MEDICARE

Implementation of 

Financial Incentive 

Programs under 

Federal Fraud and 

Abuse Laws

Report to Congressional Requesters

March 2012

GAO-12-355

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-355, a report to 

congressional requesters

March 2012

MEDICARE

Implementation of Financial Incentive Programs 

under Federal Fraud and Abuse Laws

Why GAO Did This Study

GAO has long expressed concern that 

increases in Medicare spending are 

unsustainable and do not necessarily 

enhance health care quality. 

Traditional Medicare provider payment 

systems reward the volume of services 

instead of the quality or efficiency of 

care by paying physicians for each 

service provided. Some health 

systems, which can be hospitals, 

physicians, health plans, or a 

combination, use financial incentive 

programs to reward physicians for 

improving quality and efficiency with 

the goal of better outcomes for patients 

and savings for hospitals and payers.

Federal laws that protect patients and 

the integrity of federal programs, 

including Medicare, limit health 

systems’ ability to implement financial 

incentive programs. These fraud and 

abuse laws include the physician selfreferral law, or Stark law; the antikickback statute; and the Civil 

Monetary Penalties (CMP) law. The 

Centers for Medicare & Medicaid 

Services (CMS) and the Office of 

Inspector General (OIG) within the 

Department of Health and Human 

Services (HHS), and the Department of 

Justice oversee and enforce these 

laws.

GAO examined how federal fraud and 

abuse laws affect the implementation 

of financial incentive programs, 

stakeholders’ perspectives on their 

ability to implement these programs, 

and alternative approaches through 

which HHS has approved

implementation of these programs.

GAO analyzed relevant laws and 

agency guidance and documentation; 

and interviewed agency officials, legal 

experts, and provider stakeholders. 

What GAO Found

Certain financial incentive programs are permitted within the framework of federal 

fraud and abuse laws, but stakeholders GAO spoke with reported that the laws, 

regulations, and agency guidance have created challenges for program design 

and implementation. The Stark law and anti-kickback statute, which restrict 

financial relationships among providers, have statutory and regulatory exceptions 

and safe harbors, respectively, that permit financial incentive programs that meet 

specific criteria. However, there are no exceptions or safe harbors specifically for 

financial incentive programs intended to improve quality and efficiency, and legal 

experts reported that the constraints of existing exceptions and safe harbors 

make it difficult to design and implement a comprehensive program for all 

participating physicians and patient populations. The CMP law prohibits hospitals 

from paying physicians to reduce or limit services, and OIG has interpreted the 

law to apply to the reduction or limitation of any services, whether or not those 

services are medically necessary. The CMP law does not include statutory 

exceptions to this prohibition, and OIG does not have the authority to create 

exceptions through regulation. Through its advisory opinion process, OIG, 

however, has indicated that it would not impose sanctions for specific financial 

incentive programs that otherwise violated the CMP law but presented a low risk 

of fraud and abuse. Legal experts stated that innovative arrangements are 

difficult to structure and that the advisory opinion process is burdensome. 

Through alternative approaches, HHS has approved implementation of otherwise 

prohibited financial incentive programs that incorporate safeguards, under its 

statutory authority to conduct demonstrations and other initiatives. Specifically, 

CMS has conducted demonstration projects to test financial incentive programs 

that reward quality and efficiency. These demonstration projects included 

safeguards, such as linking payments to quality measures, to protect program 

and patient integrity. CMS has incorporated safeguards into the Medicare Shared 

Savings Program, which allows eligible providers to participate as accountable 

care organizations to share savings with the Medicare program. As specifically 

authorized for the Medicare Shared Savings Program, CMS and OIG will waive

fraud and abuse laws for, among other things, the distribution of shared savings 

in the Medicare Shared Savings Program, subject to certain requirements. The 

Center for Medicare and Medicaid Innovation within CMS is also implementing 

programs to test financial incentives.

GAO’s work suggests that stakeholders’ concerns may hinder implementation of 

financial incentive programs to improve quality and efficiency on a broad scale.

Stakeholders—government agencies and health care providers—likely will 

continue to have different perspectives about the optimal balance between 

innovative approaches to improve quality and lower costs and retaining 

appropriate patient safeguards. HHS reviewed a draft of this report and in its 

written comments, clarified its position on CMS’s authorities to create exceptions 

and issue waivers to permit certain financial incentive programs, noting that its 

authority to issue waivers is broader than its authority to create Stark exceptions. 

We modified the draft to reflect the Department’s position. View GAO-12-355. For more information, 

contact James Cosgrove at (202) 512-7114 or 

cosgrovej@gao.gov.
Page i GAO-12-355 Health Care Financial Incentive Program Implementation

Letter 1 

Background 6

Certain Financial Incentive Programs Are Permitted under Federal 

Fraud and Abuse Laws, Regulations, and Guidance, but 

Stakeholders Reported Challenges in Designing and 

Implementing Programs within This Framework 18

HHS Has Approved Otherwise Prohibited Financial Incentive 

Programs That Incorporate Safeguards, under Demonstration 

Project and Other Authorities 32

Concluding Observations 36

Agency Comments and Our Evaluation 37

Appendix I Comments from the Department of Health and Human Services 41

Appendix II GAO Contact and Staff Acknowledgments 44

Related GAO Products 45

Table

Table 1: Summary of Federal Fraud and Abuse Laws and 

Enforcement Mechanisms 14

Contents
Page ii GAO-12-355 Health Care Financial Incentive Program Implementation

Abbreviations

ACO accountable care organization

CMP Civil Monetary Penalties

CMS Centers for Medicare & Medicaid Services

CT computed tomographic

DOJ Department of Justice

FCA False Claims Act

GDP gross domestic product

HEDIS Healthcare Effectiveness Data Information Set

HHS Department of Health and Human Services

IOM Institute of Medicine

MCO managed care organization

OIG Office of Inspector General

PIP physician incentive plan

PPACA Patient Protection and Affordable Care Act

SAB Special Advisory Bulletin

SSA Social Security Act

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Page 1 GAO-12-355 Health Care Financial Incentive Program Implementation

United States Government Accountability Office

Washington, DC 20548

March 30, 2012

Congressional Requesters

For many years the United States has devoted an increasing proportion 

of its gross domestic product (GDP) and federal budget to the provision of 

health care services. National health expenditures rose from 

approximately 7 percent of GDP in 1970 to approximately 18 percent—

$2.5 trillion—in 2009. Over this same period, the proportion of federal 

budget outlays devoted to health care increased even more rapidly from 

approximately 8.3 to 26.9 percent.1 Medicare spending, which represents 

a large share of federal health care expenditures, is projected to increase 

from approximately $519 billion in 2010 to approximately $922 billion in 

2020.2 We have long expressed concern that the increases in Medicare 

spending are unsustainable, especially in light of evidence that suggests 

that greater spending does not necessarily translate to better health care 

quality.3

The Medicare Payment Advisory Commission, Institute of Medicine 

(IOM), and other experts have recommended that payments for health 

care should contain stronger incentives for quality and efficiency. IOM, in 

its 2001 report “Crossing the Quality Chasm: A New Health System for 

the 21st Century”, recommended that payment methods should, among 

other things, provide an opportunity for providers to share in the benefits 

of quality improvement, align financial incentives with the implementation 

of care processes based on best practices and the achievement of better 

patient outcomes, and enable providers to coordinate care for patients 

across settings and over time. However, current provider payment 

 

1

Office of the Actuary, Centers for Medicare & Medicaid Services, National Health 

Expenditure Tables, table 1, accessed October 18, 2011, 

https://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf. Total federal 

budget outlays obtained from U.S. Budget for Fiscal Year 2011, Table 3.2—Outlays By 

Function and Subfunction: 1962–2015, accessed January 25, 2011, 

www.gpoaccess.gov/usbudget/fy11/sheets/hist03z2.xls. 

2

Medicare is the federal health insurance program serving individuals aged 65 and older, 

individuals under 65 with certain disabilities, and individuals diagnosed with end-stage 

renal disease. In 2011, Medicare covered 48.9 million beneficiaries.

3

GAO, The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update, 

GAO-10-468SP (Washington, D.C.: Mar. 2, 2010).

 
 

Page 2 GAO-12-355 Health Care Financial Incentive Program Implementation

systems used by traditional Medicare create conflicting incentives and 

contribute to the growth in spending by rewarding volume of services 

regardless of quality and cost,4 leading to duplication and overutilization 

of services that is wasteful and potentially harmful.5

Physicians play a central role in the generation of health care 

expenditures, and the incentive for physicians to order more services has 

a broad impact on total spending. While the services they provide directly 

to patients account for an estimated 20 percent of total health care 

expenditures, their influence is estimated to account for up to 90 percent 

of these expenditures because they either directly or indirectly control or 

influence most of the health services that are provided.

Specifically, under 

traditional Medicare, hospitals are paid a predetermined fixed amount for 

each hospital stay regardless of the number of services provided, but 

physicians receive payment for each service delivered and have little 

incentive to coordinate the provision of care or control the volume of 

services. 

6 For example, 

physicians admit patients to hospitals, and they order services such as 

imaging studies and laboratory tests. As some policy experts have noted, 

many factors give physicians an incentive to order more services than 

may be necessary, including a physician culture that values 

meticulousness, the scarcity of data comparing the effectiveness of 

different treatments and interventions, and the fear of malpractice 

lawsuits. In conjunction with these factors, paying physicians for an 

intervention that may only be justified by a slim clinical rationale adds a 

strong financial incentive to deliver more services.7

 

4

Medicare Parts A and B, under which Medicare pays hospitals and physicians, 

respectively, are known as traditional Medicare.

5

For example, studies have shown that unnecessary imaging tests, such as computed 

tomographic (CT) scans, can result in an increased cancer risk for patients. A 2007 study 

estimated that up to 2 percent of all cancers in the United States may be attributable to 

radiation from CT scans.

6

GAO, Medicare: Per Capita Method Can Be Used to Profile Physicians and Provide 

Feedback on Resource Use, GAO-09-802 (Washington, D.C.: Sept. 25, 2009).

7

E.J. Emmanuel, and V.R. Fuchs. “The Perfect Storm of Overutilization.” Journal of the 

American Medical Association, vol. 299, no. 23, (2008): 2789-2791.
 

Page 3 GAO-12-355 Health Care Financial Incentive Program Implementation

Faced with these challenges, policymakers, health care providers, and 

others have sought ways to improve the quality of care and at the same 

time reduce costs. While the federal government examines various 

reforms to payment mechanisms, some health systems8 are 

implementing financial incentive programs to promote the quality and 

efficiency of care by rewarding physicians for meeting quality benchmarks 

and improving efficiency. Proponents of these programs believe they 

have the potential to result in better health outcomes for patients, and 

savings for hospitals and third-party payers, such as private health plans 

and public health programs including Medicare. Congress has included 

various reforms in the Patient Protection and Affordable Care Act 

(PPACA), including those that align incentives for hospitals and 

physicians to improve health care quality and efficiency in conjunction 

with efforts to develop collaborative care models for the Medicare 

program. For example, PPACA requires that the Department of Health 

and Human Services (HHS) establish a shared savings program—the 

Medicare Shared Savings Program—that encourages coordination of 

care under Medicare Parts A and B and promotes accountability for 

patient populations. Under the Medicare Shared Savings Program, 

eligible health systems that achieve savings for Medicare by improving 

quality and efficiency may receive a share of the savings they generate 

as financial incentive payments.9

A number of federal laws apply to financial relationships among hospitals, 

physicians, health plans, and other entities. Among other things, these 

laws limit health systems that deliver care to Medicare beneficiaries from 

implementing financial incentive programs that could, for example, 

influence providers to recommend medically inappropriate services or 

withhold costly services that are medically necessary. These federal laws 

were designed to protect patients and the integrity of federal health care 

programs, including Medicare. They include, among others, the physician 

Health systems that implement other 

financial incentive programs must comply with various federal laws in 

their efforts to reward quality and efficiency.

