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26–377 2006

HEARING ON GAINSHARING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

OCTOBER 7, 2005 

Serial No. 109–44 

Printed for the use of the Committee on Ways and Means 

( 


hmoore on PROD1PC68 with HMRPT
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COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON HEALTH 

NANCY L. JOHNSON, Connecticut, Chairman 

JIM MCCRERY, Louisiana 

SAM JOHNSON, Texas 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

KENNY C. HULSHOF, Missouri 

FORTNEY PETE STARK, California 

JOHN LEWIS, Georgia 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

RAHM EMANUEL, Illinois 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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C O N T E N T S 

Advisories announcing the hearing ........................................................................ 2 

WITNESSES 

Office of Inspector General, U.S. Department of Health and Human Services, 

Lewis Morris ......................................................................................................... 6 

American Association of People with Disabilities, Andrew J. Imparato ............. 39 

American Medical Systems, Martin Emerson ....................................................... 24 

Goodroe Healthcare Solutions, Joane Goodroe ...................................................... 21 

Grand View Hospital, Stuart H. Fine .................................................................... 34 

New Jersey Hospital Association and Affiliates, Gary S. Carter ........................ 30 

The Society for Thoracic Surgeon’s Task Force on Pay for Performance, Jeffery Rich, M.D. ...................................................................................................... 44 

SUBMISSIONS FOR THE RECORD 

Goodroe, Joane H., Goodroe Healthcare Solutions, Norcross, GA, statement .... 59 

Leahey, Mark, Medical Device Manufacturers Association, letter ...................... 66 


hmoore on PROD1PC68 with HMRPT

hmoore on PROD1PC68 with HMRPT
(1) 

HEARING ON GAINSHARING 

FRIDAY, OCTOBER 7, 2005 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON HEALTH

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:40 a.m., in room 

1100, Longworth House Office Building, Hon. Nancy L. Johnson 

(Chairman of the Subcommittee), presiding. 

[The advisory, revised advisory, and revised advisory #2 announcing the hearing follow:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943 

September 29, 2005 

No. HL–10 

Johnson Announces Hearing on Gainsharing 

Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Health 

of the Committee on Ways and Means, today announced that the Subcommittee will 

hold a hearing on gainsharing to align the interests of health care providers. The 

hearing will take place on Friday, October 7, 2005, in the main Committee 

hearing room, 1100 Longworth House Office Building, beginning at 10:00 

a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include representatives 

from groups affected by Medicare’s payment policies. However, any individual or organization not scheduled for an oral appearance may submit a written statement 

for consideration by the Committee and for inclusion in the printed record of the 

hearing. 

BACKGROUND: 

Improvements in the quality and efficient delivery of health care in the Medicare 

system is of paramount importance to Congress. In order to achieve these goals, it 

is essential that physicians and hospitals work together in the delivery of medical 

services. However, certain impediments prevent full cooperation between physicians 

and hospitals. For example, Medicare maintains separate payment systems for physicians and hospitals, and statutory and regulatory constraints make it difficult for 

physicians and hospitals to work together. 

The use of certain operational and financial incentive arrangements, commonly 

referred to as gainsharing arrangements, may assist in improving the alignment of 

physician and hospital interests. One type of gainsharing arrangement uses methodologies designed to enable hospitals to directly increase payments to physicians 

for measurable contributions to, and for improvements in, all areas of hospital operational and financial performance, while improving the quality of care. 

In announcing the hearing, Chairman Johnson stated, ‘‘To ensure that fee-forservice Medicare continues to be a viable option for America’s seniors and people 

with disabilities, it is imperative to implement system changes which include the 

creation of opportunities for skilled medical service professionals to work together 

to improve both health care quality and efficiency. Gainsharing arrangements, if designed properly, have the power to create fundamental changes to systems that can 

help integrate the delivery of medical services across different groups of providers 

to achieve higher quality care and improved efficiency. This hearing will provide the 

Subcommittee with the opportunity to hear from witnesses on this important issue.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the current Medicare payment system, identification of 

legal and regulatory considerations associated with the ability of physicians and 

hospitals to engage in gainsharing arrangements, and an examination of potential 

solutions. On the first panel, CMS and the Office of Inspector General will present 

information on the Medicare payment structure and gainsharing demonstrations, 


hmoore on PROD1PC68 with HMRPT
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and the legal and regulatory considerations involved in gainsharing arrangements. 

The second panel will provide input from affected parties, including testimony from 

witnesses with experience in gainsharing arrangements, hospital and physician 

issues. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Friday, October 

21, 2005. Finally, please note thatdue to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below.Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943 

September 29, 2005 

No. HL–10 Revised 

Witness Announcement for Hearing on 

Gainsharing 

The witnesses at the Subcommittee on Health, Committee on Ways and Means, 

hearing on gainsharing to align the interests of health care providers, will include 

a representative from the U.S. Department of Health and Human Services, Office 

of Inspector General, not the Centers for Medicare and Medicaid Services. 

All other details for the hearing remain the same. (See Health Advisory No. HL– 

10, dated September 29, 2005). 

f 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON HEALTH 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3943 

October 05, 2005 

No. HL–10 Revised #2 

Change in Time for the Hearing on Gainsharing 

Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Health 

of the Committee on Ways and Means, today announced that the Subcommittee 

hearing on gainsharing to align the interests of health care providers, previously 

scheduled for 10:00 a.m. on Friday, October 7, 2005, in the main Committee hearing 

room, 1100 Longworth House Office Building, will now be held at 9:30 a.m. 

All other details for the hearing remain the same. (See Health Advisory No. HL– 

10, dated September 29, 2005). 

f 

Chairman JOHNSON. We do have a closing time certain. I am 

sorry to get us starting a little bit late, but to make up for it, I am 

not going to use my opening statement, which is rather long. Instead, I am just going to say that this is as important a hearing 

as I have chaired in my years in Congress. There isn’t a sector of 

economy that has improved quality without people working together in a different way than our current silo system allows, 


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incentivizes, encourages, or even makes possible. So, we do need to 

think through the challenge that the gainsharing demonstrations 

that have already taken place pose to us. Because the next round 

of improvement in quality is going to come from the embedding of 

technology into the delivery system The inclusion of all actors in 

that system—the whole team—in the understanding of measurement, in the commitment to quality, in the transparency of the system. So, we have a real challenge before us, but it is one we cannot 

afford not to meet. So, we have a very good panel today that will 

both give us better understanding of some of the tools that we have 

at our disposal as well as some of the concerns that we also have 

to meet. So, I welcome all of you. I welcome the panel. I am very 

pleased to have Mr. Morris from the Inspector General’s Office 

here. I yield to Mr. Stark. 

Mr. STARK. Madam Chair, it is so seldom that I take exception 

to your approach to these problems, but with the other issues we 

have before us—implementing the new private drug coverage, 

which evidently the Centers for Medicare and Medicaid Services 

(CMS) has screwed up again in their latest booklet. I recall 20 

years ago in this Subcommittee we examined this gainsharing. We 

called it ‘‘kickbacks’’ in those days. We decided that wasn’t such a 

good idea, to encourage profit sharing at the expense of beneficiaries Taxpayers, because they suffered. When the hospital prospective payment system was implemented, hospitals began enlisting physicians through incentive plans to help contain costs. But 

this created inducements for the docs to withhold care or create 

early discharge. We enacted new penalties in Title 9 of the Social 

Security Act. Bluntly stated, what we are going to talk about today 

is whether to turn back time Allow kickbacks, which will benefit 

nobody but either the doctor or the hospital, but saves money. The 

taxpayers The beneficiaries will suffer. 

I would like to insert in the record a New York Times article of 

September 22nd, which outlines some shyster doctor down in Louisiana who was collecting hundreds of thousands of dollars for getting kickbacks, The New York Times can say it more eloquently 

than can I. But we have heard from Dr. Kassirer, The New England Journal of Medicine, about financial relationships between 

physicians, the pharmaceutical Biotech Medical device industries 

that are adversely affecting the quality of care. I understand the 

U.S. Department of Justice has recently issued subpoenas in an investigation of orthopedic device manufacturers’ relationships with 

surgeons. It is possible that at least some of these relationships include illegal kickbacks. We should be considering ways to curb 

these relationships, not propagate them. I believe that gainsharing 

is not only misguided, it is very dangerous. The overall direction 

of the program we may disagree with, but we should reduce fraud 

Abuse. This idea of kickbacks—which is the only thing that you 

can call gainsharing—is wrong. If there is money to be saved, the 

hospitals should give it back to Medicare. There is no reason on 

God’s green Earth that they should give it to the doctors. It should 

go to the taxpayers, or back to Medicare to increase benefits for the 

beneficiaries. I look forward to the witnesses trying to explain why 

they should do otherwise. 


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Chairman JOHNSON. Thank you, Mr. Stark. I appreciate your 

comments. Because certainly, those are the concerns that are 

raised by what I consider to be the historic system. I don’t think 

it will meet the challenges of the 21st century, That is what we 

need to work on. So, Mr. Morris, welcome. 

STATEMENT OF LEWIS MORRIS, CHIEF COUNSEL TO THE INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. 

DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Mr. MORRIS. Good morning, Madam Chair, Members of the 

Subcommittee. I am Lewis Morris, Chief Counsel at the U.S. Department of Health and Human Services (HHS), Office of Inspector 

General (OIG). I appreciate the opportunity to discuss the OIG’s 

views on gainsharing programs offered by hospitals. 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 hospital’s costs attributable to the physicians’ 

efforts. Although there are a number of different types of 

gainsharing arrangements, one purpose of gainsharing is to align 

physician incentives with those of the hospital, and thereby hospital cost reductions. The OIG recognizes the potential benefits of 

gainsharing arrangements That hospitals have a legitimate interest in enlisting physicians in efforts to reduce and eliminate unnecessary costs. Nonetheless, the OIG has historically been very wary 

of gainsharing arrangements because these arrangements implicate 

the fraud Abuse laws. With respect to the civil monetary penalty 

(CMP) law, the major concern is the impact of gainsharing on the 

quality of care provided to Medicare Medicaid beneficiaries. The 

CMP is an intentionally broad prohibition reflecting congressional 

concern that under the prospective payment system hospitals 

would have an economic incentive to pay physicians to discharge 

patients too soon—quicker Sicker—or otherwise stint on patient 

care. 

Put simply, any hospital gainsharing plan that encourages physicians through direct or indirect payments to reduce or limit clinical 

services violates the law. Gainsharing arrangements may also implicate the Federal anti-kickback statute, if one of the purposes of 

the payments is to influence referrals of Federal health care program business. For example, gainsharing arrangements that encourage physicians to ‘‘cherry pick’’ healthier patients for hospitals 

offering gainsharing, while sending the sicker, more costly patients 

to hospitals not offering gainsharing, implicates the anti-kickback 

statute. Although the OIG has significant concerns about the risks 

posed by gainsharing, we have issued seven favorable advisory 

opinions on gainsharing arrangements. The cost-saving measures 

in the improved arrangements generally fall into one of the following categories: product standardizations, product substitution, 

opening packaged items only as needed, or limiting the use of certain supplies or devices. We understand that the Committee is considering legislation that would allow the CMS to conduct demonstration projects to test and evaluate gainsharing methodologies. 

When considering the structure and requirement of such projects, 

we would recommend the inclusion of criteria that focuses on three 


hmoore on PROD1PC68 with HMRPT
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aspects: accountability, quality controls, and safeguards against 

payments for referral. 

To promote accountability, the actions that will result in costsaving incentives should be clear and separately identified. By ensuring transparency and full disclosure to patients, the demonstration projects would foster accountability, as well as allow for meaningful assessment of the arrangement’s potential effects on quality 

of care. Quality controls are a second key safeguard. It is critical 

that the cost-saving measures for which gainsharing payments are 

made do not adversely affect patients. For example, establishing 

baseline thresholds below which physicians do not receive any 

money for savings may protect against inappropriate reductions in 

service. 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, 

the demonstration projects should contain limitations on how the 

payments are calculated distributed to physicians, including caps 

on the scope Duration of arrangements. Finally, in establishing the 

authority for a gainsharing demonstration, we recommend a careful 

review of any waiver of fraud abuse authorities, to ensure that it 

is not overly broad or undercuts the integrity of the project. In conclusion, gainsharing arrangements may help reduce hospital costs 

by aligning the economic interests of the hospital Its physicians. 

However, gainsharing arrangements violate the civil monetary penalty law and, improperly structured, pose substantial risks under 

the Federal anti-kickback statute. The OIG has approved several 

arrangements that have been structured very carefully in order to 

minimize the risk to quality of care The abuses associated with 

kickbacks. These arrangements incorporate a number of safeguards 

to promote accountability, quality, and protections against payment 

for referrals. We recommend that any gainsharing demonstration 

project incorporate these safeguards. Thank you. 

[The prepared statement of Mr. Morris follows:] 

Statement of Lewis Morris, Chief Counsel to the Inspector General, Office 

of 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 OIG’s 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. 


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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 hospital’s 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 Medicare’s 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 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 hospital’s 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 hospital’s savings resulting from the physician’s 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 

physician’s 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 

soon—quicker and sicker—or 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 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 


hmoore on PROD1PC68 with HMRPT
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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 arrangement’s 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 physician’s 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 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 hospital’s actual acquisition costs; limiting participation to physicians already on the hospital’s 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 physician’s incentives 

to change referral patterns or cherry pick healthier patients for the hospitals offerVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 E:\HR\OC\26377.XXX 26377

hmoore on PROD1PC68 with HMRPT
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ing 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. 

f 

Chairman JOHNSON. Thank you very much, Mr. Morris. Let me 

just ask you a couple of things. You say in your testimony on page 

2 that any hospital gainsharing plan that encourages physicians 

through direct or indirect payments to reduce or limit clinical service violates CMP. To me, it is an example of how backward-thinking our law is, because there is nothing in this statute that talks 

about medical necessity or quality. I mean, if the same device is 

on the market for about $1,000 differential in payment, why isn’t 

that kind of limit a reasonable limit? You see, to reduce or limit 

clinical services violates the CMP: that is what we used to think. 

Now there is such a plethora of services that medical necessity and 

quality care really should be the drivers of service determination. 

So, if we have a Federal law, it is kind of like defensive medicine. 

If courts are going to require you to be exposed on all fronts, well, 

then you are going to do every test under the sun. If they are going 

to hold you accountable for appropriate treatment of that disease, 

then you can look at the protocols of your specialty organization 

and the specific information about that patient, You can provide 

appropriate, high-quality care, without doing inappropriate and unnecessary tests, which we have seen a plethora of. So, doesn’t it 

concern you that the civil monetary penalty law, as well as the 

anti-kickback law, really don’t look at quality? 

Mr. MORRIS. You are correct that the CMP law is very broad 

Would sanction a hospital or a physician that receives payments to 

reduce care, regardless of whether that care was medically unnecessary or otherwise. The anti-kickback statute also addresses incentives that could potentially distort physician decision-making. 

The concern in both cases is that those incentives to physicians 

could adversely affect care. The CMP, however, does not distinguish between reduction of services that are medically unnecessary 

from those that are medically necessary. 


hmoore on PROD1PC68 with HMRPT
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Chairman JOHNSON. Certainly, we are going to hear later from 

the next panel from a company that you actually have worked 

quite a bit with, I understand, Joane Goodroe’s company—‘‘Something Solutions,’’ I have kind of forgotten its name. But anyway, 

would you say that the technology of measurement has advanced 

in recent years? Could we have benchmarked physicians 10 years 

ago the way we can benchmark them now? Could we have tracked 

specific actions of physicians that committed to gainsharing arrangements 10 years ago the way we could now? 

Mr. MORRIS. I think I would defer to Ms. Goodroe on that question. I would tell you that in the advisory opinions we have issued 

we relied heavily on the ability of both experts within HHS as well 

as the quality measures that the particular arrangements provided, 

to give us those sorts of assurances. I think, frankly, that much of 

this would turn on the specific arrangement, the particular sorts of 

services under the gainsharing arrangement, and the measures 

that would be available. But I think Ms. Goodroe could probably 

tell you more about what specific measures are available. 

Chairman JOHNSON. I did want to make that point early; that 

you really couldn’t have overseen a system like this in the old days. 

Now that we have learned so much about chronic disease management, we have also learned a lot about measuring, a lot about oversight, that we didn’t know even five years ago. You do have to have 

that kind of system capability or, you are right, you really expose 

the system to those who would most criminally manipulate it. Mr. 

Stark. 

Mr. STARK. Thank you. Mr. Morris, in your testimony you used 

the word ‘‘share.’’ As you think of that ‘‘share,’’ you mean sharing 

money, I suspect. 

Mr. MORRIS. In the context of the gainsharing arrangement? 

Mr. STARK. Yes. 

Mr. MORRIS. Yes, it would be sharing some of the proceeds that 

result from savings. 

Mr. STARK. Could those not be synonymous with—the financial 

words, I suppose, would be ‘‘commission,’’ ‘‘profit sharing,’’ even 

‘‘kickback’’ if one wanted to use the vernacular. All of those things 

similar; would they not? 

Mr. MORRIS. Yes, they would. I think we always have a concern 

when sharing, commissions, or call them what you will, occurs between anyone who has the ability to control referrals and anyone 

who would benefit from those referrals. 

Mr. STARK. Now, you mentioned just a minute or two ago that 

this idea of paying physicians might, I think you said, distort the 

doctors’ decision-making process. You are a lawyer? 

Mr. MORRIS. Yes, sir. 

Mr. STARK. If a doctor—I am not, but I wanted to think this 

through, and perhaps you could help me. But if a doctor were routinely taking money for using a particular device or a particular 

drug or a particular procedure—say, earlier discharge—the patient 

was subsequently harmed, wouldn’t that information to be detrimental to the physician in a malpractice case, in your opinion as 

a lawyer? 

Mr. MORRIS. If I understand the question, if physicians inappropriately changed practice as a result of gainsharing or commissions 


hmoore on PROD1PC68 with HMRPT
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or kickbacks, that resulted in harm, that would seem to be highly 

relevant to both the government’s law enforcement efforts—because 

we would pursue that as a kickback—Also, certainly in the private 

sector, as a malpractice variable. 

Mr. STARK. Okay. Now, let me tell you what the VA does. The 

only reason I want to go through this is just to see, off the top of 

your head, whether you think there would be any problems with 

current law if we assumed for the minute that the VA was a state 

hospital association, or a single hospital or a chain. They bring together the clinicians, the docs—I suppose, maybe some other people, but the doctors principally who are involved in a procedure. 

The VA hospital people say, ‘‘Look, we would like to standardize. 

We would like to use one drug or piece of equipment, or whatever. 

Doctors, as a group, can you all agree on one item that we would 

agree is the right one to use?‘‘ Guess what? Generally, they can. 

So, they usually get somewhere between one and three items that 

are acceptable. They can define these in language so you could 

measure whether or not a piece of equipment or a drug met the 

standards. Then they go out to the manufacturers and say, ‘‘Do any 

of you make or provide equipment that meets these standards?‘‘ 

The ones that do are then allowed to submit a bid. They pick the 

lowest price, and that is how they proceed to buy those. I am not 

sure. I was talking with the VA; I forgot to ask whether somebody 

who wasn’t the lowest price could also sell at that lower price that 

was established. Now, if that were set up, obviously, it would be 

a good thing for CMS to do that, and that would solve all of the 

problems. That would get us better results than this. But if a hospital did that, let’s say, a large hospital, do you see anything in 

that kind of a procedure that would be considered a kickback or 

violating any current laws that you can think of? 

Mr. MORRIS. Under the hypothetical you have offered, there 

would not be any money or remuneration going back to the doctors 

who participated both in that decision and who then conformed 

their clinical practice. There would not likely be a kickback, based 

on the scenario as you have described it. Although we would need 

to know an awful lot about the particular docs. 

Mr. STARK. The doctors would just be helping the hospital save 

some money, They would be practicing good medicine. 

Mr. MORRIS. I think a distinction—I don’t profess to have a full 

understanding of how the VA system works, but my understanding 

is most of the physicians working in the VA system are employees 

of the VA; Therefore, under the direction and control of the hospital. 

Mr. STARK. No. I mean, physicians are allowed to practice medicine in their own best judgment, so that they are no more under 

‘‘the control.’’ I suppose, if they were lousy and goofed up or weren’t 

productive, they could be fired. Any more than a lawyer who works 

for a salary would give an opinion that was any less valid than a 

lawyer who was working by the hour. I mean, they have a code of 

ethics—even as government employees. 

Mr. MORRIS. Well, as the New York Times article you referenced at the beginning indicates, one of the challenges that faces 

private-sector hospitals is having physicians order services or deVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\26377.XXX 26377

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vices consistent with the procurement interests of the hospital. Device manufacturers can use various incentives. 

Mr. STARK. I suspect we would have to do that. I think you are 

right. I don’t think they would have a lot of trouble. But there is 

always the CMS—could not follow a procedure like this. Then that 

would solve the problem. Thank you very much. 

Mr. MORRIS. Yes, sir. 

Mr. STARK. Mr. McCrery. 

Mr. MCCRERY. I will be very short, Madam Chair. Mr. Morris, 

you are from the Inspector General’s Office with HHS; is that 

right? 

Mr. MORRIS. Yes, sir. 

Mr. MCCRERY. So, your focus is on enforcement of current laws, 

with respect to kickbacks and all those kinds of considerations; is 

that right? 

Mr. MORRIS. That is correct. 

Mr. MCCRERY. So, you are not here in a policy position with 

HHS to comment on potential changes to the law which might vary 

the scope of your examinations in the Inspector General’s Office, 

right? 

Mr. MORRIS. That is correct. 

Mr. MCCRERY. But even working with the current set of laws 

that are in place, your office has found some of these kinds of arrangements to be acceptable under the laws we have right now; is 

that right? 

Mr. MORRIS. We have found the arrangements we looked at to, 

in each case, implicate the civil monetary penalty law. They violate 

the law by providing incentives to physicians to reduce care. They 

also implicate the kickback statute. But because our advisory opinion authority allows us in the specific instance to indicate that we 

will exercise prosecutorial discretion and not pursue a particular 

arrangement, provided there are adequate safeguards, in these instances we found that there were specific safeguards that would 

warrant us not pursuing a sanction or other action against these 

particular requesters. 

Mr. MCCRERY. Okay. Thank you. Madam Chair, it might be interesting to have HHS testify at another time as to any ideas they 

have for curtailing the increases in costs that we are seeing in the 

system. Obviously, we are looking at a very dangerous, I think, result of current law at the end of this year, when physicians’ payments are going to be reduced dramatically because of the current 

law. If we don’t find some way to curtail the increase in these costs, 

I am afraid we are going to be stuck with some of the old ways of 

living within our means; which is just to cut reimbursement rates. 

So, I am hopeful that HHS will bring us some positive ideas as to 

how to accomplish our task. 

Chairman JOHNSON. Thank you. I hope the Inspector General 

will work with us, from his experience in this regard, because we 

are just in a different world. The plethora of possibilities is just 

simply too great for the law not to notice the difference between 

necessary and unnecessary, or appropriate Inappropriate, care. Mr. 

Ramstad. 

Mr. RAMSTAD. Thank you, Madam Chair. Mr. Morris, a study 

published in yesterday’s New England Journal of Medicine conVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\26377.XXX 26377

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cluded that innovative new implantable cardiac defibrillators represent good value to the Medicare Program. I could have offered 

that voluntarily, but the empirical data don’t lie. It was, as I said, 

a study released yesterday. This study’s authors, as I read the article, noted that a key contributor to improved outcomes for patients, 

including heart patients, is the flexibility—I am quoting now from 

the study, ‘‘A key contributor to improved outcomes is the flexibility to change systems of care to incorporate new knowledge into 

practice.’’ My question is this: How specifically would gainsharing 

recognize and reward important new medical breakthroughs, new 

medical knowledge such as the technology that led to the development of implantable defibrillators? 

