Medicare: Implementation of Financial Incentive Programs under Federal Fraud and Abuse Laws
Released: 2012-04-30T00:00:00

Letter

Background

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.

Financial Incentive Programs

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’ efforts in controlling the costs and improving or maintaining the quality of patient care. These are often referred to as gainsharing arrangements.

Although results from financial incentive programs tried to date have been mixed, some experts believe they have the potential to increase quality and efficiency. explicit goals of quality improvement rather than efficiency improvement, these programs can improve quality and efficiency by rewarding physicians for adhering to clinical protocols. 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.

While pay-for-performance programs tend to have 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.

In 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.

Federal Fraud and Abuse Laws and Enforcement Mechanisms

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, unless the arrangement satisfies a statutory or regulatory exception. Studies have found that these self-referrals encouraged overutilization and increased health costs. The Stark law also prohibits these entities that perform the designated health services from presenting, or causing to be presented, claims to Medicare or billing any individual, third-party payer, or other entity for these services. The Stark law includes a number of exceptions and authorizes the Secretary of HHS to create regulatory exceptions for financial relationships that do not pose a risk of patient or program abuse. 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.

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 CMS is responsible for issuing regulations under the Stark programs. law and collecting payments made in violation of the law. OIG is responsible for enforcing the Stark law’s civil monetary penalties.

Civil 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.

Anti-kickback Statute

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, subject to statutory exceptions and regulatory safe harbors promulgated by OIG. 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.

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 anti- kickback 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. 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.

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. The statute does not contain 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. 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. OIG is responsible for enforcing the CMP law.

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. FCA prohibits certain actions, including the knowing presentation of a false claim for payment by the federal government. 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.

Those 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). 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.

Advisory Opinion Authority

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. CMS is required to issue advisory opinions on the Stark law, and OIG is required to issue advisory opinions on the CMP law and the anti-kickback statute, among other matters. 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 agencies incur in responding to the request.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.

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

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.

Financial Incentive Programs May Be Permitted under Stark and Anti-kickback Exceptions and Safe Harbors; Stakeholders Nevertheless Reported Challenges Structuring Permissible Programs

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. 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. 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 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 anti- kickback safe harbors, and the agency annually solicits input from providers on potential safe harbors, as required by statute.

Financial 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. exception. 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). 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. Additionally, operating multiple financial incentive programs covering different populations of physicians may create potential inefficiencies through redundancy or conflicting program objectives.

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. 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.

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. 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.

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

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 anti- kickback 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. The requester-hospital was participating in a pay- for-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. 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 data, which included data for Medicare patients, instead of using only commercial patient data, to determine incentive payments for physicians.not to impose sanctions for this program.

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

Stakeholders Reported That OIG Interpretation of CMP Law Diminished Ability to Reward Any Service Reduction or Limitation, Including Services Not Medically Necessary

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.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 A 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. 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. By contrast, in OIG’s view, patients in traditional Medicare incur substantial additional financial obligations in exchange for access to physicians of their choice.

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 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. 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.

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.

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 cost- effective 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 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, 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 Although the program retained the payments only to quality measures.efficiency measures, such as medically inappropriate days, these measures were tied to widely used clinical standards, no payment was tied to them, and they were used only to collect information on physician performance.

OIG Permits Certain Financial Incentive Programs through Its Advisory Opinion Process, but Stakeholders Reported Challenges in Implementing These Programs

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. 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 In various documents addressing the matter, OIG adversely affected.has noted its concern with the potential effect gainsharing has on the quality of care provided to Medicare patients. Specifically, OIG’s concerns 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 In these opinions, OIG opinions on specific gainsharing arrangements.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.

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 use of certain supplies or devices.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 specific cost-saving actions and resulting savings that are clearly and separately identified; 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 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 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 developing arrangements. 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. 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.

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.

HHS Has Approved Otherwise Prohibited Financial Incentive Programs That Incorporate Safeguards, under Demonstration Project and Other Authorities

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, 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. 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.

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, 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; legal structure and governance requirements; patient-centeredness; monitoring; disclosure and transparency requirements; and program integrity screens. 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.

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. 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, CMS and OIG require that the ACO does not limit or reduce medically necessary services.distribution of savings accrued during the period in which the ACO is The waiver covers the 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.

See Medicare Program; Pioneer Accountable Care Organization Model: Request for Applications, 76 Fed. Reg. 29,249 (May 20, 2011). 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.

Concluding Observations

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 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.

Agency Comments and Our Evaluation

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 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.

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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.

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

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.

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