The opportunity offered by gainsharing to increase compensation and profitability by reducing costs and waste is appealing to many hospitals and physicians.
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Published 6/1/2016
James M. Daniel Jr, JD, MBA; John Cherf, MD, MPH, MBA

The Death and Rebirth of Gainsharing: Payment Opportunities for the Orthopaedic Surgeon

"Gainsharing" is a popular management and incentive compensation strategy that is often used in manufacturing and by companies with industrial service lines. It is used to reduce costs by paying incentives to employees who develop or participate in cost-saving strategies. The amount of the "gainshare" incentive payment is typically based on the amount of cost savings produced by the employee, as determined by a preset formula and other performance measures.

The interest in gainsharing among healthcare providers stems from a desire to reduce the high costs of health care. Promising incentives to reduce costs can create a greater degree of accountability and efficiency among those who actually provide services for an organization.

From a hospital's perspective, gainsharing can increase profitability simply by reducing the costs of delivering services. At the same time, the payment of incentives for patient outcomes based on performance measures can improve the quality of health care delivered to patients. From the physician's perspective, gainsharing is a way to share in savings that would otherwise belong entirely to a facility such as a hospital.

Questions about potential inadvertent and negative effects of gainsharing on patients have lingered for several decades. Some federal agencies involved in the delivery and supervision of federal healthcare programs have expressed concern that paying physicians for cost reductions would encourage behaviors that could potentially lower the quality of patient care and defraud federal healthcare programs. As a result, statutes, regulations, and federal agencies have taken positions against gainsharing.

Frequently asked questions include whether gainsharing is legal and what role it should play in contemporary healthcare delivery models. These questions are especially topical, due to recent legal and regulatory changes that could promote a potential resurgence of gainsharing in health care. At the same time, these changes could provide opportunities for orthopaedists to improve not only their compensation streams but also the care quality for patients.

History and background
The Office of the Inspector General (OIG) of the Department of Health and Human Services (HHS) has historically been suspicious of gainsharing arrangements. From its start in 1965 until 1983, the Medicare program operated on a cost-basis system. Hospital providers were paid on the basis of their reasonable actual cost for providing services to beneficiaries. This payment model, however, essentially rewarded hospitals for providing higher volumes of services. Coupled with the increased costs of advancing medical technology, the cost-based Medicare payment model led to drastic increases in charges to the Medicare program.

In 1983, Congress adopted as an alternative the prospective payment system model of hospital reimbursement, which was based on diagnostic-related group (DRG) categorization. The DRGs under this payment model were phased in over several years at a time when there were concerns that hospitals might try to "stint" on patient care to improve their bottom lines.

DRGs are assigned a payment weight that, according to the HHS, "reflects the average level of resources for an average Medicare patient in the DRG, relative to the average level of resources for all Medicare patients." Because Medicare capped payment within each DRG, hospitals assumed new risk for higher costs. This generated fear that hospitals might undercut patient care or provide incentives to physicians to reduce care by limiting services or discharging patients early. As a result, in order to combat this concern, civil monetary penalty (CMP) laws were enacted (42 U.S.C. § 1320a-7a). Simply put, the law prohibits payments to physicians for reducing services to Medicare beneficiaries, imposing significant financial penalties on Medicare providers who commit fraud.

In addition, state fraud and abuse laws affect the legal analysis of gainsharing and must be considered. Some state laws are more restrictive than their federal counterparts, while others are less burdensome or follow federal law. However, the subject of state law is beyond the scope of this article.

Conflict and controversy
The Internal Revenue Service (IRS) and the OIG were soon at odds over gainsharing.
In 1999, the IRS issued two unreleased private letter rulings (essentially, opinion letters on specific tax issues for individuals) taking a favorable view of gainsharing and concluding that gainsharing would not jeopardize a nonprofit hospital's tax-exempt status. Shortly thereafter, the OIG strongly discouraged hospitals and physicians from gainsharing in special advisory bulletins. Although gainsharing might serve legitimate interests for hospitals, physicians, and patients, the OIG saw gainsharing as a violation of the CMP law.

According to the OIG's interpretation, the CMP law was so broad that it prohibited any payments to "induce" physicians to reduce or limit any items or services for the health care of Medicare patients. Such a negative view put a halt to many gainsharing programs in existence or under development. The IRS, concerned that it had wrongly interpreted the CMP law, reconsidered its position and advised against entering into gainsharing arrangements.

The issue was this: What did the word "services" mean in the CMP law? The CMP law prohibited payments to physicians meant to reduce the healthcare "services," but did that mean any type of services—even extraneous, wasteful, and unnecessary services to Medicare beneficiaries? Or, alternatively, did "services" mean the "medically necessary services" that the patient actually needed? Many legal experts disagreed on the answer, but the OIG position was clear. As a result, many hospitals and physicians feared that gainsharing programs would risk violating the CMP law.

However, the OIG, probably sensing dissatisfaction with the CMP law's plain language, took some steps to convey that gainsharing was not a major fraud-and-abuse concern of the agency. Between 2000 and 2013, the OIG issued more than a dozen advisory opinions favorable to gainsharing programs for a variety of reasons.