 

8

For the purposes of our study, health systems can include hospitals, physicians, and 

health plans, or any combination thereof.

9

Pub. L. No. 111-148, §§ 3022, 10307, 124 Stat. 119, 395, 940 (codified at 42 U.S.C. 

§ 1395jjj). In addition to eligible health systems, other organizations may be included in 

the Medicare Shared Savings Program. PPACA also includes numerous provisions 

affecting Medicare payments, payment rules, covered benefits, and the delivery of care.
 

Page 4 GAO-12-355 Health Care Financial Incentive Program Implementation

self-referral law (known as the Stark law),10 the anti-kickback statute,11

and the Civil Monetary Penalties (CMP) law.12,13 For purposes of this 

study, we refer to these three laws as the fraud and abuse laws. Federal 

agencies with oversight and enforcement responsibilities under these 

laws—including the Centers for Medicare & Medicaid Services (CMS) and 

the Office of Inspector General (OIG) within HHS—have issued 

regulations and guidance regarding financial incentive programs, while 

guarding against patient and program abuse. The Department of Justice 

(DOJ) also enforces the anti-kickback statute.14

You asked us to review how federal laws and regulations may affect the 

development of collaborative health care delivery arrangements designed 

to promote quality and efficiency, specifically financial incentive programs. 

Our report examines (1) how federal fraud and abuse laws, regulations, 

and guidance affect the implementation of financial incentive programs, 

and the perspectives of stakeholders on their ability to implement such 

programs; and (2) alternative approaches to the federal fraud and abuse 

laws through which HHS has approved certain financial incentive 

programs.

To determine how federal fraud and abuse laws, regulations, and 

guidance affect the implementation of financial incentive programs, and 

the perspectives of stakeholders on their ability to implement such 

programs, we interviewed officials from CMS, HHS’s OIG, and DOJ who 

 

1042 U.S.C. § 1395nn.

1142 U.S.C. § 1320a-7b(b). 

1242 U.S.C. § 1320a-7a. The CMP law provides for penalties for a variety of activities 

specified in the statute. In this report, we focus on the penalties that may apply to 

hospitals that pay physicians to induce a reduction or limitation of services. 42 U.S.C. 

§ 1320a-7a(b). 

13These three laws apply to various federal health care programs. For example, the CMP 

law applies to both the Medicare and Medicaid programs. For the purpose of our study, 

we focused on Medicare because all three laws apply to Medicare, and GAO has 

identified the program as being at high risk for fraud, waste, and abuse. 

14Additionally, violations of the Stark law and anti-kickback statute may result in violations 

of the civil False Claims Act (FCA), which provides for civil penalties and triple damages 

for knowingly presenting or causing to be presented, a false or fraudulent claim for 

payment or approval by the United States. DOJ is the government agency responsible for 

enforcing the FCA. Private parties may also bring actions on behalf of the government, 

which DOJ can elect to join. 31 U.S.C. §§ 3729-3733.
 

Page 5 GAO-12-355 Health Care Financial Incentive Program Implementation

have responsibility for enforcing the federal fraud and abuse laws.15 We 

also analyzed relevant federal laws, regulations, and advisory opinions. 

To obtain the stakeholders’ perspectives, we interviewed eight legal 

experts about their experiences in advising clients in implementing 

financial incentive programs,16 and representatives from five health care 

industry groups that represent hospitals, physicians, and the health 

insurance industry. We also reviewed stakeholders’ published statements 

on fraud and abuse laws. Additionally, we interviewed officials of 10 

health systems to obtain illustrative examples of financial incentive 

programs to improve quality and efficiency,17

To identify alternative approaches to federal fraud and abuse laws 

through which HHS has approved certain financial incentive programs, 

we interviewed CMS officials, including officials responsible for Medicare 

demonstrations,

and a prominent financial 

incentive program expert with experience designing financial incentive 

programs to improve efficiency.

18 for the Medicare Shared Savings Program, and from 

the Center for Medicare and Medicaid Innovation (Innovation Center). We 

also reviewed CMS documentation on selected Medicare 

demonstrations19

 

15As part of our work, for fiscal years 2005 through 2010, we requested that OIG identify 

any Stark law or anti-kickback statute enforcement actions on the basis of providers’ 

implementation of pay-for-performance programs or gainsharing arrangements. Similarly, 

we requested that DOJ officials identify any FCA settlements involving the Stark law or 

anti-kickback statute against providers who implemented such programs during the same 

time period.

and proposed and final rules for the Medicare Shared 

16To determine which legal experts to interview, we identified individuals who have 

counseled health systems on these issues, conducted a literature review to identify 

individuals who made contributions to the study of federal fraud and abuse laws within the 

context of health systems, and solicited recommendations from legal experts during 

interviews.

17To select the health systems, we requested recommendations from legal experts and 

industry group representatives. We also used a judgmental sampling technique to achieve 

variation in the type of health system, such as physician groups, hospital-based systems, 

and systems that include a health plan and size of the system.

18CMS uses demonstrations, which are typically time-limited programs, to test payment 

methods.

19We identified relevant Medicare demonstrations and other projects through our research 

and interviews with CMS officials on financial incentive program demonstrations.
 

Page 6 GAO-12-355 Health Care Financial Incentive Program Implementation

Savings Program.20 Finally, we reviewed the joint CMS and OIG notice 

and final rule regarding the waiver of certain federal fraud and abuse laws 

for the Medicare Shared Savings Program.21

We conducted this performance audit from October 2010 through 

February 2012 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

Health systems may use a variety of financial incentive programs to 

encourage improvements in the quality and efficiency of health care 

delivery. The payment of rewards to physicians, however, creates 

financial relationships that may implicate, that is, give rise to concern 

under, federal fraud and abuse laws designed to protect against undue 

influences on medical judgment.

Health systems may offer a variety of financial incentive programs to 

encourage improvements in quality and efficiency, including those that 

help align incentives between hospitals and physicians. Health systems 

can use pay-for-performance programs to reward physicians for 

adherence to clinical protocols or objective improvement in individual 

patient care outcomes. They can also use shared savings programs to 

align physician incentives with those of hospitals by offering physicians a 

percentage of the hospitals’ cost savings attributable to the physicians’ 

 

20Medicare Program; Medicare Shared Savings Program: Accountable Care 

Organizations, 76 Fed. Reg. 19,528 (Apr. 7, 2011); Medicare Program; Medicare Shared 

Savings Program: Accountable Care Organizations, 76 Fed. Reg. 67,802 (Nov. 2, 2011). 

21Medicare Program; Waiver Designs in Connection with the Medicare Shared Savings 

Program and the Innovation Center, 76 Fed. Reg. 19,655 (Apr. 7, 2011); Medicare 

Program; Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg.

67,992 (Nov. 2, 2011).

Background 

Financial Incentive 

Programs
 

Page 7 GAO-12-355 Health Care Financial Incentive Program Implementation

efforts in controlling the costs and improving or maintaining the quality of 

patient care. These are often referred to as gainsharing arrangements.22

Although results from financial incentive programs tried to date have been 

mixed, some experts believe they have the potential to increase quality 

and efficiency.23 While pay-for-performance programs tend to have 

explicit goals of quality improvement rather than efficiency improvement, 

these programs can improve quality and efficiency by rewarding 

physicians for adhering to clinical protocols.24 For example, these 

programs may result in savings for Medicare if the programs lead to 

better patient health outcomes, fewer medical interventions, and a 

reduction in the provision of services that are not medically necessary. 

Similarly, shared savings programs that reward physicians for using less 

expensive hospital supplies may result in savings for Medicare by 

lowering hospital costs. Specifically, shared savings programs, if 

implemented on a broad scale, could lower hospital costs sufficiently to 

reduce Medicare’s hospital payments.25

The availability of financial incentives, however, may affect a physician’s 

judgment, introducing a profit motive that may lead to inappropriate 

referrals or reductions or limitations in services. In this respect, financial 

incentive programs may implicate federal fraud and abuse laws designed 

to protect patients and the integrity of the Medicare program.

 

22For the purposes of our study, we use the term “financial incentive program” to refer to 

pay-for-performance programs, shared savings programs, and gainsharing arrangements.

23In its January 2012 issue brief on programs tested by CMS, the Congressional Budget 

Office examined, in part, independent evaluations of four CMS programs where health 

care providers were given financial incentives to improve the quality and efficiency of care 

rather than payments based strictly on the volume and intensity of services delivered. The 

Congressional Budget Office concluded that results of these four programs were mixed. In 

one program where payments were bundled to cover all hospital and physicians services 

for heart bypass surgeries, Medicare spending was reduced by 10 percent, and there 

were no apparent adverse effects on patients’ outcomes. The remaining three programs 

appeared to have produced little or no savings for Medicare. Of these three programs, two 

slightly improved quality of care based on the measures adopted for the program. The 

third program had little or no effect on Medicare spending or quality in its first year.

24Pay-for-performance programs may result in increased costs if the clinical protocols 

result in the use of more services or more expensive services. 

25Since Medicare hospital payments are based in part on the estimated average hospital 

cost per admission, reduced hospital costs, over time, may be reflected in Medicare’s 

payment updates.
 

Page 8 GAO-12-355 Health Care Financial Incentive Program Implementation

Federal fraud and abuse laws designed to protect the integrity of services 

that are reimbursed under federal health care programs, including 

Medicare, regulate certain types of conduct, including financial 

relationships that may influence the delivery of care. Health systems must 

operate within the framework of federal fraud and abuse laws when 

designing and implementing financial incentive programs. Table 1, which 

follows the section on advisory opinion authority, summarizes the federal 

fraud and abuse laws and enforcement mechanisms.

The Stark law and its implementing regulations prohibit physicians from 

making referrals for certain “designated health services” paid for by 

Medicare, including hospital services, to entities with which the physicians 

(or their immediate family members) have a financial relationship,26

unless the arrangement satisfies a statutory or regulatory exception.27,28

Studies have found that these self-referrals encouraged overutilization 

and increased health costs.29,30

 

26A financial relationship is an ownership or investment interest—through equity, debt, or 

other means—in the entity or a compensation arrangement between the physician or 

immediate family member and the entity. CMS regulations further define financial 

relationship as direct compensation, indirect compensation, direct ownership, and indirect 

ownership. 42 C.F.R. § 411.354. 

The Stark law also prohibits these entities 

that perform the designated health services from presenting, or causing to 

2742 U.S.C. § 1395nn.

28The Social Security Act (SSA) prohibits payments to states for Medicaid services that 

would be prohibited by Medicare under the Stark law. 42 U.S.C. § 1396b(s).

29See Medicare Program; Physician Ownership of, and Referrals to, Health Care Entities 

that Furnish Clinical Laboratory Services, 57 Fed. Reg. 8,588 (proposed Mar. 11, 1992). 

In June 1988, Congress mandated that the HHS OIG conduct a study on physician 

ownership of and compensation from health care entities to which the physicians make 

referrals. OIG reported that patients of referring physicians who owned or invested in 

independent clinical laboratories received 45 percent more laboratory services than 

Medicare patients generally. OIG found similar effects on utilization associated with the 

existence of compensation arrangements between laboratories and physicians. Patients 

of these physicians used 32 percent more laboratory services than all Medicare patients in 

general. Based in part on the results of this study, Congress passed the Stark law in 

November of 1989. Medicare and Medicaid Programs; Physicians’ Referrals to Health 

Care Entities With Which They Have Financial Relationships, 63 Fed. Reg. 1659, 1661 

(Jan. 9, 1998).

