Testimony of: 
Lewis Morris 
Chief Counsel to the Inspector General 
U.S. Department of Health and Human Services 
 
Good morning Madam Chairman and Members of the Subcommittee.  I am Lewis 
Morris, Chief Counsel at the U.S. Department of Health and Human Services Office of 
Inspector General (OIG).  I appreciate the opportunity to discuss OIGs views on 
gainsharing programs offered by hospitals.   
 
While gainsharing promotes hospital cost reductions by aligning physician incentives 
with those of the hospital, these arrangements also implicate the fraud and abuse laws. 
When evaluating the risks posed by a gainsharing program, OIG looks for three types of 
safeguards: measures that promote accountability, adequate quality controls, and controls 
on payments that may change referral patterns.  Properly structured, gainsharing 
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.  In a number of specific cases, OIG has concluded that the arrangement 
presents a low risk of abuse and, therefore, exercised its prosecutorial discretion not to 
impose sanctions.  However, absent a change in law, it is not currently possible for 
gainsharing arrangements to be structured without implicating the fraud and abuse laws.   
 
My testimony begins with a brief overview of gainsharing and a discussion of the Federal 
laws that are implicated by these types of arrangements.  I will then describe some useful 
considerations in evaluating the risk of fraud and abuse posed by gainsharing 
arrangements. 
 
BACKGROUND ON GAINSHARING ARRANGEMENTS 
  
While there is no fixed definition of gainsharing, the term has typically referred to an 
arrangement in which a hospital gives physicians a share of any reduction in the 
hospitals costs attributable in part to the physicians efforts.  Gainsharing can take 
several forms.  Some arrangements are narrowly targeted, giving the physician a financial 
incentive to reduce the use of specific medical devices and supplies, to switch to specific 
products that are less expensive, or to adopt specific clinical practices or protocols that 
reduce costs.  Other more problematic arrangements are not targeted at utilization of 
specific supplies or specific clinical practices, but instead offer the physician payments to 
reduce total average costs per case below target amounts. 
 
A purpose of gainsharing is to align physician incentives with those of the hospital and 
thereby promote hospital cost reductions.  Under Medicares prospective payment 
system, hospitals have a strong incentive to reduce per patient admission costs, because 
they receive a fixed amount for inpatient services without regard to actual costs.  
Physicians, on the other hand, are reimbursed separately based upon a fee schedule and 
may have little or no incentive to choose less costly supplies or devices, or to support 
hospital efforts to negotiate lower prices from suppliers of physician-chosen items and 
supplies, such as stents and cardiac and prosthetic devices.  In fact, there are reports of 
medical device manufacturers having financial relationships with some physicians that 
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing October 7, 2005    Page 1  create conflicts of interest and potentially reward the physician for loyalty to the device 
manufacturer at the expense of the hospital and the health care system in general.  
 
Gainsharing arrangements are an attempt to bridge the gap between the hospital and 
physician payment systems.  By giving the physician a share of any reduction in the 
hospitals costs attributable to his or her efforts, hospitals anticipate that the physician 
will practice more cost effective medicine.  For example, gainsharing programs that 
include product standardization may provide a physician with an incentive to choose 
clinically equivalent and medically appropriate devices that are also less expensive.  The 
hospital then shares with the physician a portion of the hospitals savings resulting from 
the physicians use of the standardized product.  
 
PERSPECTIVE ON GAINSHARING 
 
OIG recognizes the potential benefits of gainsharing arrangements and that hospitals have 
a legitimate interest in enlisting physicians in efforts to reduce and eliminate unnecessary 
costs.  Nonetheless, OIG has historically been very wary of gainsharing arrangements, 
because these arrangements implicate the Civil Monetary Penalty (CMP) and Federal 
anti-kickback statutes.  There may also be physician self-referral or Stark law 
implications.  However, the physician self-referral issues are more appropriately 
addressed by the Centers for Medicare & Medicaid Services (CMS) because the Stark 
law falls under the purview of that agency. 
 
