issued a written statement. "We consider this a lost opportunity to make the Medicare system more efficient and help preserve it into the future," said Gary Carter, the association's president and CEO. The association previously argued that the misaligned Medicare payment system-which reimburses hospitals by the case but doctors by the procedure-results in inefficient care. Others have countered that physician gainsharing essentially financially rewards physicians for withholding medical care.
Goal was to expand, not end program
Still, this lawsuit could be a case in which the hospital plaintiffs threw out the baby with the bath water. "Our goal in bringing this case wasn't to end the demonstration project but to expand it to other hospitals and doctors throughout the state, improve its design and protect nonparticipating hospitals from an adverse economic impact," Harvey Holzberg, president and CEO of both Robert Wood Johnson University Hospital and its parent system, said in a written statement. "Demonstration projects such as these must be built on a level playing field. This project was not."
Rather than shutting down the project altogether, the plaintiffs in their trial brief had asked the judge to permit the four hospitals to participate. Bissell's comments from the bench, however, indicated that he thought there was no wiggle room for gain-sharing under the HHS inspector general's strict interpretation of Medicare law.
Subject to Bissell's final opinion, the case may mark the first time a published ruling has overturned the CMS' approval of a Medicare demonstration project, said Gregory Luce, the plaintiff's lead attorney and a partner at Jones Day in Washington. Even more significantly, Bissell indicated in his oral remarks that he "accepted" a 5-year-old interpretation by the inspector general that gain-sharing intractably violates the Civil Monetary Penalties, or CMP, law and cannot be waived by the CMS, Luce said.
That law prohibits hospitals from offering payments to physicians that either directly or indirectly encourage them to reduce or limit care provided to Medicare patients. In July 1999, the inspector general's office issued a special advisory bulletin that "decreed unequivocally that gain-sharing arrangements between hospitals and physicians" violated the CMP law, according to the plaintiffs' trial brief.
The special advisory bulletin apparently was prompted by numerous requests by hospitals throughout the country that were exploring gain-sharing programs. The same bulletin defined gain-sharing as an arrangement in which a hospital gives physicians a percentage share of any reduction in costs "attributable in part to the physicians' efforts"-exactly what the New Jersey demonstration project proposed.
Depending on the final written order, the CMS, as the sole defendant in the case, will likely have only two options: Appeal the ruling or revamp the demonstration project to address the judge's concerns, Luce said. But Luce also said he wasn't sure the experiment could be rejiggered. "On its face, it doesn't seem to be readily fixable," he said.
Though the injunction quashes this particular demonstration project, Luce said he didn't think the ruling necessarily carried implications for other CMS demonstration projects, such as the ongoing pay-for-performance project that is being led by the Premier hospital alliance. The Premier project is a quality initiative and does not offer physicians financial rewards for limiting patient care, he said.
Premier referred all questions about its project to the CMS. Officials at the CMS and the U.S. Justice Department declined to comment pending a written order. Former CMS Administrator Tom Scully, who approved the New Jersey project, did not respond to a request for an interview.
"It is a ruling that affirms the right of adversely affected parties to challenge a project, although we have to see the court's (written) opinion," Luce said. "It also makes clear that the courts are authorized to approve and disapprove projects."
The program promised top-performing doctors as much as 25% more in Medicare fees, while participating hospitals risked losing 2% of their Medicare revenue if the effort failed in the second year to improve efficiencies and cut costs as expected. In the trial brief, the plaintiffs argued that achieving the necessary 2% cost savings would be a slam-dunk for the participating hospitals because of the June 2003 regulatory change in calculating outlier payments, which are intended to compensate hospitals for unusual cases in which costs exceed standard Medicare rates. The plaintiffs noted that the methodology was revamped because of "a glaring weakness in the regulations" that allowed hospitals to increase their Medicare payments by artificially inflating their charges.
New Jersey is home to an unusually high number of not-for-profit hospitals that boosted their bottom lines with Medicare outlier payments (July 14, 2003, p. 4). Two of the plaintiffs-the Hamilton hospital and St. Francis-were among the top 10 hospitals nationwide, excluding Tenet Healthcare Corp. hospitals, that relied heavily on Medicare outlier payments to boost revenue, according to a Modern Healthcare analysis. None of the eight hospitals participating in the pilot program were on that list.
Irony in ruling
The court's ruling is ironic considering the four hospitals sued the CMS because they were excluded from the demonstration project, said Holy Name's Maron. "If the experiment had succeeded, they would have been (able to participate), so I'm at a loss," he said. "That shows how shortsighted we've become because of the short-term pressures we're all dealing with."
Maron said Holy Name was in the midst of rolling out the program to its physicians and had recruited close to 50. The hospital planned to distribute the doctors' share of the profits in June based on results from the first quarter, he said. If the hospital failed to achieve the necessary cost savings, it risked losing nearly $1.5 million in the second year of the program, but it was a risk worth taking, he said. "We stayed in the project solely because we thought it was a worthy experiment," Maron said.
Hunterdon Medical Center in Flemington had already recruited 75 of the 89 physicians eligible to participate in the program, said Robert Pickoff, the hospital's chief medical officer. It was not a hard sell, he added. "Physicians have felt for some time that incentives need to be aligned," he said.
Robert Wise, president and CEO of Hunterdon, said the hospital had poured a lot of time and effort into the project. "It's especially disappointing in view of the information that the Medicare trust fund will probably be bankrupt in 2019, and that means we will need to be creative in developing alternative pilot projects like this one in New Jersey," he said.
The project's architect, Michael Kalison, a lawyer whose company developed the software that was to be used to measure physician performance, said the ruling made no sense in light of the "circuit breakers" that were built into the project to protect hospitals that did not participate. The program was also designed to maintain patient care if not improve it, he said.
"It is a fastball down the middle. If you want to test this idea, this is how you would structure it," Kalison said. "There are setbacks and (this) was a setback. But am I determined? Absolutely. Absolutely. There is an inevitability about this idea."