30Similarly, GAO found that physicians with financial interests in entities to which they can 

refer patients may have higher referral rates. See GAO, Medicare: Referrals to PhysicianOwned Imaging Facilities Warrant HCFA’s Scrutiny, GAO/HEHS-95-2 (Washington, D.C.: 

Oct. 20, 1994).

Federal Fraud and Abuse 

Laws and Enforcement 

Mechanisms

Stark Law
 

Page 9 GAO-12-355 Health Care Financial Incentive Program Implementation

be presented, claims to Medicare or billing any individual, third-party 

payer, or other entity for these services.31 The Stark law includes a 

number of exceptions32 and authorizes the Secretary of HHS to create 

regulatory exceptions for financial relationships that do not pose a risk of 

patient or program abuse.33,34

The Stark law prohibits physicians from making referrals to entities with 

which they or their immediate family members have a financial 

relationship, regardless of whether that relationship is intended to result in 

these referrals. In this regard, the Stark law is a strict liability statute. 

Those physicians or health systems that violate the Stark law by either 

making prohibited referrals or billing for the services for which the referral 

was made may be subject to a number of sanctions. Any amounts 

received for claims in violation of the Stark law must be refunded. Those 

who know or should know that they are submitting (or causing to be 

submitted) a claim in violation of the Stark law may be subject to civil 

monetary penalties of up to $15,000 for each service, an assessment of 

three times the amount claimed, and exclusion from federal health care 

programs.

The Stark law was enacted to prevent 

physicians from referring patients and ordering tests and services that 

may be unnecessary—and result in overutilization—for the purpose of 

financial gain. Financial incentive programs implicate the Stark law

because they create a financial relationship between the entity paying the 

incentive and the physician who receives it, which could give the 

physician an incentive to refer patients to that entity.

35 CMS is responsible for issuing regulations under the Stark 

law and collecting payments made in violation of the law. OIG is 

responsible for enforcing the Stark law’s civil monetary penalties.

 

3142 U.S.C. § 1395nn(a)(1)(B).

3242 U.S.C. §§ 1395nn(b)-(e). 

33There are more than 20 Stark law statutory and regulatory exceptions that may apply 

generally, to ownership or investment, or to compensation arrangements. 

3442 U.S.C. § 1395nn(b)(4). Stark law regulations are located at 42 C.F.R. §§ 411.350-

411.389.

35Civil monetary penalties of up to $100,000 may be imposed on those who enter into 

arrangements that they know or should know have the principal purpose of assuring 

referrals that would violate the Stark law if made directly.
 

Page 10 GAO-12-355 Health Care Financial Incentive Program Implementation

The anti-kickback statute makes it a criminal offense for anyone to 

knowingly and willfully solicit, receive, offer, or pay any remuneration to 

induce or reward referrals of items or services reimbursable under 

Medicare,36 subject to statutory exceptions and regulatory safe harbors 

promulgated by OIG.37

A financial incentive program under which a hospital paid physicians who 

referred patients for admission would implicate the anti-kickback statute. 

Unlike the Stark law, the anti-kickback statute is intent-based; the action 

must be knowing and willful. Penalties under the anti-kickback statute 

include imprisonment for up to 5 years and criminal fines of up to 

$25,000. In addition, those individuals and entities violating the antikickback statute are subject to civil penalties of up to $50,000 per act, an 

assessment of three times the remuneration, and exclusion from 

participation in federal health care programs.

The law helps to limit the potential for money to 

influence providers’ health care decisions, and, in this respect, helps to 

prevent overutilization of services, the provision of unnecessary or 

substandard services, and the inappropriate steering of patients.

38

In addition to providing for the imposition of civil monetary penalties for 

certain enumerated activities, such as knowingly presenting a Medicare 

claim that is part of a pattern of claims for items or services that a person 

knows are not medically necessary, the CMP law provides penalties for 

hospitals that knowingly make an indirect or direct payment to a physician 

as an inducement to reduce or limit services to hospital patients, and for 

physicians who accept such payments.

OIG and DOJ are charged 

with enforcing the anti-kickback statute. OIG is responsible for issuing 

regulatory safe harbors under the anti-kickback statute and, as under the 

Stark law, has administrative enforcement responsibilities. DOJ 

prosecutes cases under the anti-kickback statute.

39

 

36The anti-kickback statute applies to payments made under federal health care 

programs. We focused on Medicare because all three laws apply to Medicare, and GAO 

has identified the program as being at high risk for fraud, waste, and abuse. 

The statute does not contain 

3742 U.S.C. § 1320a-7b(b). For the purposes of this study, we refer to anti-kickback 

statutory exceptions and regulatory safe harbors as safe harbors.

3842 U.S.C. §§ 1320a-7a(a)(7), 1320a-7(a)-(b).

3942 U.S.C. § 1320a-7a(b). The CMP law applies to the Medicaid and Medicare programs.

We focused on Medicare because all three laws apply to Medicare, and GAO has 

identified the program as being at high risk for fraud, waste, and abuse.

Anti-kickback Statute

CMP Law
 

Page 11 GAO-12-355 Health Care Financial Incentive Program Implementation

exceptions for this prohibition and does not authorize OIG to establish 

exceptions by regulation. Like the Stark law and the anti-kickback statute, 

the CMP law reflects congressional concern that incentive payments may 

create a conflict of interest that may limit the ability of the physician to 

exercise independent professional judgment in the best interest of the 

patient.40 Financial incentive programs that reward physicians with a 

share of hospital cost-savings realized through a reduction or limitation of 

items and services implicate the CMP law. In addition, payments from a 

hospital to a physician designed to reward quality that lead to a reduction 

or limitation of services furnished to hospital patients also implicate the 

CMP law. Hospitals or physicians who violate the CMP law are subject to 

civil penalties of up to $2,000 per patient covered by the payments, and 

exclusion from participation in federal health care programs.41

The False Claims Act (FCA) serves as another enforcement mechanism 

for federal fraud and abuse laws. Claims that are submitted in violation of 

the Stark law or the anti-kickback statute may also be considered false 

claims and, as a result, create additional liability under the FCA.

OIG is 

responsible for enforcing the CMP law.

42 FCA 

prohibits certain actions, including the knowing presentation of a false 

claim for payment by the federal government.43

Penalties under the FCA include triple damages, plus an additional 

penalty for each false claim filed up to $11,000.

For example, a financial 

incentive program under which a hospital submitted a claim to Medicare 

for a service provided by a physician when the physician and hospital had 

a financial relationship in violation of the Stark law, would implicate the 

FCA if the requisite intent were present.

44

 

40H.R. Rep. No. 99-727, at 444 (1986), reprinted in 1986 U.S.C.C.A.N. 3607, 3841.

DOJ is charged with 

enforcing the FCA and enforces the Stark law and the anti-kickback 

statute through the FCA. FCA claims also may be brought by third parties 

4142 U.S.C. §§ 1320a-7a(b), 1320a-7(b)(7). 

4231 U.S.C. §§ 3729-3233.

4331 U.S.C. § 3729(a)(1)(A). 

44Those who violate the FCA are liable for a civil penalty of not less than $5,000 and not 

more than $10,000, as adjusted by inflation, plus three times the amount of damages the 

government sustains, though the court may reduce damages. 31 U.S.C. § 3729(a)(1)-(2). 

Violators are also liable for the cost of the action. 31 U.S.C. § 3729(a)(3).

False Claims Act –

Enforcement Mechanism for 

Federal Fraud and Abuse Laws
 

Page 12 GAO-12-355 Health Care Financial Incentive Program Implementation

alleging the submission of false claims and these “whistleblowers” can 

receive between 15 and 30 percent of a monetary settlement or recovery 

plus expenses and attorneys’ fees and costs.45

In response to requests for specific guidance from providers on whether 

an existing or proposed financial arrangement, including a financial 

incentive program, violates the fraud and abuse laws, CMS and OIG have 

the statutory authority to issue advisory opinions.46 CMS is required to 

issue advisory opinions on the Stark law,47 and OIG is required to issue 

advisory opinions on the CMP law and the anti-kickback statute, among 

other matters.48

 

4531 U.S.C. § 3730(d).

Advisory opinions are issued only in response to a 

request regarding an existing or proposed arrangement to which the 

requester is a party. Advisory opinions are binding on the Secretary of 

HHS and the individual or entity requesting the opinion; no other parties 

can rely on an advisory opinion. The time between when CMS and OIG 

receive an advisory opinion request and when the advisory opinion is 

released can depend on, for example, the information contained in the 

request and the amount of time needed for the agencies to obtain 

additional information from the requester. Requesters must submit 

certified written requests that include information specified in regulations. 

If the initial request for an advisory opinion does not contain all the 

information the agencies need, the agencies may request whatever 

additional information is necessary to respond to the request. When 

requesting an advisory opinion, requesters must agree to pay all costs the 

46CMS and OIG consult with DOJ in issuing advisory opinions. CMS and OIG do not 

consider requests that present a general question of interpretation or pose a hypothetical 

situation through the advisory opinion process.

47CMS will not address whether fair market value will be, or was, paid or received for 

goods, services, or property, or whether an individual is a bona fide employee through the 

advisory opinion process. 42 C.F.R. § 411.370(c).

4842 U.S.C. § 1320a-7d(b)(2). OIG is prohibited from addressing whether fair market value 

will be, or was, paid or received for goods, services, or property, or whether an individual 

is a bona fide employee through the advisory opinion process. 42 U.S.C. § 1320a7d(b)(3). OIG has also issued compliance guidance and special advisory bulletins. OIG is 

also authorized to issue special fraud alerts in response to a request to inform the public 

of practices considered to be suspect or of particular concern. 42 U.S.C. § 1320a-7d(c).

Advisory Opinion 

Authority 
 

Page 13 GAO-12-355 Health Care Financial Incentive Program Implementation

agencies incur in responding to the request.49 CMS has 15 days and OIG 

has 10 days to notify the requesters whether their requests have been 

formally accepted or declined or whether additional information is needed. 

Once a request has been accepted, CMS has 90 days and OIG has 

60 days to respond, with certain exceptions.

 

49OIG currently charges $86 per hour to prepare an advisory opinion. The actual cost of 

an opinion will vary based upon the amount of work required to prepare the opinion. 

Requesters may set a cap by designating the maximum amount that they are willing to 

spend on an advisory opinion. OIG will stop processing the request once this amount is 

reached, at which point, the requester has the option to withdraw the request or continue.
 

Page 14 GAO-12-355 Health Care Financial Incentive Program Implementation

Table 1: Summary of Federal Fraud and Abuse Laws and Enforcement Mechanisms

Law Summary Exceptions Agency oversight Penalties 

Stark law Prohibits physicians from 

making referrals for certain 

services to entities with 

which they have a financial 

relationship to prevent 

financial incentives from 

affecting physicians’ 

medical judgment; prevents 

overutilization

Statutory and 

regulatory 

exceptions

Regulatory exceptions 

created by, advisory 

opinions issued by, and 

overpayment amounts 

collected by CMS; 

enforced by OIG

Civil monetary penalties, 

assessment of three times the 

amount claimed, denial of 

payments and refunds of amounts 

collected from individuals, and 

exclusion from federal health care 

programs

Anti-kickback statute Prohibits offers and receipts 

of remuneration to induce 

or reward of referrals for 

services to prevent financial 

incentives from affecting 

physicians’ medical 

judgment; prevents 

overutilization 

Statutory 

exceptions and 

regulatory safe 

harbors

Regulatory safe harbors 

created and advisory 

opinions issued by OIG; 

enforced by OIG and 

DOJ

Criminal penalties; civil monetary 

penalties, assessment of three 

times the remuneration, and 

exclusion from federal health care 

programs

CMP law Prohibits payments by 

hospitals to physicians to 

induce reduction or 

limitation of services to 

hospital patients to prevent 

financial incentives from 

affecting physicians’ 

medical judgment; prevents 

underutilization

None Advisory opinions issued 

by OIG; Enforced by 

OIG

Civil monetary penalties and 

exclusion from federal health care 

programs

False Claims Act 

(FCA)—used as 

enforcement 

mechanism for 

federal fraud and 

abuse laws

Prohibits knowingly 

presenting or causing to be 

presented a false claim for 

payment to the federal 

government; additional 

mechanism to enforce the 

Stark law and anti-kickback 

statute

None Enforced through 

lawsuits brought by DOJ 

and whistleblowers

Civil penalties and triple damages

Source: GAO analysis of the federal fraud and abuse laws and the FCA.
 

