This article is more than 5 years old. Information may no longer be current.

Gainsharing and other surgeon/hospital partnering: What’s legal, what’s not?

Avoid legal jeopardy and get the most from these relationships. Leading health care attorneys and the head of a major university hospital system explain.

Issue: March 2006

Add topic to email alerts

Receive an email when new articles are posted on

Please provide your email address to receive an email when new articles are posted on .

Subscribe

Added to email alerts

You've successfully added to your alerts. You will receive an email when new content is published.

Click Here to Manage Email Alerts

You've successfully added to your alerts. You will receive an email when new content is published.

Click Here to Manage Email Alerts

Back to Healio

We were unable to process your request. Please try again later. If you continue to have this issue please contact customerservice@slackinc.com.

Back to Healio

Jack Bert, MD (Moderator): Many physicians continue to explore methods of developing relationships with hospitals. Joint venturing of surgery centers and various ancillary services with hospital systems is not uncommon and can work to both the hospital’s and physician’s advantage. The benefits of developing economic relationships with hospital systems include the following:

• capturing referral sources that are owned and controlled by the hospital system;
• avoiding competition with the hospital by sharing control of the ancillary service; and
• improving the efficiency of the ancillary service by physician management.

Gainsharing with a hospital system has remained controversial, however.

To gain perspective on this important subject, we asked two nationally recognized health care attorneys and a former AAOS president (who is CEO of a 550-member group of physicians that gainshares with a university hospital system) questions regarding the feasibility and legality of hospital-physician relationships. It is clear from the discussion below that it is possible to devise creative methods of partnering legally with hospitals.

We begin with some insights on physician/hospital partnership hospitals from Roby Thompson, MD, then present some specific questions to our attorney panelists.

Roby Thompson, MD: In considering any type of physician-hospital partnership, it is essential that a knowledgeable health care attorney be involved in structuring the arrangement because of the complex federal regulations governing such relationships, including private inurement, and fraud and abuse.

Models that have been used by multispecialty practice groups such as University of Minnesota Physicians include the following:

(1) Management Service Agreements (MSA) — where a physician group contracts with a hospital to manage a segment of the hospital’s business. Included in those contracts can be performance bonuses based on specific targets that do not suggest limiting service to patients or providing unnecessary services to patients.

An example would be managing a hospital outpatient clinic or emergency room for a fixed annual fee with performance bonuses based on criteria such as improved patient satisfaction, decreased wait time in the clinics, decreased time for new patient appointments, etc.

In addition, Professional Service Agreements (PSA) also might be employed where physician groups are compensated by the hospital for professional services at a “fair market value” comparable to a specialist’s income in a competitive marketplace.

Likewise, in certain circumstances, hospitals are required to provide 24-hour coverage, and compensation for call coverage may be part of a PSA agreement, for example, emergency room call, ICU call, etc. In other words, call coverage over and above the physician’s responsibility for their own patient population or group of patients, or providing other professional or administrative services to the hospital, justifiably may be included in a PSA with a hospital.

(2) Hospitals may outsource a component of their business such as laboratory services, physical therapy, etc. Physician groups then might own those services and sell them to the hospital at “fair market value.”

(3) “Joint Ventures” are more challenging because of federal regulations that prohibit hospitals from entering into a financial arrangement with a physician or physician group that might be construed as encouraging referrals by the physician group to the hospital.

Certain “safe harbors” have been defined for joint ownership such as jointly owned equipment like a linear accelerator or a magnetic resonance image unit which is then leased back to the hospital at a “fair market value.” Under this approach the professional revenue would remain with the physicians and the technical revenue would remain with the hospital, but the physicians and the hospital both share in the lease payments as the equipment owners.

Certain demonstration projects known as “gainsharing” have been put in place for cardiovascular services and are being implemented for orthopedics in a variety of hospitals. These are really not “gainsharing” from the standpoint of increased revenue being shared but more importantly, cost savings resulting in a gain in net revenue.