With respect to the CMP, the major concern is the impact of gainsharing on the quality of 
care provided to Medicare and Medicaid beneficiaries.  The CMP, sections 1128A(b)(1) 
and (b)(2) of the Social Security Act, prohibits a hospital from knowingly making a 
payment directly or indirectly to a physician as an inducement to reduce or limit items or 
services furnished to Medicare or Medicaid beneficiaries under a physicians direct care.  
The CMP is an intentionally broad prohibition, reflecting Congressional concern that 
under the inpatient prospective payment system hospitals would have an economic 
incentive to pay physicians to discharge patients too soonquicker and sickeror 
otherwise truncate patient care. 
   
Any hospital gainsharing plan that encourages physicians, through direct or indirect 
payments, to reduce or limit clinical services violates the CMP.  The payment need not be 
tied to an actual reduction in care or to a reduction in medically necessary services, so 
long as the hospital knows that the payment may influence the physician to reduce 
services to his or her patients.  There may be limited cost-saving measures that do not 
have the potential to reduce services, such as not opening certain supplies until needed.  
Even then, the circumstances must be closely scrutinized to ensure that the delay in 
opening the supplies does not have the potential to cause a reduction in services. 
 
Gainsharing arrangements may also implicate the Federal anti-kickback statute, section 
1128B(b) of the Social Security Act, if one purpose of the cost-saving payments is to 
influence referrals of Federal health care program business.  Examples of gainsharing 
arrangements that give rise to concerns under the anti-kickback statute include, without 
limitation:  an arrangement intended to encourage physicians to cherry pick healthier 
patients for hospitals offering gainsharing while sending the sicker, more costly patients 
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing October 7, 2005    Page 2 
  to other hospitals not offering gainsharing; an arrangement intended to foster loyalty and 
attract more physician referrals to the hospital; or an arrangement that allows a physician 
to continue for an extended period of time to reap the benefits of previously-achieved 
savings or to receive cost-saving payments unrelated to anything done by the physician.  
Moreover, OIG is concerned that gainsharing arrangements may lead to unfair 
competition among hospitals competing for physician-generated business. 
 
GUIDANCE ON GAINSHARING ARRANGEMENTS 
  
OIG has expressed significant concerns about the risks posed by gainsharing.   In 1999, 
OIG issued a Special Advisory Bulletin on Gainsharing outlining its analysis of 
arrangements call black box gainsharing.  Black box gainsharing refers to arrangements 
that give physicians money for overall cost-savings without knowing what specific 
actions the physicians are taking to generate those savings.  Under these types of 
arrangements, there is little accountability, insufficient safeguards against improper 
referral payments, and a lack of objective performance measures to ensure that quality of 
care is not adversely affected.  For example, the drive for savings could motivate the 
physician to discharge a patient prematurely or otherwise inappropriately influence length 
of stay decisions, the very abuses that led to the enactment of the CMP law.   
 
OIG also has issued seven favorable advisory opinions on gainsharing arrangements that 
are significantly different from the black box arrangements discussed in the 1999 Special 
Advisory Bulletin.   The cost-saving measures in the approved arrangements generally 
fall into one of the following categories:  product standardization; product substitution; 
opening packaged items only as needed; or limiting the use of certain supplies or devices.  
While each advisory opinion is limited to the specific facts presented by the requestor and 
cannot be relied upon by any other party, the considerations identified in the opinions are 
relevant when assessing gainsharing arrangements. 
 