Page 15 GAO-12-355 Health Care Financial Incentive Program Implementation

CMS has general statutory authority to test new payment methods and 

other alternatives to payment policies, with Medicare providers, through 

demonstration projects.50 Generally, such demonstrations are time-limited 

to test program changes, but some have been extended. In connection 

with such demonstration projects, the Secretary of HHS may waive 

certain payment and reimbursement requirements, including the Stark 

law.51 The Secretary of HHS has also been required by statute to conduct 

specific Medicare demonstrations, which provide implicit or express 

authority for waivers of federal fraud and abuse laws.52

In addition, PPACA requires that HHS establish the Medicare Shared 

Savings Program, which will provide financial incentive payments to 

eligible groups of providers and suppliers that join together in what are 

called accountable care organizations (ACO) and that achieve savings for 

Medicare by improving the quality and efficiency of care delivered to 

assigned traditional Medicare beneficiaries. PPACA authorizes HHS to 

waive fraud and abuse laws as may be necessary to carry out the 

Medicare Shared Savings Program.

PPACA also established the Innovation Center within CMS specifically to 

test innovative payment and service delivery models to reduce program 

expenditures while preserving or enhancing the quality of care furnished 

to Medicare and Medicaid beneficiaries.53

 

50The SSA authorizes the Secretary of HHS to develop and engage in experiments and 

demonstration projects to determine whether changes in methods of payment or 

reimbursement would increase the efficiency and economy of Medicare health services 

through the creation of additional incentives for these purposes without adversely affecting 

the quality. 42 U.S.C. § 1395b-1(a)(1)(A). 

The Innovation Center can test 

new payment methods, including financial incentive programs, by 

51The Stark law may be waived under this authority because it is a payment and 

reimbursement provision located in title XVIII of the SSA. 42 U.S.C. § 1395b-1(b). 

However, because the anti-kickback statute and CMP law are located in title XI of the 

SSA, they cannot be waived under this authority.

52See, e.g., 42 U.S.C. § 1395cc-3, which provides that the Secretary of HHS will establish 

a demonstration program that examines health delivery factors that encourage the 

delivery of improved quality in patient care, including the provision of incentives for 

improving the quality and safety of care and achieving the efficient allocation of resources. 

For demonstrations conducted under 42 U.S.C. § 1395cc-3, the Secretary of HHS may 

waive the Stark law, anti-kickback statute, and CMP law.

53Pub. L. No. 111-148, §§ 3021, 10306, 124 Stat. 119, 389, 939 (codified at 42 U.S.C. 

§ 1315a). 

CMS’s Demonstration and 

Waiver Authority
 

Page 16 GAO-12-355 Health Care Financial Incentive Program Implementation

implementing models and expanding successful models nationwide.54

The Secretary of HHS has the authority to waive certain federal fraud and 

abuse laws for time-limited models, but not for successful model 

expansions.55

Medicare beneficiaries can opt to enroll in private plans administered by 

Medicare managed care organizations (MCO) to receive covered 

benefits.56 These MCOs, also known as Medicare Advantage Plans or 

Medicare Part C, provide both hospital (Part A) and medical insurance 

(Part B).57 MCOs may offer lower out-of-pocket costs and more benefits 

than traditional Medicare. Once enrolled, however, choices that 

beneficiaries would traditionally make may be subject to the MCO’s 

approval. For instance, MCOs may utilize primary care physicians as 

gatekeepers to manage patient access to specialty services, may require 

beneficiaries to pay higher out-of-pocket costs if they choose a provider 

not on the preferred list, and may require patients and doctors to obtain 

organizational approval for elective hospitalization, certain expensive 

diagnostic tests, or specific medical procedures.58

MCOs have an incentive to limit services because of the way they are 

paid by Medicare. MCOs receive a monthly payment for each enrollee. 

Medicare makes the same monthly payment to the MCO for the enrollee 

regardless of how many or few services the enrollee actually uses. If an 

MCO’s expenditures for its enrollees are less than its monthly payments, 

the MCO retains the excess. To help protect beneficiaries, MCOs are 

required to operate quality assurance programs. CMS is responsible for 

monitoring MCOs to ensure that MCOs are providing quality, timely, and 

appropriate services. In addition to day-to-day monitoring, CMS selects 

 

5442 U.S.C. § 1315a(b)-(c).

5542 U.S.C. § 1315a(d).

56See 42 U.S.C. § 1395w-21.

57Nearly two-thirds of MCOs include Medicare prescription drug coverage (Part D).

58M.A. Rodwin, Consumer Protection and Managed Care: Issues, Reform Proposals, and 

Trade-Offs. 32 Hous. L. Rev. 1319 (1996). 

Medicare Managed Care 

Organizations
 

Page 17 GAO-12-355 Health Care Financial Incentive Program Implementation

organizations each year for an on-site audit based on a risk assessment 

and other criteria.59

MCOs employ various techniques to control costs and manage health 

service use, such as implementing financial incentive programs with their 

providers. Like other financial incentive programs, MCOs’ physician 

incentive plans (PIP) must comply with the Stark law and anti-kickback 

statute.60 However, unlike financial incentive programs between hospitals 

and physicians, PIPs are not subject to the same provision of the CMP 

law. Congress crafted a separate law, under which MCOs can implement 

PIPs as long as payments are not made to reduce or limit medically 

necessary services to individual patients. If physicians are placed at 

substantial financial risk, that is more than 25 percent of their payment is 

at risk, MCOs must provide stop-loss protection based on the number of 

patients, and MCOs must also conduct periodic surveys of current and 

prior enrollees to address enrollees’ access to and satisfaction with the 

quality of services. MCOs must provide CMS with information about 

financial incentive programs for approval.61 MCOs that violate this 

provision are subject to civil monetary penalties of up to $25,000 and 

suspension of enrollment activities, Medicare payment, or marketing 

activities.62

 

59As part of its monitoring activities, CMS conducts financial audits, audits of plan bids, 

and audits of the accuracy of health status data submitted by plans.

60“Physician incentive plan” means any compensation arrangement between an eligible 

organization and a physician or physician group that may directly or indirectly have the 

effect of reducing or limiting services provided with respect to individuals enrolled with the 

organization.

6142 U.S.C. § 1395mm(i)(8). As initially enacted, the CMP law prohibited hospitals and 

MCOs from paying physicians to reduce services, regardless of whether the services are 

medically necessary. Congress subsequently amended the CMP law to remove MCOs 

and passed a separate provision that permits MCOs to implement incentive plans as long 

as plans do not induce the reduction or limitation of medically necessary services.

6242 C.F.R. § 422.752(a)(1).
 

Page 18 GAO-12-355 Health Care Financial Incentive Program Implementation

Certain financial incentive programs are permitted within the framework of 

federal fraud and abuse laws through various Stark law and anti-kickback 

statute exceptions and safe harbors, respectively or because they do not 

implicate one or more of the laws in the first instance. OIG has interpreted 

the CMP law to prohibit hospitals from rewarding the reduction or 

limitation of services, but permits certain financial incentive programs 

through its advisory opinion process. However, stakeholders we spoke 

with reported that the laws, regulations, and agency guidance have 

created challenges for financial incentive program design and 

implementation, and some health systems have terminated or refrained 

from implementing these programs. Neither OIG nor DOJ took any 

enforcement actions against financial incentive programs in fiscal years 

2005 through 2010.

CMS and OIG have acknowledged new exceptions and safe harbors may 

be necessary to facilitate financial incentive programs. CMS has 

acknowledged that existing Stark law exceptions may not be sufficiently 

flexible to encourage a wider array of nonabusive and beneficial incentive 

programs that both promote quality and achieve cost savings. CMS can 

create additional exceptions as long as the exception does not pose a risk 

of program or patient abuse.63 According to CMS officials, this “no risk” 

requirement is high and limits their ability to create new regulatory 

exceptions to the Stark law. In 2008 CMS attempted to use its authority to 

propose a new exception covering financial incentive programs.64

 

6342 U.S.C. § 1395nn(b)(4).

However, the “no risk” requirement necessitated a narrow exception with 

many structural safeguards in light of the risk that financial incentive 

programs could be used to disguise payments for referrals or adversely 

affect patient care. In its proposed rule, CMS noted that the design of the 

proposed exception created a challenge in providing broad flexibility for 

64Medicare Program; Revisions to Payment Policies Under the Physician Fee Schedule 

and Other Revisions to Part B, 73 Fed. Reg. 38,502, 38,604 (proposed July 7, 2008).

Certain Financial 

Incentive Programs 

Are Permitted under 

Federal Fraud and 

Abuse Laws, 

Regulations, and 

Guidance, but 

Stakeholders 

Reported Challenges 

in Designing and 

Implementing 

Programs within This 

Framework

Financial Incentive 

Programs May Be 

Permitted under Stark and 

Anti-kickback Exceptions 

and Safe Harbors; 

Stakeholders Nevertheless 

Reported Challenges 

Structuring Permissible 

Programs
 

Page 19 GAO-12-355 Health Care Financial Incentive Program Implementation

innovative, effective programs while at the same time protecting the 

Medicare program and patients from abuses. The agency solicited 

comments, and many of the comments it received criticized the number 

and complexity of safeguards needed to achieve the “no risk” standard. 

To date, the agency has taken no further action to finalize this regulatory 

exception, and CMS officials told us the agency has no plans to do so in 

the near future. Similarly, OIG officials told us that they recognize that 

industry innovation may be significant enough to warrant new antikickback safe harbors, and the agency annually solicits input from 

providers on potential safe harbors, as required by statute.65

The Stark law and anti-kickback statute apply variously to provider 

financial relationships, and their respective exceptions and safe harbors 

are not specific to financial incentive programs focused on quality and 

efficiency, such as pay-for-performance or gainsharing arrangements, 

between hospitals and physicians. As a result, financial incentive 

programs that implicate these laws must be structured to fit into 

applicable exceptions and may be structured to fit into applicable safe 

harbors,66 which some legal experts we spoke with characterized as 

narrow in scope.67

 

65OIG received a letter from a provider stakeholder in response to the agency’s 2010 

solicitation of new safe harbors requesting a safe harbor specifically for financial incentive 

programs. The agency is considering but has not taken action on this request.

To illustrate, an official from an urban health system in 

the Southwest told us that to improve the quality of care, they 

implemented a financial incentive program to reward physicians who met 

certain quality measures. To comply with the Stark law, the health system 

structured its program to comply with the bona fide employment 

66Financial incentive programs could be structured so that they do not implicate one or 

more of these laws. For example, HHS stated that a program limited to commercial 

patients might not implicate any of the laws. 

67Legal experts told us that while the anti-kickback statute is complicated, they find it 

easier to comply with than the Stark law due to the anti-kickback statute’s intent 

requirement. 
 

Page 20 GAO-12-355 Health Care Financial Incentive Program Implementation

exception.68 Employed physicians are rewarded for meeting certain 

clinical outcome quality measures, such as diabetes glucose measures 

and pediatric immunizations, as well as patient satisfaction measures. 