Most have been centered around control of costs for implant purchasing and utilization. These must be carefully structured and include assurance measures that quality control is in place and that accurate cost accounting capabilities are in place by the hospital.

Some consultants have estimated that less than 10% of the hospitals in the United States have those capabilities at present. These gainsharing arrangements are structured over a limited time frame with baseline data and yearly reporting after that, and include controls and limits on any payments that may change referral patterns.

The attractiveness of these ventures is that they serve the ultimate objective of providing better patient care at a lower cost, driving down health care inflation while making hospitals and physicians financially successful, as well as financially prudent.

For most of these hospital-based partnerships to be effective, there needs to be enough volume for the hospital to benefit, and there needs to be a physician group or affiliation that provides for alignment to make the MSA or PSA work. A variety of models are available from a loosely affiliated group of physicians in a single specialty to a large integrated multispecialty group.

The alignment between hospitals and physician groups using these models can provide the hospital with the same rewards it sees with an employed physician model, but still maintains the private practice model where the physician retains responsibility for the best interest of the patient while providing optimum care at the lowest cost.

Bert: Are there ways you know of for physicians to partner with hospitals legally?

Paul Torgerson, JD: Many of the problems faced by the health care industry today are rooted in the fragmentation of care delivery. Said another way, the processes used by hospitals to deliver their part of the health care continuum are not always aligned with the processes used by the providers who deliver the professional component of care.

Consequently, the incentives of providers are often in conflict with one another. As a result, in many cases, patients experience the health care system as disjointed, confusing and unsatisfying care episodes, rather than as an integrated system for managing their health. Hospitals and physicians can definitely partner to improve that environment.

Partnering relationships run the gamut from simple part-time employment relationships aimed at aligning processes and incentives in particular segments of clinical service to ownership by physicians of interests in an entire hospital. With full awareness of the regulatory landscape and careful planning, many other contractual and joint venture relationships in between are possible as well.

Many arrangements have been approved through statutory exceptions, regulatory “safe harbors,” or advisory opinions, and regulatory views continue to evolve as the fragmentation and waste inherent in the current system are exposed. Key features of most approved arrangements include the following:

• written documentation; any compensation set in advance;
• financial benefit not dependent on referrals or referral volumes;
• financial arrangements at fair market value; and
• protections against abuse.

Health care lawyers can help physicians identify the boundaries as hospitals and physicians search for new ways to work together.

David Glaser, JD: Absolutely. You can jointly offer certain services, such as an ambulatory surgical center (ASC) or a surgical department of a hospital or an MRI. You can also use other relationships, such as management agreements or gainsharing to improve the delivery of care and the economic performance of both the hospital and the physician group.

Bert: What are the advantages to partnering with hospitals now and in the future? Is it better to do this in a joint venture with the hospital as a freestanding ASC or as an inpatient/outpatient surgery department? (This discussion could involve the difference in Medicare part A reimbursement as opposed to reimbursement for a freestanding ASC.)

Torgerson: If one believes that aligned incentives and shared processes are more likely to produce better outcomes than unaligned processes aimed at conflicting goals, the value of physicians and hospitals working closely together to shape and deliver integrated processes seems obvious.

Physicians’ and hospitals’ pursuit of shared clinical objectives, shared commitment to deliver cost-effective care and a common interest in the patient’s satisfaction with the care delivery can only lead to more efficient processes, less waste and greater satisfaction with the experience on the part of both care providers and patients.

If physicians know that hospital administrators understand the flaws in their processes and physicians and administrators work hand in hand to remove the barriers, and improve the processes, good things should happen for patients.

Glaser: The benefits of working with a hospital vary greatly depending on the situation. For example, in states where a certificate of need (CON) is required, a joint venture may be the only way that the physician group will be able to open a new service.

In other cases, it may be possible for the physician group to independently establish an ASC, but a surgical venture with the hospital may be far more lucrative. First, the hospital may be able to obtain better reimbursement. Medicare reimbursement for hospital-based facilities is typically higher than for ASCs.