Mr. MORRIS. I believe Ms. Goodroe could give you more specifics. I think the general answer would be this. Gainsharing, if 

properly structured, would provide for sufficient quality controls 

and accountability so that if physicians received incentives to try 

new devices or take into account savings that would result from 

certain cost-effective measures, we could both ensure that patient 

care was secured and cost savings were realized. 

Mr. RAMSTAD. I am sure you are aware, Mr. Morris, speaking 

of empirical data, of the studies in the field that show overall, if 

you look at the macro picture, health care, medical technology 

saves dollars for the system. There is ample research to support 

that assertion that conclusion. My concern is that we are going to 

provide an incentive for doctors and providers to do it in the cheap, 

to coin a phrase, to avoid the use of life-saving, life-enhancing medical technology—which at the time for that patient might cost 

more, but, if you look at that patient’s longer view, could save his 

or her life or enhance their lifestyle, enhance their very life—it is, 

again looking at the macro picture, going to save the system 

money. So, don’t you share that concern that perhaps we are going 

to provide incentive for providers to do it on the cheap? 

Mr. MORRIS. That is one of the concerns that we have, It was 

taken into account when we looked at these particular arrangements. As I mentioned, one of the reasons that these particular arrangements were approved was because we felt that there were 

adequate safeguards to ensure quality. For example, in the arrangements we looked at, the physicians, although they would receive incentives if they used some of the standardized cardiac devices, were all still able to get any device they wanted to use. So, 

their ability to provide the best device for a particular patient was 

preserved. 

Mr. RAMSTAD. What do you base that on, that the access has 

not been thwarted? 

Mr. MORRIS. Because as part of analyzing these particular arrangements, the requesters laid out in great detail the specific 

measures and both the accountability and quality control measures 

that were in place. They certified that those measures will be in 

place. We also relied on clinicians, experts within the department, 

to review all of the safeguards to ensure that patient care would 

not be compromised. So, we basically relied on both experts as well 

as the representations of the requester. 

Mr. RAMSTAD. Well, you know, they always say the proof is in 

the pudding. I don’t think we know enough, the experience of 


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gainsharing is not that long in terms of time span. But I am really 

concerned about access and quality, I think we need to keep those. 

I am glad you share those concerns as we work together on this 

legislation. 

Mr. MORRIS. Thank you. 

Mr. RAMSTAD. Thank you. Yield back, Madam Chair. 

Chairman JOHNSON. Thank you very much. Mr. Lewis. 

Mr. LEWIS. Thank you very much, Madam Chair. Thank you, 

Mr. Morris, for being here. Madam Chair, before I ask my questions, I would just like to say that I am very concerned about the 

mistake in the Medicare new handbooks that have been sent out 

to seniors. The mistake is in the table that helps beneficiaries compare plans. The mistake is in the column that tells beneficiaries 

whether they will have to pay extra premiums. So, beneficiaries 

choose a plan, think there are no extra costs; when in fact, they 

will be hit with extra premiums. I understand that CMS does not 

plan to correct this handbook. Instead of correcting the handbook 

and sending out new ones, CMS suggests that people can go to the 

Medicare website. Well, most seniors do not use computers. The 

CMS also says you can call the organization offering the drug plan, 

or call CMS. This prescription drug plan is already complicated 

enough. Seniors should not have the burden of making sure the information is accurate. People need to make informed choices. If the 

seniors see this information in print, they should be able to depend 

on it. The CMS should reprint the handbook. Otherwise, CMS 

should cover the costs of additional premiums for people who are 

surprised by additional costs. Madam Chair, I renew again my call 

for oversight hearings for Medicare part B. Now, Mr. Morris, what 

are the potential dangers for patients under gainsharing arrangements? Do you support codifying the safeguards that were in the 

OIG advisory opinion? If not, why not? 

Mr. MORRIS. The potential risks to patients posed by poorly designed gainsharing arrangements would include giving physicians 

incentives to reduce the length of stay, get the patient out of the 

hospital quicker and sicker; to skimp on devices or supplies that 

would be necessary to care for the patient; or otherwise cut costs 

in such a way that would compromise care. The particular arrangements that we looked at, and the many cost-saving measures that 

would be recognized as part of a gainsharing program, were carefully scrutinized by us, experts within the department, as well as 

outside consultants. Because each of those arrangements is very 

fact determinative, and there were many of the cost-saving measures which we did not find sufficiently safeguarded for quality, I 

think it would be dangerous to take any of the advisory opinions 

and codify a gainsharing standard based on those. The approach 

that we have recommended in our testimony is to take into account 

three general principles—accountability, quality controls, and 

measures to ensure kickbacks are not in play—and use those principles to oversee a demonstration project and the arrangements 

that would come out of it. 

Mr. LEWIS. When the OIG issued its advisory opinion on the six 

gainsharing arrangements earlier this year, what steps did you 

take to ensure that incentive was not included in arrangements to 

encourage physicians to reduce care to Medicare patients? 


hmoore on PROD1PC68 with HMRPT
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Mr. MORRIS. What incentives were in place? 

Mr. LEWIS. Yes. 

Mr. MORRIS. There are a number of incentives we took into account. There were caps on the amount of money that a physician 

could realize. There were baselines established, so that a physician 

could not reduce the level of services he or she was providing based 

on historic baselines. There were quality oversight measurements. 

There is an ongoing monitoring of the arrangement itself to ensure 

that quality is preserved. So, there is a wide range of safeguards, 

both in terms of specific caps and ceilings, structural safeguards, 

as well as ongoing oversight. We believe that those in combination 

adequately protected the interests of the patient as well as the program. 

Mr. LEWIS. Thank you. Mr. Morris, why do you limit approval 

of a gainsharing program to just 1 year? What was the rationale? 

Mr. MORRIS. The rationale was that we did not want the payout 

coming from gainsharing savings to be spread out over multiple 

years, because it could implicate remuneration for kickbacks. We 

wanted to have a fairly tight, focused return to the physician for 

specific acts done within a tight timeframe. We thought a 1-year 

timeframe was appropriate. 

Mr. LEWIS. You think it would work? 

Mr. MORRIS. Well, I think we will be interested to see what the 

results are. We are going to be watching this area very carefully, 

to see whether gainsharing actually does successfully align the incentives of hospitals and physicians without compromising quality 

of care. 

Mr. LEWIS. Thank you very much. Madam Chair, yield back. 

Chairman JOHNSON. Thank you, Mr. Lewis. Mr. English. Oh, 

sorry. Mr. Johnson. 

Mr. JOHNSON. Mr. Morris, do you believe in gainsharing that 

doctors will place financial incentives above patient care if given 

the opportunity? 

Mr. MORRIS. I can’t say as to any particular arrangement. I will 

say that our experience has been, as a law enforcement agency, 

that physicians respond to economic incentives. We have seen, both 

in their opportunity to invest in imaging centers and laboratories 

and the like, that if they can enhance their financial position by 

making referrals to a particular entity, they will do so. We have 

also seen at times that that results in both inappropriate costs to 

our program also can implicate quality of care. So, I think the short 

answer would be I think that some physicians may inappropriately 

allow financial incentives to affect their medical judgment. 

Mr. JOHNSON. Depends on the guy, is what you are saying. 

Mr. MORRIS. Or lady, yes. 

Mr. JOHNSON. Or lady. You know, since 1999, you only approved seven arrangements for gainsharing. It seems like it is exceedingly difficult to implement a meaningful program. Could you 

comment? 

Mr. MORRIS. I think that is a fair perception. We have worked 

very hard to ensure that any gainsharing arrangement has sufficient controls to assure accountability, quality controls, Inhibit 

kickbacks or referrals. We have scrutinized each one very carefully. 


hmoore on PROD1PC68 with HMRPT
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A lot of the arrangements we have looked at did not pass the bar 

and were not deemed acceptable. 

Mr. JOHNSON. Well, you must have some criteria set up. What 

is it? Let me ask you this question. If you do approve a gainsharing 

operation in some hospitals, do they continue to have access to all 

of, let’s say, the medical devices, for example? Or do they go to one 

company and try to cut costs? Have you run into that? 

Mr. MORRIS. In the arrangements that we approved, physicians 

continued to have access and were able to use devices that they 

felt, on a patient-by-patient basis, were in the best interests of the 

patient. They would realize the gainsharing benefits if they picked 

one of the products which had been standardized. In the arrangements we looked at, there was more than one vendor who was providing the devices that were standardized. But even so, physicians 

continue to have the ability to select particular devices or equipment that they felt was in the best interests—— 

Mr. JOHNSON. But they wouldn’t participate in gainsharing if 

they did that, according to you. 

Mr. MORRIS. They would not realize the gainsharing benefits 

from that particular decision. But most of these gainsharing arrangements had multiple—19, 20 different cost-saving measures. If 

they conformed their clinical practice to those measures, they 

would realize the benefit of gainsharing as to those measures. So, 

for example, they might choose not to pick a particular device, although it was part of the list of standardized products; but they 

might agree to use other cost-saving measures that were part of 

the gainsharing arrangement. 

Mr. JOHNSON. I can’t see much difference in that and specialty 

hospitals, for example, in which the docs get together and try to 

form their own gainsharing, if you will. Do you consider that a difference? 

Mr. MORRIS. Well, specialty hospitals are different. I mean, a 

gainsharing arrangement exists between a hospital and physicians 

who are not its owners, generally, and for whom it is trying to 

align their interests. Obviously, if the physicians own the hospital 

you have a very different matrix. 

Mr. JOHNSON. Okay. Thank you very much. Thank you, 

Madam Chairman. 

Chairman JOHNSON. Thank you. Mr. Camp. 

Mr. CAMP. Thank you very much. I, too, am interested in these 

pilot programs that OIG implemented. I just wonder if you could 

elaborate a little bit more on why OIG selected the sites that it did. 

Mr. MORRIS. Oh, let me clarify. We did not implement any pilot 

projects. The Inspector General’s Office does not engage in any programmatic functions. What we did was, consistent with our advisory opinion authority, tell entitles that were setting up arrangements whether we felt there were adequate safeguards to warrant 

not pursuing our enforcement authorities. So, we did not pick the 

arrangements, and we did not pick the entities that came in and 

requested advisory opinions from us. 

Mr. CAMP. Thank you. Do you think there are adequate safeguards for further implementation of the gainsharing agreements 

for a wider-scale implementation or a larger-scale implementation 

of these agreements? 


hmoore on PROD1PC68 with HMRPT
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Mr. MORRIS. It would really depend on the specific facts of the 

specific arrangement. 

Mr. CAMP. Are you satisfied, then, with the safeguards that 

were in place for those pilot programs that did occur? 

Mr. MORRIS. For the seven arrangements that we reviewed, we 

believe there were adequate safeguards to ensure accountability, 

quality control, and protections against kickbacks. We articulated 

those in the advisory opinions. So, as to those specific arrangements, we indicated that we would not use our enforcement authorities. 

Mr. CAMP. Does that allow you to make any judgment on a 

broader or a larger-scale implementation of the gainsharing programs in other places? I mean, you are satisfied with what occurred? Do you think that protections are in place? Are they adequate for larger implementations of the gainsharing agreements? 

Mr. MORRIS. It would depend on the agreement. It is, you know, 

the old adage: if you have seen one gainsharing agreement, you 

have seen one gainsharing agreement. It would have to be a casespecific analysis. If there was to be a demonstration whereby there 

were a larger number of gainsharing arrangements underway, we 

would urge that there be a range of safeguards put in place so that 

all of those arrangements conform to the three touchstones that we 

have touched upon: quality, insurance against referrals, and accountability. 

Mr. CAMP. Some have said that these agreements could lead to 

a lessening of the quality of care. What do you think about that? 

Mr. MORRIS. I think that is a real risk. I think it is one of the 

reasons why it is so important that there be a great number of 

safeguards and ongoing monitoring, to assure that patient care is 

not compromised through gainsharing. We do believe, based at 

least on the arrangements that we have reviewed and approved of, 

that it is possible, at least in the context of those arrangements, 

to structure a gainsharing arrangement so that patient care and 

the interests of the program are safeguarded. But vigilance is critical. 

Mr. CAMP. So, if there were a broader implementation of these 

agreements, you see that that could happen if the proper safeguards were put in place on a case-by-case basis? 

Mr. MORRIS. On a case-by-case basis. 

Mr. CAMP. All right. Thank you. Thank you. 

Chairman JOHNSON. You know, I am stunned at your comments. I want my colleagues on the Committee to think about this. 

You are saying only on a case-by-case basis, under a law that 

doesn’t discriminate between medical necessity and non-medical 

necessity. Now, we have hip devices that are plastic, that are 

$3,000, that are good for 3 years. We have titanium hips that are 

good for 40 years, that are $8,000. Now, should a health care system that is getting increasingly unaffordable to the people of America have no ability to look at appropriateness of when to use the 

plastic and when to use titanium? Is that really what you are saying; that on their own they should have no ability to do this; that 

only if the government gets in there and approves this relationship, 

that only then should they have that ability? Because remember, 

the CMP law doesn’t allow any consideration for anything other 


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than access. Device numbers. They are all lined up on the shelf; 

you have to have access to every one. Now, are we nuts? 

Mr. MORRIS. I won’t answer the second question, for lack of 

competence. 

[Laughter.] 

Chairman JOHNSON. Okay. Let me ask you—I do know the answer to that one. Let me ask you one other thing. The way you describe this, are you aware that hospitals and device manufacturers 

currently—currently—negotiate agreements that involve price and 

volume usage, just like the pharmaceutical companies do? 

Mr. MORRIS. Yes, I am aware of that. 

Chairman JOHNSON. Do you oversee those contracts? 

Mr. MORRIS. No. 

Chairman JOHNSON. No. You don’t know in how many hospitals people have access. I have heard that there are some community hospitals that provide one device. I think our gainsharing bill 

will guarantee a far better selection than that, and a far more doctor-centered, doctor-controlled situation than that. I also know that 

there are contracts that are based on getting 70, 80 percent of your 

business. Now, you are not looking at that. The government either 

can’t see it, or doesn’t want to see it. We are acting as if the 

gainsharing agreements are in a vacuum. The world is changing. 

If you don’t think the big guys with big devices aren’t negotiating 

in a way that keeps little guys out, you aren’t noticing. 

Mr. MORRIS. The distinction I think I would make is that we 

certainly are very much in favor of volume discounts; provided that 

they are passed on to our program so we realize savings on behalf 

of the Medicare program. The concern that I think gainsharing 

raises is that if a physician shares in those savings, agrees to 

change his or her clinical practice so as to only use the less expensive hip, to use your analogy, and realizes profit or part of the revenues of it, and it doesn’t go back to the program, the risk is that 

that may—may—affect his or her medical judgment. So, it is not 

a question of being in favor of discounts being passed on to our program. We strongly favor that. The question is ensuring that the decisions are made in a way that ensures quality of care. 

Chairman JOHNSON. But we are not overseeing that now. In a 

transparent gainsharing agreement we will actually know much 

more about that. There will be measurements; there will be parameters. What is going on now is happening, and we do not know how 

much it is happening, and we can’t see it if it does happen. The 

money isn’t going back to Medicare. It is keeping the hospital alive, 

and there is some value in that. But we don’t know the interaction 

of the savings there with subsidizing hospital services that we don’t 

recognize in Medicare and don’t pay for, that Medicaid doesn’t pay 

for, and the private sector no longer subsidizes. So, it is not quite 

as easy as: the money all has to flow back to Medicare. So, I don’t 

want to put you in an awkward position, but I just want to point 

out that I agree with everything you said about gainsharing and 

how important it is to have a structure over it so that we can 

measure and hold people accountable. But I don’t want the Members of the Committee to think that we have this structure in place 

now. Because I think gainsharing will give us more ability to assure that hospital care is physician-patient-centered and accountVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\26377.XXX 26377

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able than we are seeing develop now, whether it is in the boutique 

hospital sector, the specialty hospital sector, or whether it is in 

some of the arrangements that the market of course is very ingenious at developing. So, I will conclude the comments of the panel, 

then, because we want to hear the other panel, and we are under 

a time constraint. Thank you very much, Mr. Morris, for your good 

answers to the questions and for your excellent testimony. We look 

forward to working with you. 

Mr. MORRIS. Thank you very much. 

Chairman JOHNSON. As the next panel assembles at the dais, 

let me recognize Mr. Ferguson of New Jersey to introduce one of 

the participants. Also, let me recognize Mr. Gingrey, who is a Member of Congress but also a physician, and has taken a great interest 

in the work of this Subcommittee because he understands the nature of what we are doing and its importance to the evolution of 

the medical community. We thank you for being here. Mr. 

Ramstad, did you wish to speak? 

Mr. RAMSTAD. Yes. Madam Chair, I would also like the privilege of introducing one of the witnesses from my district. 

Chairman JOHNSON. Well, why don’t you start, Mr. Ramstad? 

Sorry, I was unaware of that. 

Mr. RAMSTAD. Not at all. Madam Chair, Members of the Committee, thank you for the privilege of introducing an outstanding 

chief executive officer, a great corporate citizen, and a personal 

friend, Martin Emerson, who is Chief Executive Officer of American Medical Systems in Minnetonka Minnesota, my hometown. So, 

it is great to have you here, Marty, as well as the other witnesses. 

Thank you, Madam, Chair. 

Chairman JOHNSON. Mr. Ferguson. 

Mr. FERGUSON. Thank you, Madam Chair. I very much appreciate your graciousness in allowing me to introduce a friend and 

constituent; I certainly appreciate your interest in this gainsharing 

issue. I serve as Vice Chair of the Health Subcommittee on the Energy Commerce Committee, and have a great deal of admiration for 

your work and the work of this Subcommittee. I also appreciate the 

fact that you have come to New Jersey to review and get a better 

understanding for our New Jersey demonstration project that is the 

topic of this conversation today. I am particularly pleased to be 

able to support something as creative as the New Jersey Physician 

Hospital Demonstration Project, and am very pleased to be able to 

welcome a friend Constituent, Gary Carter, who is President and 

CEO of the New Jersey Hospital Association (NJHA). Gary has 

been advocating for hospitals and improving health care for many 

years; the last 11 spent leading the health care advocacy group, the 

NJHA. Prior to coming to my home state of New Jersey, Gary was 

the President of the New Hampshire Hospital Association for 8 

years. Before coming east, he had a number of executive management posts with Intermountain Health Care, which is a system of 

hospitals in Utah, Idaho, and wyoming, and Nevada. He is known 

as an association leader who builds consensus, who fosters cooperation. He is certainly dedicated to working in New Jersey to improve 

hospital-physician relations and broader advocacy on behalf of the 

NJHA’s member hospitals; Certainly, I think, will have some great 


hmoore on PROD1PC68 with HMRPT
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insights for your Subcommittee with regard to gainsharing. So, 

thank you very much. 

Chairman JOHNSON. Thank you for that nice introduction. I 

would say, I say this to all of you, it was a very important experience for us to go sit with the New Jersey people. I am going to invite all Members of the Subcommittee to repeat that experience. 

Because we got to talk to doctors; we got some sense of how the 

relationships changed as they got into this, and what it means to 

move to a patient-centered hospital system, which is not exactly 

what I believe we have now. So, I agree with you: he is a consensus 

builder. We are delighted to have him here. I consider his testimony, his contribution today, very crucial to our ability to move 

forward. I do think all Members need to do that. I think we need 

to go to other sites where people are doing creative things, and we 

need to understand how the current law is a barrier, actually, to 

deeper, more powerful relationships within the caring community. 

That much said, Ms. Goodroe? 

STATEMENT OF JOANE GOODROE, PRESIDENT CHIEF EXECUTIVE OFFICER, GOODROE HEALTHCARE SOLUTIONS, NORCROSS, GEORGIA 

Ms. GOODROE. Chairman Johnson Distinguished Members of 

the Committee, I want to thank you for the opportunity to appear 

before you today to share my thoughts on the topic of gainsharing. 

My name is Joane Goodroe. I received a bachelor of science in nursing and a masters in business administration, and have extensive 

clinical and administrative background in hospitals. 

Chairman JOHNSON. Excuse me, Ms. Goodroe. I did forget to 

mention that the timer gives you 5 minutes. This goes for everybody. Your whole statement will be included in the record, but you 

will have only 5 minutes. Now, the bells have rung for two votes: 

a 15-minute vote, followed by a 5-minute vote. I have read all the 

testimony. While I regret that I won’t be here to hear your statement, I am going to leave immediately. Then I will come back 

Chair the hearing up until the point I have to go for the second 

vote. I would urge some of the members of the panel to go now, 

and come back and question, so that we can keep the panel moving 

through these two votes. So, know that I have read your testimony, 

Ms. Goodroe and Mr. Emerson, I will be back as promptly as possible. Meanwhile, Mr. McCrery will take the chair. 

Mr. MCCRERY. [Presiding.] Please continue, Ms. Goodroe. 

Ms. GOODROE. I am currently the CEO of Goodroe Healthcare 

Solutions, which was acquired this week by VHA, Inc. Goodroe 

Healthcare is the company that developed the gainsharing model 

which has received seven separate approvals from the OIG. These 

approvals were obtained only after our gainsharing methodology 

was highly scrutinized to assure that any decrease in cost would 

not negatively impact patients. As part of the gainsharing plan, 

there are safeguards to protect the patient, including that any technology a physician requests must be available. My first experience 

with gainsharing started in 1989, when I was an administrator at 

Saint Joseph’s Hospital of Atlanta, which was one of the hospitals 

that worked with CMS on the Medicare Coronary Artery Bypass 

Demonstration Project. In this well-studied project, we created a 


hmoore on PROD1PC68 with HMRPT
22 

gainsharing model that aligned incentives to decrease costs while 

maintaining quality. As you consider legislation, I want to comment on three important aspects of gainsharing. The first: 

Gainsharing is important because it is the physicians who are the 

ones who can control costs. This has been well documented, and 

once again validated in the February 2005 Boston University 

School of Public Health study that was recently released. The summary was simple: Health care costs are soaring unsustainably. 

Their solution to the problem is economic alignment of physicians 

with these thoughts: physicians control 87 percent of spending; 

very important, physicians know where the waste exists; also, it is 

the individual doctor’s decision that is the best way to assure that 

patient care is not compromised when saving money. The physician 

is the one with the ultimate responsibility of the patient. It is the 

physician who takes personal risk when caring for patients. It is 

the physician who has the knowledge to decrease costs without 

compromising quality. In our current system, the hospital pays for 

the products Services that are utilized, even though it is the physician who determines how to use them. Most people do not realize 

that each physician delivers care to the same type of patient in a 

unique manner. For example, in any procedure performed, each 

physician will have a preference card outlining the way he wants 

the procedure done. You can use the comparisons of a chef or an 

artist who wants to create the best possible product. Each takes 

pride in their individual process, because physicians believe they 

are delivering the best care to their patients. 

Yet each of these practices have not been studied to assure quality care to the patients. In gainsharing, cost-saving practices are 

analyzed before implementation, with safeguards in place to protect the patient. The second point: Gainsharing targets the waste 

of resources in the health care system, in order to improve quality. 

Physicians practicing with a unique preference is a waste of resources. More importantly, there is no way that so many different 

methodologies result in the best quality for patients. This diversity 

in patient practice begins in training. Physicians may have three 

different professors who teach them the same procedure three different ways. Each physician then takes all of these practices, and 

develops an additional methodology specific to their practice. There 

are as many ways to perform a procedure in this country as there 

are physicians performing that procedure. For the physician there 

has been no incentive for them to change their practice. Matter of 

fact, changing a way a physician practices is hard work, and requires a substantial amount of effort. From the physician’s point of 

view, why take the risk of changing the way you perform a procedure, if you feel good about the outcomes? 

