View from Washington: Revisitation

Federal policymakers take another look at the value of physician-hospital gain-sharing arrangements

Considering the significant financial pressures from payers over recent years, coupled with the reality that 60 percent of hospitals lose money providing patient care, healthcare providers are vigilantly reviewing all operational components that drive costs. One hospital cost-control measure that is obtaining visibility again is gain-sharing arrangements between providers and physicians. Earlier this year, Health and Human Services Inspector General (HHS IG) issued six advisory opinions softening their 1999 guidance by detailing how such programs can be administered to minimize violations of federal law. This revised policy position is likely to accelerate hospital adoption of gain-sharing arrangements to manage providers’ escalating supply costs.

In such gain-sharing collaborations, hospitals engage physicians to design and implement cost containment strategies for a variety of procedures, products and policies. In return, doctors receive a percentage of the cost savings. Given reimbursements from public and private payers are falling and overall expenditures are rising, hospitals are looking for ways to cut costs. But since physicians are reimbursed separately under Medicare, doctors do not have the same incentives to save hospitals money. Thus, gain-sharing programs bridge this incentive gap by offering physicians a portion of the hospital savings in exchange for the physician’s effort in implementing cost-cutting strategies.

In February 2005, the IG issued a series of favorable advisory opinions allowing gain-sharing arrangements. Historically, the IG has prohibited such transactions because they violate civil monetary penalty laws, in that they induce physicians with financial gains to limit services or devices to Medicare and Medicaid patients.

Eight characteristics were identified in each of the advisory opinions that assured the IG the programs would not hinder patient care. Concerns that physicians in pursuit of monetary gains would abuse the collaborative relationships were minimized. Even though advisory opinions are specific to the parties involved, these recent opinions provide specific fundamentals of what the IG will seek before approving a gain-sharing program.

The Medicare Payment Advisory Commission (MedPAC) recommended Congress to allow the HHS Secretary the authority to permit and regulate gain-sharing arrangements. The advisory panel’s position on gain-sharing was included in a March 2005 report on specialty hospitals.

At a March 8 Senate Finance Committee hearing on specialty hospitals, MedPAC Chairman Glenn Hackbarth told lawmakers, “Gain-sharing could capture some of the incentives that are animating the move to physician-owned specialty hospitals while minimizing some of the concerns that direct physician ownership raises.”

Committee Chairman Sen. Charles Grassley (R-Iowa) and ranking member Sen. Max Baucus (D-Mont.) indicated they are drafting bipartisan specialty hospital legislation for introduction early this summer, and insiders say gain-sharing provisions may be included.

Policymakers’ revisit in reviewing gain-sharing arrangements is welcomed by the provider and physician communities. In addition to product standardization, which will provide hospitals artillery against medical device manufacturers in price negotiations, physician incentives will be aligned with providers to enact other supply chain programs, such as streamlining scheduling of operating rooms and implementing compliance with clinical protocols, all without compromising the quality of care. These innovative, cost-saving, supply chain approaches will provide benefits to all players in the supply chain: providers, physicians, payers and patients.

About the Author

Robert Betz Ph.D.
Robert Betz, Ph.D., is president of Robert Betz Associates, Inc. (RBA), a well-established federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit
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