When evaluating a particular gainsharing program, OIG has generally focused on three 
aspects:  accountability; quality controls; and safeguards against payments for referrals.   
With respect to accountability, a transparent arrangement that clearly and separately 
identifies the actions that will result in the cost-savings promotes accountability in several 
ways.  First, it allows for a meaningful, objective assessment of the arrangements 
potential effects on quality of care.  By contrast, black box gainsharing involves 
payments based on overall cost-savings, without any way to identify what specific and 
measurable actions the physician has taken to generate the cost-savings.  Second, full 
disclosure to the patient of his or her physicians participation in the gainsharing program 
promotes accountability.  Finally, transparency permits scrutiny of the actions of 
physicians that are attributable to gainsharing payments, thus allowing the medical 
malpractice liability system to act as a further safeguard against inappropriate care.  
  
Quality controls are a second key aspect OIG looks at when evaluating a gainsharing 
arrangement under the advisory opinion process.  It is critical that the cost-saving 
measures for which gainsharing payments are made do not adversely affect patients.  
Accordingly, OIG looks for features that protect quality care.  For example, OIG believes 
it is important to have a qualified, outside, independent party perform a medical expert 
review of each cost-savings measure to assess the potential impact on patient care.  The 
 
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Subcommittee on Health:  Hearing October 7, 2005    Page 3 
  hospitals that obtained favorable advisory opinions established baseline thresholds based 
upon historic utilization and national data to protect against inappropriate reductions in 
services and to ensure that physicians would not receive any money for savings that 
accrued beyond the baseline thresholds.  This structure helped protect against the 
physicians receiving payments for savings resulting from limiting necessary items and 
services.  The arrangements OIG approved also include ongoing monitoring of quality of 
care and compliance with the gainsharing program.  This oversight allows for the 
detection and appropriate handling of any inappropriate variation in treatment or uses of 
supplies or devices.  
   
A third category of safeguards is directed at preventing gainsharing payments from being 
used to reward or induce patient referrals in violation of the anti-kickback statute.  In this 
regard, OIG focuses on how payments are calculated and distributed to the physicians.  
Examples of safeguards that minimize the risk of abuse include, but are not limited to: 
calculating savings based on the hospitals actual acquisition costs; limiting participation 
to physicians already on the hospitals medical staff (to prevent enticing other physicians 
to change referral patterns); limiting the amount, duration, and scope of the payments 
(there is less incentive for a physician to switch referral patterns for short-term dollars); 
and distributing the gainsharing profits on a per capita basis to all physicians in a single-
specialty group practice (reducing the incentive for individual physicians to generate 
disproportionate cost-savings).  In short, there need to be safeguards that minimize the 
physicians incentives to change referral patterns or cherry pick healthier patients for the 
hospitals offering gainsharing payments, while steering sicker, more costly patients to 
other facilities. 
 
It must be stressed that any evaluation of the risks presented by a gainsharing 
arrangement is highly fact specific.  For example, with respect to the product 
standardization cost-saving measures approved in the favorable advisory opinions, OIG 
knew the specific vendors and products at issue and were able to have a medical expert 
evaluate the impact on quality of care.  Furthermore, the physicians participating in the 
gainsharing arrangements could make patient-by-patient determinations of the 
appropriate supply or device, because the hospital continued to stock the full range of 
supplies and devices, not just those that would result in cost-saving payments.  It is 
important to note that OIG did not approve every cost-saving measure proposed by the 
requestors of the opinions.  As noted in the opinions, some measures were rejected and 
withdrawn from the arrangements.  As such, any broad reading of the opinions should be 
done with caution.  Different cost-saving measures or different payment structures could 
have produced different results.    
 
CONCLUSION 
 
Gainsharing arrangements may help reduce hospital costs by aligning the economic 
interests of the hospital and its physicians.  However, gainsharing arrangements violate 
the CMP and, improperly structured, pose substantial risk under the Federal anti-
kickback statute.  OIG has approved several arrangements that had been structured very 
carefully in order to minimize the risk to quality of care and the abuses associated with 
kickbacks.  These arrangements incorporated a number of safeguards to promote 
accountability, quality, and protections against payments for referrals.   
 
House Committee on Ways and Means 
Subcommittee on Health:  Hearing October 7, 2005    Page 4