It is important to understand that no other industry could remain competitive on quality and cost without key engineers—which 

are the physicians—determining how to maintain quality while decreasing costs. Physicians reengineering the care of patients is the 

best way to save billions of dollars, while assuring that quality is 

maintained. The final point: There are many misconceptions of 

gainsharing; most importantly, the idea that quality of patient care 

may be harmed. In order for gainsharing programs to work, you 

must make sure that quality of care is maintained by looking at 


hmoore on PROD1PC68 with HMRPT
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quality, predetermining changes, and measuring data. If you look 

at 50 physicians performing the same procedure, you will see 50 

different ways the procedure is formed. Gainsharing is a process 

where the physicians study how colleagues perform their procedures and determine the best processes to adopt in order to increase efficiency while assuring quality. In addition to a body of 

knowledge being created where physicians will constantly invent 

more efficient ways of delivering care to their patients, the best 

way to think of this is to look at how other industries operate. They 

look at not just quality, but also cost. That is what we must do in 

health care today, because we do not have the dollars to continue 

to just think that quality is the only thing that will be delivered 

to these patients. Quality will be withheld from patients if we can’t 

afford to give patients quality. Thank you for your time. 

[The prepared statement of Ms. Goodroe follows:] 

Statement of Joane Goodroe, President and Chief Executive Officer, 

Goodroe Healthcare Solutions, Norcross, Georgia 

Chairman Johnson and distinguished members of the Committee, I want to thank 

you for the opportunity to appear before you today to share my thoughts on the 

topic of gainsharing. My name is Joane Goodroe. I received a bachelor of science in 

nursing and a masters in business administration and have an extensive clinical 

and administrative background. 

I am currently CEO of Goodroe Healthcare Solutions, LLC, the company that developed the gainsharing model which has received seven separate approvals from 

the Office of Inspector General. These approvals were obtained only after our 

gainsharing methodology was highly scrutinized to assure that any decrease in cost 

would not negatively impact quality. As part of the gainsharing plan, there are safeguards to protect the patient including that any technology a physician requests 

must be made available. 

My first experience with gainsharing started in 1989, when I was an administrator at Saint Joseph’s Hospital of Atlanta, one of the hospitals that worked with 

CMS on the Medicare Coronary Artery Bypass Demonstration Project. In this well 

studied project, we created a gainsharing model that aligned incentives to decrease 

costs while maintaining quality. 

As you consider legislation, I would like to comment on three important aspects 

of gainsharing. 

One: Gainsharing is important because the physicians are the ones who 

can control costs. 

This has been documented many times and again validated in the February 2005, 

Boston University School of Public Health study on Health Care Costs from 2000– 

2005. The summary was simple: Healthcare costs are soaring unsustainably. Their 

solution to the problem is economic alignment of physicians with these thoughts. 

• Physicians control 87% of spending. 

• Physicians know where the waste exists. 

• An individual doctor’s decision is the best way to assure that patient care is not 

compromised when saving money. 

The physician is the one with the ultimate responsibility for the patient. It is the 

physician who takes personal risk when caring for patients, and it is the physician 

who has the knowledge to decrease costs without compromising quality. 

In our current system, the hospital pays for the products and services that are 

utilized even though it is the physician who determines the products and services 

for each patient. Most people do not realize that each physician delivers care to the 

same type of patient in a unique manner. For example, in any procedure performed, 

each physician will have a preference card outlining the way he wants the procedure 

done. You can use the comparisons of a ‘‘chef’’ or an ‘‘artist’’ who wants to create 

the best possible product. Each takes pride in their individual process because physicians believe they are delivering the best care to their patients. Yet, each of these 

practices has not been studied to assure quality care for patients. In gainsharing, 

cost saving practices are analyzed before implementation with safeguards in place 

to protect the patient. 


hmoore on PROD1PC68 with HMRPT
24 

Two: Gainsharing targets the ‘‘waste’’ of resources in the healthcare system 

in order to improve quality. 

Physicians practicing with a unique preference is a waste of resources and more 

importantly there is no way that so many different methodologies result in the best 

quality for patients. This diversity in physician practice begins in training. Physicians may have three different professors who teach them to perform the same procedure three different ways. Each physician then takes all of these practices and 

develops an additional methodology specific for their practice. 

There are as many ways to perform a procedure in this country as there are physicians performing a procedure. For the physicians, there has been no incentive for 

them to change their practices. 

Matter of fact, changing the way a physician practices is hard work and requires 

a substantial amount of effort. From the physician’s point of view, ‘‘why take the 

risk of changing the way you perform a procedure if you feel good about the outcomes?’’ 

It is important to understand that no other industry could remain competitive on 

quality and cost without the key ‘‘engineers’’ (this would be the physicians) determining how to maintain quality while decreasing overall costs. Physicians reengineering the care of patients is the best way to save billions of dollars while assuring that quality is maintained. 

Three: There are many misconceptions of gainsharing, most importantly 

the idea that quality of patient care may be harmed. 

In order for gainsharing programs to work, there must be careful measurement 

of existing quality, pre-determination of where changes may be appropriate, and 

data to measure outcomes of changes. These simple tasks assure that quality patient care is maintained while cost are decreased. 

If you look at 50 physicians performing the same procedures, you will see 50 different ways the procedure is performed. Gainsharing is a process where the physicians study how colleagues perform their procedures and determine to best which 

processes to adopt in order to increase efficiency while assuring quality. 

Our gainsharing model was designed for complex cardiac procedures. With appropriate safeguards to assure quality, gainsharing concepts can be applied throughout 

all services. 

If physicians first make changes based on best practice outcomes, followed by 

eliminating unnecessary costs, then quality will actually improve. 

In addition, a body of knowledge is created where physicians constantly invent 

more efficient ways of delivering care to their patients. Again, the best way to think 

about this is to look at how any other industry operates today. For example, if you 

are making washing machines, you will not be able to produce the best product at 

an affordable product unless the engineer is considering both quality and cost of the 

products being made. No one but the engineers of this product are qualified to make 

the decisions of how changes will affect quality. In health care, the physician is the 

engineer. 

The physician has been concerned about quality but has never been concerned 

about costs. Today, healthcare is not affordable. This means that all patients are 

not currently receiving the care that they need. Physicians working with hospitals 

to assure that resources are available to pay for needed technology and services is 

the best to guarantee quality care. 

Gainsharing is simply: 

Physicians assuring that patients have access to all needed technology in order 

to deliver the best quality care while eliminating waste in the system. 

f 

Mr. MCCRERY. Thank you, Ms. Goodroe. Mr. Emerson. 

STATEMENT OF MARTIN J. EMERSON, CHIEF EXECUTIVE OFFICER, AMERICAN MEDICAL SYSTEMS, WEST MINNETONKA, 

MINNESOTA 

Mr. EMERSON. Thank you, Mr. Chairman, Ranking Member 

Stark, other Members of the Committee. My name is Marty Emerson. I am President CEO of American Medical Systems, a leading 

innovator today in the field of urology and gynecology. I am here 

today on behalf of the Advanced Medical Technology Association, 


hmoore on PROD1PC68 with HMRPT
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AdvaMed. I ask that my full written statement be entered into the 

record. AdvaMed would like to thank the Subcommittee for holding 

this important hearing today to begin discussions on gainsharing. 

We strongly believe that significant changes to Medicare law require a thorough review of all potential impacts on patients. You 

will hear some things today that may sound appealing about 

gainsharing, but this is a complex issue. You are considering rolling back some basic provisions for protecting patients. We have two 

primary concerns about gainsharing. The first is setting up a system that incentivizes delivering cheaper care, versus delivering 

quality care. The second is creating a system that could limit patient access to beneficial technologies. We are entering an era of 

technological advance that is revolutionizing patient care. In the 

last few years, patients have benefited from new technologies like 

drug-eluting stents that open up clogged arteries without major 

surgery, and diagnostic tests that identify which patients will benefit from new cancer drugs. 

As I mentioned earlier, we are concerned that a policy like 

gainsharing will have a negative effect on these advances. This policy might reward short-term savings, not better treatments, and 

might impact patients’ access to those better treatment options. My 

company recently introduced an innovative device, ‘‘Perigee,’’ which 

is designed to significantly improve the treatment of bladder 

prolapse, a painful condition in which a woman’s pelvic muscles become weak or damaged and the bladder shifts out of its normal position. Our Perigee product replaces the current procedure which 

requires significant recovery times and has a one-year failure rate 

of 30 to 50 percent. Our new technology provides consistent successful results that significantly reduce recovery times and prevent 

the need for further surgery. I ask you, what would have happened 

to thousands of patients who have already benefited from our new 

technology under gainsharing? Currently, a healthy tension exists 

between physicians who advocate for patient care via advanced 

medical treatments, and the hospital administrators who actively 

work to manage costs. Under a gainsharing program, this balance 

between patient care and cost cutting might be skewed, and access 

to innovative approaches, approaches like my company introduces, 

could be compromised, as hospitals might choose to focus on shortterm savings over technologies that may cost more up front, but 

will also generate larger savings for our health care system in the 

long run. 

This is especially concerning to small company innovators. As 

you know, small companies create most of our new technologies. At 

least two-thirds of AdvaMed’s membership is comprised of companies that are classified as small businesses. These companies already must overcome real hurdles to make our technologies available to Medicare beneficiaries. Gainsharing would create yet another hurdle within a marketplace where the largest manufacturers would have a significant advantage. Gainsharing could also 

negatively impact patient choice among current technologies. Medical devices are not always interchangeable commodities. For example, physicians are now able to choose between mechanical, porcine, 

and different heart valves made from the pericardium of a cow. The 

physician and patient together select a heart valve based on the asVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\26377.XXX 26377

hmoore on PROD1PC68 with HMRPT
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sessment of the benefits and risks of each valve, and the lifestyle, 

age, and medical condition of the patient. Choosing the cheaper 

porcine valve would save money today, but would require another 

costly and painful surgery down the road. Even in situations where 

average results from two devices would be expected to be similar, 

factors unique to the patient—such as patient size, or the configuration of the patient’s anatomy where an implantable device will be 

placed—may indicate that one brand of a device is superior for that 

patient. 

We are concerned that gainsharing arrangements would lack 

adequate safeguards to prevent these concerning situations for patients. We share the Subcommittee’s desire to eliminate excess cost 

and waste from our health care system. We believe that there are 

a number of steps that can be taken to reduce costs without compromising quality care, such as: additional efforts to prevent and 

treat diseases early; reduction in medical errors; improvements to 

the management of chronic diseases; and advances to the infrastructure and organization of care through the adoption of information technology. Should the Committee choose to move forward on 

gainsharing, we welcome the opportunity to work with you on 

achieving mutual objectives, if we can find a carefully targeted and 

limited approach that does not create incentives to cut back on patient care, limit the therapeutic choices available to doctors and the 

patients, or slow the development and diffusion of medical innovation. Thank you. 

[The prepared statement of Mr. Emerson follows:] 

Statement of Martin Emerson, Chief Executive Officer, American Medical 

Systems, West Minnetonka, Minnesota 

AdvaMed and its member companies would like to thank the Chairwoman, Ranking Member, and Members of the Subcommittee for holding this important hearing 

today to begin the discussion on the topic of gainsharing. We strongly believe that 

significant changes like this to Medicare law require thorough review of any and 

all potential impacts on the people the program is designed to serve, Medicare beneficiaries. 

The Medical Technology Industry 

AdvaMed represents over 1300 of the world’s leading medical technology 

innovators and manufacturers of medical devices, diagnostic products and medical 

information systems. Our companies produce approximately 90% of the medical 

technology products used in the United States. AdvaMed is proud to represent an 

industry that brings new hope to patients around the world, and U.S. companies 

that are benchmark manufacturing leaders in terms of total production, innovation 

and highest quality products. The medical technology industry directly employs 

about 350,000 workers in the U.S. 

Our industry is fueled by innovative energy and competition, which drives very 

rapid product development cycles that, in many cases, can lead to new technology 

iterations every 18 months. Two-thirds of AdvaMed’s membership is comprised of 

companies with sales of under $30 million annually. 

Innovative medical technology saves and enhances peoples’ lives. Our products enrich patients’ productivity and quality of life, thereby improving living standards 

and benefiting society overall. Medical technology also contributes substantially to 

economic growth. Our products increase productivity by allowing workers to recover 

from illness faster, remain longer in the workforce, and thrive without expensive 

long-term care. Studies show that funds invested in health care yield far greater 

benefits than costs to a nation’s economy over the long term. 

The role of medical technology will become even more important as our nation’s 

population ages. According to the 2002 Commission on Global Aging, medical advances will bring ‘‘longer, healthier, more productive lives with declining rates of 

disability for the elderly.’’ Innovative medical technologies offer an important soluVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 E:\HR\OC\26377.XXX 26377

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tion for nations that face the challenges of balancing serious budget constraints and 

the demands of serving aging populations. 

To deliver value to patients, our industry invests heavily in research and development (R&D). The level of R&D spending in the medical devices and diagnostic industry, as a percent of sales, more than doubled during the 1990s, increasing from 

5.4% in 1990 to 8.4% in 1995 and over 11% last year. In absolute terms, R&D 

spending has increased 20% on a cumulative annual basis since 1990. Our industry’s R&D spending is over three times the overall U.S. average. 

The Potential Impact on Patient Care 

As the Members of the Subcommittee know, gainsharing is an arrangement between a hospital and a physician to share in any savings as a result of specific actions taken by the physician in directing the use of items or services for patient 

care. These arrangements have been considered to be in violation of the federal antikickback provisions, physician self-referral laws, and the civil monetary penalty 

(CMP) prohibition on hospital payments to physicians. Under the CMP rules, a hospital cannot pay a physician to induce reductions or limitations of patient care services to Medicare or Medicaid beneficiaries under the physician’s direct care. 

The greatest concern about relaxing these existing laws designed to protect patients is the potential negative impact on patient care. Patients deserve the best 

treatment options and technologies available for their unique circumstances. They 

deserve to reap the fruits of this new century of the life sciences, unhindered by 

policies that will slow the progress of medical knowledge from the lab bench to the 

bedside. They expect government policies that support providing the most appropriate and highest quality care. 

American Medical Systems, Inc. (AMS) and the medical technology industry are 

very concerned about proposals to relax these laws and legalize gainsharing. We believe gainsharing should be carefully studied by Congress before any decision is 

made to move forward with relaxing the existing rules that prohibit gainsharing. 

We believe that gainsharing would have an immediate and significant negative effect on public health by encouraging the use of the least expensive option without 

consideration of long-term effects or overall health economics. It would be a severe 

impediment to the development and rapid diffusion of beneficial new technology, 

could have an especially negative impact on small companies, and could eliminate 

important therapeutic and diagnostic choices for doctors and patients. We are concerned that, in the end, patients could suffer most. 

At the same time, we share this Subcommittee’s desire to reduce excess cost and 

waste in our health care system, and we want to work with you on ways to achieve 

this goal in a way that truly protects patients and medical innovation. 

The Potential Impact on Technology Development and Diffusion 

We are entering an era of technological advance that has the potential to revolutionize patient care. In just the last few years, we have seen such remarkable new 

technologies as drug-eluting stents to open up clogged arteries and prevent heart 

attack without major surgery, new artificial hips and knees that may never need 

to be replaced, electrical implants to treat Parkinson’s disease and epilepsy, and diagnostic tests to identify which patients will benefit from a new cancer drug and 

which will not. 

We are concerned that a policy like gainsharing will have a negative impact on 

these advances in technology development and diffusion. If not designed with adequate safeguards for patients, gainsharing could easily reward cheaper treatments, 

not better treatments. It could be based solely on the short-term cost of a hospital 

stay, not the longer term cost of treatment over the course of an illness. It is primarily focused on the issue of cost, not value. 

AMS is a medical device company that develops and markets minimally-invasive, 

life-restoring therapies. Recently, we introduced an innovative device, Perigee ̈, 

which is designed to significantly improve the treatment of bladder prolapse in 

women. Bladder prolapse is a painful and distressing condition in which a woman’s 

pelvic muscles become weak or damaged, and the bladder shifts out of its normal 

position. Our device integrates a specialty surgical mesh with a set of delivery tools 

to deliver superior efficacy in correcting the condition. This device replaces the current ‘‘gold standard’’ procedure for bladder prolapse in which the physician plicates 

(or pulls together) the patient’s existing tissue to resupport the bladder. Plication 

procedures demonstrate a one-year failure rate of 30–50%, while our technology provides consistent, successful results that reduce and prevent the need for further surgeries. 

Despite the failure rates of the current plication procedure and the success rate 

of our technology, some patients do not have access to the technology when hospitals 


hmoore on PROD1PC68 with HMRPT
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are reluctant to make them available for use. Currently, a healthy tension exists 

between the physician advocates for patient care and the use of advanced and new 

technologies and the hospital administration that seeks to manage costs. This is a 

good balance between patient care and efficient use of resources. Under a 

gainsharing program, the balance between patient care and cost-cutting will be 

skewed. Patient access to the best care could be compromised and virtually insurmountable hurdles for adoption of beneficial new technologies could be created. 

Our company is also evaluating a number of innovative and minimally invasive 

techniques to treat benign uterine fibroids and their debilitating symptoms. The 

current standard of care for treating fibroids is a hysterectomy, an invasive procedure in which the uterus and offending fibroids are removed. While efficient for the 

healthcare system, the recovery period for a hysterectomy is long and there are significant risks associated with surgery. In addition, many women and physicians believe it is critical to leave the healthy uterus intact and treat this condition with 

the least invasive procedure possible. 

If gainsharing were implemented, our company would be forced to re-evaluate our 

decision to invest in the design and development of new minimally invasive technologies in this area. We believe we would face overwhelming obstacles in the adoption of this new technology since, even though it offers the potential for improved 

patient care, it would not provide hospitals and physicians with the short-term savings that would be rewarded under gainsharing. 

A significant amount of new technologies are created by small companies. These 

companies already confront significant hurdles to bring technologies to market and 

have them accepted into the Medicare system. Gainsharing would place an additional barrier to the adoption of their advanced devices. Patients currently face notable barriers in accessing several innovative technologies made by AMS, even 

thought they offer clearly beneficial outcomes for patients. We are concerned that 

gainsharing would exacerbate this problem, especially since AMS does not have vast 

resources to overcome the additional market adoption hurdles that could be presented by gainsharing. Gainsharing’s standardization measures would create an 

anti-competitive marketplace where the largest manufacturers would have a significant advantage. 

The Potential Impact on Therapeutic and Diagnostic Choices 

Gainsharing could negatively impact patient access to new technologies as well as 

choice among current technologies. Advanced medical devices are not always interchangeable commodities. For example, physicians are now able to choose between 

mechanical heart valves, porcine heart valves, and valves made from the pericardium of a cow. The physician and patient select a prosthetic heart valve based 

on an individual assessment of the benefits and risks of each valve and the lifestyle, 

age and medical condition of the patient. When considering the use of a tissue valve, 

the porcine heart valve is cheaper, but may not last as long as the more expensive 

alternatives. For some patients, choosing the cheaper porcine valve would save 

money today, but could require another costly and painful surgery down the road. 

Plastic, metal, and ceramic replacement hips all have different characteristics that 

could affect their durability for individual patients and the likelihood that they 

would need to be replaced. 

Even when the choice is between two brands of devices made from similar materials, the best choice for an individual patient is not always obvious. In situations 

when average results from two devices would be expected to be similar, factors 

unique to the patient, such as the patient’s size and the configuration of the area 

where an implantable device will be placed, may suggest that one brand of device 

is superior for that patient. Physician familiarity and comfort with a particular device is also critical. Typically, it is the match between a physician’s skills, training, 

and familiarity with a specific device which produces the best outcome for a patient. 

Physician use is also important in medical device innovation. Physicians help generate the next generation of devices by coming up with new ideas in the clinical setting. Removing the choices available to physicians will only hinder the industry in 

device innovation. 

Oversight of Quality and Accountability 

As you may know, the OIG issued advisory opinions in February 2005 on six different requests by hospitals proposing gainsharing arrangements. In all six advisory 

opinions, the OIG noted that the gainsharing arrangements could violate the CMP 

statute, but the OIG wrote that it would not impose sanctions against the hospitals 

if several protections were included in the arrangements. The protection from sanctions was not granted for any other arrangements beyond these six specific requests, 


hmoore on PROD1PC68 with HMRPT
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and under current law, the OIG will continue to scrutinize any gainsharing arrangement requests on a case-by-case basis. 

The tailored patient safeguards delineated by the OIG in the advisory opinions 

addressed maintaining patient access to quality care, designing quality controls with 

the input of credible medical experts, limiting the scope of the arrangements, ensuring public awareness and accountability on the details of the arrangements, and restricting actions allowed for yielding savings and methods of distributing the savings. The OIG required these elaborate and extensive safeguards to ensure that hospitals would not stint on care because it recognized that gainsharing could result 

in economic incentives undermining clinically appropriate decisions by physicians. 

Since we do not have feedback from the six arrangements to review and little experience with gainsharing, it seems premature to push ahead without careful study. 

For example, the several hospitals that have received advisory opinions are blinded 

to the public and stakeholders. We are concerned about how the quality will be 

measured given the difficulty of risk adjustment, lags in data, and the pervasive 

lack of measurement of value as opposed to cost across our whole system. It will 

also be hard to assess quality in the short term since different patient outcomes for 

some technologies will not be apparent for years after the procedure is performed, 

and it may be impossible to account for lost quality from failure to adopt new technology. 

The Impact on Long-Term and Overall Program Costs 

We are strongly concerned that when gainsharing is permitted to occur, arrangements will be designed to find savings by limiting the range of medical technologies. 

While these approaches may yield short-term savings to an individual hospital and 

the physicians working there, they may well be eclipsed by far greater overall 

health system costs in the long-run. 

Current contracting patterns at the hospital, regional, and ownership level already drive down the cost of devices without jeopardizing the physician or the patient in the quality of care provided. The medical technology industry is highly competitive and under immense market pressure to keep costs down. According to figures from the Bureau of Labor Statistics, price increases for medical devices have 

consistently been below the increases in the consumer price index for the last five 

years. According to Department of Commerce and CMS figures, medical devices as 

a share of national health spending have remained constant at about 5%. When the 

American Hospital Association (AHA) studied the increase in hospital costs over the 

last five years, it found that the cost of purchasing medical devices as a component 

of the increase was not even large enough to warrant breaking it out as a separate 

item. 

Conclusion 

We share the Subcommittee’s desire to eliminate excess cost and waste from our 

health care system and we strongly support evidence-based medicine. We believe 

that there are a number of steps that can be taken to achieve the objective of reducing costs without compromising quality care, such as additional efforts to prevent 

and treat diseases early, reduction in medical errors, improvements to the management of chronic diseases, and advances to the infrastructure and organization of 

care through the adoption of information technology. Incentives should also be 

adopted to encourage treatments and innovations that focus on improved patient 

outcomes and overall savings to the health care system. 

As you know, Congress passed laws to prohibit gainsharing out of concern about 

conflicts of interest that could influence a physicians’ ability to exercise independent 

professional judgment about the best interests of his or her patients. Congress did 

not want hospitals paying physicians to reduce or limit services to Medicare patients. Congress must continue to ensure that high-quality patient care is not jeopardized by financial incentives to cut costs. 

Thank you again for providing us the opportunity to submit the views of our industry on this important topic. We welcome the opportunity to work with this Subcommittee on achieving mutual objectives if we can find a carefully targeted and 

limited approach that does not create incentives to cut back on patient care, limit 

the therapeutic choices available to doctors and patients, or slow the development 

and diffusion of medical innovation. 

f 

Mr. MCCRERY. Thank you, Mr. Emerson. There are only about 

3 minutes left on the vote. Mrs. Johnson obviously got tied up on 

the floor. So, I am going to recess the Subcommittee hearing until 


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such time as Mrs. Johnson returns. It shouldn’t be but just a few 

minutes. So, the Subcommittee is in recess. 

[Recess.] 

Chairman JOHNSON. The hearing will reconvene. While Members are on their way back from the floor, since some in our audience are fairly new to Washington, I do want to just take a point 

of personal privilege and say, if you haven’t walked through the 

tunnel between Longworth and the Capitol, you owe it to the children of America. Every year, we have an artist from every district, 

through competition. We bring their work to Washington and we 

hang it in that tunnel. This year, it is just exceptional. There are 

some pieces there that will knock your socks off. You owe it to 

yourself, as well as to the youth in our high schools, to go by and 

look at it. 

Mr. STARK. Will the gentlelady yield? 

