Hospital permitted to share pay-for-performance bonuses with physician-owned practice

October 23, 2008

The Department of Health and Human Services Office of Inspector General (OIG) has given the green light to a hospital's proposed arrangement to change its pay-for-performance program to allow for sharing with a physician-owned entity a percentage of the bonus compensation it receives from a private insurer for meeting certain quality targets, according to an advisory opinion posted October 14.

This material originally appeared in the October 17, 2008, issue of Health Lawyers Weekly, a publication of the American Health Lawyers Association (www.healthlawyers.org).

The Department of Health and Human Services Office of Inspector General (OIG) has given the green light to a hospital’s proposed arrangement to change its pay-for-performance program to allow for sharing with a physician-owned entity a percentage of the bonus compensation it receives from a private insurer for meeting certain quality targets, according to an advisory opinion posted October 14.

According to OIG, the proposed arrangement could constitute an improper payment to a physician to induce reduction or limitation of services to Medicare or Medicaid beneficiaries under the physician’s direct care, thereby triggering the civil monetary penalty (CMP) provision set forth in the Social Security Act (Act).

In addition, OIG said that the proposed arrangement could potentially generate prohibited remuneration under the anti-kickback statute, which prohibits payments to physicians for referring federal healthcare program business to a facility.

OIG concluded, however, that it would not impose sanctions because the arrangement as structured posed a low risk of fraud and abuse.

The requesting hospital participates in a pay-for-performance program implemented by a private insurer, under which the insurer pays the requestor for the care of patients in a given year (i.e., base compensation), as well as an additional percentage of the base compensation (i.e., incentive payments) based on the extent to which the requestor meets certain standards of quality and efficiency established by the insurer.

OIG explained that, to calculate the incentive payments to be received for complying with “quality targets,” the private insurer takes into account not just those insured under its plans, but all of the requestor’s inpatients (including Medicare and Medicaid beneficiaries) having a designated condition or procedure.

Under the proposed arrangement, the requestor would enter into an agreement with a physician-owned entity whose members are on the requestor’s medical staff, according to the opinion. Pursuant to that agreement the physician entity would require its members to undertake various tasks to ensure that the quality targets are achieved, including developing policies and procedures, conducting peer review, and auditing medical records.

The requestor would then pay the physician entity a percentage, not to exceed 50%, of the incentive payments it receives from the private insurer for achieving the insurer’s quality targets, the opinion noted. The physician entity would then distribute its earnings under the agreement to its members on a per capita basis.

At the outset of its analysis, OIG reiterated its long-standing concerns about gainsharing programs or similar cost-savings arrangements such as the requestor’s pay-for-performance proposal.

Nonetheless, OIG concluded that, although the incentive payments at issue implicated the CMP, several features of the proposed arrangement provide sufficient safeguards against patient and federal healthcare program abuse.

OIG first noted that there is credible medical support that the proposed arrangement could improve patient care and was not likely to adversely affect it. Moreover, under the proposed arrangement, bonus compensation is not reduced for not meeting a specific quality standard in medically inappropriate circumstances (i.e., where applying the standard is contraindicated with regard to the particular patient), according to the opinion.

In addition, the requester certified that it would monitor the quality targets throughout the term of the agreement “to protect against inappropriate or limitations in patient care of services,” OIG said.

The proposed arrangement also “clearly and separately” identifies the performance measures that could result in incentive payments to the physician entity, OIG noted, adding that such transparency allows for public scrutiny of and individual physician accountability for any adverse effects of the proposed arrangement.

Turning to its anti-kickback concerns, OIG noted safeguards that mitigated against the risks that the proposed arrangement would be used to attract referring physicians or to increase referrals from physicians already on the requestor’s staff.

Among other safeguards, OIG highlighted the fact that membership in the physician entity would be limited to physicians who have been on the requestor’s medical staff for at least a year.

In addition, OIG said that the per capita distribution of the incentive payments among the members of the physician entity would reduce the risk that the proposed arrangement might be used to reward individual physicians to refer patients to the requestor.

Advisory Opinion 08-16 (Dept. of Health and Human Servs. Office of Inspector Gen. Oct. 7, 2008).