Another hurdle for gainsharing arrangements was the physician self-referral law, also known as the federal Stark law ("Stark"), which prohibits a physician from referring patients who require certain Medicare services to an entity in which that physician (or an immediate family member) has a financial interest. The issue was whether the Stark law prohibited percentage-based arrangements to physicians for gainsharing. After a number of proposals to revise Stark were rejected, the OIG eventually promulgated regulations covering compensation arrangements, ownership arrangements, and fair market value that included gainsharing components.

However, the plain language of the CMP law remained problematic. In 2014, the OIG asked for public commentary for a proposed regulation interpreting "services," even though it could not write the words "medically necessary" into the statute. The OIG also made the unusual move of declaring that gainsharing had not been an enforcement priority of the agency and had not resulted in any prosecutions to date.

Does MACRA settle the debate?
The passage of the Medicare Access and CHIP (Children's Health Insurance Program) Reauthorization Act (MACRA) in April 2015 negated the need for OIG to issue final regulations on the topic. MACRA added the words "medically necessary" to the CMP law, limiting the prohibition to only those inducements that limit "medically necessary" services. The change narrowed the scope of the CMP law and significantly reduced the risk of scrutiny for hospitals and physicians interested in gainsharing arrangements.

Congress also directed the Centers for Medicare and Medicaid Services (CMS) to make a report recommending the removal of impediments and the inclusion of safeguards to make gainsharing programs available. The language had additional effects that seem to indicate a broader agency acceptance of the legality of gainsharing. For example, in November 2015, CMS issued new waivers for accountable care organizations (ACOs). These waivers eliminated an earlier gainsharing waiver from 2011 because the exception was no longer necessary.

Clearly, the pendulum is now swinging toward gainsharing. Due to reduced reimbursement availability, the opportunity offered by gainsharing to increase compensation and profitability by reducing costs and waste is appealing to many hospitals and physicians.

Gainsharing opportunities for orthopaedists
Broadly speaking, two types of gainsharing (external and internal) are available for orthopaedists in today's payment environment. External gainsharing is exemplified by new payment models from Medicare (and possibly Medicaid in the future) that involve orthopaedic services. Both the Bundled Payment for Care Improvement (BPCI) project and Comprehensive Care for Joint Replacement (CJR) model incorporate gainsharing by sharing Medicare savings from reduced expenses with orthopaedists. Internal gainsharing may be permitted under post-MACRA guidance and regulations enabling hospitals to share the savings in orthopaedic service expenses with the participating physicians.

With internal gainsharing, a hospital achieves greater alignment of incentives with physicians by sharing a portion of the savings generated through operational cost reductions as compared to the hospital's total episodic reimbursement from a payer. In sum, a hospital can increase its margin, and a physician can receive additional revenue in the form of "shared savings," by reducing costs to deliver services under a fixed prospective payment.

In contrast to internal gainsharing arrangements, a number of federal reimbursement programs and demonstration projects rely on external gainsharing approaches. In an external gainsharing arrangement, providers are able to share in the savings they create by holding total healthcare expenditures below a defined threshold. The expenditure threshold can be established as a target price for an episode of care, such as those defined as part of the BPCI or CJR programs. Thresholds may also be established as an aggregate expenditure benchmark for an attributed population of beneficiaries, as in the Medicare Shared Savings Program.

Depending on the program, providers are permitted to share in a significant portion of the savings they help to generate. In the BPCI and CJR programs, for example, physicians are permitted to receive shared savings distributions totaling up to 50 percent of their Part B professional fee for the episode.

In geographical areas in which bundled payment models are currently in place, providers may receive advance federal approval of gainsharing programs, including those that reward orthopaedic surgeons for reducing episodic costs. Many of these programs have generated significant cost reductions by minimizing variation in care delivered by post-acute providers, a sector plagued by variability in cost and quality.

Physicians, particularly orthopaedic surgeons, are positioned to create win-win arrangements through gainsharing arrangements with hospitals. Using either external or internal approaches, gainsharing provides a mechanism to align provider incentives, deliver on the accountable care goals of the bundled payment and ACO programs, and create opportunities for both parties to share in a value-based revenue stream.

James M. Daniel Jr, JD, MBA, is an attorney with the firm of Hancock, Daniel, Johnson & Nagle, PC, in Richmond, Va. John Cherf, MD, MPH, MBA, is a member and section leader of the AAOS Health Care Systems Committee and a member of the AAOS Now editorial board.

©James M. Daniel Jr, JD, MBA and John Cherf, MD, MPH, MBA.

Editor's Note: The information contained in this article is intended for general information purposes and should not be considered legal advice. Individuals who need legal advice should contact a duly licensed professional.

Bottom Line

  • Although many experts say that gainsharing can increase profitability by reducing the costs of delivering healthcare services, others are concerned that it may lead to fraud and abuse.
  • As healthcare costs have increased despite various attempts to control them, attitudes and regulations on gainsharing have shifted.
  • Current federal programs, such as the BPCI project and the CJR model, use external gainsharing, enabling providers to share in the savings resulting from holding total healthcare expenditures below a defined threshold.
  • Hospitals may use internal gainsharing (sharing a portion of the savings generated through operational cost reductions as compared to the hospital's total episodic reimbursement from a payer) to achieve greater alignment of incentives with physicians.
  • Orthopaedic surgeons may benefit from gainsharing arrangements that improve the patient care experience, improve population health, and reduce per capita costs of care.