Chairman JOHNSON. Yes, I will be happy to yield. 

Mr. STARK. You weren’t here at the time, but guess which elderly Member of the House of Representatives walked through that 

tunnel for years, looking at those stupid bare walls, and went to 

Architect White and said, ‘‘Why can’t we hang state posters or 

something in this hallway?‘‘ Guess who that Member was who 

found the place to hang that art? 

Chairman JOHNSON. Outstanding! Pete, you have always been 

high on my list of creative thinkers and real contributors to this 

process, and you are now the best. Okay. Now, it rained. When I 

realized how hard it was raining, we all have to go around, and it 

takes longer. The best laid plans don’t work. So, I understand that 

Ms. Goodroe concluded. I am not sure that Mr. Emerson concluded. 

Mr. STARK. Concluded, yes. 

Chairman JOHNSON. You concluded? Okay. 

Mr. EMERSON. I have concluded. 

Chairman JOHNSON. Mr. Carter. 

STATEMENT OF GARY S. CARTER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEW JERSEY HOSPITAL ASSOCIATION 

AND AFFILIATES, PRINCETON, NEW JERSEY 

Mr. CARTER. Good morning. I am Gary Carter, President and 

CEO of the New Jersey Hospital Association. I would like to thank 

Chairwoman Nancy Johnson and the Members of the Committee 

for allowing me the opportunity to meet with you today. In particular, I would like to thank Mrs. Johnson and the members of her 

staff for their visit to New Jersey to get a better understanding of 

what we were trying to accomplish with our demonstration project; 

and I would let you know that, if you would like, we would be 

happy to bring physicians and CEOs to visit with you here to talk 

about what we were doing. Aligning the performance incentives of 

physicians, hospitals, and the Medicare Program is an efficient and 

practical way to encourage optimal quality of care decisions. Although it was stalled by a few hospitals that wanted to be included 

but were precluded by a CMS cap on participation, I feel that the 

New Jersey Demonstration experience I am about to describe held 

the promise to achieve this goal. If reimplemented in some form, 

hospital participation in this project should remain voluntary, with 

opportunities to opt out at the end of years one and two of the 


hmoore on PROD1PC68 with HMRPT
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project if the participating hospital is not achieving an appropriate 

level of physician participation, quality improvement, or cost savings. 

Prior to granting New Jersey a waiver, CMS originally required 

participating hospitals to guarantee a savings to the Medicare Program of not less than 2 percent of a hospital’s Medicare payments 

beginning in the second year of the demonstration. While participating hospitals would prefer a project without the guarantee, I believe it is critical that any guaranteed savings requirement begin 

no sooner than the second year. Also, a guarantee that is lower 

than 2 percent will stimulate greater hospital participation, and 

should be considered moving forward. Finally, while specialty hospitals do not exist in New Jersey, NJHA does not view the implementation of this project as a reason to lift or ease current efforts 

to implement a moratorium on specialty hospitals. They are very 

separate issues. Now I would like to provide a brief overview of our 

project. Traditionally, hospitals and physicians operate with different economic incentives. For the last 20 years, hospitals have 

been paid on a per-case basis, while physicians are paid on a feefor-service basis. Long lengths of stay, by default, tend to consume 

more services and accumulate additional costs and create potential 

quality problems. In order to guarantee proper oversight, a rigorous structure was created to ensure that everyone stayed focused 

on physician-hospital collaboration and quality performance. The 

NJHA created its own demonstration steering committee; each hospital also required to form its own internal oversight committee 

staffed by not less than 50 percent physicians. 

In September of 2003, the CMS awarded to the New Jersey Hospital Association a waiver to demonstrate what is commonly referred to as gainsharing. The incentives were structured as follows: 

The objective of the demonstration was to reempower physicians, 

under a rational economic structure, to partner with hospitals in 

patient care; Physician participation is strictly volunteer; The 

project provided a bonus only for physicians; therefore, no risks or 

penalties; the purpose is to incentivize improvement and reward 

achievement, not to punish; The incentives are based on individual 

physician performance, adjusted for severity of illness; The demonstration was designed to place no additional paperwork demands 

on physicians; there are no changes in claims processing or payment routines; Quality and responsibility for quality are the 

project’s highest priorities. It is the hospitals themselves who provide sources of funds for demonstration. I have been asked why 

hospitals would be willing to take on this responsibility. The obvious answer is that improved operational performance can lead to 

improved quality and financial performance. Quality monitoring is 

a key component of this demonstration. Process measures selected 

to evaluate performance were associated with acute myocardial infarction, heart failure, and community acquired pneumonia. These 

quality measures were chosen based on their relevance to the 

Medicare population. Participating hospitals also integrated their 

own individual quality programs into the project. 

Hospitals were given the power to condition participation in the 

demonstration by individual physicians on participation in institution-specific quality programs, including clinical quality protocols. 


hmoore on PROD1PC68 with HMRPT
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As physician interest in the demonstration grew, interest also grew 

in promoting its success by utilizing the demonstration framework 

as a tool to further improve quality. In conclusion, I am here today 

to support legislation that would allow New Jersey and other states 

to participate in a program where we could align incentives of physicians and hospitals. We appreciate your efforts in this regard, 

and look forward to continuing our work with the Subcommittee in 

developing gainsharing policies. Thank you. 

[The prepared statement of Mr. Carter follows:] 

Statement of Gary S. Carter, President and Chief Executive Officer, New 

Jersey Hospital Association and Affiliates, Princeton, New Jersey 

Good morning. I am Gary Carter, President and CEO of the New Jersey Hospital 

Association. I’d like to thank Chairwoman Nancy Johnson and members of the committee for allowing me the opportunity to meet with you today. In particular I would 

like to thank Mrs. Johnson and members of her staff for their visit to New Jersey 

to get a better understanding of what we were trying to accomplish with our Demonstration project. 

Aligning the performance incentives of physicians, hospitals and the Medicare 

program is an efficient and practical way to encourage optimal quality of care decisions. Although it was stalled by a few hospitals that wanted to be included, but 

were precluded by a CMS cap on participation, I feel that the New Jersey Demonstration experience that I am about to describe held the promise to achieve this 

goal. If re-implemented in some form, hospital participation in this project should 

remain voluntary with opportunities to opt-out at the end of year’s one and two of 

the project, if the participating hospital is unhappy for any reason, is not achieving 

an appropriate level of physician buy-in, quality improvement or cost saving success. 

Prior to granting New Jersey a waiver, CMS originally required participating hospitals to guarantee savings to the Medicare program of not less than 2 percent of 

a hospital’s Medicare payments beginning in the second year of the demonstration. 

While participating hospitals would prefer a project without the guarantee, I believe 

it is critical that any guaranteed savings requirement begin no sooner than the second year. Also, a guarantee that is lower than 2 percent will stimulate greater hospital participation and should be considered moving forward. 

Finally, while specialty hospitals do not exist in New Jersey, NJHA does not view 

the implementation of this project as a reason to lift or ease current efforts to implement a moratorium on specialty hospitals. These are separate issues. 

Now I would like to provide a brief overview of our project. Traditionally, hospitals and physicians operate with different economic incentives. For the last twenty 

years hospitals have been paid on a per-case basis while physicians are paid on a 

fee-for-service basis. Long lengths of stay, by default, tend to consume more services 

and accumulate additional cost for which the hospital receives no additional reimbursement from Medicare. This has the potential to create an adversarial atmosphere between hospitals and physicians. 

New Jersey’s Medicare Demonstration of Performance Based Incentives project 

was designed as an attempt to identify, pilot test and evaluate a specific methodology to better align current payment methods with quality improvement goals. Almost half of the hospitals in the state of New Jersey expressed interest in participating in the project. 

In order to guarantee proper oversight, a rigorous structure was created to ensure 

that everyone stayed focused on physician/hospital collaboration and quality performance. NJHA created its own Demonstration Steering committee staffed by participating hospital CEOs, CFOs and Medical Directors, as well as Quality Oversight 

and Finance sub-committees. Each hospital was also required to form its own internal Oversight Committee staffed with not less than 50 percent physicians. Hospital 

specific internal Quality and Finance sub-committees were also a required component of participation. 

In September of 2003, the Centers for Medicare and Medicaid Services (CMS) 

awarded to the New Jersey Hospital Association a waiver to demonstrate what is 

commonly referred to as gainsharing. By properly aligning physician and hospital 

incentives the New Jersey demonstration held the promise to achieve several objectives: 

1. Facilitate collaboration between physicians and hospitals; 

2. Infuse efficiency through greater access to needed services, quicker turn 

around time on procedure scheduling and test results; 


hmoore on PROD1PC68 with HMRPT
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3. Provide a new source of funds to support quality initiatives; 

4. Add incremental payments to augment depleted physician fee schedules; 

5. Return patient care decisions to physicians in consultation with their patients; 

6. Improve the financial health of hospitals; 

7. Improve the long-term viability of the Medicare Trust Fund. 

Physician and hospital economic incentives are, at best, inconsistent. This means 

that there will be a significant amount of inefficiency in the delivery system so long 

as this situation persists. Real progress cannot be made on the challenge of improving performance—both quality and operational—without returning responsibility to 

the doctors and making them partners. 

The way in which physicians in the field perceive this program is critical to its 

success. The incentives were structured as follows: 

• The objective of the Demonstration was to re-empower physicians—under a rational economic structure, to partner with hospitals in patient care. 

• Physician participation is strictly voluntary. 

• The project is bonus only for physicians; therefore, no risks or penalties. The 

purpose is to incent improvement and reward achievement; not to punish. 

• Incentives are based on individual physician performance, adjusted for severity 

of illness. 

• The Demonstration was designed to place no added paperwork demands on physicians; there are no changes in claims processing or payment routines. 

• Quality, and responsibility for quality, are the project’s highest priorities. 

It is the hospitals themselves who provide the source of funds for the Demonstration. I have been asked why hospitals would be willing to take on this responsibility. 

The obvious answer is that improved operational performance can lead to improved 

financial performance. This, in turn, creates a source of funds for important needs 

including quality of care initiatives, care to the uninsured and capital improvement. 

For the hospital, aligning incentives can result in: 

• Shorter inpatient stays; 

• Improved quality of patient care; 

• Fewer marginal but costly diagnostic tests; 

• Reductions in pharmacy expense; 

• Efficient use of operating rooms;Cost effective use of critical care and telemetry 

units; 

• Evidence-based selection and purchase of medical devices and hardware; 

• Improved discharge planning. 

In addition, if the Demonstration were to be implemented and successful, it 

should: 

• Improve the financial health of hospitals; 

• Augment physician fee schedules; 

• Provide a new source of funds to Medicare and its beneficiaries; and 

• Provide a model that could improve the performance of the Prospective Payment System (PPS). 

Quality monitoring is a key component of this demonstration. Process measures 

selected to evaluate performance were associated with Acute Myocardial Infarction 

(AMI), Heart Failure, and Community Acquired Pneumonia. These quality measures 

were chosen based on their relevance to the Medicare population. Participating hospitals also integrated their own individual quality programs into the project. 

Hospitals were given the power to condition participation in the demonstration by 

individual physicians on participation in institution-specific quality programs, including clinical quality protocols. As physician interest in the Demonstration grew, 

interest also grew in promoting its success by utilizing the Demonstration framework as a tool to improve quality. 

In conclusion, I am here today in support of legislation that would allow New Jersey and other states to participate in a program where we could align incentives 

of physicians and hospitals. We appreciate your efforts in this regard and look forward to continuing our work with the Subcommittee in developing gainsharing policies. 

I would now be happy to answer any questions. 

f 

Chairman JOHNSON. Thank you, Mr. Carter. Mr. Fine. 


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STATEMENT OF STUART H. FINE, CHIEF EXECUTIVE OFFICER, 

GRAND VIEW HOSPITAL, SELLERSVILLE, PENNSYLVANIA, ON 

BEHALF OF THE AMERICAN HOSPITAL ASSOCIATION 

Mr. FINE. Good morning. My name is Stuart Fine, I am the 

CEO of Grand View Hospital in Pennsylvania. I am here today on 

behalf of the American Hospital Association, its 4,800 member hospitals and health systems. Part of Grand View’s mission is to provide and coordinate the appropriate utilization of quality, cost-effective health care and related services for our community. There 

are approximately 300 full- and part-time physicians on our medical staff and more than 1,500 employees of Grand View who help 

us to accomplish our mission. Madam Chairman, we commend your 

leadership, and thank the Committee for its work in seeking public 

policy changes that can help hospitals and doctors work together 

to improve the quality and efficiency of patient care delivery. But 

we believe very strongly that gainsharing can do the most good for 

the most people if we move beyond thinking of it only as a way to 

achieve cost savings. We need to be able to use incentives in working with physicians to improve quality of care and patient safety 

and to ensure that our communities have access to the care and 

services that they require. We believe it is time to move beyond 

demonstration projects. Such projects benefit only a limited number of communities, but doctors and hospitals everywhere need 

help. We need to clear away the underbrush of what are confusing 

laws and regulations that prevent doctors and hospitals from focusing on the bigger picture: providing quality care at an affordable 

price. 

Hospitals and doctors currently have only a few ways in which 

they can share incentives to come together. Hospitals can employ 

doctors, or they can spend large sums of money and years of time 

to take advantage of remarkably limited and confusing case-specific 

gainsharing opportunities. We urge you to amend Federal law and 

regulation. Many changes are desperately needed. The CMP law 

prohibition against any incentive to reduce care, regardless of medical necessity, is far too all-encompassing. It prohibits inducements 

to reduce services even when such services may be unnecessary or 

duplicative. The HHS Secretary should be authorized to create safe 

harbors to foster this broader range of care improvement initiatives 

with proper safeguards. Those safe harbors should apply across all 

Federal that restrict them. The current Federal focus on limiting 

incentives to the sharing of cost savings feeds consumer fears. This 

causes folks to worry that this could result in stinting on care or 

delaying adoption of new technologies and treatments. For providers, gainsharing is often not a realistic option, because such collaborative programs have generally been limited to a year’s duration. That simply does not support the needed investment, both in 

time and money, for either hospitals or physicians. 

Any proposal that would seek to guarantee up-front savings to 

the Medicare Program would likely stifle most providers’ incentive 

to participate. For example, an initiative to adopt technologies that 

improve patient safety might require significant capital investment 

to purchase hardware and software, as well as to train hospital 

staff, physicians, and physician support staff in their use. That investment could reduce medical errors and complications, but might 


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not yield monetary savings for the hospital. Yet it is the right thing 

to do for patients and for the Medicare Program. Hospitals should 

not be penalized or have impediments put in their way to making 

such investments on behalf of their communities. Because physician-owned limited-service providers can offer incentives without 

the same constraints that apply to facilities not owned by physicians, requiring payments to Medicare would be an unfair penalty 

against community hospitals. Importantly, patient safeguards could 

govern the incentive arrangements we are recommending. However, there are no patient safeguards covering the incentives allowed by physician-owned limited-service providers. The financial 

rewards associated with our recommended approaches would never 

equal those of ownership. Therefore, we strongly urge that action 

to remove barriers to the use of incentives must not be considered 

a substitute for the needed ban on physician self-referral to limited-service providers. 

The actions we have recommended will help create productive 

working relationships with physicians. They can do nothing, however, to change the conflict of interest inherent in physician ownership under the physician self-referral prohibition. In conclusion, 

while the roles of hospitals and physicians are different, each needs 

the other, and our patients need us both. Too many legal and legislative barriers still in the way of hospital and physician efforts to 

collaborate in making health care better. Congress can help by 

modernizing law and regulations so that hospitals and physicians 

can work together in ways that benefit everyone having a stake in 

providing, or in receiving, high-quality care. Thank you very much 

for this opportunity to participate in today’s hearing, I remain 

available to respond to your questions. 

[The prepared statement of Mr. Fine follows:] 

Statement of Stuart H. Fine, Chief Executive Officer, Grand View Hospital, 

Sellersville, Pennsylvania 

I am Stuart Fine, CEO at Grand View Hospital in Sellersville, Pennsylvania. I 

am here today on behalf of the American Hospital Association (AHA) and our 4,800 

member hospitals, health systems and other health care organizations, and our 

33,000 individual members. We appreciate the opportunity to share with you our 

thoughts on the potential of gain sharing to help patients, physicians, hospitals, and 

the Medicare program itself. 

Formed in 1913 as Bucks County’s first hospital, Grand View Hospital is in most 

ways a typical community, not-for-profit hospital. We provide a broad array of patient services, from obstetrics to orthopedics, and from hospice/home care to oncology. Our mission, in brief, calls for us to ‘‘provide and coordinate the appropriate 

utilization of quality, cost-effective health care and related services’’ for the people 

of our community. More than 250 physicians comprise our medical staff. 

Madam Chairman, all health care is about teamwork. It involves the talent and 

dedication of a wide range of very special people—from doctors and nurses to technicians and nutritionists and many, many more. Hospital care is especially dependent 

on the ability of hospital leaders to work with physicians to make sure they have 

the resources needed to get patients the right care, at the right time, and in the 

right setting. 

We therefore commend your consideration of public policy changes that could improve the ability of hospitals and physicians to work together to improve the efficiency of hospital care delivered to Medicare patients. When we talk about gain 

sharing as a way to improve the efficiency of our health care system, we are talking 

about much more than just cost efficiency—gain sharing can also bring gains in 

quality, patient safety and community access. 

For this reason, we urge the committee to revise various federal laws that affect 

hospital-physician working relationships, so that they can foster the teamwork needVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 E:\HR\OC\26377.XXX 26377

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ed to address the many challenges facing the delivery of health care today and in 

the future. 

Currently, federal laws are focused on prohibiting or limiting interactions between 

hospitals and physicians that might have monetary value to either party. While the 

intent is honorable—to avoid conflicts of interest—the effect is to impede the ability 

of hospitals and physicians to work together using incentives to improve quality, patient safety and community access to services. The current federal focus on sharing 

‘‘cost savings’’ gives rise to a fear among beneficiaries and consumers that such efficiency-only incentives would result in things like curtailed care and slower adoption 

of new technologies and treatments. We believe Congress should modernize the current concept of gain sharing and focus on the broader goal of fostering hospital-physician arrangements that provide incentives for care improvement. 

At the same time, we also urge that Congress not view action in this area to be 

a substitute for a permanent ban on the use of the whole hospital exception under 

the Ethics in Patient Care Referrals Act by physician-owned limited-service hospitals. 

Gain Sharing in Today’s Environment 

Gain sharing is currently understood to be the sharing between hospitals and 

physicians of cost savings that stem from specific actions to improve the efficiency 

of care delivery. Very little gain sharing is currently allowed. The Department of 

Health and Human Services (HHS) Office of Inspector General (OIG), which is 

charged with enforcing some of the laws that affect hospital-physician relationships, 

in 1999 issued a ruling that effectively banned gain-sharing arrangements. In that 

ruling, the OIG noted that well-designed arrangements could result in better care 

at lower cost by, for example, encouraging physicians to reduce the use of unnecessary ancillary services and inpatient days. Nevertheless, the OIG concluded that the 

Civil Money Penalties Law prohibited gain sharing, and that the OIG lacked the 

statutory authority to impose safeguards to ensure that cost-saving measures do not 

reduce quality. 

Earlier this year, the OIG issued several advisory opinions that allowed a very 

narrow approach to reducing costs of cardiac procedures. The opinions allowed a 

specific arrangement to provide incentives for physicians to adhere to clinical best 

practices and reduce the inappropriate use of supplies. Though judged illegal under 

current law, the OIG elected not to challenge those arrangements at present because they included multiple safeguards to protect quality of care for beneficiaries 

and to guard against inappropriate use of Medicare funds. This slight alteration in 

the OIG’s position on gain sharing may have been stimulated by recommendations 

from the Medicare Payment Advisory Commission (MedPAC) in March 2005. 

MedPAC urged that Congress provide HHS with the authority to allow a much 

broader use of hospital-physician gain sharing arrangements, as long as they are 

regulated to protect the quality of care and minimize financial incentives that could 

affect physician referrals. 

A Broader Approach 

The AHA believes that broadening gain sharing to focus not just on cost reduction 

but also on care improvement initiatives would benefit patients, hospitals and physicians. Specifically, we believe federal laws that affect hospital-physician relationships should be amended to: 

Foster hospital-physician incentive arrangements designed to improve or maintain 

community access to services, or to achieve one or more of the six aims for health 

care delivery articulated by the Institute for Medicine ( IOM) in its report, Crossing 

the Quality Chasm. The six aims are that health care be safe, effective, patient-centered, timely, efficient, and equitable. 

Foster hospital-physician incentive arrangements that are designed to: 

• Achieve needed improvements in the health care delivery system even if they 

do not produce an immediate cost savings. 

• Sustain community access to services that are essential. With physicians less 

dependent on hospitals as a place to practice, new incentives should be allowed 

in order to maintain community access to services (such as trauma and emergency department services), support community outreach efforts, care for the 

uninsured, and other aspects of hospital operations that require physician support. 

• Promote the integration of clinical care across providers, across settings, and 

over time. 

• Adopt and integrate information technology (IT) systems and technology. IT 

linking hospitals, physicians, and other providers together is essential to imVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 E:\HR\OC\26377.XXX 26377

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proving patient safety, productivity, quality monitoring, and coordination across 

care settings. 

• Enhance institutional or practitioner productivity or achieve other efficiencies. 

Establish a simpler, consistent set of rules for how hospitals and physicians construct their working relationships. The complexity, inconsistency and sometimesconflicting interpretations of federal laws and regulations affecting hospital-physician arrangements is a significant barrier. Few arrangements can be structured 

without very significant legal expense. Even then, it is often unclear whether the 

arrangements might be challenged in the future. 

Enable hospital-physician contracting with health plans and purchasers as a single unit, especially when pay-for-performance provisions are utilized. Health plans 

and purchasers often adopt different approaches to payment for hospitals and physicians that in turn create different and sometimes-conflicting incentives. As more 

purchasers move toward pay-for-performance methods, the need to align hospital 

and physician payment incentives becomes critical. 

More specifically, AHA believes that the following types of arrangements should 

be allowed if they are designed to achieve an acceptable purpose, there are mechanisms in place to protect the quality of care provided to beneficiaries and avoid inappropriate influence on physician referrals, and the incentive arrangements are 

transparent to patients. These arrangements may not yield tangible savings to a 

hospital, but they may yield savings to the health care system overall and can improve the care we provide. 

• Sharing of cost savings from efficiencies 

• Incentives to meet quality indicators (even when savings do not accrue to the 

hospital) 

• Incentives to clinically integrate services and coordinate care across settings 

• Sharing of pay-for-performance bonuses from payers 

• Joint recruitment of physicians by hospitals and physician practices 

• Joint hospital and physician contracting with payers to ensure aligned performance incentives 

• Service contracts with physicians to build new service capacities 

• Management contracts with physicians 

• IT and other technology sharing to enable communication across settings 

• Ability to purchase or operationally support IT for other providers to increase 

IT adoption and integration 

• Hospital assistance to physicians in obtaining malpractice insurance 

Moving from Gain Sharing to Incentives for Care Improvement Initiatives 

Federal law affecting hospital-physician relationships is extremely complex and 

comes from multiple sources. These are the most-relevant federal laws: 

• Medicare’s Civil Money Penalty Law (CMPL) prohibits any direct or indirect 

hospital payments to physicians that are aimed at reducing or limiting services, 

regardless of medical necessity. 

• Focusing this prohibition on preventing incentives to reduce medically necessary services would spawn many care-improvement initiatives, including 

those that would significantly improve the quality and safety of patient care 

both in the short and long terms. It also would allow hospitals to share with 

physicians the result of reduced costs. 

• Medicare’s Ethics in Patient Care Referrals Law prohibits physician self-referrals to any entity in which he/she has an ownership or financial interest for any 

of a lengthy list of designated health services, one of which is hospital inpatient 

and outpatient care. These provisions basically prevent any financial relationship between a hospital and a referring physician unless that relationship satisfies an exception. There are few exceptions that apply to non-ownership relationships between hospitals and physicians and the exceptions that do apply are 

very rigid. 

