On November 16, the Office of Inspector General (OIG) of the Department of Health & Human Services once again indicated its willingness to approve gainsharing agreements under certain parameters by issuing a new advisory opinion, 06-022. (The full text of the opinion can be found at http://oig.hhs.gov/fraud/docs/advisoryopinions/2006/AdvOpn06-22NewA.pdf.) Significantly, this advisory opinion expressly allows gainsharing agreements with a single group of physicians that is the exclusive provider of certain services to a hospital. Gainsharing agreements are cost-sharing arrangements between hospitals and physicians in which hospitals agree to split demonstrated savings over a period of time with the group of physicians who helped generate the savings. Gainsharing arrangements have been suspect in the past because they involve payments from hospitals to significant referral sources and could be interpreted to violate the anti-kickback statute as well as the Stark Act. (The advisory opinions from the OIG only opine on the anti-kickback statute.) The OIG has indicated previously that "improperly designed or implemented" gainsharing arrangements could adversely affect patient care and could be a vehicle to hide referral payments by hospitals. Like several of the other opinions, Advisory Opinion 06-22 involved a group of cardiac surgeons. However, in this situation, all cardiac surgeons included in the gainsharing project are members of a single professional association. This professional association includes all cardiac surgeons who practice at the hospital. The hospital at issue proposed to share savings in 24 specific areas identified to curb "inappropriate use or waste of medical supplies." These 24 areas involve three basic categories of savings: 1) Limiting the use of surgical supplies to "as needed" situations; 2) Substitution of less costly items for items currently used by the surgeons; and 3) Product standardization of cardiac devices. The advisory opinion provides examples in each of these categories. For limiting supplies, it gives the example of stopping the uniform administration of aprotinin, an anti-hemorrhaging medication. In the second category, the example of potential savings involves the use of reusable rather than disposable warming blankets. In the third category, the surgeons and hospital developed a list of preferred vendors and products with negotiated pricing discounts. In the proposed arrangement, the hospital is agreeing to pay the physician practice 50 percent of the documented savings with certain limitations. Documented savings are calculated by comparing the prior year's costs, adjusted for inflation, in each of the areas with the costs incurred in the current year. In each of the 24 categories, the hospital will not share savings with the physicians over a certain target. Excluded are any cost savings that the third party administrator determines are the result of "inappropriate reductions" in utilization. Savings will be distributed to the practice's physicians on a per capita basis without regard to the individual physician's contribution to the savings. In approving the proposed model, the OIG emphasized three points: 1) The arrangement was structured to minimize the potential for increasing referrals; 2) There is no hidden intent in the program to reward cardiologists or potential referral sources to the cardiac surgeons and savings are distributed prorate; and 3) The proposed arrangement sets out specific areas of cost savings. The OIG pointed out that individual surgeons must retain the ability to make patient-by-patient determinations regarding the implementation of any savings initiatives. The opinion also highlights several limitations on overall payments in the proposed arrangement. If the number of procedures payable to a governmental healthcare program increases over the previous year, there can be no sharing of savings from the additional procedures. (The opinion indicates the cardiac surgeons also practiced at other area hospitals so there is a concern that the gainsharing program might impact referral patterns without this restriction.) In addition, a committee must be in place to monitor the severity, ages and payors of the patient. A key factor in the OIG's approval of the proposed arrangement appears to be the hospital's retention of a third party administrator to collect data and calculate cost savings as well as quality. This third party determined that the hospital could implement the 24 cost savings without detrimentally impacting patient care. This third party administrator adds considerably to the cost of implementing a gainsharing arrangement but seems to be a necessary component for regulatory approval. Gainsharing models offer a promising opportunity to align the interests of physicians and hospitals and contain healthcare costs. However, these models must be structured very carefully to satisfy legal requirements and protect patient care. The recent OIG opinion helps clarify these requirements. Colin H. Luke is the Chairman of Balch & Bingham, LLP's Health Law Practice Group. December 2006