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Will gainsharing break the back of the orthopedic device makers?
Earlier this year, the OIG allowed one hospital to test a gainsharing program with cardiac surgeons. How this will affect orthopedics is still unknown.
“Gainsharing” in the orthopedics industry has created quite a buzz on Wall Street lately. What the effect of gainsharing agreements might be on the manufacturers of orthopedic products has been the subject of many discussions among analysts who follow the industry. Several hospitals support the idea of gainsharing as a way to help control orthopedic implant costs. Some hospital administrators see orthopedic manufacturers as “Public Enemy No. 1,” because orthopedic implants make up one of the few medical-device categories able to sustain price increases from year to year.
At present, Medicare reimburses at a fixed rate per procedure, so it is in a hospital’s best interest to reduce patient length of stay along with the cost (and quantity) of supplies/materials used in care. To do this, a hospital must enlist the cooperation of its doctors, and sharing the savings achieved in this way — gainsharing — offers an effective way to encourage that cooperation.
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Today, gainsharing is strictly limited, primarily by two sections of the Social Security Act. The first is 1128A(b), which prohibits hospitals and managed care plans from giving incentives to physicians to reduce clinical services. The second is 1128B(b), which relates to anti-kickback regulations. The Office of the Inspector General (OIG) has generally held a very strict view that gainsharing is illegal. Simply put, its position is that these laws protect patients from the risk that a hospital might skimp on products and services in order to pad its bottom line.
New opinion alters landscape
However, earlier this year the OIG released an advisory opinion (AO) that in effect allowed one hospital to test a gainsharing plan with a group of cardiac surgeons for one year. The AO states that the OIG will not impose financial sanctions on the program. But the OIG also made it clear in its opinion that gainsharing remains illegal. Nevertheless, investors are concerned, believing that orthopedics would be a potential target if such agreements become a trend, or if pressures grow to relax the current laws.
No material effect
We at Morgan Stanley believe that the AO will not have a material effect on the current environment. Our reasons are threefold as follows:
- The OIG continues to take a strict view that gainsharing is illegal. The Social Security Act clearly states that gainsharing is illegal and that the Secretary of Health and Human Services lacks the authority to make exemptions. The only permissible vehicle for gainsharing is as outlined in the AO.
- Compliance/monitoring costs are substantial and may outweigh the benefits of gainsharing. The AO stipulates that the hospital must hire additional full-time staff to administer and monitor the gainsharing program. It is unclear whether the program can generate an adequate return given the one-year time limit.
- Physician compliance remains an issue regardless of financial incentives. The gainsharing agreement sets specific parameters for treatment standards. All cost savings get paid to the physician group, which then determines how to compensate the individual physicians. However, individual physicians are not bound to abide by the agreement.
A more efficient route, in our view, would be for Congress to amend the laws to allow for gainsharing by changing the appropriate safe harbors. To this end, Senators Chuck Grassley (R–Iowa) and Max Baucus (D–Montana) have proposed legalizing gainsharing in their co-sponsoring of the “Hospital Fair Competition Act of 2005.”
In sum, the recent AO probably will not have a near-term impact on orthopedics companies. But if Senators Grassley and Baucus have their way, we believe the issue of gainsharing will continue to be a hot topic in the orthopedics world.
For more information:
- Glenn Reicin is an equity analyst covering the medical device industry at Morgan Stanley in New York City. His insights into the orthopedics industry led the editors of Orthopedics Today to ask him to contribute articles from time to time. He has agreed to contribute (without compensation) in hope of eliciting feedback from the orthopedic community. You may contact him at glenn.reicin@morganstanley.com.