The program only includes the hospital’s employed physicians, who 

constitute less than 10 percent of the physicians who provide services at 

the hospital. As a result, this financial incentive program does not align 

incentives between the health system and independent physicians who 

have privileges at the hospital. To incentivize quality improvement on a 

broader scale, hospital officials told us they were able to use another 

Stark law exception to implement a separate financial incentive program 

to include independent physicians. Specifically, because the health 

system had a health plan component, the health system was able to use 

the physician incentive plan exception in creating a financial incentive 

program for independent physicians to reward them for meeting a 

separate set of quality measures—the Healthcare Effectiveness Data 

Information Set (HEDIS).69 The physician incentive plan exception 

permits financial incentive plans that are administered and paid through 

health plans under certain conditions. Hospitals or health systems without 

a health plan component would have to design a financial incentive 

program to fit into other exceptions to include independent physicians.70

 

68An official told us the health system was not concerned about implicating the antikickback statute with the implementation of their program because of the anti-kickback 

statute’s intent requirement. The Stark law’s bona fide employment exception conditions 

the exception on the employment being for identifiable services, the remuneration paid 

under the employment being consistent with fair market value and not determined in a 

way that takes into account the volume or value of referrals, and the remuneration 

provided being commercially reasonable even if no referrals were made to the employer. 

42 C.F.R. § 411.357(c). Generally, the bona fide employment safe harbor permits 

amounts paid by an employer to an employee who has a bona fide employment 

relationship for the furnishing of services for which payment is made under Medicare. 

42 C.F.R. § 1001.952(i).

Additionally, operating multiple financial incentive programs covering 

different populations of physicians may create potential inefficiencies 

through redundancy or conflicting program objectives.

69HEDIS contains 75 measures, including blood pressure control measures, cancer 

screenings, immunizations, and comprehensive diabetes care measures. 

70Legal experts we spoke with told us they can rely on the following Stark exceptions and 

anti-kickback safe harbors: risk-sharing exception and safe harbor, personal services 

arrangement exception and safe harbor, fair market value exception, indirect 

compensation exception, prepaid plan exception, academic medical center exception, 

physician incentive plan exception, and the managed care safe harbor.
 

Page 21 GAO-12-355 Health Care Financial Incentive Program Implementation

In addition, most of the legal experts we spoke with told us that it is 

difficult for health systems to navigate the Stark law, and one legal expert 

told us that as a result health systems have terminated existing financial 

incentive programs or refrained from starting new programs. Some legal 

experts also told us that the requirements for complying with the Stark 

exceptions are difficult to apply when crafting financial incentive 

programs. In particular, they told us it is challenging to establish whether 

incentive payments meet the Stark fair market value exception, which in 

part requires that compensation be consistent with fair market value of 

services provided.71

Some legal experts also told us that many of the Stark exceptions on 

which they rely require that compensation, including incentive payments 

from hospitals to physicians, not reflect the volume or value of referrals 

made by the physician.

One legal expert we spoke with noted that the Stark 

law’s fair market value exception potentially applies to payments from 

hospitals to physicians. For salary, the fair market value exception can be 

satisfied by using published surveys of wages to determine the fair 

market value of services provided. However, according to this legal 

expert, the exception becomes more difficult to apply when trying to 

determine the fair market value in connection with incentive payments, 

separate from compensation, for meeting performance goals. Specifically, 

some legal experts told us that the exception is unclear about how to 

measure the fair market value of services when those services involve 

meeting a clinically based outcome measure for a financial incentive 

program to improve quality. Additionally, it would be difficult to calculate 

the value of services not provided as a result of the physician providing 

higher quality care leading to better health outcomes.

72

 

7142 C.F.R. § 411.357(l). 

To comply with this requirement, financial 

incentive programs may be structured so that incentive payments are 

distributed to all participating physicians without being directly related to 

any individual physician’s compliance with quality improvement criteria. 

Therefore, all participating physicians would receive the same payment 

without necessarily contributing the same level of effort. As a result, 

according to some of the legal experts we spoke with, an 

underperforming physician would not have an incentive to change his or 

her practices to improve the quality of care.

72E.g., 42 U.S.C. §§ 1395nn(e)(2)(ii), 1395nn(e)(3)(A)(v), 1395nn(e)(5)(B).
 

Page 22 GAO-12-355 Health Care Financial Incentive Program Implementation

Financial incentive programs limited to commercial patients may also 

implicate federal fraud and abuse laws. Some legal experts and health 

systems we spoke with told us it is difficult to separate commercial 

patients from Medicare patients for the purposes of financial incentive 

programs. Financial incentive programs limited to commercial patient 

populations may “spill over” to Medicare patients. For example, a financial 

incentive program that rewards quality improvement for commercial 

patient outcomes may influence how a participating physician treats 

Medicare patients. To protect themselves from Stark law and antikickback statute violations, health systems may structure their programs 

to fit into an exception or safe harbor in case a Medicare patient is 

inadvertently included in the program. For example, officials from a 

hospital system in a major urban area in the Midwest told us the hospital 

entered into a financial incentive program to share savings with a 

commercial payer for its commercial patient population only. These 

officials told us their program only includes employed physicians to further 

protect the providers from Stark law or anti-kickback statute violations if a 

Medicare patient is inadvertently included in the program.

Financial incentive programs limited to commercial patients also might 

include Medicare patients in other ways. For example, a commercial 

insurer that used a hospital’s achievement of quality benchmarks could 

include the hospital’s Medicare patients in determining whether the 

benchmarks are met. In 2008, OIG issued a favorable advisory opinion in 

response to a request from a hospital seeking to implement a financial 

incentive program to reward physicians for meeting quality targets for 

commercial patients.73 The requester-hospital was participating in a payfor-performance program with a private insurer, under which the hospital 

would be rewarded with a bonus payment for achieving quality targets 

based on health outcomes of all patients, including Medicare patients.74

 

73U.S. Dept. of Health and Human Services, Office of Inspector General, OIG Adv.Op. 

08-16 (Washington, D.C.: Oct. 14, 2008).

The hospital stated that it needed to implement a financial incentive 

program with its physicians in order to achieve those quality targets and 

would reward physicians with a share of the bonus payment received 

from the private insurer. OIG determined that the program implicated the 

anti-kickback statute because the program relied on all hospital patient 

74In addition, the arrangement between the insurer and the hospital would reward the 

hospital for meeting efficiency measures.
 

Page 23 GAO-12-355 Health Care Financial Incentive Program Implementation

data, which included data for Medicare patients, instead of using only 

commercial patient data, to determine incentive payments for 

physicians.75

OIG officials told us that they did not take any Stark law or anti-kickback 

statute enforcement actions on the basis of providers’ implementation of 

pay-for-performance programs or gainsharing arrangements from fiscal 

years 2005 through 2010. Additionally, DOJ officials were unable to 

identify any DOJ FCA settlements involving the Stark law or anti-kickback 

statute that were based on the implementation of such programs during 

the same time period. However, some legal experts we spoke with told us 

that although there have not been any FCA cases or settlements, the 

threat of being the first case has created a chilling effect for providers. 

Some legal experts told us that as a result, their clients were conservative 

when implementing such programs.

In its advisory opinion on the matter, however, OIG elected 

not to impose sanctions for this program.

In addition to the Stark law and anti-kickback statute, hospitals must 

comply with the CMP law, which OIG interpreted in a 1999 Special 

Advisory Bulletin (SAB) as prohibiting payments from hospitals to 

physicians to induce a reduction or limitation in Medicare services for 

hospital patients, even if the services are not medically necessary.76

 

75OIG determined that the program also implicated the CMP law because adherence to 

quality standards under the program could induce physicians to reduce or limit current 

levels of items or services provided to Medicare patients, but elected not to impose 

sanctions. For example, if adherence to a quality standard results in physicians 

discontinuing an item or service sooner than would be their practice in the absence of the 

financial incentive program, then a limitation of items or services would occur.

A 

violation of the CMP law may result if the hospital knows that the payment 

may influence the physician to reduce or limit services, even if the 

payment is not tied to a specific patient or to an actual diminution in care. 

Any hospital financial incentive program that encourages physicians 

through payments, indirectly or directly, to reduce or limit clinical services 

violates the CMP law. Unlike the Stark law and anti-kickback statute, the 

CMP law does not have any statutory exceptions nor does it give OIG the 

authority to create regulatory exceptions. However, OIG has issued 

76Publication of the OIG Special Advisory Bulletin on Gainsharing Arrangements and 

CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries, 

64 Fed. Reg. 37,985 (July 14, 1999).

Stakeholders Reported 

That OIG Interpretation of 

CMP Law Diminished 

Ability to Reward Any 

Service Reduction or 

Limitation, Including 

Services Not Medically 

Necessary
 

Page 24 GAO-12-355 Health Care Financial Incentive Program Implementation

advisory opinions effectively permitting certain financial incentive 

programs that would otherwise violate the CMP law.

OIG considers the CMP law a reflection of congressional concern that 

payments from hospitals to physicians may result in stinting on care.77 In 

its SAB, OIG stated that the CMP law is intentionally broad, and noted in 

the SAB that the plain language of the statute does not limit its application 

to those services that are “medically necessary.” According to OIG 

officials, historically the CMP law developed as a patient quality of care 

law, not just a restriction on financial relationships. In addition, the SAB 

indicated that OIG’s interpretation of the CMP law was based, in part, on 

Congress’s inclusion of “medically necessary” in the law for MCOs. 

According to OIG officials, OIG interpreted the enactment of a separate 

law for MCOs to reflect the difference between MCOs and hospitals. They 

stated that MCOs, unlike hospitals, can more readily identify the patients 

participating in the network. OIG further reasoned that patients who enroll 

in an MCO understand that their physicians will have an economic 

incentive with respect to managing their care, and in return, patients 

share in any savings through increased benefits, such as reduced 

copayments and the addition of outpatient prescription drug coverage.78

According to OIG, hospitals may align incentives with physicians to 

achieve cost savings through means that do not violate the CMP law. For 

example, depending on the circumstances, an arrangement where the 

hospital pays the physicians a fixed fee that is fair market value for 

specific services rendered would compensate the physicians for their 

effort and not for a reduction or limitation in services. Achieving savings 

through actions that do not adversely affect the quality of patient care 

By contrast, in OIG’s view, patients in traditional Medicare incur 

substantial additional financial obligations in exchange for access to 

physicians of their choice.

 

77In the SAB, OIG pointed to a congressional report noting that a committee of jurisdiction 

believed that such incentive payments created a conflict of interest that may limit the 

ability of the physician to exercise independent professional judgment in the best interest 

of the patient. Additionally, OIG cited a 1986 GAO report that evaluated the potential for 

abuse in financial incentive programs. See GAO, Medicare: Physician Incentive Payments 

by Hospitals Could Lead to Abuse, GAO/HRD-86-103 (Washington, D.C.: July 22, 1986).

78U.S. Dept. of Health & Human Services, Office of Counsel to the Inspector General, 

Recent Commentary Distorts HHS IG’s Gainsharing Bulletin, available at 

http://oig.hhs.gov/fraud/docs/alertsandbulletins/bnagain.htm. 
 

Page 25 GAO-12-355 Health Care Financial Incentive Program Implementation

may require substantial effort on the part of the physicians. Depending on 

the circumstances, if the financial incentive program is based on the 

physician’s efforts rather than a percentage of cost savings, the program 

may not violate the CMP law.79

One legal expert and an industry group stakeholder we spoke with 

consider OIG’s interpretation of the CMP law overly broad—prohibiting 

payment from hospitals to physicians to induce the reduction or limitation 

of any service, regardless of medical necessity. In February 2009, an 

industry group stakeholder wrote to OIG contending that the agency 

should interpret the CMP law in the context of Medicare’s requirements 

that only medically necessary services are covered by the program. Since 

Medicare only covers medically necessary services, and the CMP law 

prohibits reduction or limitation of Medicare services, according to this 

stakeholder, the CMP law should be interpreted as prohibiting a reduction 

or limitation of medically necessary services.