• Medicare’s Anti-kickback Law prohibits any payment for referrals, or inducement or reward for, the purchase, order, or lease of any covered item or service. 

The effect of these provisions is to limit arrangements to those that share 

verifiable cost savings. In many respects these provisions clash with those of the 

CMPL. 

• Tax Exemption Law prohibits private benefit or inurement. These provisions 

prohibit payments to physicians that are based on a portion of gross or net revenues, or any payments that violate physician self-referral or anti-kickback laws. 


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Development of a Legislative Proposal 

We applaud the Chairman’s leadership in examining how to modify current law 

to foster productive relationships between hospitals and physicians that also benefit 

Medicare beneficiaries and the Medicare program itself. As you develop your legislative proposal, we have several recommendations: 

Allow incentive relationships between hospitals and physiciansto support 

care improvement initiatives affecting quality, patient safety, and access to 

services, in addition to cost efficiency. Quality of care for beneficiaries, and cost 

savings to the Medicare program, will be the likely result in the form of reduced 

medical complication rates, reduced readmissions, reduced duplication of services by 

different providers, reduced admissions, and improved operational efficiency. 

Reach beyond demonstration projects and amend current federal laws to 

eliminate inconsistent and counterproductive provisions.Clearly there are 

some changes that must be made. For example, the CMPL prohibition on any incentive to reduce care, regardless of medical necessity, should be limited so that it only 

prevents incentives to reduce medically necessary care. We also believe that the imperative to systematically address health care delivery issues calls for immediate 

change in the complex maze of federal requirements governing hospital-physician 

relationships. The HHS Secretary should be authorized to create safe harbors to foster care improvement initiatives with proper safeguards, and those safe harbors 

should be applied across all the federal laws that currently restrict them. 

Do not require that hospitals guarantee savings to the Medicare program 

as a condition for incentive arrangements. Such a requirement would have an 

overwhelmingly chilling effect on the development of care improvement initiatives 

for several reasons: 

• Hospitals would be taking the risk of upfront investment in incentive approaches that might or might not yield cost savings to the hospital. For example, an initiative focused on adopting technologies that improve patient safety 

would require significant upfront investment. That investment could bring increased patient safety and fewer complications, which might prevent readmissions. Most of those gains would not yield operating cost savings for the hospital, and in fact might reduce revenues to the extent that admissions are reduced. But it is the right thing to do for patient care, and the hospital should 

not be penalized by a requirement to pay Medicare for the right to do it. 

• The viability of incentive arrangements would be limited to those hospitals or 

areas where costs and/or length of stay (LOS) are high. Per-case costs and LOS 

are the primary areas where reductions would yield savings to the hospital 

under Medicare’s inpatient prospective payment system. Hospitals that already 

are very efficient, or are in areas where they are historically very efficient, 

might achieve limited or no savings. They would have to generate enough savings or other funds to cover the payment to the program, the investment cost 

of the incentive arrangement, and the cost of incentive payments to physicians. 

• The long-term viability of the approach would be limited. We question whether 

the savings each year would cover a payment to the program, as well as the 

cost of investments and physician incentives. This is especially the case when 

any productivity gains might generate MedPAC recommendations for further 

reductions in the update factor. 

• Any required payments to the Medicare program would be an unfair penalty 

against community hospitals compared to physician-owned hospitals. Physicianowned hospitals are able to provide incentives without the same constraints as 

hospitals not owned by physicians, and they would not be subject to the same 

payment requirement. MedPAC has demonstrated that physician-owned specialty hospitals do not provide care at lower cost, even though they have shorter 

lengths of stay. Such differences under the program would not be appropriate. 

Do not substitute action in this area for the much-needed ban on physician self-referral to limited-service hospitals. The actions we have recommended will help create productive working relationships with physicians without entering into joint ownership arrangements. They can reshape hospital-physician relationships at a time when physicians depend much less on hospitals as a 

place to practice. They can do nothing, however, to change the conflict of interest 

inherent in allowing physician-owned limited service hospitals access to the whole 

hospital exception under the physician self-referral prohibition. Safeguards would 

govern the incentive arrangements we are recommending; the incentives allowed 

under the whole hospital exception have no patient safeguards. Further, the rewards associated with our recommended approach would never equal those associated with physician ownership. 


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Conclusion 

The relationship between hospitals and the physicians who practice in them has 

always been central to quality care. Hospital managers and governing boards are 

responsible for providing the facilities, equipment, and staff required to deliver 

health care services, but it is the physicians who provide or direct the delivery of 

those services. While the roles of hospitals and physicians are different, they are 

highly interdependent—we need each other, and patients need both of us. 

But in today’s environment, too many legal and legislative barriers stand in the 

way of hospital and physician efforts to make health care better for all they serve. 

The major delivery system changes called for by the IOM and others are within 

reach. Congress can help us reach those goals by easing federal law so that hospitals and physicians can work together in ways that will benefit everyone with a 

stake in high quality health care. 

f 

Chairman JOHNSON. Thank you very much, Mr. Fine. Mr. 

Imparato. 

STATEMENT OF ANDREW J. IMPARATO, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, AMERICAN ASSOCIATION OF 

PEOPLE WITH DISABILITIES 

Mr. IMPARATO. Good morning, Madam Chair and Members of 

the Subcommittee. My name is Andy Imparato. I am the President 

and CEO of the American Association of People With Disabilities 

(AAPD). We have about 120,000 members around the country, and 

our mission is political and economic empowerment for children 

Adults with all types of disabilities. I wanted to start by thanking 

all three of you for your leadership on disability issues. I know 

Congressman Ramstad is the Co-Chair of the Bipartisan Disabilities Caucus, and we really appreciate your raising the issues that 

you raised at this hearing today that are particularly important for 

folks with disabilities. This year, we celebrated the 15th anniversary of the Americans With Disabilities Act. The goals for that law 

is how we evaluate public policy: equality of opportunity, full participation, independent living, and economic self-sufficiency. We 

hold those goals up against the Medicare Program as it currently 

exists. Oftentimes, the program is not meeting the needs of people 

with disabilities who want to participate fully in their communities. We have had big fights with Medicare about getting coverage for a wheelchair for people who are able to take one step 

when they get out of their bed. So, there are a lot of real basic 

things that people need that Medicare oftentimes fights in terms 

of being willing to pay for them. 

That is the backdrop that we look at as we evaluate the practice 

of gainsharing. The AAPD is part of a coalition with seniors and 

health advocates who have some serious concerns regarding 

gainsharing, many of which have been mentioned; concerns that 

have to do with the potential of this practice to exacerbate preexisting problems with how Medicare meets the needs of beneficiaries with disabilities. It may harm the physician-patient relationship. It may produce illusory short-term cost savings at the expense of long-term health. It may punish physicians who have developed a specialty practice with an emphasis on higher-cost patients with disabilities and chronic health conditions. In my written 

testimony I cite two studies that were done recently that document 

how Medicare is inadequately serving patients currently. There 


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was a 2004 RAND report on quality of care received by older adults 

that found that vulnerable and disabled seniors receive about half 

of the care that would be recommended for people with their conditions. Also, a 2003 Kaiser Family Foundation survey of health experience of people with disabilities found that Medicare beneficiaries had the biggest cost-related problems of all of the respondents who had health insurance. Within this population, almost 70 

percent reported going without needed items, such as equipment 

and eyeglasses. So, that is the backdrop that we look at this new 

practice of gainsharing. 

On the physician-patient relationship, I think we all want our 

doctor to be our advocate. When a doctor is evaluating what treatment to prescribe, we want the doctor to be using their medical 

training and making a medical decision that is in the best interests 

of the patient. Anything that gives the doctor a financial incentive 

around what they are going to prescribe raises a red flag. I know 

one of the things that the Inspector General has recommended is 

disclosure forms, so that patients know if there is a practice like 

this going on. But I really worry about how that is going to operate 

in practice. If you are getting that disclosure form as you are 

checking in for a procedure to a hospital, are you really in a good 

position to say, ‘‘No, I don’t like this gainsharing relationship‘‘? Our 

fear is that it is going to be fine print that a lot of people won’t 

notice. Again, it may affect the trust that the patient has for the 

physician. On the short-term versus long-term costs, just a basic 

example is the type of seating that somebody gets prescribed for 

their wheelchair. It may be cheaper to prescribe a seating system 

that may result in pressure sores, which could result in longerterm costs down the road. So, really, taking that into account is important. 

Last, on this issue of penalizing doctors, there was a reference 

by the Inspector General to ‘‘cherry picking,’’ where patients that 

are higher cost might get referred to hospitals that don’t have 

gainsharing. We are also concerned about physicians who develop 

specialties and have a high-cost patient base. We don’t want them 

to be penalized in a gainsharing context. So, I would like to close 

just by asking questions for the Subcommittee to consider as you 

look at this issue: Will patients be able to benefit from the latest 

technology, as Congressman Ramstad raised? What will be the impact on research, development, and innovation, if physicians aren’t 

prescribing the latest technologies? Will people be able to get treatment or devices that are best suited to their individual needs, or 

will they be forced to select from a pre-approved list from the hospital that may not meet their individual needs? Will people with 

hard-to-diagnose conditions be obstructed from seeing an experienced specialist because of cost concerns? Thank you again for the 

opportunity to be here. 

[The prepared statement of Mr. Imparato follows:] 

Statement of Andrew J. Imparato, President and Chief Executive Officer, 

American Association of People with Disabilities 

Madame Chair, Ranking Member Stark, and Members of the Subcommittee: 

Thank you for inviting me to testify at this important hearing. My name is Andrew J. Imparato, and I am the President and CEO of the American Association 

of People with Disabilities (AAPD), the largest membership organization repVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 E:\HR\OC\26377.XXX 26377

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1 ‘‘The Quality of Health Care Received by Older Adults,’’ RAND 2004, available at 

www.rand.org. 

resenting children and adults with all types of disabilities in the U.S. AAPD’s pursues its mission of political and economic empowerment through programs in the 

area of public policy advocacy and research, leadership development, civic participation, and mentoring and career exploration. 

Prior to joining AAPD, I was general counsel and director of policy at the National 

Council on Disability, an independent agency advising the President and the Congress on public policy issues affecting people with disabilities. I have also worked 

as an attorney with the U.S. Equal Employment Opportunity Commission, the U.S. 

Senate Subcommittee on Disability Policy, and the Disability Law Center in Boston, 

Massachusetts. 

AAPD was founded on the fifth anniversary of the signing of the Americans with 

Disabilities Act (ADA), and we promote public policies that are consistent with that 

law’s important goals for people with disabilities: equality of opportunity, full participation, independent living, and economic self-sufficiency. As we look at the potential impact of ‘‘gainsharing’’—the topic of today’s hearing—on Medicare beneficiaries with disabilities, we will want to know whether or not this practice will 

lead to greater opportunity, participation, independence and self-sufficiency for the 

consumer population. 

Based on our preliminary analysis of the potential impact of this new practice on 

beneficiaries with disabilities and chronic health conditions, we have some important questions for the Subcommittee to consider. 

Will patients be able to benefit from the latest technology if doctors feel pressure 

to use older, less costly options? What impact will changes in physician behavior 

brought about by gainsharing have on research and development and innovation? 

Will people be able to get the treatment or device best suited to their individual 

needs, or will they be forced to settle for whatever the hospital decides to include 

in its inventory of low-cost options? Will people with hard-to-diagnose conditions be 

obstructed from seeing an experienced specialist because of cost concerns? 

As you know, Medicare is a critical program that serves millions of people with 

disabilities across the lifespan. Approximately 6 million current Medicare beneficiaries are people with significant disabilities who are under 65. Unfortunately, 

when Medicare was created, society’s expectations for people with disabilities were 

not as robust as they are today. These artificially low expectations created restrictions in the Medicare program like the requirement that disabled beneficiaries with 

mobility impairments can only be covered for items they need to get around their 

home or apartment. 

AAPD has worked with other disability and seniors organizations to modernize 

Medicare so that it is made more consistent with the goals of the ADA. We welcome 

creative approaches to improve the Medicare program so that it works better for 

beneficiaries, including efforts to eliminate wasteful health care costs. We believe 

it is important that reform proposals be assessed so that they do not inadvertently 

harm patients or jeopardize quality care. 

The Wrong Incentives Can Take a Bad Situation and Make it Worse 

Last year, RAND issued a report examining the quality of care received by older 

adults.1 In their report, the researchers found that vulnerable and disabled seniors 

receive about half the care that would be recommended for people with their health 

condition, and that care for geriatric conditions, such as incontinence or falls, is 

poorer than care for general medical conditions. They also found that physicians 

often fail to prescribe recommended medications for older adults. 

These findings are particularly significant as the Subcommittee examines whether 

physicians should be given an incentive to reduce the costs of providing care to their 

Medicare patients. If patients are already being under-treated, do we really want 

to reward doctors financially for doing even less? 

In seeking to explain the reasons why geriatric conditions may get inadequate attention in primary care settings, the RAND researchers noted that medical schools 

and primary care residency programs may not emphasize the skills needed to diagnose and treat diseases limited largely to the geriatric population. This same concern applies in the diagnosis and treatment of many disabling conditions for people 

under 65. 

When the Kaiser Family Foundation (KFF) did a survey looking at the health 

care experience of people with disabilities in 2003, they found that nearly half of 

those surveyed reported that they go without medically necessary equipment and 

other items due to cost; more than one-third postponed care because of cost; and 

more than one-third spent less on basics such as food, heat, and other services in 


hmoore on PROD1PC68 with HMRPT
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2 ‘‘New Survey Shows People with Disabilities Face Major Barriers,’’ Kaiser Family Foundation 2003, available at www.kff.org/newsroom/Disability-Health-Coverage.cfm. 

order to pay for health care.2 Focusing in on the Medicare beneficiaries, the KFF 

researchers found that among the survey respondents with any type of health insurance, those with Medicare alone reported the highest rates of serious cost-related 

problems. Within this population, nearly seven in ten reported going without needed 

items, such as equipment and eyeglasses; 60 percent said they had put off or postponed care due to cost; and more than half said they spent less on basic needs, such 

as food or heat, in order to pay for health care. 

Many of the problems experienced by people with disabilities and chronic health 

conditions stem from the inadequacy of the Medicare benefits package. When the 

incentives associated with gainsharing are superimposed on this already problematic situation, my concern is that disabled Medicare beneficiaries will have even 

greater difficulty getting the health care services that they need. 

Harming the Physician-Patient Relationship 

In addition to the concerns about gainsharing exacerbating preexisting problems 

with the quality and adequacy of care being delivered to Medicare beneficiaries with 

disabilities, I have a parallel concern about what these kinds of financial incentives 

will do to the physician-patient relationship. People with disabilities and chronic 

health conditions often have a difficult time finding a physician with the skills and 

experience necessary to help them manage what are often complex and highly individualized medical conditions. Once a patient finds the right physician, s/he expects 

that physician to be an advocate for the patient when there are disputes with insurers about what is medically necessary and whether a particular course of treatment 

is justified over other, potentially less costly, alternatives. If a patient knows that 

his or her physician has a financial incentive to keep costs down, that knowledge 

is likely to make it more difficult for the patient to trust that s/he is getting objective medical advice. We should be very cautious about setting up a health care system where the physician comes to be viewed as an agent of the insurer and not as 

an advocate for providing the best possible care for the patient. Gainsharing raises 

many of the same issues for disabled consumers as the earlier proliferation of managed care. People with disabilities often ran into serious barriers in getting the right 

care from the right provider in the managed care environment. The difference in 

the gainsharing context is that the doctor now has a financial stake in limiting a 

patient’s options. 

Short-term Savings can Harm Long-term Outcomes 

For consumers with long-term disabilities and chronic health conditions, it is important for the health care system to take a long-term view of how best to help the 

patient manage their condition. In a gainsharing system that rewards physicians for 

producing short-term savings, it is unclear that doctors will have the right incentives to take a long-term view about what equipment and procedures will produce 

the best long-term outcomes for a particular patient. In such an environment, savings may be short-lived and patient health and quality of life are likely to suffer. 

For example, if a patient with quadriplegia is prescribed a low-cost seating system, 

that might create short-term savings over a more expensive product, but it can also 

result in costly future emergency room visits to deal with the ensuing pressure 

sores. 

As AAPD noted in a letter from a range of patient advocacy groups sent to members of Congress earlier this week (a copy of the letter is attached to this testimony), 

we have a range of other concerns related to how the physician incentives associated 

with gainsharing will play out for patients. 

The letter raises several specific examples of how gainsharing might affect the 

quality of care patients receive in the context of artificial hips or heart valves, spinal 

fusions, heart monitoring devices, female Alzheimer’s patients, and cancer detection 

and treatment. And once again, all of these concerns should be viewed in the context 

of a Medicare program that is already proving to be inadequate in meeting the 

health needs of disabled and vulnerable Medicare beneficiaries. 

There are currently powerful economic forces within the Medicare payment system, which are designed to drive costs down. Moreover, market competition and entities such as group purchasing organizations also force economies. We believe that 

additional efforts to contain costs should be focused on measuring and rewarding 

improved quality of care and outcomes as well as efforts to improve system efficiency through electronic medical records and greater use of health information 

technology. Also, if there are really savings to be realized from changing physician 


hmoore on PROD1PC68 with HMRPT
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behavior, why not allow the Medicare program, as opposed to individual physicians, 

to benefit from these savings? 

Penalizing Physicians Who Serve Difficult-to-Treat Patients 

A final concern that I would like to raise regarding gainsharing has to do with 

how it will affect physician decisions about which patients to treat. Physicians who 

have developed highly specialized skills and experience may find themselves penalized for having a practice that produces high per-patient costs associated with more 

expensive diagnostics and care. Although hospitals may attempt to risk adjust in 

these situations, there is no guarantee that the risk adjustment will be adequate 

to create a level playing field for physicians that have a particular expertise resulting in consistently high expenditures because of the complex nature of their patients’ disabilities. Ultimately, this can create disincentives for doctors to go into 

certain specialties, and it can create disincentives for general practitioners to agree 

to treat patients who have unusually complex or chronic health conditions. 

Given the concerns that I and other patient advocates have raised regarding 

gainsharing, I strongly encourage the members of this subcommittee to proceed with 

great caution as you evaluate whether to encourage the use of this practice in the 

Medicare program. It is my understanding that limited use of the practice has been 

authorized by the Office of the Inspector General at the Department of Health and 

Human Services. I am hopeful that we will study how the practice is affecting patient care in these approved programs, paying particular attention to the quality of 

care being received by patients with disabilities and chronic health conditions, before taking up the issue of whether the practice should be expanded through new 

legislation. 

Thank you for the opportunity to testify on this important topic. 

————— 

Dear Member of Congress: 

We, the undersigned consumer, patient and health care organizations are aware 

of various legislative proposals aimed at reducing waste and unnecessary costs in 

the health care system through the use of ‘‘gainsharing’’ arrangements and by rewarding physicians for their ‘‘efficiency.’’ 

While we strongly support the need to eliminate wasteful health care costs, we 

are very concerned about the policies that create incentives to achieve short term 

savings at the expense of patients and quality care. These reforms could result in 

the following: 

• The doctor-patient relationship could be undermined by creating a potential 

conflict between physicians’ responsibility to provide the best possible care for 

patients and physicians’ economic interests. • Gainsharing could cause physicians both to forgo a more long-term, holistic approach to patient care in favor of short-term savings, and to view patients as 

data points. • Patients may be denied the latest technology as physicians feel pressure to use 

older, less costly options. • Research and development innovation could be severely impacted due to lack 

of physician adoption based on cost, making it even more difficult to bring new 

research that could benefit patients to market. • Patients may not have access to the most appropriate treatment or device for 

their individual needs, due to the hospitals’ inventory of lowest cost options. • Patients with particularly hard to diagnose conditions may be obstructed from 

seeing an experienced specialist who would provide more extensive (and costly, 

but essential) tests, procedures and/or care. • Groups that already suffer from undertreatment of their conditions—women, 

minorities, and people with disabilities or chronic conditions—may find their 

situation worsened. • When translated into actual patient care, we are worried that the following 

kinds of examples may occur: • Physicians may choose short-term savings solutions, such as less-expensive artificial hips or heart valves with a 5 year life expectancy versus a 10 year life 

expectancy, to receive a financial incentive. • Patients requiring spinal fusion may only have access to the low-cost option of 

Allograft Bone products (which offer a limited choice of shapes and sizes), even 

though alternative, albeit more expensive, products offer an extensive range of 

sizes, angles, shapes and strengths to meet individual patient needs. 

• For patients with Congestive Heart Failure, new medical devices are available 

which measure fluid levels in patients’ chests, helping to prevent or minimize 

edema. However, these devices are more expensive than traditional devices and 


hmoore on PROD1PC68 with HMRPT
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specialized implanting physicians have no incentive (in fact, they have disincentive) to implant the newer, improved, and more expensive devices. • Female patients may be disproportionately impacted, as much of the new research and technology focused specifically on women has occurred in recent 

years. New information about the role gender plays in Alzheimer’s disease may 

never reach patients if physicians are unable to justify the cost of understanding the differences of the disease in men and women. • Cancer patients may be negatively affected from initial discovery of their disease thru treatment. Improved technology allowing oncologists to provide earlier, unequivocal cancer diagnoses could have a major impact on individual patient outcomes, but only if the medical environment continues to encourage research and development. Treatment breakthroughs in radiation therapy, such 

as brachytherapy and IMRT (allowing for more targeted radiation therapy) may 

be overlooked for older, less-expensive options. • Highly specialized, experienced physicians may be most negatively impacted by 

physician profiling, as they are more likely to be involved with high risk or special needs patients, who require more expensive diagnostics and care. A specialist certainly couldn’t compete with the ‘‘cost-savings’’ score of, for example, 

a family physician. 

We are deeply concerned about the consequences of legislation establishing 

gainsharing or ‘‘efficiency’’ standards for physicians. Before any legislation is enacted in this area, there should be a full and open consultation process with patient 

advocacy organizations, as well as experts in the field. 

Sincerely, 

American Association of People with Disabilities 

Alliance for Aging Research 

Families USA 

Family Voices 

Kidney Cancer Association 

National Association For Continence 

National Disability Rights Network 

National Mental Health Association 

National Spinal Cord Injury Association 

Parkinson’s Action Network 

Prevent Blindness America 

Society for Women’s Health Research 

United Spinal Association 

f 

WomenHeart 

Chairman JOHNSON. Thank you, Mr. Imparato. Dr. Rich. 

STATEMENT OF JEFFREY RICH, M.D., CHAIRMAN, THE SOCIETY OF THORACIC SURGEON’S TASK FORCE ON PAY FOR 

PERFORMANCE, NORFOLK, VIRGINIA 

Dr. RICH. Thank you, Madam Chairman Johnson, Ranking 

Member Stark, and Members of the Subcommittee, for inviting me 

to testify on behalf of the cardiac surgeons about gainsharing and 

aligning incentives for quality improvement and cost savings. I am 

the Chair of the Virginia Cardiac Surgery Quality Initiative, an organization that has been restricted by current laws in our attempt 

to advance quality improvement. We support the intent of these 

laws, but believe their broad interpretation has led to the stifling 

of innovation in health care delivery and payment. Finding a balance between these two goals will be critical as we move forward 

with value-based purchasing; for in this difficult budget environment, incentives for these programs can come from the sharing of 

savings between hospitals and physicians that stem from improvements in quality. It is critical that we make a key distinction between two types of gainsharing. The common model of gainsharing 

that many are discussing today occurs through the coordination of 


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supply-based purchasing to manage resources and create cost savings that are shared with physicians. This model can be appropriate with routine items used in care delivery where quality is not 

significantly impacted by the choice of supplies. We must be careful, however, not to impede access to advanced technology and devices where clinical indication and quality are critical. 