Some private payors also provide more favorable reimbursement to hospitals. Second, if the hospital’s participation increases patient volume, it may be possible to greatly increase revenue with little increase in the total costs, making the venture far more efficient and profitable.

There are, of course, potential disadvantages to working with the hospital. Many physicians bristle at the bureaucratic nature of hospitals. Physicians often suspect that the hospital is unfairly shifting overhead from hospital operations to the joint venture.

Either of these factors may make the joint venture less profitable than operating the service independently. If physicians are able to retain management control over the venture, it is often possible to limit these disadvantages. It is important to note that while some hospitals insist that the tax exemption rules require the hospital to maintain 51% control over joint ventures, there is no case law supporting that assertion. We have worked on many ventures where physicians are the ones managing the operations.

Bert: Can physicians legally share revenue streams with a hospital system?

Torgerson: Health care regulation at both federal and state levels severely limits the ability of physicians to share directly in a hospital’s revenue stream. The limitations are based primarily on governmental concern that such economic relationships create conflicts of interest leading to over-utilization of services and the temptation to refer patients for care based on economics rather than medical judgment.

Although government regulators acknowledge that many legitimate business relationships are called into question under the existing statutes and rules, the fear of abuse is seen as a greater potential harm. Some sharing is allowed in specific situations, however, such as operation of ASCs by joint ventures of hospitals and certain physicians.

Tax-exempt hospitals face the additional factor that revenue sharing can jeopardize exempt status. As a result, careful planning is necessary when structuring joint ventures in tax-exemption environments.

Glaser: Yes, but ... it is certainly possible to create relationships where revenue is shared, but the Stark law, the antikickback statute, and tax exemption rules all can impact the relationship. It is always possible for a hospital to pay a physician for the physician’s work. For example, if the physician serves on a hospital committee, it is perfectly legal for the hospital to compensate the physician for the income the physician would have earned working for his/her practice.

In any business, however, it is better to try to tap into a revenue stream that is not “hours driven.” That may be possible, but it requires care to ensure that regulators cannot argue that the payments are really intended to compensate the physician for referring to the hospital.

Bert: Is gain sharing allowable between the physician group and a hospital system, in your opinion?

Torgerson: The Office of Inspector General recently approved a “gainsharing” program involving a hospital and cardiologists. The advisory opinion described the protections that the parties had built into the arrangement to overcome the regulators’ normal list of concerns. The protections included, among other things, the following:

• notifications to the patients of the financial relationships;
• notice to other physicians that the hospital was not encouraging referrals to this service; and
• independent medical opinions that the savings projects would not restrict or limit needed care; and limitation on the shared gains under the program to an annual period of time.

In recent testimony to the Health Subcommittee of Ways & Means, the Chief Counsel in the Office of Inspector General (OIG) stated, “Properly structured, gain sharing arrangements may offer opportunities for hospitals to reduce costs without causing inappropriate reductions in medical services or rewarding referrals of federal health care program patients.” Given the almost universal interest in controlling the growth in health care costs, gain sharing and other programs aimed at controlling costs should gain traction.

Glaser: Absolutely. A few years ago, the government tried to argue that gainsharing was impermissible because a federal law prohibits payments that are intended to limit beneficiary access to services.

The government’s position was not very defensible, and they have since conceded that hospitals can compensate physicians if the physicians work to reduce hospital costs. For example, if all of the orthopedic physicians at a facility agree to use a particular medical device, permitting the hospital to obtain a volume discount, the hospital can share the savings with the physicians.

In recent advisory opinions, the government has approved several gainsharing arrangements. The government focuses on certain safeguards designed to minimize the risk that the program would lower the quality of patient care.

For example, one proposal allowed by the OIG capped the total payments to the physicians and included utilization targets designed to remove any financial incentives if there were dramatic increases or decreases in utilization after the gainsharing program was launched.

The approved programs were also fully disclosed to the public, and permitted physicians to choose alternate devices when medically appropriate. The advisory opinions make it clear that as long as the financial incentives are designed to protect patients, gainsharing does not violate federal law.