According to OIG officials, even if the 

program leads to a reduction or limitation of services, as long as the 

payment is not for the purpose of reducing services, the program would 

not violate the CMP law. For example, a hospital could pay a physician to 

complete his or her rounds by a specific time, which may result in patients 

being evaluated for discharge earlier. The payment is not tied to a 

reduction or limitation of services, but if patients are not hospitalized 

longer than necessary, this arrangement makes it possible for the hospital 

to be efficient and reduce costs.

Some legal experts we spoke with and two industry group stakeholders 

consider the CMP law a major hurdle to the development and 

implementation of financial incentive programs that allow the hospital to 

reward physicians for lowering hospital costs and improving quality by 

reducing medically unnecessary services. Similarly, an industry group 

stakeholder, in a September 2010 statement to OIG, claimed that the 

CMP law constrains the development of financial incentive programs that 

would align hospital and physician incentives to provide more costeffective care by, for example, encouraging more careful choice among 

available generic and brand name drugs or use of outpatient rather than 

inpatient services. This stakeholder noted that physicians are concerned 

that participation in such gainsharing arrangements exposes them to 

 

79These financial incentive programs would need to comply with the Stark law and 

anti-kickback statute.
 

Page 26 GAO-12-355 Health Care Financial Incentive Program Implementation

liability under the CMP law. Another industry group stakeholder, in a 

May 2008 statement, asserted that the CMP law has dissuaded providers 

from pursuing financial incentive programs using specific practice 

protocols, even those based on clinical evidence and recognized as best 

practices, because of provider concern that OIG might find that the 

program provided an incentive to reduce or limit services.

Some legal experts told us that their health system clients have 

implemented financial incentive programs to reward quality, and they also 

include efficiency measures that could reduce or limit services but do not 

tie incentive payments to these measures to avoid implicating the CMP 

law. Although physicians are not rewarded for meeting these efficiency 

measures, their performance in meeting these benchmarks may be 

monitored and information may be shared with the physician as 

feedback,80 possibly providing a nonfinancial incentive to improve 

efficiency. For example, one legal expert described an arrangement 

between a hospital and its independent physicians to reward quality. The 

original goal of the program was to reduce the length of stay for patients. 

In addition to quality measures such as adhering to clinical protocols and

meeting patient satisfaction benchmarks, the hospital wanted to include 

efficiency measures, such as standards for inpatient admission that could 

have limited admissions, but the physicians’ attorney was concerned that 

the program would violate the CMP law. Specifically, the attorney was 

concerned that including standards for inpatient admissions could lead to 

a reduction of services if, for example, a patient who did not meet these 

standards was denied admission to the hospital even if admission was 

not necessary. In response to these concerns, the hospital tied incentive 

payments only to quality measures.81

 

80In our work on physician profiling, a review of the literature suggested that without other 

incentives, feedback alone has no more than a moderate influence on physician 

performance. However, the potential influence of feedback from CMS regarding Medicare 

costs is uncertain, and may be greater than that of feedback from other sources, because 

Medicare reimbursement typically represents a larger share of physicians’ practice 

revenues than that from other insurers. Factors that appear to influence the effectiveness 

of feedback include its source, frequency, and intensity. See 

Although the program retained the 

GAO-09-802. CMS is 

implementing a feedback program with physicians. GAO, Medicare Physician Feedback 

Program: CMS Faces Challenges with Methodology and Distribution of Physician Reports, 

GAO-11-720 (Washington, D.C.: Aug. 12, 2011).

81This legal expert told us that clients tend to be conservative and are reluctant to move 

forward with the financial incentive program even when he advises them that the 

arrangement would not violate the CMP law.
 

Page 27 GAO-12-355 Health Care Financial Incentive Program Implementation

efficiency measures, such as medically inappropriate days, these 

measures were tied to widely used clinical standards,

82 no payment was 

tied to them, and they were used only to collect information on physician 

performance.83

In its 1999 SAB, OIG interpreted the CMP law to prohibit gainsharing 

arrangements in response to hospitals’ implementation of “black box” 

gainsharing arrangements in the 1990s. In OIG’s view, those gainsharing 

arrangements, in which physicians were paid for overall cost savings 

without the hospitals determining the specific actions the physicians took 

to generate the savings, posed a high risk of abuse.84 According to OIG, 

the black box gainsharing arrangements provided little accountability, 

insufficient safeguards against improper referral payments, and lacked 

objective performance measures to ensure that quality of care was not 

adversely affected.85

 

82Specifically, this financial incentive program included the InterQual criteria as its 

measures. The InterQual criteria represent criteria to evaluate the appropriateness of 

medical care, based on an assessment of the patient’s clinical status, and include, as part 

of clinical or quality protocols, standards for appropriate admissions and avoidable days of 

stay. Additionally, CMS uses the InterQual criteria as part of its inpatient services auditing 

program.

In various documents addressing the matter, OIG 

has noted its concern with the potential effect gainsharing has on the 

quality of care provided to Medicare patients. Specifically, OIG’s concerns 

83The legal expert who described this arrangement told us that the program had reduced 

the average length of stay by 2 days while maintaining quality of care for patients

84OIG was concerned that in order to retain or attract high-referring physicians, hospitals 

would be under pressure from competitors and physicians to increase the percentage of 

savings shared with the physicians, manipulate the hospital accounts to generate 

phantom savings, or otherwise game the arrangement to generate income for referring 

physicians. 

85OIG advisory opinions have noted that many gainsharing arrangements contain features 

that heighten the risk that payments will lead to inappropriate reductions or limitations of 

services. These features include, but are not limited to, a lack of a demonstrable direct 

connection between individual actions and any reduction in the hospital’s out-of-pocket 

costs and any corresponding gainsharing payment; the individual actions that would give 

rise to the savings are not identified with specificity; there are insufficient safeguards 

against the risk that other, unidentified actions, such as premature hospital discharges, 

might actually account for any savings; the quality-of-care indicators are of questionable 

validity and statistical significance; and there is no independent verification of cost 

savings, quality-of-care indicators, or other essential aspects of the arrangement. See, 

e.g., U.S. Dept. of Health & Human Services, Office of Inspector General, OIG Adv.Op. 

05-04 (Washington, D.C.: Feb. 10, 2005). 

OIG Permits Certain 

Financial Incentive 

Programs through Its 

Advisory Opinion Process, 

but Stakeholders Reported 

Challenges in 

Implementing These 

Programs
 

Page 28 GAO-12-355 Health Care Financial Incentive Program Implementation

include stinting on patient care, “cherry picking” healthy patients and 

steering sicker and more costly patients to hospitals that do not offer such 

arrangements, payments in exchange for patient referrals, and unfair 

competition among hospitals offering cost-sharing programs to foster 

physician loyalty and to attract more referrals.

OIG has recognized, however, that certain gainsharing arrangements 

may reduce costs and improve quality without compromising care or 

rewarding referrals. Specifically, OIG has recognized that certain 

gainsharing arrangements, while potentially violating the CMP law and 

the anti-kickback statute, present a minimal risk of fraud and abuse that 

these laws were intended to address. On this basis, OIG has indicated 

that it would not subject specific arrangements approved in advisory 

opinions to sanctions. Through its advisory opinion process, OIG has 

evaluated certain gainsharing arrangements that could implicate the CMP 

law and anti-kickback statute. Since 2001, OIG has issued 14 advisory 

opinions on specific gainsharing arrangements.86

In evaluating the risks posed by these gainsharing arrangements, OIG 

looked for measures that promote accountability, provide adequate 

quality controls, and protect against payments for referrals. The cost 

saving measures included in the approved gainsharing arrangements can 

generally be categorized as product standardization measures, product 

substitution, opening packaged items only when needed, or limiting the 

In these opinions, OIG 

concluded that the arrangements presented a low risk of abuse and that 

they would not, therefore, be subject to sanction. While OIG advisory 

opinions provide important guidance to providers about what may or may 

not be sanctioned by OIG, the opinions only address the anti-kickback 

statute and the CMP law. Because CMS, not OIG, has responsibility for 

interpreting the Stark law, OIG gainsharing opinions do not address the 

legality of these arrangements under the Stark law. CMS has not received 

any requests to issue advisory opinions on gainsharing arrangements, 

and therefore has not done so.

 

86U.S. Dept. of Health & Human Services, Office of Inspector General, OIG Adv.Op. 01-01

(Washington, DC: Jan. 11, 2001); OIG Adv.Op. 05-01 (Jan. 28, 2005); OIG Adv.Op. 05-02

(Feb. 10, 2005); OIG Adv.Op. 05-03 (Feb. 10, 2005); OIG Adv.Op. 05-04 (Feb. 10, 2005); 

OIG Adv.Op. 05-05 (Feb. 18, 2005); OIG Adv.Op. 05-06 (Feb. 18, 2005); OIG Adv.Op. 

06-22 (Nov. 9, 2006); OIG Adv.Op. 07-21 (Dec. 28, 2007); OIG Adv.Op. 07-22 (Dec. 28, 

2007); OIG Adv.Op. 08-09 (July 31, 2008); OIG Adv.Op. 08-15 (Oct. 6, 2008); OIG 

Adv.Op. 08-21 (Nov. 25, 2008); OIG Adv.Op. 09-06 (June 23, 2009).
 

Page 29 GAO-12-355 Health Care Financial Incentive Program Implementation

use of certain supplies or devices.87

• specific cost-saving actions and resulting savings that are clearly and 

separately identified;

The arrangements included similar 

features that, when taken together, OIG determined they provided 

sufficient safeguards to reduce the risk of program and patient abuse so 

that OIG would not seek sanctions against the health system for violation 

of the CMP law. These safeguards include

• credible medical support that implementation of the arrangement 

would not adversely affect patient care;

• payments that are based on all procedures and do not reflect the 

differences among individual patients’ insurance coverage;

• protection against inappropriate reductions in services by utilizing 

objective historical and clinical measures to establish baseline 

thresholds below which no savings accrue to the physicians;

• protections in the product standardization portion of the arrangement 

to further protect against inappropriate reductions in services by 

ensuring that individual physicians will still have available the same 

selection of devices after implementation of the arrangement as 

before;

• written disclosure provided to patients whose care may be affected by 

the arrangement and an opportunity for patients to review the cost 

savings recommendations prior to admission to the hospital;

• financial incentives that are reasonably limited in duration and 

amount; and

 

87Examples of cost-saving measures included in gainsharing arrangements permitted by 

OIG: Product standardization and substitution include standardizing the types of cardiac 

catheterization devices, such as stents and balloons, which are used by the physicians, 

and substituting types of items and services for which product substitution will have no 

appreciable clinical significance, such as utilizing reusable warming blankets to maintain 

body temperature. Opening packaged items only when needed includes having 

disposable equipment available to the physician, but only opening the packaging when 

needed. Use-as-needed measures include limiting the use of a specific medication given 

to many surgical patients preoperatively to prevent hemorrhaging to patients that are at 

higher risk of perioperative hemorrhage as indicated by objective clinical standards.
 

Page 30 GAO-12-355 Health Care Financial Incentive Program Implementation

• profits that are distributed to the physicians on a per capita basis, 

mitigating any incentive for an individual physician to generate 

disproportionate cost savings.

According to OIG, improperly designed or implemented arrangements 

could be vehicles to disguise payments for referrals. OIG found that the 

specific gainsharing arrangements evaluated in the advisory opinions 

could violate the anti-kickback statute, but the agency stated it would not 

impose sanctions for those arrangements because they included 

safeguards that reduced the likelihood that the arrangement would be 

used to attract referring physicians or to increase referrals from existing 

physicians. Due to the circumstances of the arrangements, as well as the 

included safeguards, OIG determined that the arrangements presented a 

low risk of fraud or abuse under the anti-kickback statute. Although the 

advisory opinions have focused on specific service lines, such as cardiac 

and orthopedic surgery, OIG officials stated that they are willing to 

evaluate gainsharing arrangements for other service lines. However, to 

date, OIG has not been asked to do so.