The other model for gainsharing is very different. We believe this 

is the model on which the future of value-based purchasing will be 

built. This is the model that I will refer to as ‘‘quality sharing,’’ because improved quality is the primary factor that drives cost containment. While there is debate regarding the benefit of purchasing 

decisions, there is no question that reducing complications is best 

for patients, can lower costs, and can be fostered through quality 

sharing. Quality sharing does not create incentives to use inexpensive but sub-optimal supplies. It refers to the savings that accrue 

from improving quality of care. The Virginia Initiative has tested 

this model, and we believe we can now achieve and quantify cost 

savings associated with quality improvement, as I noted in my testimony before you in March. In 2002, we proposed the CMS demonstration that would achieve savings by the sharing of data between hospitals and physicians on outcomes, costs, and best practices. The purpose was to show how we could simultaneously improve quality and reduce costs in cardiac surgery by aligning incentives for physicians and hospitals. Payments to surgeons were to be 

adjusted based upon the outcome of their patients. A portion of the 

savings was to be returned to CMS. Secretary Thompson announced approval of our project in 2003. The CMS issued strong 

statements in support of it. In July 2004, CMS advised us that our 

quality improvement demo was in violation of Federal law. The 

OIG maintained that a redistribution of a global payment by the 

hospital with incentives for performance violated ‘‘Stark’’ regulations and civil monetary penalty laws, despite quality controls, accountability through public reporting, and monitoring of referral 

patterns. 

The project was effectively terminated due to broad interpretation of the current statutes. Our work in Virginia now forms the 

basis for a proposed Medicare pilot program yet to be approved by 

Congress. The STS seeks to establish a national program whereby 

we reduce complications from cardiac surgery for all Medicare 

beneficiaries, while potentially saving the program hundreds of 

millions of dollars annually. We will accomplish this by combining 

our National cardiac clinical database with the Medicare part A 

claims database, to determine exactly the level of quality that is 

being delivered at each site, and at what cost. We will improve outcomes, reduce costly complications, Achieve savings. Under our 

pilot program, cost savings will occur from improved outcomes. The 

majority of these savings accrue to the hospital, but some is also 

returned to CMS. However, without changes in existing laws, none 

of the savings will go to the surgeons who bear the responsibility 

for achieving them. This is why restrictions such as the ‘‘Stark’’ 

CMP laws must be reexamined to allow and encourage quality-focused cost containment. The laws should allow the sharing of Parts 

A and B savings with the hospital and the physicians who create 

these savings, as long as quality improvement is demonstrated. 


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Shared savings are one way to help finance value-based purchasing 

programs. 

Can quality sharing offer a solution to the health care financing 

crisis? Most definitely, but it will require the approval of the 

shared savings models that are quality-focused, patient-centered, 

and safe. Current laws have stifled innovation in health care reform and prevented the implementation of some of these more 

unique programs. Perhaps it is time for a change. Physicians, hospitals, and device manufacturers are striving for ways to simultaneously protect beneficiaries, improve quality, and reduce costs. I 

am here to tell you that we have shown that it is possible. All we 

need is trust granted us by the government, to allow us to create 

these models of care delivery and realize these shared goals. Thank 

you for your time this morning. 

[The prepared statement of Dr. Rich follows:] 

Statement of Jeffery Rich, M.D., Chairman, The Society for Thoracic 

Surgeon’s Task Force on Pay for Performance, Norfolk, Virginia 

Good morning Madam Chairman Johnson, Ranking Member Stark, and members 

of the Subcommittee. Thank you for inviting me to this hearing on gainsharing and 

to discuss our experience with sharing incentives between Medicare parts A and B 

to improve the quality of care for Medicare Beneficiaries. My name is Jeffrey Rich. 

I am Chairman of the Society of Thoracic Surgery (STS) Taskforce on Pay for Performance. I am also the Chair of the Board of Directors of the Virginia Cardiac Surgery Quality Initiative (VCSQI) an organization that has felt the implications of current laws in attempting to advance quality improvement. 

The term gainsharing can carry a negative connotation to patients, providers, industry and even some in Congress. This has occurred as a result of the perception 

that gainsharing works explicitly to reduce choice and services to patients in an effort to save money through the sharing of these dollars with physicians. Congress 

enacted legislation to protect populations at risk against some gainsharing activities, and we support the intent of these laws. As we will discuss, the broad interpretation of these laws, however, has led to the stifling of innovation in healthcare delivery and payment reform. We fear that this may continue. In the current 

healthcare financing crisis as stakeholders attempt to craft potential solutions, it 

has become apparent that Pay for Performance leading to Value-Based Purchasing 

has ascended to the option of choice. It has also become apparent that these proposals, including the Chariman’s H.R. 3617, the Medicare Value-Based Purchasing 

for Physician Services Act of 2005, will utilize incentives for achieving measures of 

economic efficiency, translated as cost savings. Money to finance these programs will 

almost certainly come in part from the sharing of Part A/B savings that result from 

physician’s improving quality. These incentives may first be shared between CMS 

and physicians and ultimately between physicians and hospitals as the savings potential is greatest on the Part A side. Proper interpretation and application of current Stark and CMP laws or modifications of them will be decisive in their success. 

Gainsharing—or Qualitysharing 

It is critical that we make a key distinction in our discussions of ‘‘gainsharing’’ 

arrangements. Much like Pay for Performance, which is in a rapid evolutionary 

phase, gainsharing can have a variety of meanings to different people and we must 

be certain that we understand the intended definition as we discuss health policy 

and legislative action. Two types of gainsharing need to be understood and considered separately in order for us to move rapidly towards innovative payment reform. 

The first is perhaps the most commonly understood which is coordination of supplybased purchasing to manage resources and create reduction in costs. This model can 

be appropriate with routine items used in care delivery such as gloves, masks, intravenous tubing, and other medical supplies where clinical indication and outcomes 

are not significantly impacted by the choice of supplies. This model, however, can 

impede a very critical component of high quality care, and that is access to advanced technology and devices such as heart valves and artificial joints. It is essential that gainsharing arrangements not restrict the physician’s choice of the most 

beneficial clinical device or treatment solely on the basis of cost. Additionally, 

gainsharing agreements that promote buying consortia for advanced technologies 

are acceptable but must provide equivalency in outcomes related to the use of the 


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product and include the proviso that providers continue to have access to clinically 

appropriate alternate products which may be considered superior. 

The other model for gainsharing is very different, and we believe this is the model 

for the future of P4P with the potential for savings of a much larger magnitude. 

This is a model that I will refer to as ‘‘Qualitysharing’’ because quality must be the 

primary factor that drives resource utilization management and cost containment in 

healthcare through the development of cost savings models. 

We know that medical complications lead to a higher cost of care because complications are linked to prolonged hospitalization and increased use of diagnostic 

and therapeutic interventions. As I demonstrated in my testimony here in March, 

the highest quality hospitals in our project were also those with the lowest costs. 

As quality increases, complications—and therefore costs—are decreased. 

Qualitysharing refers to the savings that accrue from improving quality of care. 

Qualitysharing does not create incentives to use inexpensive but suboptimal resources. The quality of care is ensured through careful development of the models 

and is measured prior to the sharing of savings. We believe that qualitysharing can 

appropriately align incentives between physicians, hospitals, and CMS to improve 

the quality of care for all Medicare beneficiaries leading to reductions in costly complications, the creation of quality guided resource utilization, and the achievement 

of sustained savings. This should be the ‘‘Holy Grail’’ of Value-Based purchasing. It 

will, however, require the development of physician incentive programs that allow 

in the sharing of savings generated by these QI efforts, a concept quite different 

from the currently perceived gainsharing arrangements. 

VCSQI Demo 

I’d like to explain how ‘‘Qualitysharing’’ would have worked through our experience, and why it ultimately was prevented from moving forward by the Civil Monetary Penalty Laws and, with no offense to the Ranking member, ‘‘Stark’’ laws. 

In 2000, we had proposed a demonstration program that would achieve savings 

through hospitals and physicians sharing data on outcomes, cost, and best practices. 

The purpose was to increase quality and contain costs in cardiac surgery statewide 

in the Commonwealth of Virginia through an initiative called the Virginia Cardiac 

Surgery Quality Initiative (VCSQI). 

The VCSQI is a voluntary consortium of 16 hospitals and 10 cardiac surgery practices providing open-heart surgery in Virginia. Hospitals include four multi-hospital 

systems (one for-profit), two state university medical centers, and 6 regional medical 

centers and community hospitals. They perform 99% of Virginia’s open-heart procedures. The VCSQI was established through a grass roots, self funded effort in 1996 

with a mission to improve the quality of cardiac surgical care on a statewide basis, 

contain healthcare costs, and test reimbursement methodologies that reward quality 

improvement. It sought to demonstrate that an inclusive collaboration between hospitals and physicians would improve clinical outcomes across an entire state in programs of all size through the sharing of data, outcomes analysis, and process improvement driven by use of the Society of Thoracic Surgeons (STS) National Cardiac 

Database. Its cost containment goals were to occur through the creation of a unique 

IT platform, a database linking clinical and financial outcomes. The VCSQI’s intent 

was to demonstrate that through a focus on quality, cost containment in cardiac surgical care could be achieved through a reduction in complications, improved efficiencies of care and reduced resource utilization driven by explicitly defined savings 

models. 

The VCSQI in conjunction with ARMUS Corporation developed a unique clinical/ 

financial IT platform. Clinical data from the Society of Thoracic Surgeons (STS) 

Adult Cardiac Surgery database was mapped with financial data from standardized 

hospital (Medicare Part A ‘‘UB–92’’) claims files. These Part A, UB–92 files were 

further refined by organization of 239 ICD 9 revenue codes into 21 Revenue Categories to allow more definable hospital-to-hospital comparisons. Hospital specific 

Medicare defined Ratio of Cost-to-Charges (RCCs) were then applied to the charge 

driven UB–92 record to normalize charges and create applicable cost profiles. Tracking of the financial impact of quality improvement was, and currently is possible 

and forms the cornerstone of many current VCSQI QI initiatives. A business case 

for quality has been developed within the state. 

In March 2000 an application to CMS for a demonstration project (Demo) entitled 

‘‘Statewide Quality Focused Global Pricing for Cardiac Surgery’’ was submitted. The 

3 year project was to combine Part A and B payments into a single hospital specific 

global payment for cardiac surgical DGRs, and would allow payment redistribution 

at the local level based on physician performance as measured by quality metrics. 

The intent was to create financial incentives for meeting quality goals tied to clinical performance in open-heart surgery. The demonstration was designed to align 


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clinical and financial incentives between hospitals and physicians while elevating 

the standard of care and reducing costs. On the physician side, it provided a method 

for physicians to remove themselves from the much-maligned Resource-Based Relative Value System (RBRVS) through the use of Pay for Performance models. For 

CMS, there was potential to reduce financial risk (outliers included), stabilize payments for costly procedures, and reduce administrative costs (simplified billing). On 

the hospital side there was the potential to increase profitability by the application 

of explicit savings models aimed at reducing resource utilization while always maintaining a focus on quality. Patients benefited from statewide access to high quality 

care and a single co-pay. 

In early 2001, the VCSQI Demo application was introduced to Secretary of Health 

and Human Services (HHS) Thompson who immediately was in support of the 

project. Subsequent meetings with CMS Administrator Scully and the Division of 

Demonstration Projects at CMS occurred. Concurrent with these efforts the Institute of Medicine (IOM) had issued its report on ‘‘Crossing the Quality Chasm’’ which 

described exactly the VCSQI efforts to improve quality and ‘‘better align current 

payment methods with quality improvement’’. Additionally on April 12, 2001 Reuters Health announced ‘‘upcoming White House efforts to reform Medicare are likely 

to include financial incentives to hospitals and doctors who successfully—improve 

the quality of care’’. 

The VCSQI project gained tentative approval at CMS in March 2002 and final approval in November. Secretary Thompson announced approval of the project to a 

standing ovation at the STS annual meeting in January 2003. The project was temporarily derailed when budget neutrality as defined by the Office of Management 

and Budget included a post-acute care component that placed hospitals at-risk for 

financial losses occurring beyond the hospitalization discharge DRG. An acceptable 

risk model was eventually developed and the VCSQI hospitals and physicians began 

an intense implementation design for the project while the project was under review 

at the Office of the Inspector General (OIG). Simultaneously, CMS was describing 

this project’s ability to ‘‘achieve savings for the Medicare program through increased 

efficiencies and, in the longer term, reductions in complications’’ and stating that 

‘‘the global payment will align financial incentives of hospitals and physicians and 

give providers flexibility to allocate resources as they determine appropriate’’. In 

July 2004 CMS advised the VCSQI that the Demo payment incentive plans would 

be a violation of federal law. The Department of Justice maintained that redistribution of a global payment by the hospital with incentives for performance violated 

Stark Regulations and Civil Monetary Penalty laws. Although told to proceed if desired, it was in the context of the statement that the VCSQI ‘‘would be in violation 

of the law but the department would not prosecute’’. Furthermore, we were simultaneously advised that any other entity could file civil suit. This was occurring in the 

same timeframe that a group of hospitals in New Jersey followed similar advice and 

had their project halted by court order. This directly led to the VCSQI hospitals and 

physicians collectively deciding not to pursue any further efforts to implement the 

project. Despite widespread support from HHS, CMS, and the entire state of Virginia, and in line with IOM directives, a project that appeared to have ‘‘all the right 

stuff’’ was dismantled by a federal agency. 

Since that time additional voices have weighed in about the value and efficiency 

of reducing the artificial barrier between Parts A and B for some services. In a letter dated December 30, 2004 from MedPAC Chairman Hackbarth to Vice President 

Cheney, he described the global payment model as a solution to payment reform 

whereby ‘‘the quality of a surgery and its related pre—and post-surgical care could 

be measured as a whole; and the hospital and surgeon would be held jointly accountable. Combining hospital and physician payments would make it possible for 

Medicare to reward good quality outcomes directly, and leave it to the participants 

in the care to divide the reward among themselves.’’ The VCSQI model exactly! 

Since the undoing of the VCSQI demo, Dr. David Brailer at the then newly 

formed Office of the National Coordinator for Health Information Technology had 

a high profile IT projected in metropolitan Chicago halted by OIG on grounds of violation of Stark Regulations. At this point red flags should be flying high for any private or government agency wishing to embark on Pay for Performance or any other 

payment reform methodology. An important solution, I believe, will be for Congress 

to create carefully crafted leeway in the Stark and CMP rules to remove barriers 

to implementation for similar projects. Exceptions are needed that protect patient 

choice and quality of care, yet still align incentives to accelerate quality improvement, reduce costly complications, and develop patient centered, safe cost savings 

models, all of which will work to achieve significant savings in healthcare costs. 


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Future STS and VCSQI Initiatives 

Where does that leave the VCSQI? VCSQI remains a collaborative effort actively 

improving quality on a regional basis. In fact we are leading the private P4P effort. 

We have entered into agreements with the largest private insurer in the state, Anthem BC/BS of Virginia, to utilize our STS quality data in a private P4P program. 

We hope to continue to be a test bed for policy formulation/ payment reform in cardiac surgery with a model that can be replicated nationally. Our collaborative will 

continue to address the quality/ cost relationship in an attempt to achieve cost containment through a focus on quality. 

In fact, the VCSQI is the basis for a national pilot program that the STS has submitted to Congress entitled ‘‘Quality Focused Cost Containment in Cardiac Surgery 

for Medicare Beneficiaries’’. It is a national program designed on the Virginia model 

with a blended STS clinical and Medicare UB–92 financial database. It will focus 

on quality improvement through the creation of regional collaborations that will 

share data and develop and share national best practices. Clinical performance will 

be based on the National Quality Forum National Voluntary Consensus Standards 

for Cardiac Surgery, a project that the STS was instrumental in bringing to fruition. 

Cost containment will occur through the reduction of costly complications and the 

development of cost savings models using quality guided resource utilization management and measures of efficiency that are patient centered and quality focused. 

Through this mechanism we hope to achieve significant and sustainable reductions 

in Medicare healthcare spending. Implicit will be the need to provide performancebased incentives to physicians that are meaningful and can drive change. This will 

require the sharing of Part A/B savings with CMS and hopefully between hospitals 

and physicians consistent with the principles outlined previously for 

‘‘QualitySharing’’. We hope that CMS and Congress will join us in another attempt 

to improve quality for Medicare beneficiaries while reducing costs and ask respectfully for relief of the legislative and regulatory barriers that we have encountered 

previously. 

The Future of quality improvement without incentives 

This debate is really about where to locate incentives to accelerate quality improvement in health care delivery. However, it is impossible to have this debate 

without some suggesting that physicians ought to improve quality without incentives, but rather because it is what they do. I agree with those sentiments. I think 

the same ought to be true of hospitals and device manufacturers and purchasing 

consultants, but that is not the reality that we are living in today. The STS has 

some strong feelings on this central topic that I must share with you. 

Through our STS National Cardiac Database cardiac surgeons have improved 

quality by dramatically reducing mortality in open-heart surgery. These reductions 

in operative mortality were achieved in the face of dramatic progressive increases 

in the risk and acuity of our patient population. 

In the last two decades, the STS has taken the lead in objective, data-centered 

quality improvement on a national level. We will continue to do so with the resources available, but I must emphasize that: 

1. Quality Improvement requires significant investments in time and 

money. The much sicker patient population mandates increased resources to 

provide safe care. The well-recognized quality improvements associated with IT 

require significant capital investments. The STS Database itself is an unfunded 

financial burden on an already strained system. We can improve quality and we 

can reduce costs, but we can not continue to do while the government continues 

reduce our payments and undervalue our services. 

2. Our financial resources are greatly diminished. We improved quality over 

a period during which our Medicare payment rates were cut by over 50%, and 

while our practice costs skyrocketed. Unfortunately, a major consequence of these 

payment cuts has been an unsustainable reduction in applicants to our specialty 

and the early retirement of a large portion of our workforce. One third of our 

residency programs did not fill this year. This is occurring at a time when the 

population ages and the potential pool of Medicare beneficiaries in need of cardiac surgery is expanding rapidly. By our estimates, we are on the verge of an 

access crisis in cardiothoracic surgery—the specialty that treats the top six 

causes of death in the country. Under the current payment system you may witness the slow death of a specialty that quite literally none of us can live without. 

The STS believes that under ‘‘QualitySharing’’ agreements meaningful incentives 

can and should be provided to reverse this trend. 

Furthermore, there is a related problem that now serves to prevent cardiothoracic 

surgeons from continuing to improve quality and achieve cost savings. As the IOM 


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has pointed out, in high-risk surgery such as open-heart surgery, having a consistent team in place in the OR is a key to quality. Cardiothoracic surgeons currently employ such a team and bring those team members to the hospital to give 

clinical assistance. In 1999 CMS decided to remove the payment for these clinical 

staff from the practice expense calculations. Very rarely do hospitals pay for such 

a skilled team, and Medicare no longer will. In fact, we have recently seen examples 

of hospitals charging the surgeons to bring clinical staff to the hospital! This is a 

direct barrier to our ability to improve patient outcomes, is counter to the IOM recommendations, and more to the point, is directly in violation of the BBA ’97 language on practice expense. 

Rather than compromise the quality of care, most CT surgeons continue to employ 

these clinical staff at their own expense, and again the costs are borne not by Medicare, not by hospitals, but by the surgeons—who have no opportunity to share in 

the savings these staff generate. For most, the improvement in lives saved is enough 

compensation, but the cost of $50 to $100 million per year of uncompensated expense in this specialty has further decreased reimbursement making the specialty 

less attractive to trainees and has furthered the reduction in applicants. ‘‘Quality 

Sharing’’ would allow incentives that may once again maintain consistent teams for 

high quality care in cardiothoracic surgery. 

Current and future implementation potential 

It is important to highlight that not all physician groups can presently achieve 

quality-based savings. It requires the development of a set of the most clinically relevant specialty performance measures that must be vetted through the consensus 

development process at the NQF as we have done with our NQF approved cardiac 

measure set. It requires a database of clinical data mapped into Medicare claims 

data with a high match rate. It requires not only process measures but also outcome 

measures that use scientifically validated risk adjustment. And it requires the will 

and determination of physicians, hospitals, data managers, and Government. Most 

importantly, it requires the creation of shared savings models that provide meaningful incentives to create change. I must say CMS has been a tremendous asset to 

us, with intelligent and well motivated people sharing our goals of striving for ways 

to improve quality and simultaneously reduce costs. I am here to tell you that it 

is possible, all we need is trust granted us by government to create these models 

of care delivery and realize these shared goals. 

Since it is the goal of the Congress and CMS to one day have all physicians electronically submit clinical data on their patient encounters through EMRs, it is important that we undertake pilot programs now with those who are prepared. Credible models must be developed prior to implementing these payment systems for all 

physicians in the future. 

QualitySharing: the New Metric 

In conclusion, the STS and its regional collaborations such as the VCSQI have 

been involved in QI for the past 15 years. These improvements have occurred in an 

era of declining reimbursements and without incentive payments primarily because 

we feel that this is our professional responsibility. I personally feel that the greatest 

privilege society has given us as physicians is the ability to care for patients. But 

on behalf of all physicians, as perhaps the primary drivers of quality improvement, 

and hence health care savings, I must ask a central question about gainsharing. 

Why should physicians, who drive much of the ‘‘gain,’’ be the only group excluded 

from the ‘‘sharing’’? 

In the current healthcare financing crisis, the STS now realizes that our next 

greatest responsibility is the delivery of high quality care in a fiscally responsible 

manner. Is traditional gainsharing a partial solution? Possibly, if done properly. Is 

‘‘QualitySharing’’ a more complete solution? Most definitely, but it will require the 

development of shared savings models that are quality focused, patient centered and 

safe and that will hopefully lead to reductions in healthcare expenditures and the 

stabilization of the Medicare Trust Fund. To date, current laws have stifled innovation in healthcare reform and prevented the implementation of some of these more 

unique programs. Perhaps it is time for a change. ‘‘QualitySharing’’ appears to be 

the right thing to do, at the right time, and for the right reasons. 

Thank you for this opportunity and your attention this morning. 

f 

Chairman JOHNSON. Thank you very much, Dr. Rich. I have 

basically two questions that I want to bring to people’s attention. 

Mr. Emerson, in your testimony you clearly state what others have 


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raised concerns about; that gainsharing could have an especially 

negative impact on small companies and could eliminate important 

choices for doctors and patients. You go on to state that 

gainsharing would place an additional barrier to the adoption of 

smaller companies’ devices, and would create an anti-competitive 

marketplace where the largest manufacturers would have a significant advantage. Now, isn’t it true that in today’s world hospitals 

negotiate with device manufacturers and agree and develop purchasing contracts where larger device companies provide reduced 

prices to hospitals that promise 70 to 80 percent of annual revenue 

from device-related procedures; that 70 to 80 percent of the annual 

revenues will go directly to that company’s devices? Aren’t there a 

lot of things going on right now between device manufacturers and 

hospitals that are clearly barriers to smaller companies getting 

their devices onto the market, clearly barriers to competition? 

Mr. EMERSON. Madam Chairman, I would agree with your 

statement. But I would draw one clear distinction between an era 

of gainsharing as it is currently being discussed, and the era that 

we live in today. What we live in today as a small company is, yes, 

we have significant hurdles in front of us; but when we bring innovation to the market, we always know that we can count on physicians to be an advocate for that technology. The concern I would 

have in an era of gainsharing is that we have put the physician 

on the other side of that advocacy equation. As we move forward 

as a small company trying to bring innovation to market, who at 

a hospital will we find that we can hope to look for a friendly ear, 

who will be looking to advocate for patient care and new technologies? Certainly, we have competitive issues today; but the competition, in and of itself, is not bad. 

Chairman JOHNSON. Well, it is these controlling contracts that 

I think are very concerning. If 80 percent of the revenues from device-related procedures will be directly tied to the use of that company’s devices, you have really closed a lot of the market to any 

other competitor, large or small. But the other thing I wanted to 

mention, too, is in terms of the doctor being an advocate, unfortunately, we are seeing more and more evidence that the doctor is an 

advocate because the doctor gets a cut. So, we can’t answer this one 

way or another. I know you don’t condone that, but I think to notice that the way devices are marketed now does not assure either 

physician choice or patient choice—nor does it assure easy access 

for small, innovative companies—is important. You know, the heart 

of this matter is exactly what Mr. Imparato said. The heart of this 

matter: Is this going to be a more doctor-centered system, or a less 

doctor-centered system? Is it going to increase the voice of physicians in the running of hospitals? Now, when I sat with Mr. 

