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Will You Need to Compete in a Gainsharing Environment?
Martin Gold
Technology Access Partners
It’s no secret that policymakers are concerned about the solvency of the Medicare program. For several years, Congress has been grappling with ways to divide a shrinking pool of Medicare dollars among an ever-increasing number of Medicare beneficiaries. At the same time, healthcare costs continue to escalate, often as a result of new cutting-edge medical technologies that allow people to live longer lives with better quality.
While it’s clear that significant healthcare reform is necessary to secure the Medicare program for the next generation, the nature of the reform is still unclear. As a result, many cost-control programs are being beta-tested by Medicare and other policymakers. Gainsharing, a recent cost savings initiative, has device manufacturers both intrigued and apprehensive.
The concept of gainsharing is not a new idea, but until recently, it had been more theory than practice. In early 2005, the theory was put to the test. The Office of the Inspector General (OIG) approved several gainsharing programs that permit hospitals to share with their physicians the savings generated as a result of cost-reduction measures implemented by the physicians.1
The US healthcare system, especially as structured under the Medicare program, inadequately aligns the financial incentives of hospitals and physicians to properly control costs. Under the Medicare hospital payment system, hospitals are reimbursed a fixed amount per patient discharge (the DRG methodology) for providing care to patients. Except for a few extreme situations, the fixed payment is intended to pay for all costs regardless of whether those costs exceed or fall below the DRG payment. As a result, it is in a hospital’s best interest to control unnecessary utilization of services to keep costs down. Physicians, on the other hand, are reimbursed by Medicare based on a fee-for-service schedule. As a result, the more services a physician provides, the greater his or her reimbursement.
Gainsharing is an attempt to correct this failing of the system and align the financial incentives of hospitals and physicians to eliminate unnecessary costs. While this might appear to be an uncomplicated issue, a number of laws are in place to restrict hospitals and physicians from collaborating in this manner. In the late 1990s, several physician incentive programs were developed by hospitals to encourage physicians to practice in a more efficient and conscientious manner to reduce hospital costs. The savings generated by these efforts were then to be shared between the physicians and the hospital.
On July 14, 1999, the OIG issued a special advisory bulletin informing the healthcare industry that these programs potentially violated the civil monetary penalty (“CMP”), a law that prohibits hospitals from knowingly making a payment to a physician to reduce or limit services to Medicare or Medicaid beneficiaries. As a result of this ruling, gainsharing was effectively eliminated as a cost-control tool.
In January 2001, the OIG re-opened the door for gainsharing and stated that it would not impose sanctions against a properly structured gainsharing program—even though the program potentially violated CMP and other laws. In January and February 2005, the OIG approved the first six gainsharing deals between hospitals and their cardiac surgeons. Although cardiac surgery was the first specialty to be subject to this new program, orthopedics has also been identified as a likely target for similar gainsharing arrangements.
To properly understand why specialties such as cardiac surgery and orthopedics are attractive to gainsharing advocates, we must first analyze the source of the savings generated by gainsharing arrangements. It was made very clear by the OIG that savings could not be generated through reductions in patient care. A number of operational, clinical and financial safeguards were put in place by the OIG prior to approving these deals in order to protect patients. Therefore, the savings were to be derived from several non-patient care sources.
The first source of savings was to be generated by substituting less costly surgical and supply items for items currently used by physicians. The second source of savings was through the standardization of certain devices, when medically appropriate. The third source was by reducing the unnecessary opening of packaged items (surgical trays, supplies and disposable components) during surgery, and the final source was by performing blood cross-matching only as needed. Overall, the majority of cost savings were to be generated through the control and standardization of devices, implants and other surgical supplies.
The cost savings generated through gainsharing are intended to be derived by controlling and modifying surgeons’ use of high cost implants and other medical devices. Hence, cardiac surgery and orthopedics are likely targets due to the specialties’ extensive use of implantable technologies.
A fundamental principle of gainsharing is that inappropriate physician selection of medical devices and supplies has contributed to increased costs and that restricting that choice will generate significant savings. Unfortunately, standardization and substitution of technologies are not always possible. In many cases, there is an absence of independent clinical evidence that compares the clinical performance of one manufacturer’s device against another’s. Therefore, surgeons generally choose devices based on their personal clinical experience and success with a technology, a device’s ease of use and their previous clinical training.
Without the ability to limit physicians’ choice of technologies, much of the success of gainsharing is dependent on hospitals obtaining the best price for their surgical supplies and implants. Device manufacturers are concerned that this financial dynamic could force them to bid against competitors to gain exclusivity under a hospital’s gainsharing program.
In recent testimony before the House Ways & Means Subcommittee on Health, AdvaMed (the medical device industry trade organization) stated, “We believe that gainsharing would have an immediate and significant negative effect on public health by encouraging the use of the least expensive option without consideration of long-term effects or overall health economics. It would be a severe impediment to the development and rapid diffusion of beneficial new technology, could have an especially negative impact on small companies and could eliminate important therapeutic and diagnostic choices for doctors and patients. We are concerned that, in the end, patients could suffer most.”
While the future of gainsharing is uncertain, a limited number of these arrangements are currently being tested. It is unlikely that gainsharing will be initiated on a large scale until the results of these programs are analyzed and the various legal concerns are addressed.
1 OIG Advisory Opinion No. 05-01 (Jan. 28, 2005); OIG Advisory Opinion No. 05-02 (Feb. 10, 2005); OIG Advisory Opinion No. 05-03 (Feb. 10, 2005); OIG Advisory Opinion No. 05-04 (Feb 10, 2005); OIG Advisory Opinion No. 05-05 (Feb. 18, 2005); OIG Advisory Opinion No. 05-06 (Feb. 18, 2005).