In February 2009, one industry group stakeholder asked OIG in writing to 

withdraw the agency’s SAB that interpreted the CMP law as prohibiting 

gainsharing. The industry group asserted that the agency’s subsequent 

advisory opinions permitting implementation of certain gainsharing 

arrangements represent an “implicit acknowledgment that the 

experiences and context that gave rise to the 1999 Bulletin [SAB] have 

changed significantly.” Specifically, according to this stakeholder, tools, 

such as the proliferation of quality measures, are now available to prevent 

financial incentives from causing harm to patients. However, according to 

OIG officials, although the health care delivery environment has changed 

since the CMP law was enacted, the payment systems that led to the 

enactment of the CMP law are still in use.

Legal experts and stakeholders told us that multiple challenges are 

associated with implementing gainsharing arrangements since OIG 

issued its SAB, despite the availability of OIG’s advisory opinion process. 

Some legal experts told us they were reluctant to use the advisory opinion 

process because it is expensive and time-consuming. Some experts 

noted that, in their experience, legal expenses incurred in obtaining an 

advisory opinion ranged from $15,000 to over $50,000 depending on the 

complexity of the arrangement, in addition to other costs associated with 
 

Page 31 GAO-12-355 Health Care Financial Incentive Program Implementation

developing arrangements.88 The financial incentive program expert we 

spoke with reported that it took over a year of review before OIG issued 

its first advisory opinion approving a novel gainsharing program.89

Health systems implementing gainsharing arrangements have structured 

their arrangements to be identical to those already approved, thereby 

lowering but not eliminating the overall risk that the arrangement would 

result in sanction for violating the CMP law. For example, we spoke with 

officials from a health system in the Northeast that is implementing a 

gainsharing arrangement with its orthopedics division. According to these 

officials, the health system is relying exclusively on the elements of 

previous OIG gainsharing advisory opinions to define the parameters of 

its gainsharing arrangement. Officials told us that they will not be pursuing 

areas for savings that OIG has not previously approved. However, even 

when implementing a gainsharing arrangement that has already been 

approved, legal experts told us there are challenges. Some legal experts 

told us that gainsharing arrangements permissible under OIG’s advisory 

opinions are narrow, and the approved gainsharing arrangements focus 

on certain procedural areas and include specific measures, such as 

limiting the use of certain surgical supplies and substitution of less costly 

items for those items currently used by the physicians. In addition, 

financial incentives to physicians must be distributed equally per capita 

regardless of the level of effort on the part of the physician.

Some 

industry group stakeholders said that because the advisory opinions are 

only applicable to the requesting health system, other health systems 

cannot rely on the advisory opinions for assurance that OIG will not 

enforce the CMP law, even though OIG officials told us the agency did 

not take any enforcement actions against financial incentive programs for 

fiscal years 2005 through 2010.

 

88In addition to legal fees, health systems looking to develop financial incentive programs, 

including gainsharing arrangements, may have other expenses such as consulting fees 

and other internal system costs. One legal expert we spoke with told us that his clients’ 

reluctance to implement these gainsharing arrangements was due, in part, to business 

considerations. Specifically, the costs associated with developing the arrangement may 

outweigh the potential quality and efficiency benefits of the arrangement. According to 

him, these costs are inherent to the development of gainsharing arrangements and not 

due to the requirements of OIG advisory opinions.

89One legal expert told us that during this review process, a program can be started while 

waiting for the advisory opinion to be issued; however, money cannot be shared with the 

physicians during this time. Instead, the money can be put in an escrow account and 

distributed after a favorable advisory opinion is issued.
 

Page 32 GAO-12-355 Health Care Financial Incentive Program Implementation

HHS has permitted implementation of certain financial incentive programs 

that otherwise might not be permitted under federal fraud and abuse laws, 

but it has required safeguards to protect program and patient integrity. 

CMS has conducted these programs through authorized demonstration 

projects, the Medicare Shared Savings Program, and the Innovation 

Center. These demonstration projects and programs are designed for 

specific types of providers and health systems, and some health systems 

may not be willing or eligible to participate.

CMS has conducted demonstration projects to test financial incentive 

programs that include safeguards to protect program and patient integrity. 

For example, CMS, as authorized by the Deficit Reduction Act of 2005,90

designed the Medicare Hospital Gainsharing Demonstration to determine 

whether gainsharing arrangements could align incentives between 

hospitals and physicians to improve the quality and efficiency of care as 

well as hospital operation and financial performance.91

According to CMS officials, CMS has incorporated safeguards from 

previous demonstrations and MCOs in its rule for the Medicare Shared 

Savings Program, which allows ACOs to participate in a shared savings 

arrangement with the Medicare program. The Medicare Shared Savings 

Program is designed to pay providers on a fee-for-service basis, and will, 

The demonstration 

project involved arrangements between hospitals and physicians under 

which the hospitals made gainsharing payments to physicians that were a 

share of the savings incurred directly as a result of collaborative efforts to 

improve overall quality and efficiency. CMS officials told us that this 

demonstration incorporated safeguards to protect program and patient 

integrity. Specifically, these safeguards included the requirement that 

providers meet quality thresholds by linking incentive payments to quality 

measures; that the financial incentive payment be limited to 25 percent of 

the amount normally paid for similar cases; and that payments not be 

based on the volume or value of referrals. CMS monitored physician 

referral and admission patterns throughout the demonstration to ensure 

that care provided to patients was not compromised. Although CMS has 

not completed its evaluation of this demonstration, officials told us they 

had not observed participants engaging in fraudulent behavior or become 

aware of harmful effects on patients.

 

90Pub. L. No. 109-171, § 5007, 120 Stat. 4, 34 (2006).

91This project began October 1, 2008, and expired on September 30, 2011.

HHS Has Approved 

Otherwise Prohibited 

Financial Incentive 

Programs That 

Incorporate 

Safeguards, under 

Demonstration 

Project and Other 

Authorities 
 

Page 33 GAO-12-355 Health Care Financial Incentive Program Implementation

at least in theory, help align incentives by sharing potential savings with 

providers that agree to meet quality and efficiency standards. According 

to CMS, the program incorporates the following broad categories of 

safeguards: quality measures;92 legal structure and governance 

requirements;93 patient-centeredness;94 monitoring;95 disclosure and 

transparency requirements;96 and program integrity screens.97 These 

safeguards are intended to protect patient and program integrity by 

ensuring that patient needs and experiences inform the delivery of care 

and ACO governance. An ACO’s continued participation in the Medicare 

Shared Savings Program is contingent on its performance. CMS has the 

authority to terminate an ACO’s participation in the program based on the 

agency’s findings.

 

92There are 33 quality measures across four domains: Patient/Caregiver Experience, Care 

Coordination/Patient Safety, Preventive Health, and At-Risk Population.

93Each ACO must establish a mechanism for shared governance and have a leadership 

and management structure that includes clinical and administrative systems. An ACO’s 

governing body should include ACO participants and a Medicare beneficiary.

94Among other things, an ACO must have processes in place to promote patient 

engagement that address the following: compliance with beneficiary experience of care 

survey requirements; compliance with the beneficiary representation requirements; a 

process for evaluating the health needs of the ACO’s population, including consideration 

of diversity in its patient populations and a plan to address the needs of its population; 

communication of clinical knowledge/evidence-based medicine to beneficiaries in a way 

that is understandable to them; beneficiary engagement and shared decision making that 

takes into account the beneficiaries’ unique needs, preferences, values, and priorities; and 

written standards for beneficiary access and communication, and a process for 

beneficiaries to access their medical records.

95CMS will use a range of methods to monitor and assess the performance of ACOs, 

including but not limited to any of the following, as appropriate: (1) analysis of specific 

financial and quality measurement data reported by the ACO as well as aggregated 

annual and quarterly reports; (2) analysis of beneficiary and provider complaints; and 

(3) audits, including, for example, analysis of claims, chart review (medical record), 

beneficiary survey reviews, coding audits, and on-site compliance reviews.

96In addition to the data ACOs must report to CMS, ACOs must report specified 

information publicly. 

97According to CMS officials, among other things, CMS will screen ACOs and ACO 

participants during its review of ACO applications and throughout the course of the ACOs’ 

participation in the Medicare Shared Savings Program against the List of Excluded 

Individuals and Entities (those excluded from federal health care programs). 
 

Page 34 GAO-12-355 Health Care Financial Incentive Program Implementation

CMS and OIG have issued an interim final rule with comment period that 

establishes waivers of the fraud and abuse laws for the Medicare Shared 

Savings Program, including, among others, a shared savings distribution 

waiver.98 This waiver applies to distribution of shared savings from the 

ACO and within the ACO to ACO participants or ACO providers or

suppliers. It also applies to the distribution of shared savings to providers 

outside the ACO but only for activities that are reasonably related to the 

purposes of the Medicare Shared Savings Program. In both cases, 

among other requirements,99 CMS and OIG require that the ACO does 

not limit or reduce medically necessary services.100

 

98Medicare Program; Final Waivers in Connection with the Shared Savings Program, 

76 Fed. Reg. 67,992 (Nov. 2, 2011). CMS and OIG included the following additional 

waivers for ACOs participating in the Medicare Shared Savings Program: (1) an “ACO

pre-participation” waiver of the fraud and abuse laws that applies to ACO-related start-up 

arrangements in anticipation of participating in the Medicare Shared Savings Program, 

subject to certain limitations, including limits on the duration of the waiver and the types of 

parties covered; (2) an “ACO participation” waiver of the fraud and abuse laws that applies 

broadly to ACO-related arrangements during the term of the ACO’s participation 

agreement under the Medicare Shared Savings Program and for a specified time 

thereafter; (3) a “compliance with the Stark law” waiver of the anti-kickback statute and 

CMP law for ACO arrangements that implicate the Stark law and meet an existing 

exception; and (4) a “patient incentive” waiver of the anti-kickback statute and the 

provision of the CMP law addressing inducements to beneficiaries for medically related 

incentives offered by ACOs under the Medicare Shared Savings Program to beneficiaries 

to encourage preventive care and compliance with treatment regimes.

The waiver covers the 

distribution of savings accrued during the period in which the ACO is 

99In order for the fraud and abuse laws to be waived for the distribution or use of shared 

savings under this particular waiver, the ACO must meet the following conditions: (1) the 

ACO has entered into a participation agreement and remains in good standing under its 

participation agreement; (2) the shared savings are earned by the ACO pursuant to the 

Medicare Shared Savings Program; (3) the shared savings are earned by the ACO during 

the term of its participation agreement, even if the actual distribution or use of the shared 

savings occurs after the expiration of that agreement; (4) the shared savings are (a) 

distributed to or among the ACO’s ACO participants, its ACO providers or suppliers, or 

individuals and entities that were its ACO participants or its ACO providers or suppliers 

during the year in which the shared savings were earned by the ACO, or (b) used for 

activities that are reasonably related to the purposes of the Medicare Shared Savings 

Program; and (5) payments of shared savings distributions made directly or indirectly from 

a hospital to a physician are not made knowingly to induce the physician to reduce or limit 

medically necessary items or services to patients under the direct care of the physician.

100Payments made by a hospital to induce a physician to reduce or limit medically 

necessary care without providing acceptable alternative medically necessary care would 

not qualify for the waiver. For example, payments to discharge patients without regard to 

appropriate care transitions or payments to use a drug or device known to be clinically 

less effective do not qualify for the waiver.
 