Carter’s people, doctors and others, at first the doctors didn’t believe this was going to give them any more. So, I want you to talk 

about—those of you who have tried it, Dr. Rich Mr. Carter Ms. 

Goodroe, who have had experience—at first, doctors are suspicious. 

At least, that has been my experience. 

You have been in this a long time, Dr. Rich, over many years 

now. What happens? Why is it doctors change their attitude? What 

happens afterward? What are the systems consequences of the attitudinal changes that take place, when you really can work together 


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for quality Cost, but cost is secondary to the quality changes that 

take place? Now, that is my impression. So, I want you to either 

affirm or deny. Don’t feel uncomfortable denying. Remember, my 

knowledge is about as big as a thimble. So, why don’t we start from 

the left. Ms. Goodroe, would you comment on this issue of systems 

change in quality and doctor control? Because that is at the heart 

of this whole thing. 

Ms. GOODROE. There is a lot of misunderstanding when people 

think that the technology is going to be withheld. If anything, the 

opposite happens. What you have are physicians finally, under 

these economic arrangements, physicians working together to look 

to see what is the best quality. Then, how do you apply costs to 

that? How do you figure out how to get the physicians all going in 

the same direction to get the best quality? That turns around to 

be less cost. So, it is not about not putting in something. Matter 

of fact, there is no reward if you don’t put in an internal 

defibrillator that we heard earlier. A defibrillator would be that 

you would look at the options of the types of defibrillators you 

would put in. Is it right to put in a single chamber versus a dual 

chamber that has a huge price difference? Then, you have a lot of 

different vendors. So, it is not about ever the technology not being 

available. There is no reward for that, whatsoever. 

Chairman JOHNSON. Mr. Carter? 

Mr. CARTER. Madam Chairman, we actually have seen a tremendous amount of collaboration between the physicians and the 

administration. I think what happened, as you found when you visited our State, there was a concern: what was the agenda? But 

once we explain we are trying to improve the quality of care 

through discussion about the way in which we are doing it—as Ms. 

Goodroe said, at the beginning, your physicians are trained by a 

variety of different teachers; have different techniques of doing 

things. The whole staff could be trained by different physicians and 

all have a unique way of doing it. Once we got together and talked 

about a better way of doing it from a scientific standpoint, there 

was great collaboration. We weren’t allowed to proceed, because of 

litigation, but there is still interest in improving this by working 

together. 

Chairman JOHNSON. How did you select medical devices? You 

say in your testimony that it was an evidence-based selection and 

purchasing process. 

Mr. CARTER. What we did was, we brought together the physicians and asked them what was the best approach to this. It wasn’t 

a CEO-driven issue or a CFO-driven issue. It was the physicians 

talking about what they thought was the best technique for the patient. 

Chairman JOHNSON. Could they have a range of choices? 

Mr. CARTER. Yes. 

Chairman JOHNSON. If they decided they wanted something 

that wasn’t on the shelf, could they get that? 

Mr. CARTER. Yes. 

Chairman JOHNSON. They were not in any way dinged, in 

terms of their payment, if they used devices that were not part of 

the original plan? 


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Mr. CARTER. Well, again, it was all outcome basis. So, with the 

patient, if there were no complications and they were discharged 

in a timely fashion, then there was no ding, as you call it. 

Chairman JOHNSON. Yes. I meant to bring this up earlier, because a big point was made of how voluntary this is, both on the 

institution’s part and on the doctor’s part; that is very important; 

That you can come in or you can go out, You have control over that. 

But in terms of payment, are the doctors all paid the same? 

Mr. CARTER. I honestly cannot remember how they were done. 

I think it was individual-based, but I can’t remember for sure. Can 

I just turn around and look at somebody? 

Chairman JOHNSON. Yes. 

[Pause.] 

Mr. CARTER. It was individual-based. 

Chairman JOHNSON. Okay. Dr. Rich? 

Dr. RICH. For us, collaboration with the hospital has been incredibly important. I will speak from my own personal experience 

at Sentara Health Care, where we put together collaborative arrangements between cardiologists, cardiac surgeons, The hospital 

administrators a decade ago. The focus of those collaborations was, 

and always will be, quality improvement. It was designed to bring 

people together to continue to improve quality, with the realization 

that by improving quality we could reduce complications and potentially save money for the system. We used that model in the private sector, and had enormous benefit from it. We had no restriction to any technologies. The determinations of the results of the 

program on quality and on the financial side were all done at the 

programmatic level, so no physician was ever stopped from using 

any technology. Every technology was available. There were, of 

course, groups put together that looked at perhaps picking three 

valves, or three devices that would be the preferred devices; but 

never any restriction beyond that in terms of being able to obtain 

technologies. 

Chairman JOHNSON. But what you were able to do in the private sector, you were not able to do in the public sector? 

Dr. RICH. No. This is just a model that we used for our demonstration project. Basically, the restrictions were put on us 

through these current laws that said that any redistribution of payments—in our payment mechanism, there was a pay-for-performance mechanism that we developed with variable payment rates to 

physicians Surgeons. We went at-risk as well as at-benefit, so we 

could potentially reduce our payments on any annual basis. The 

problem was that the interpretation of the law said that one penny 

above our medical allowable charge in an incentive program violated these laws. 

Chairman JOHNSON. Right. 

Dr. RICH. Despite focusing on quality, providing absolute improvement in quality, monitoring of quality, and accountability 

through public reporting. 

Chairman JOHNSON. Okay. Those of you who have had experience in this, we have a premiere hospital demonstration that is 

electing to meet a far greater number of quality criteria—I think 

it is 62, or something—than the 12 required under the law. We are 

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ing is that there is a dynamic that happens when you reach the 

62 that doesn’t happen when you reach the 50. A dynamic that results from closer collaboration, mutual respect, broadening of the 

team, so on. So, are you seeing that? Can you measure that, Ms 

Goodroe? 

Ms. GOODROE. That is exactly what you are seeing, is a collaboration between hospital and all the different physician colleagues. 

Right now, everybody is working very independently, on their own. 

These types of economic alignments bring all physicians together, 

and the hospital together with the physicians. It is all based on 

data, looking, discussing things; instead of people doing the things 

they think work best, which may get a quality outcome but you are 

going to have a huge cost differentiation, and that is why there is 

so much waste in the system right now. 

Chairman JOHNSON. So, you actually can measure specifically 

what they are doing? For instance, if they get together and discuss 

the way one person is working, another person, what the protocols 

are in that discipline? 

Ms. GOODROE. Yes. I will give you an example. Every surgeon 

sutures differently. They use different lengths, types, everything. 

Now, those are $1, $5, $10 items that can cost millions of dollars 

at the end of the year. They will sit down and discuss, ‘‘Well, why 

do you suture that way? Why do you suture this way? What is good 

about this? What is the best way?’’ 

Chairman JOHNSON. They never did that before? 

Ms. GOODROE. Never. It is not in the literature. They have 

never discussed it. It is truly in this very artistic way the physicians have practiced. 

Chairman JOHNSON. Yes, Dr. Rich? 

Dr. RICH. Yes. We did exactly that. I would say, you know, we 

talk about standardized treatment protocols; we developed within 

the system standardized practice protocols. Those are exactly as 

Ms. Goodroe described. Tracking quality and tracking outcomes is 

important, and we do this through the Society of Thoracic Surgery 

database. We blended it with the UB-92 database, the Medicare 

claims database, so that we can actually look at the impact on 

quality. 

Chairman JOHNSON. Let me call myself to a halt, because I am 

over my time I want the others to have a chance before we have 

to adjourn at 12:00. But both of you have databases. I think I have 

to point out from your testimony that the burden of these databases is almost greater than any one organization can bear. That 

is another reason why you really have to have collaborative efforts. 

But technology and measurement are at the heart of what you 

have been able to do. Mr. Stark. 

Mr. STARK. Thank you, Madam Chair. Dr. Rich, have you ever 

opened a bag of charcoal briquettes? 

Dr. RICH. Yes, sir. 

Mr. STARK. You know if you pull that string, sometimes, if you 

get the right string, the whole top comes right off, and if you don’t 

get the right string, you sit there and pull? Can you assure me— 

I can’t look at my latest wound here in public, but can you assure 

me that they never used those stitches on me? 

Dr. RICH. Yes. 


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Mr. STARK. Okay. I feel much better. I will pull on this string. 

[Laughter.] 

Mr. STARK. Actually, I want congratulate the thoracic surgeons. 

Dr. RICH. Thank you. 

Mr. STARK. In pedestrian parlance, you were back here in 

March, suggesting to us that, while you thought pay-for-performance had its good qualities, we weren’t ready for it yet. I think I 

am going to hark back to your testimony. This excludes the thoracic surgeons, but for the most part, most specialties don’t have 

the database, the outcomes research that your specialty has built 

up, I think over the last 5 or 6 years—which may be long enough 

or not. But I think what you indicated is that we need more information More database to effectively do pay-for-performance. I am 

further advised, or guess, that the anesthesiologists may be the one 

other specialty besides the thoracic surgeons. This was to defend 

themselves from malpractice, but I don’t care why. But at any rate, 

they have gathered a great database on anesthesia procedures that 

they have found have saved lives and been more efficient as they 

worked on this. Is it fair to suggest that there aren’t any—at least, 

I am unaware—specialties, procedural specialties, that have done 

as advanced research and building a database as you and the anesthesiologists? 

Dr. RICH. Actually, the cardiologists have a very sophisticated 

database. 

Mr. STARK. That is separate? That is different from thoracic? 

Dr. RICH. Yes. 

Mr. STARK. Okay. But don’t we need that across the procedural 

specialties to really accomplish any kind of measuring of quality? 

Don’t we need to collect more and more sophisticated and detailed 

databases and outcomes research? 

Dr. RICH. Yes. Absolutely. 

Mr. STARK. Thank you. That, I think, is key. Also, I want to 

congratulate you. Again, in your testimony, slipped in here someplace, you suggest that you think that it is impossible to have this 

debate that we are having today without some suggesting that physicians ought to improve quality without incentives, but rather because it is what they do. I think that is a very good statement, because I notice that Ms. Goodroe suggests that there is no incentive 

for physicians to change their practices. I just go down the list, 

other than dollars: professional recognition; pride; successful treatment of patients; psychic remuneration; for those of you who care, 

under this faith-based Administration you get brownie points from 

Saint Peter. All kinds of incentives out there. 

[Laughter.] 

Mr. STARK. So, I would just like to suggest that there are incentives other than dollars. Then I would like to talk with Mr. Carter 

and Mr. Fine. I was up early this morning reading ‘‘Pig Will and 

Pig Won’t.’’ I suspect, unless your children are very small like 

mine, you haven’t read ‘‘Pig Will and Pig Won’t’’ lately. You can 

skip it. But you guys remind me of that, because both of you in 

your testimony say—Mr. Carter says, ‘‘Finally, while specialty hospitals don’t exist in New Jersey, the New Jersey Hospital Association does not view the implementation of this project as a reason 

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cialty hospitals.’’ Mr. Fine, you suggest that you don’t substitute action in this area for the much-needed ban on physician self-referral 

to limited-service hospitals. Gentlemen, we don’t have time in my 

allotted time, but I am going to submit to you that there is no difference; that this gainsharing is just the camel’s head going into 

the tent of specialty hospitals. The only difference is a matter of 

degree. Some legal basis to make that statement is that if we allowed the gainsharing, we would just open the doors to specialty 

hospitals, and for general acute care hospitals this could be financially disrupting. I am one to say that is up to what the hospitals 

want to do. I am not going to tell you how best to organize. But 

I just want you to think carefully. I mean, I would want to get the 

savings back for Medicare that you guys think you would get, and 

not let you give it to the doctors. You don’t like that idea. But the 

other side of it is, you may just open the floodgates to specialty 

hospitals, because there isn’t much difference. It is only in degree 

Intensity. So, go back and think about that with your members and 

colleagues, Think how much you really want to share all these savings with the docs. I yield back. 

Mr. FINE. Well, may I offer a comment concerning that? 

Mr. STARK. Oh, sure. I would love to hear it. 

Mr. FINE. I believe my comments spoke not only about limitedservice hospitals, but limited-service providers. In my region in 

southeastern Pennsylvania, we have a vast number of private endoscopy centers, private imaging centers, things of that ilk. We, 

like in Mr. Carter’s state, do not have specialty hospitals of the 

types referred to. 

Mr. STARK. Right. 

Mr. FINE. We certainly have rehab hospitals like Children’s Hospital. 

Mr. STARK. But Mr. Fine, it is the same thing. It takes the 

high-profit, high-margin services out of your members’ hospitals, 

and sets them over here where there is more profit to be made. 

That is profit that you have to use in cost shifting to pay for the 

emergency room or whatever is the least profitable part of your 

members’ services. 

Mr. FINE. We have no ability to work with members of our medical staff to try to come out with something that addresses both of 

our needs. They are now incented to construct these freestanding 

facilities and skim the cream and leave us dealing with the more 

complicated higher—— 

Mr. STARK. To the credit of the physicians, most of those things 

are promoted by the ‘‘Shylocks’’ of the medical care promotion industry, who are neither hospital administrators nor physicians, but 

people out there creating a good—they are entrepreneurs of a sort. 

It is something you guys have to deal with. I don’t have any answers. But I mean, the question I am only saying is, do you really 

want to cannibalize the whole hospital, and put the emergency 

room here and the birthing center there and the acute care center 

there? Traditionally, you have kept it together for cost shifting. 

That is a discussion I think needs to go on before we just open the 

gates to letting people cannibalize the various procedures within. 

Mr. FINE. Yes, we would certainly enjoy working with you and 

your staff to pursue that further. 


hmoore on PROD1PC68 with HMRPT
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Mr. STARK. Great. Talk to the Chairman. She is the one in 

charge around here. 

Chairman JOHNSON. Mr. Ramstad. 

Mr. RAMSTAD. Thank you, Madam Chair. Mr. Imparato, first of 

all, I want to thank you for your kind words and for the privilege, 

really, of working with you and your group, the American Association of People With Disabilities. Both Jim Langevin, my colleague 

and friend from Rhode Island, I, and the rest of our bipartisan Disabilities Caucus really enjoyed it and appreciated working with you 

and your group. My first question for you, Mr. Emerson, if you will, 

please, as all of you know, the Committee is considering proposals 

to ensure, really, that Medicare genuinely receives value for the 

physicians’ services that it purchases. Hardly an Earth-shattering 

concept, and certainly a worthy one, an important one. But again, 

the devil is in the details. In determining value, these proposals 

must rely on quality and efficiency measures selected through a 

careful consensus-based review process based on recommendations 

of physician specialty services—or societies, rather. Various societies determine the standards. Now, if gainsharing were implemented, wouldn’t it be problematic—or irresponsible, really—to 

subject patients to possible cuts in services that haven’t been similarly reviewed; that is, that haven’t gone through the same careful 

review and selection process based on the judgments of national 

specialty societies or a consensus of the peer-reviewed literature? 

Is that a different standard? 

Mr. EMERSON. Yes, Mr. Ramstad, it would be difficult. One of 

the challenges facing the health care system today is the disparity 

of data across different disease states and different specialties. 

There are clearly some disease states and some specialties where 

the data is well understood and the dataset is very solid; which can 

lead to a fruitful conversation as to the ultimate goal of delivering 

better patient outcomes. Across different specialties, and quite honestly in areas where we are talking about introducing new technologies, by definition, the dataset isn’t as robust. So, one of the 

challenges then in a gainsharing environment would be, how would 

those new technologies be assessed from a perspective of being able 

to deliver the innovations that we believe they will deliver? I think 

the outcome of that would be patients running the risk, again, of 

not having a physician advocate on their side, in terms of trying 

to bring forward new technologies as a way of bettering outcomes. 

Mr. RAMSTAD. Well, those are pretty important caveats, and 

certainly my concerns, as well. The other question I have is for you, 

Ms. Goodroe, if you please. You have publicly talked about the rise 

in acquisition costs of devices in coronary stenting procedures, and 

the increase in total costs per procedure. This is a little bit puzzling to me, and perhaps you can help me understand. My understanding is that the newer drug-eluting stent products have resulted not in increases, but in substantial reductions in the need 

for retreatment and hospital readmissions caused by rhestinosis. In 

addition, according to the literature I have read and the studies 

that I have seen, the newer devices have really become more sophisticated. Doctors are dealing with more complex cases that previously would have required more invasive, and therefore more expensive procedures; more expensive, more invasive surgeries. For 


hmoore on PROD1PC68 with HMRPT
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example, people like my dad, who had a blockage in the left main 

artery, or multiple arteries, and require more stents per procedure. 

Diabetics is another example, with multiple problems; and others. 

Do you, when you make those statements, acknowledge those factors? 

Ms. GOODROE. Yes, sir. Our technology measures cost, quality, 

and utilization. You are referring to studies that were very small 

studies that were to the approval of those devices. Our technology 

actually captures data on every patient that had a stent procedure. 

We look at how those stents were used What happened. An example is when drug-eluting stents were released about a year and a 

half ago, the cost of the stents was very, very high for drug-eluting. 

They actually came down when another stent came on the market 

that offered the same thing. But the cost per case went up immensely over the last year and a half, even though the price came 

down. Our database can show that the physicians started utilizing 

more devices per patient; that right now, out of our database—and 

we are hoping now to get these studies published; we are working 

with Stanford University and others on it—it is showing that you 

can’t measure a benefit from that increase in cost. That is our problem right now. It is that we use technologies without evaluating 

where we are getting the benefits. I am the first one that is for new 

technology. We need the best technology for patients. But we have 

got to make sure that we put an incentive in there that people 

study how these technologies are really being utilized. The initial 

studies that look at the effectiveness of this are not enough. Because the effectiveness has nothing to do with how those devices 

are really used once they come into the market. 

Mr. RAMSTAD. Well, I think your assertion that you cannot 

quantify—not to use your words, but to use my words—cannot 

quantify a benefit from the increase in costs, I am not sure all the 

literature, all the studies would support that. 

Ms. GOODROE. We are working on studies right now that there has been a $4 billion increase in costs based on drug-eluting stents, 

alone. We are working on studies right now—that have not been 

accepted yet, but we are looking at it—that will look at what kind 

of benefit there has been. 

Mr. RAMSTAD. How many people’s lives have been saved, like 

my dad’s life, in that expenditure? How many people’s lives have 

been enhanced so they can function? 

Ms. GOODROE. It is interesting because it—— 

Mr. RAMSTAD. I hope your studies measure—— 

Ms. GOODROE. Yes, that is what we—— 

Mr. RAMSTAD. —the human value, as well. 

Ms. GOODROE. Yes. We are looking at that. Rhestinosis—and 

the cardiac surgeon probably could answer this the best—but 

rhestinosis does not often result in death. Rhestinosis does send 

you for another procedure, but not often in death. 

Mr. RAMSTAD. I see my time is up. Thank you, Ms. Goodroe, 

and thank you to the rest of the panelists, too. We appreciate your 

input counsel. 

Chairman JOHNSON. I certainly take my colleague from Minnesota, Mr. Ramstad’s, concerns very seriously. I do think if we 

had more time for dialog around this issue we could get a clearer 


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public understanding of what has to be done to assure that physician choices aren’t limited and that patients aren’t denied access to 

the technology they need; while at the same time hospitals aren’t 

compelled to stock devices that are roughly similar. I mean, there 

are now in the device group, like there are in the pharma area, 

medications that are very, very similar. It doesn’t mean you might 

not want a different prescription drug than the one covered by your 

plan. You have to have access to that. But I think we are losing 

sight of the degree to which the environment of technology has 

changed, like the environment of pharmaceutical therapeutics has 

changed in the last five to 10 years. We do have to get a physiciancontrolled process, just like in the physician payment system; the 

physicians control the clinical data that may be selected for their 

quality standards. 

So, this is a new world. We hope to work this in a way that you 

all are going to be at least relatively comfortable with the outcome. 

But it is a time of change. My point in asking the question of Mr. 

Emerson is that the change has happened. It is going on. We can’t 

even see it, It is having some of the very effects that Mr. Ramstad 

is concerned about. So, to do nothing is to let it all happen pellmell. To do something is to give some form and structure that results in public accountability and quality. This is actually not about 

money. It is about quality. It is about relationships. It is about a 

dynamic of quality that is parallel to what happens in continuous 

improvement in other parts of the economy and cannot by law happen in health care. So, we look forward to working with all of you, 

as well as Mr. Stark and his staff. He does have a different point 

of view. He certainly has legitimate concerns. But it is true, the 

world has changed. My hope is that we can help Medicare keep 

pace with the quality changes that the delivery system now has an 

opportunity to realize, for the sake of the patients. Thank you. 

[Whereupon, at 11:58 a.m., the hearing was adjourned.] 

[Submissions for the record follow:] 

Statement of Joane Goodroe, Goodroe Healthcare Solutions, Norcross, 

Georgia 

Presentation Summary 

Drug-eluting stents quickly replaced bare-metal stents as the arterial 

revascularization device of choice because trials show that in-stent restenosis is 

markedly reduced with the new device. Most of the available data comparing drugeluting stent (DES) to bare-metal stents (BMS) arises from randomized trials designed for the purposes of gaining FDA approval.1

In our current outcomes analysis of nearly 17,000 bare-metal stent patients we 

found that, prior to DES release, population-level stent outcomes were markedly 

better than those reported in the control arms of the FDA-oriented randomized 

trials. Consequently, reliance on the trials results substantially overstates the magnitude of the clinical problem that DES are designed to reduce. The potential for 

improvement in post-stent outcomes with widespread DES use in our population is 

markedly smaller than reported by the randomized trials. We expect that the costeffectiveness of new stent technology adoption in this population is much less attractive than the FDA-oriented trials would suggest. 

Reimbursement and policy decisions for technology adoption based on the outcomes reported in the FDA-oriented trials of emerging therapies may not align with 

decisions that would be made if population-level analyses were used to assess the 

opportunity for outcomes improvement. 

Our goal is to provide information and analyses that are useful to policymakers and to both clinical and reimbursement decision makers. We welcome your feedback and questions. 


hmoore on PROD1PC68 with HMRPT
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Background 

The major health and economic consequence of in-stent restenosis is symptomdriven repeat revascularization, usually treated with additional percutaneous coronary intervention (PCI).2 Rapid acceptance of drug-eluting stents (DES) was based 

on evidence that they reduce bare-metal stent restenosis by as much as 75%.3,4

However, in-stent restenosis is just one cause of recurrent angina after stenting, 

and the proportion of all subsequent procedures that might be averted with restenosis prevention is uncertain. Because coronary artery disease is progressive in nature, many patients require additional procedures to relieve symptoms caused by 

newly symptomatic lesions even when the initially-stented segment remains fully 

patent. Cutlip et al analyzed 5-year follow-up data for 1,288 randomized stent trial 

patients and observed that after the first follow-up year the hazard rate for target 

lesion events (including death, infarction, and revascularization) was 1.7% while 

that related to non-target lesions was 6.3%.5 Accordingly, we examined bare-metal 

stent outcomes in unselected patients during a period immediately prior to the market release of DES to identify the relative clinical importance of stented-segment lesion recurrence (restenosis) and development of other arterial lesions. 

Methods 

The data analyses described herein were conducted in compliance with the Privacy Rule contained in the Health Insurance Portability and Accountability Act of 

1996, and with approval from the Stanford University Panel for Human Subjects 

in Medical Research. 