Page 35 GAO-12-355 Health Care Financial Incentive Program Implementation

participating in the Medicare Shared Savings Program, even if those 

savings are distributed after this period. According to CMS and OIG, the 

waiver for the distribution of shared savings within the ACO is premised, 

in part, on recognition that an award of shared savings necessarily 

reflects the collective achievement by the ACO and its constituent parts of 

the quality, efficiency, and cost reduction goals of the Medicare Shared 

Savings Program. These goals are consistent with interests protected by 

the fraud and abuse laws.101

CMS officials told us the Innovation Center is also developing programs 

that use financial incentives and include safeguards used in CMS 

demonstrations and the Medicare Shared Savings Program. The 

programs will include safeguards such as using patient-centered factors 

including beneficiary survey results, provider profiles, and risk scores to 

monitor the success of these programs. For example, the Innovation 

Center has selected 32 organizations to participate in the Pioneer ACO 

Model.102 Unlike ACOs formed under the Medicare Shared Savings 

Program,103 the Pioneer ACO Model is targeted at organizations that are 

already coordinating care for a significant portion of patients under 

financial risk-sharing contracts and are positioned to transform both their 

care and financial models from fee-for-service to a value-based model.104

 

101According to HHS, PPACA provided the Department broad waiver authority for financial 

incentive programs under the Medicare Shared Savings Program. HHS used this authority

to allow many relationships that would have been covered under CMS’s proposed 2008 

Stark law exception.

CMS plans to safeguard against a reduction in necessary care in the 

102See Medicare Program; Pioneer Accountable Care Organization Model: Request for 

Applications, 76 Fed. Reg. 29,249 (May 20, 2011).

103The Pioneer ACO Model and the Medicare Shared Savings Program are distinct 

programs, and ACOs cannot participate in both programs; however, both programs share 

the same goals to improve care for individuals, improve health for populations, and slow 

growth in expenditures. The Pioneer ACO Model will complement the Medicare Shared 

Savings Program by testing models that may later be adopted in the Medicare Shared 

Savings Program.

104The Pioneer ACO Model offers multiple payment options. In the first 2 years, all 

payment options involve fee-for-service payments during the performance year with the 

opportunity to generate shared savings or shared losses at year-end (with higher levels of 

risk than in the Medicare Shared Savings Program). In the third year, Pioneer ACOs that 

have shown savings over the first 2 years will be eligible to receive population-based 

payments. Population-based payment is a per beneficiary per month payment intended to 

replace a significant portion of the ACO’s fee-for-service payment with a prospective 

payment. 
 

Page 36 GAO-12-355 Health Care Financial Incentive Program Implementation

models it tests through multiple mechanisms, including routinely 

analyzing data on service utilization, measuring beneficiary experience of 

care through surveys, and assessing beneficiary complaints. In the 

Pioneer ACO Model, CMS stated it will determine whether there are 

systematic differences in health status or other characteristics between 

patients who remain aligned with a given ACO over the life of the Pioneer 

ACO Model, and those who do not. ACOs that participate in the Pioneer 

ACO Model will also conduct surveys of their aligned beneficiaries on an 

annual basis, and according to CMS, the agency may investigate the 

practices of ACOs that generate beneficiary complaints. CMS stated it will 

also publicly report the performance of ACOs on quality metrics, including 

patient experience ratings, on its website.

CMS and OIG recognize that properly structured financial incentive 

programs have the potential to improve quality and reduce costs but that 

improperly structured programs can disguise payments for referrals or 

adversely affect patient care. The federal fraud and abuse laws discussed 

in this report apply variously to financial relationships among hospitals, 

physicians, and health plans, among other entities. As a type of financial 

relationship, health systems must take these laws into account when 

structuring financial incentive programs. Health systems can implement 

certain types of financial incentive programs through, for example, various 

Stark law exceptions, anti-kickback safe harbors, or the agencies’ 

advisory opinion processes, although hospitals may not reward the 

limitation or reduction of services—even those services that are not 

medically necessary—without first obtaining OIG approval.

Although health systems can implement certain types of financial 

incentive programs that may result in better patient health outcomes and 

lower health care costs, the challenges of implementing these programs 

within the current legal framework may, for some health systems, 

outweigh the potential benefits of doing so. As the stakeholders we spoke 

with reported, there are significant challenges to designing and 

implementing financial incentive programs through the available options. 

There are no exceptions and safe harbors specifically for financial 

incentive programs, and the Stark law’s “no risk” requirement for new 

exceptions, makes it difficult for CMS to craft an exception that allows for 

innovative, effective programs while ensuring that the Medicare program 

and patients face no risk from abuses. As such, the constraints of existing 

exceptions and safe harbors make it difficult to design and implement a 

comprehensive program for all participating physicians and patient 

populations. Furthermore, for some health systems, OIG’s interpretation 

Concluding 

Observations 
 

Page 37 GAO-12-355 Health Care Financial Incentive Program Implementation

of the CMP law constrains the development of financial incentive 

programs that would align hospital and physician incentives to provide 

more cost-effective care, and hospitals may be reluctant to pursue an 

advisory opinion because of the time, expense, and uncertainty involved. 

As a result, health systems are more likely to implement only those 

programs that mirror already approved programs or none at all.

CMS’s various demonstrations, the Medicare Shared Savings Program, 

and programs implemented by the Innovation Center provide other 

opportunities for some health systems to implement these programs 

without the associated challenges of conforming to some of the federal 

fraud and abuse laws. The demonstrations, however, are time-limited and 

not all health systems are eligible or willing to participate. Under the 

Medicare Shared Savings Program, which is a permanent program, CMS 

and OIG will waive fraud and abuse laws for financial incentive programs 

under certain circumstances, but there may be limits on health systems’ 

ability to participate.

Our work suggests that stakeholders’ concerns may hinder 

implementation of financial incentive programs to improve quality and 

efficiency on a broad scale. Different stakeholders—government agencies 

and health care providers—will likely continue to have differing 

perspectives about the optimal balance between innovative approaches 

to improve quality and lower costs and retaining appropriate patient and 

program safeguards.

HHS provided written comments on a draft of this report, which are 

reprinted in appendix I. HHS and DOJ provided technical comments 

which we incorporated as appropriate.

In its written comments, HHS sought to clarify the Department’s position 

on CMS’s use of its authorities to permit certain financial incentive 

programs—using regulatory exceptions and waivers—that the 

Department did not believe we had clearly described in the draft. 

Specifically, we had attributed the narrowness of the proposed 2008 Stark 

law exception to agency concern that financial incentive programs could 

be used to disguise payments for referrals or adversely affect patient 

care, as the agency had noted in the proposed rule. HHS clarified that the 

SSA requirement that Stark law exceptions pose “no risk of patient or 

program abuse” is a high standard that prevents the agency from 

balancing flexibility with beneficiary protection in creating exceptions. 

HHS commented that the narrowness of the proposed 2008 Stark law 

Agency Comments 

and Our Evaluation
 

Page 38 GAO-12-355 Health Care Financial Incentive Program Implementation

exception was dictated by this strict legal standard. HHS also commented 

that CMS has much greater authority in balancing flexibility with 

beneficiary protection under its waiver authority, and crafted much 

broader waivers when authorized to do so by the statutory authorities of 

the Medicare Shared Savings Program and Innovation Center. We 

modified the draft to reflect the agency’s position on this issue.

In addition, HHS commented that our draft focused on the shared 

savings-only waiver, rather than the full scope of waivers that CMS and 

OIG determined were necessary for the success of the program. We 

highlighted the shared savings distribution waiver as an example of a 

waiver of the fraud and abuse laws that ACOs can use when distributing 

savings to providers and suppliers, and included a description of the 

additional waivers in a footnote, which we determined was sufficient detail 

for this report.

HHS also commented that our discussion of the proposed 2008 Stark law 

exception does not include a discussion of the Medicare Shared Savings 

Program or Innovation Center waivers, which cover substantially the 

same gainsharing arrangements addressed in the proposed exception. 

We added a footnote addressing this issue but maintain that 

organizations that do not have programs under either the Medicare 

Shared Savings Program or Innovation Center are still required to comply 

with the Stark Law and its existing exceptions, which our stakeholders 

noted was challenging.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

date of the report. At that time we will send copies of the report to the 

Secretary of Health and Human Services and the U.S. Attorney General. 

This report also will be available at no charge on the GAO Web site at 

http://www.gao.gov. 
 

Page 39 GAO-12-355 Health Care Financial Incentive Program Implementation

If you or your staff have any questions about this report, please contact 

me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our 

offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. GAO staff who made key contributions to this 

report are listed in appendix II.

James Cosgrove

Director, Health Care
Page 40 GAO-12-355 Health Care Financial Incentive Program Implementation

List of Addressees

The Honorable Max Baucus

Chairman

Committee on Finance

United States Senate

The Honorable Michael F. Bennet

United States Senate

The Honorable Al Franken

United States Senate

The Honorable Kirsten Gillibrand 

United States Senate

The Honorable Kay Hagan

United States Senate

The Honorable Mark Udall

United States Senate

The Honorable Tom Udall

United States Senate

The Honorable Mark R. Warner

United States Senate
Appendix I: Comments from the Department of 

Health and Human Services

Page 41 GAO-12-355 Health Care Financial Incentive Program Implementation

Appendix I: Comments from the Department 

of Health and Human Services
Appendix I: Comments from the Department of 

Health and Human Services

Page 42 GAO-12-355 Health Care Financial Incentive Program Implementation
Appendix I: Comments from the Department of 

Health and Human Services

Page 43 GAO-12-355 Health Care Financial Incentive Program Implementation
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 44 GAO-12-355 Health Care Financial Incentive Program Implementation

James Cosgrove, (202) 512-7114, cosgrovej@gao.gov

In addition to the contact named above, Christine Brudevold, Assistant 

Director; Helen Desaulniers, Assistant General Counsel; Jasleen Modi; 

Elizabeth T. Morrison; Sarah Resavy; Lillian Shields; Hemi Tewarson; 

and Jennifer Whitworth made key contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 
Related GAO Products

Page 45 GAO-12-355 Health Care Financial Incentive Program Implementation

Medicare Physician Feedback Program: CMS Faces Challenges with 

Methodology and Distribution of Physician Reports. GAO-11-720. 

Washington, D.C.: August 12, 2011.

Value in Health Care: Key Information for Policymakers to Assess Efforts 

to Improve Quality While Reducing Costs. GAO-11-445. Washington, 

D.C.: July 26, 2011.

High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 

2011.

Medicare: Private Sector Initiatives to Bundle Hospital and Physician 

Payments for an Episode of Care. GAO-11-126R. Washington, D.C.: 

January 31, 2011.

Medicare: Per Capita Method Can Be Used to Profile Physicians and 

Provide Feedback on Resource Use. GAO-09-802. Washington, D.C.: 

September 25, 2009.

Medicare Physician Payment: Care Coordination Programs Used in 

Demonstration Show Promise, but Wider Use of Payment Approach May 

Be Limited. GAO-08-65. Washington, D.C.: February 15, 2008.

Medicare: Focus on Physician Practice Patterns Can Lead to Greater 

Program Efficiency. GAO-07-307. Washington, D.C.: April 30, 2007.

Medicare: Advisory Opinions as a Means of Clarifying Program 

Requirements. GAO-05-129. Washington, D.C.: December 8, 2004.

Medicare: Referrals to Physician-Owned Imaging Facilities Warrant 

HCFA’s Scrutiny. GAO/HEHS-95-2. Washington, D.C.: October 20, 1994.

Medicare: Physician Incentive Payments by Prepaid Health Plans Could 

Lower Quality of Care. GAO/HRD-89-29. Washington, D.C.: 

December 12, 1988.

Medicare: Physician Incentive Payments by Hospitals Could Lead to 

Abuse. GAO/HRD-86-103. Washington, D.C.: July 22, 1986.

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