We examined combined data from 17 hospitals that use CathSourceTM Enterprise 

software (Goodroe Healthcare Solutions, LLC, Norcross Georgia) for cardiac catheterization laboratory data management. Contributing hospitals were geographically 

distributed throughout the United States and submitted all their cardiac catheterization records to the Goodroe Data Warehouse every 3 months. To ensure accuracy, 

an automated rules engine validated the clinical and device usage data. We were 

able to observe patients who returned to the catheterization laboratory for any reason after initial stenting and the details for the procedures they received after the 

index procedure. The database does not include information about clinical events 

that occur outside of the catheterization laboratory, and so we cannot report the 

rates of stroke, out-of-lab mortality. Nor are we able to observe subsequent procedures done in laboratories that do not submit data to the Goodroe Healthcare Solutions Warehouse. 

Analysts at the Warehouse reviewed the procedural data collected for all patients 

who underwent PCI to identify patients who received bare-metal stents between December 1, 1998 and March 31, 2003. Patients who underwent atherectomy or 

brachytherapy were excluded. Patients whose PCI records did not include physicianentered data describing the stented arterial segment, or lesion type and severity 

were also excluded. We reviewed the data-harvesting pattern from all sites to ensure that the Warehouse received data from that site for at least 9 months subsequent to each index procedure date. Unique patient identifiers were employed to 

search the database for evidence of repeat PCI or diagnostic catheterization up to 

365 days following the index bare-metal stent procedure. Angiographic data from 

any subsequent catheterization laboratory procedures were examined to determine 

the anatomical targets of repeat PCI, or diagnostic catheterization results that advised coronary artery bypass surgery (CABG) referral. 

Angiographic data were collected in accordance with guidelines set forth by the 

American College of Cardiology National Cardiovascular Data Registry (ACC– 

NCDR).6 Recurrent coronary artery lesions were defined as those with ≥ 50% lumen 

diameter reduction at the time of subsequent diagnostic catheterization, or those in 

which repeat PCI was performed regardless of percent stenosis. The arterial segment in which a bare-metal stent was placed is called the target segment, or stented 

segment. 

The records for all stent procedures subsequent to the market release of DES 

were examined to illustrate the dissemination pattern of the new technology. We 

calculated the average device acquisition cost for single-vessel stent procedures in 

aid of observing the economic effect of DES adoption. 

Results 

Of 16,950 patients, 63.5% were male and the average age was 64.3 (± 12.2 years). 

Previously untreated (denovo) lesions were the sole therapeutic target of the index 

stent procedure in 94% of the patients, and 87% of the procedures were single-vessel 

treatments. 

Diagnostic catheterization was performed on 3,623 (21.4%) of the patients between 9- and 12-months follow up follow-up year, Table 1. One third of those 


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angiograms resulted in medical management recommendations without further 

revascularization. Subsequent PCI was performed in 2,070 and CABG was recommended for 209, for a total of 2,158 patients (12.7% of the cohort), including 144 

patients who had both repeat PCI and subsequent CABG referral. The average time 

from the index stent procedure to the first (or only) repeat PCI was 114 ± 91 days. 

Table 1. Follow-up diagnostic catheterization recommendations 

n % of cohort 

Diagnostic catheterization within—365 days 3,623 21.4 

Unique patients with repeat PCI 

Subsequent PCI performed 2,070 12.2 

PCI referral but procedure not observed in databank 118 0.7 

Unique patients with any CABG recommendation 209 1.2 

Medical management or non-cardiac recommendation 1,253 7.4 

Diabetes (28.1%) and hypercholesterolemia (with or without statins, 47.3%) were 

more common, and the average number of lesions ≥ 50% was higher (2.24) in patients who required follow-up PCI than in patients for whom we observed only one 

stent procedure (23.2% diabetes, 44.3% hypercholesterolemia, 1.78 lesions ≥ 50%). 

The rate of subsequent PCI was lowest, 8.2%, for patients with single-segment disease who underwent single-segment stenting at the initial procedure and highest, 

15.3%, for patients with multi-segment disease and who underwent initial multisegment stenting, Table 2. 

Table 2. Subsequent PCI rate by disease burden and extent of index stenting 

Disease burden at time of index procedure 

Single-segment Multi-segment 

Segments stented 

Single 8.2% 14.4% 

Multiple 13.9% 15.3% 

Patient-level analysis of follow-up procedures 

We examined the anatomical target of repeat revascularization for 2,158 patients 

with observed follow-up PCI or diagnostic catheterization that resulted in CABG referral, Table 3. Target vessel revascularization (TVR) was documented in 1,584 patients (9.3% of the cohort). However, 624 (39.3%) of the patients who required TVR 

also underwent PCI to relieve lesions in previously unstented arteries or had other 

lesions identified for CABG. Stented-segment (stent plus peri-stent margins) 

revascularization, with or without treatment of other lesions, was documented in 

1,194 patients (7.0% of the cohort). Of the patients who required target-segment 

revascularization 65.7% also underwent either PCI or were referred to CABG with 

lesions (≥ 50%) in previously untreated arterial segments. Target-segment 

revascularization was the sole indication for repeat revascularization in 409 patients, or 2.4% of the cohort. Almost half (964, or 44.7%) of the patients who required subsequent revascularization did not have recurrent lesions within previously-stented segments at the time of their follow-up procedure. 

Table 3. Anatomical site of subsequent revascularization, patient level 

n % 

Patients with repeat PCI data or CABG recommendation 2,158 12.7 

Patients with any target-vessel revascularization 1,584 9.3 

PCI 1,375 8.1 

CABG 209 1.2 

Revascularization limited to target vessel 960 5.7 

Combined target and non-target vessel revascularization 624 3.7 

Revascularization limited to non-target vessel 574 3.4 

Patients with any target-segment revascularization 1,194 7.0 

PCI 1,037 6.1 

CABG 157 1.0 

Revascularization limited to target segment 409 2.4 

Combined target and non-target segment revascularization 785 4.6 

Revascularization limited to non-target segment 964 5.7 


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Anatomical analysis of follow-up PCI procedures 

Within 1-year follow up after index stenting 2,070 (12.2% of the cohort) patients 

underwent further PCI. One additional PCI procedure was observed for the majority 

of the returning patients (1,741, 84%), while 329 patients returned to the catheterization laboratory for further intervention more than once (2x 255 patients, 3x 58 

patients, 4x 11 patients, 5x 5 patients). In sum, we observed 2,494 subsequent PCI 

for the 2,070 returning patients. For the 2,494 subsequent PCI procedures, the anatomical revascularization target was the initially stented segment in 31%, other arterial segments not treated at the index procedure in 54%, and both the stented segment and other arterial segments in 15%. Hence, 46% of the follow-up PCI procedures included any intervention to the initially stented arterial segment. 

We observed a concentration of non-stented segment PCI within 8 weeks after the 

index stent procedure, constituting 18% of all follow-up procedures, Figure 1. Same 

segment PCI within the first follow-up month accounted for 3.4% of all comeback 

procedures and 10.9% of all same-segment reinterventions. 

OS = arterial segment other than that stented at the index admission 

SS = the same arterial segment that was stented at the index admission 

Both = both the stented segment and other arterial segments treated at comeback 

PCI 

In April of 2003, the first DES was FDA approved and within a few weeks 50% 

of all stent procedures performed in the Goodroe network involved DES. With approval of a second brand of DES in March of 2004 the dissemination of this technology proceeded further. In this network more than 90% of all stent procedures 

currently involve DES use and approximately 80% of all stent devices used are DES, 

Figure 2. 


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Figure 2. Drug eluting stent adoption from March 31, 2003 to December 31, 2004. 

For patients who underwent elective single-segment stenting (as seen in 82% of 

this cohort), the catheterization laboratory acquisition costs for devices used in single-segment stent procedures (including guidewires, catheters and stents) increased 

27% between the second quarter of 2003 and the end of 2004, Figure 3. 

Figure 3. Device acquisition costs for single-segment, non AMI setting stent procedures 

Stented segment revascularization was indicated in 55% of the patients who underwent additional PCI or who were referred to CABG. However, improved restenosis prevention with use of DES would have averted only some of those repeat procedures because 65.7% of the patients who required target-segment revascularization also had intervention in lesions in non-stented arterial segments. Just 7% of 

this bare-metal stent population returned to the catheterization laboratory for any 

repeat PCI to treat an arterial segment that had been previously stented with a 

bare-metal stent. 

The randomized DES trials report substantially higher event rates subsequent to 

bare-metal stenting than those in this longitudinal study. In the Sirolimus-Eluting 

Balloon Expandable Stent in the Treatment of Patients With De Novo Native Coronary Artery Lesions (SIRIUS) trial, the target-lesion revascularization (TLR) rate 

for the bare-metal stent subset was 20.0%,4 compared with 7% target-segment 

revascularization in our bare-metal stent cohort. In one of Boston Scientific’s 

paclitaxel-eluting stent trials, TAXUS IV, the one-year TLR rate was 15.1%.5 This 

rate is also substantially higher than the rate for observed target-segment reinterVerDate Aug 31 2005 04:55 Apr 13, 2006 Jkt 026377 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 E:\HR\OC\26377.XXX 26377

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vention in our series. Routine angiography is known to result in higher follow-up 

PCI rates than are observed in patient cohorts without angiographic follow-up assessment.7 Because the DES trials performed for FDA approval incorporated mandatory angiographic follow up, we would logically expect the subsequent PCI rates 

to be higher than would be the case in practice settings in which follow-up events 

are symptom driven. 

Kimmel reported a 6-month repeat PCI rate of 9.9% in 1,240 consecutive patients 

who received stents in the later part of 1995.8 Based on chart review, Kimmel estimated that 85% of those follow-up PCI procedures were performed to treat restenosis. Recently Clark et al reviewed 1998 Medicare claims data in 9,868 PCI patients predominantly treated with stents, but including other forms of PCI. Compared to the Goodroe cohort, the Medicare patients were older (73.4 versus 64.3 

years) 9 and contained a larger proportion of diabetics (33.8% versus 24.1%). The 

one-year repeat revascularization rate in the Medicare population was 16.9%, compared to 12.7% for the stent patients described here. Clark applied the 85% finding 

from Kimmel’s work to their observed revascularization rate to derive an estimated 

clinical restenosis rate of 14.4%. However, since 1998 stent design evolution has resulted in improved stent patency rates, and those improvements could be reflected 

in the lower follow-up event rates in our study. In two trials of bare-metal stents, 

Baim et al 10 reported 9-month TLR rate of 7.7% and Serruys et al 11 observed that 

7.0% of the patients underwent 9-month TVR. Our angiographically based findings 

are more aligned with these more recent stent trials: The one-year target-segment 

revascularization rate was 7.0% and the TVR rate was 9.3% in our cohort. 

Clinical progression of coronary lesions accounted for repeat procedures in 5.8% 

of the PCI patients studied in a recently published report from the National Heart, 

Lung, and Blood Institute Dynamic Registry.13 We observed that 5.7% of the patients in this series underwent subsequent PCI solely to treat lesions other than 

those stented at the time of the initial PCI. Additionally, 4.6% of the cohort received 

subsequent PCI to treat both the initially stented segment and lesions in other portions of the coronary anatomy and 69% of the follow-up PCI procedures included 

treatment of arterial segments not treated during the index stent admission. 

Conversely, only 2.4% of the cohort returned for subsequent PCI solely to relieve 

symptoms related to the initially-stented segment. 

Notably, 34% of all subsequent PCI procedures were performed on non-stented arterial segments within the first 8 weeks of follow-up after index stenting. These procedures reflect either intentionally staged treatment for multi-segment coronary disease or rapid clinical progression of lesions that were not responsible for symptoms 

at the time of index stenting. 

Within the first follow-up month 20% of all comeback procedures were performed 

on non-stented lesions. 

In another recently published study, Aegma et al reported on a series of 3,146 

bare-metal stent patients with 9-month follow up.12 The TVR rate was 10.3%, which 

compares favorably to 9.3% in this Goodroe patient cohort. An additional 66 patients 

(2.1%) in the Aegma study suffered cardiac death or acute myocardial infarction 

that may be attributable to clinical restenosis (events that we were unable to observe in the databank). These authors also reported that same-segment reintervention within one month of successful stenting was due to sub acute thrombosis and 

other sub-acute stent placement issues.13 Of the same-segment reinterventions in 

this cohort, 10% occurred within the first month which would indicate a sub-acute 

in-stent event rate of less than one percent. Once we exclude all one-month reinterventions and any subsequent PCI procedures that solely targeted non-stented segments, 1,049 follow-up PCI procedures remain that included any same-segment reintervention and could potentially be restenosis-related. Hence we estimate that, at 

most, 42% of the PCI procedures done in follow-up could be associated with in-stent 

restenosis, and that these events affected 6.2% of the cohort. 

The majority of repeat PCI procedures in this population were performed to treat 

lesions other than those stented in the index procedure, and so would have been 

required even if drug-eluting stents had been used as the initial therapy. The opportunity to improve stent outcomes by reducing in-stent restenosis in this group of 

unselected stent patients would be much smaller than is suggested by results of the 

randomized DES trials. Because the cost-effectiveness of any new therapy depends 

on its effectiveness relative to the existing therapy and the in-stent clinical restenosis rate in this cohort is considerably less than the control arms of the DES trials, 

we would expect that DES use in this cohort would be substantially less cost effective than is suggested by analysis of the DES trial results.2

Drug-eluting stents are intended to reduce in-stent restenosis, and while a small 

proportion of all stent patients suffer events related to restenosis we observe that 

DES are currently used in more than 90% of the stent procedures done in Goodroe 


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participating hospitals. This new technology disseminated quickly after its market 

release and the costs related to stent procedures grew. The global market for drugeluting stents is estimated at $5 billion and there is intense competition for market 

share among stent manufacturers. However, one effect of the promotion of drugeluting stents may be costly overuse of this new technology in low clinical value situations. Concerns persist about the sub-acute complications related to DES use, and 

more study is required to see if widespread dissemination of this new therapy includes a tradeoff between restenosis-related events and stent-related complications. 

Limitations 

The stent-related clinical event rate in this study population may be affected by 

a variety of factors that we did not study and are unable to observe given the nature 

of the databank. Stent patients who suffered out-of-lab death, stroke, or recurrent 

cardiac symptoms may have returned to cardiologists or hospitals other than their 

original provider, and those subsequent events would not have been captured in the 

Data Warehouse. We did not survey the contributing hospitals to see how their 

interventional case complexity and volume compares to other centers. 

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Moses JW, Carrozza JP, Jr., Zidar JP, Kuntz RE. Cost-Effectiveness of SirolimusEluting Stents for Treatment of Complex Coronary Stenoses: Results From the 

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D, Popma JJ, Robertson L, Prince R, Lansky AJ, Ho KK, Kuntz RE. Final results 

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Medical Device Manufacturers Association 

Washington, DC 20006 

October 7, 2005 

The Medical Device Manufacturers Association (MDMA) and its member companies would like to thank the Subcommittee for holding this hearing on Gainsharing 

and for beginning the discussion on this critical public policy debate. It is important 

that all stakeholders (patients, hospitals, physicians and manufacturers) engage in 

a broad discussion and that a thorough review of all the possible ramifications is 

assessed before Congress enacts legislation. 

MDMA is a national trade association representing the innovative and entrepreneurial sector of the medical device industry. Our membership is comprised of over 

200 device manufacturers, including makers of medical devices, diagnostic products, 

and health care information systems. MDMA seeks to improve the quality of patient 

care by encouraging the development of new medical technology and fostering the 

availability of innovative products in the marketplace. 

Attempting to make the health care system more effective and efficient is a worthwhile goal shared by many and there has been much progress made in the area of 

‘‘pay for performance’’ (P4P) initiatives. P4P initiatives are programs that create financial incentives for physicians to collect better data or deliver better outcomes 

and they are consistent with the evidence-based medicine movement that has generated broad-based support in the medical community as well as in Washington. 

However, ‘‘device contract gainsharing’’ (DCG) is separate and distinct from P4P initiatives. DCG provides physicians with incentives to limit care by using the cheapest alternative or through using only one device vendor. 

Because the term gainsharing does not have a uniform definition there is much 

confusion surrounding the term. The U.S. Department of Health and Human Services’ Office of the Inspector General (OIG) has defined the term as ‘‘an arrangement 

in which a hospital gives physicians a share of any reduction in the hospital’s costs 

attributable in part to the physicians’ efforts.’’ This aligning of incentives can include giving a physician a financial incentive to ‘‘reduce the use of specific medical 

devices and supplies and to switch to specific products that are less expensive.’’ 

Gainsharing, as defined by the OIG, is very concerning to many in the medical device industry as it is inferred to mean that a physician will receive a kickback for 

using cheaper and less advanced medical technology. 

Currently illegal, gainsharing arrangements violate the Civil Monetary Penalty 

(CMP) law, federal anti-kickback statutes; and the Stark, physician self-referral law. 

Legalizing gainsharing could have long lasting ramifications that are detrimental to 

patient care, medical device innovation and the long term cost of health care. 

MDMA defines DCG, one element within the broader discussion of gainsharing, 

as an attempt to cut health care costs by offering financial incentives to doctors who 

reduce expenditures through using cheaper medical devices or by limiting physician 

choice for clinical preference products. Device contract gainsharing forces doctors to 

make unacceptable choices between patient care and larger paychecks. MDMA believes that in order to protect patient quality of care and medical technology innovation, it is essential that doctors do not have a conflict of interest in providing patient 

care. 

DCG Conflicts With Personalized Patient Care 

Proponents of DCG argue that hospitals may achieve cost savings by offering ‘‘different’’ forms of care. Certainly, reducing hospital over-treatment, if it exists, by 

more carefully examining medical necessity and lowering supply costs through simple administrative changes are worthwhile goals. However, these cost-saving mechanisms do not justify the implementation of DCG arrangements. 

• Any hospital may make adjustments to protocol, such as changing the packaging of surgical tools, in order to reduce costs. Hospital administrators and 

doctors can and should look for creative ways to make health care more efficient. However, offering financial incentives to doctors to ‘‘create efficiencies’’ 

presents a troubling conflict of interest; doctors are forced to choose between 

personal financial gain and a potential reduction in patient care. The personal 

financial conflict undermines a physician’s responsibility to focus exclusively on 

patient outcomes. 


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• ADMA supports attempts to better align physician payments with improved 

data collection and better outcomes. These types of ‘‘pay for performance’’ initiatives are worthwhile since they focus on financial incentives for enhanced clinical practices that improve patient outcomes. However, MDMA is opposed to 

any programs that would create a financial incentive for doctors to limit patient 

access to medical technologies. These device contract gainsharing arrangements 

will negatively affect personalized patient care, stifle medical device innovation 

and may ultimately result in higher long-term costs to the health care system. 

DCG arrangements threaten personalized patient care initiatives by creating a 

‘‘one size fits all’’ approach to medicine. The Centers for Medicare and Medicaid 

Services (CMS) has recognized the value of moving towards patient centered care 

as the best way to improve the quality of care and reduce costs. Gainsharing will 

prevent this goal from being realized because it penalizes physician choice. 

• No single brand of medical device is superior for all patients and physicians, 

as each device has unique features and functionalities. An artificial hip or pacemaker that produces an optimal clinical outcome for one person may pose a serious health risk to another patient. Similarly, a device that one physician may 

use with complete confidence and familiarity may pose serious concerns for another doctor. Many companies produce an array of devices that accommodate 

the hand size, eyesight, and individual preference of surgeons. Proposed DCG 

arrangements, by demanding a ‘‘one size fits all’’ approach to medicine, would 

jeopardize patient safety by denying patients and physicians access to necessary 

technologies. • In Iowa, doctors constrained by a hospital’s agreement have reported having to 

transfer patients to other hospitals in order to get them the brand of medical 

device that they need. In Pennsylvania, a physician has sued his hospital for 

using a standardization contract as a facade for receiving illegal kickbacks from 

a major manufacturer. This type of financial pressure to standardize medical 

devices can reduce a physician’s ability to offer the most effective and appropriate medical care. • DCG will require doctors to undergo a retraining and education period to learn 

how to properly use and monitor devices they are required to use. This training 

period will be costly, and medical mistakes and patient injuries are inevitable 

during this learning period. Any possible efficiency benefits of DCG may be substantially offset by the costs, in terms of money, patient safety, and device innovation that standardization of medical devices entails. 

DCG Standardization Stifles Innovation: 

Standardization of medical devices, in addition to posing immediate concerns regarding patient care, also may have the unintended effect of reducing medical device 

innovation. Exclusive contracts and the incentive structure of DCG discourage medical device innovation, hurt small businesses, and create anticompetitive market 

forces. 

• DCG offers doctors strong financial incentives to maintain the status quo and 

avoid upgrading to those new and innovative medical technologies that could 

enhance patient outcomes. Doctors in DCG arrangements are encouraged to cut 

costs by using the cheapest medical devices, not to improve care by using the 

newest and most effective medical devices. 

• DCG encourages doctors to ignore or reject the medical benefits of new technologies in exchange for personal income. DCG encourages doctors to purchase 

exclusively from large companies, which negotiate with GPOs to provide lowpriced, exclusive and bundled contracts. However, innovation in the medical device market is driven by small and new companies; entrepreneurial companies 

are responsible for the overwhelming majority of medical device breakthroughs. 

They have revolutionized patient care, but they cannot be expected to compete 

and innovate if doctors are offered substantial financial incentive to accept exclusive contracts from large producers. 

• Important and lifesaving medical devices such as the drug-eluting stent may 

never have been developed if DCG had been in place ten years ago. DCG arrangements encourage stagnation in the medical device industry by financially 

penalizing doctors for buying new and innovative medical devices. 

The Potential for Overall Cost-reduction Under DCG is Small and Uncertain: 

Doctors and health care professionals have expressed concern that DCG may not 

offer substantial and sustainable health care cost reductions. Current profit-sharing 

hospital models have failed to produce tangible cost savings, and the potential for 


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increased long-term costs reduces the feasibility of controlling health care expenses 

through DCG. 

• Over the last three years, the Senate, the New York Times, Los Angeles Times, 

Government Accountability Office, the OIG, and Department of Justice all have 

launched investigations about the potential inefficiencies of GPOs and their 

drive to standardize devices within their member hospitals. Evidence does not 

support the assertion that standardization reduces contract prices, and GPOs, 

in many cases, increase health care costs. The financial justification for standardization, therefore, is based primarily on the suspect assertions of GPOs. 

• MedPAC has indicated that physician owned hospitals, for-profit ventures that 

specialize in cutting costs to increase physician payments, have not succeeded 

in reducing per-procedure health care costs. Despite that fact that the interests 

of physicians and the hospital are perfectly aligned in the physician-owned hospital model, cost savings have not been achieved. The success of DCG arrangements, which are predicated on the same incentive-based theory as physicianowned hospitals, thus is substantially in doubt. 

• The long-term cost-effectiveness of DCG agreements is also mitigated by the 

possibility that cheaper medical devices and fewer medical procedures will result in higher rates of medical complications, malpractice liability, and hospital 

re-admittance. While these decisions may result in reductions in immediate 

health care costs, the decreased durability of lower-cost medical devices may 

cause higher rates of medical complications and follow-up surgeries. Cheaper 

devices and cheaper medical procedures may cut short-term costs, but the likelihood of hospital re-admittance make DCG an unstable mechanism for producing 

long-term health care price reductions. 

MDMA urges Congress to prohibit DCG 

MDMA recognizes that rising hospital costs are a drain on health care resources, 

and reducing health care costs is necessary to ensure that health care is affordable. 

However, DCG is not an effective or adequate way to achieve these results. Containing the rising cost of health care by better aligning incentives of physicians and 

hospitals should be a priority and we hope Congress will recognize that the P4P 

model rewarding quality and appropriate care is the correct approach. Device contract gainsharing will simply create a race to the bottom, adversely impacting patient care, innovation, and the long-term cost of health care. MDMA urges Congress 

to oppose any legislation which would legalize DCG agreements. 

Again, we thank Chairman Johnson and the Subcommittee for providing us the 

opportunity to express the gainsharing perspective of the entrepreneurial, innovative medical technology sector. We are encouraged by the prospect of working together to achieve reductions in the cost of health care without jeopardizing patient 

safety, curtailing device innovation or limiting physician choice. 

Thank you. 

Sincerely, 

Mark Leahey 

Executive Director 

Æ 


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