OIG Posts Two New Advisory Opinions to End 2004 and Start 2005:
1) In December, the OIG posted Advisory Opinion No. 04-17 regarding a pathology joint venture. According to the facts of the opinion, a pathology services provider arranges to provide the full-scope of pathology lab services for physician groups, e.g., management, administrative, equipment and space, technical and professional pathology services. The physician groups specialize in urology, gastroenterology or dermatology, and bill payers, including Medicare, for the pathology services. Each group leases the path labs from the service provider on a full-time, exclusive basis. The lease is safe-harbored.

In spite of this, the OIG expressed again its concern with certain contractual joint ventures between those in a position to refer business and those furnishing the services reimbursed by Medicare, especially when most of the businessof the venture is derived by one of the venturers. The OIG believed that under the proposed arrangement the physician groups would contract out all of their path lab work to the provider and be exposed to virtually no financial risk, as each group could generate sufficient referrals to thelab to cover the monthly rental fees. Perhaps most importantly, the OIG stated that despite the fact that the groups were paying the provider only for services rendered, the mere "opportunity to obtain the difference" between what the groups received from Medicare and what they paid to the provider for services may be "impermissible remuneration." The OIG indicated that even if each of the agreements between the groups and the provider were safe-harbored the opportunity to achieve a profit would not be protected by any safe harbor. This position creates an additional opening for enforcement actions against putatively safe-harbored ventures.

2) In early January, the OIG posted Opinion No. 04-19. The OIG analyzed a malpractice insurance subsidy arrangement between a hospital and two neurosurgeons. The hospital was the only hospital in its location offering surgical services. The next closest hospital providing neurosurgery services was 45 miles away. The malpractice carrier for the two surgeons informed them prior to termination of their policy that if they retired, they would receive tail coverage without charge, but if they continued to practice, there would be a significant charge for the tail coverage. The surgeons informed the hospital that they would both choose to retire due to the malpractice premium increase, unless the hospital subsidized the insurance. The hospital informed the OIG that it was in an untenable position. It was the hub of neurosurgical services in the county and several neighboring counties. In addition, the hospital had been unable to recruit new neurosurgeons for two years. The hospital agreed to pay the entire cost of the tail insurance plus 75% of the difference between the new and prior premium expenses for the first year of the arrangement. In the second year of the arrangement, if the community need persisted, the hospital would pay an additional, capped subsidy if the premiums increased. The OIG refused to impose sanctions for four reasons: 1. the arrangement was temporary and necessary to ensure availability of neurosurgical services; 2. the arrangement was designed to prevent a significant financial windfall to the physicians; 3. the physicians are required to perform services as consideration for the premium subsidies, including call coverage, maintaining a full-time practice, and the provision of indigent care; and 4. the insurance covers the physicians activities at other sites, reducing the risk of the subsidies being a payment for referrals to the sponsoring hospital.

Gainsharing Guidance Returns: OIG Comments on Hospital/Physician Cost Savings Arrangements
Consistent with the healthcare industry's and CMS's new focus on paying for performance and quality, the OIG posted six new advisory opinions (Advisory Opinions Nos. 05-01 to 05-06) commenting on a number of hospital arrangements with cardiac surgeons and cardiologists involving the implementation of cost reduction measures. The OIG's analysis in all of these opinions is similar to its analysis in the first advisory opinion addressing a cost-reduction sharing arrangement between a hospital and a cardiology group (Advisory Opinion No. 01-1). Given the number of similar opinions issued by the OIG in such a short span and the fact that the OIG's analysis did not change from its 2001 opinion, the industry can only speculate as to whether the OIG was sending a clear signal that not only are such arrangements permissible but desired. Although the facts varied slightly from case to case, all of the agreements involved the use of incentives (the sharing of cost-savings) to encourage the physicians to use or not use certain supplies and to implement certain best management practices, such as the appropriate use of blood cross-matching and the use of certain vascular closure devices. Aside from the inferences that can be drawn from this mini-flood of advisory opinions, two key pieces of information should be drawn from the advisory opinions. First, the OIG again identified the eight key features of these non-safe harbored arrangements protecting them from sanctions. The eight features of appropriate arrangements include: 1. the specific cost-saving actions and resulting savings are clearly and separately identified; 2. the parties had credible medical support for their position that the arrangements will not adversely affect patient care; 3. the incentives apply to all procedures regardless of payer type; 4. the cost-savings proposals are based on objective, specific historical and clinical data to establish thresholds below which no savings occur; 5 physicians maintain the right to use the supplies/products of their choice; 6. the parties provide full written disclosure to patients affected by the arrangements; 7. the incentives are reasonably limited in duration and amount; and 8. profits distributed by the physician group is on a per capita basis to mitigate any incentive to individual physicians to generate disproportionate cost savings. The second important aspect of these opinions are the five risk features the OIG identified that would likely trigger sanctions. The five problematic features include: 1. no demonstrable direct connection between the individual actions and the reduction in the hospital's out-of-pocket costs; 2. the individual actions are not specifically identified; 3. insufficient safeguards to protect against adverse actions, such as premature hospital discharges; 4. the use of quality of care indicators of questionable validity and statistical significance; and 5. no independent verification of cost-savings or quality of care indicators.

New York Hospital Settles False Claims Suit for $1.5 Million
The federal government brought a Medicaid false claims suit against a New York hospital for an illegal patient referral scheme. According to the complaint, Catskill Regional Medical Center (the "Hospital") entered into an administrative services agreements for its alcohol and substance abuse detoxification program. The Hospital paid the provider of the administrative services $50,000 per month. The only problem was that the federal investigators determined that the services were not needed by the Hospital, not provided to the Hospital, or were otherwise "worthless." The only purpose of the payments were to induce hundreds of illegal patient referrals. The Hospital settled the complaint for $1.5 million on January 7, 2005. (United States ex rel. John F. Reilly v. Catskill Regional Medical Center f/k/a Community General Hospital of Sullivan County, S.D.N.Y., 00 Civ. 7906 (KMW), settlement 1/7/05)

JCAHO Issues Pay-For-Performance Guidance
Recognizing the increasing desire of providers, payers and policymakers to encourage quality improvements in the provision of health care, the Joint Commission on the Accreditation of Healthcare Organizations ("JCAHO") developed Pay-For-Performance Principles to assist parties when constructing incentive based payment programs. The ten principles focus on guidelines which improve care through thoughtful incentives while avoiding incentives which create unintended consequences. In general, the guidelines establish that incentive programs should (1) align reimbursement incentives with the provision of safe, quality care; (2) mix financial and non-financial incentives; (3) address clinical areas that are being focused on regionally and nationally to leverage established measurements of quality; (4) use credible, valid and reliable performance measures; (5) recognize a united effort (between physicians and hospitals or providers and payers) is necessary for success; (6) develop a framework to reward success closely upon achievement to facilitate behavioral change: (7) reward accreditation; (8) implement results system-wide; (9) ensure periodic assessment to guard against unintended consequences and to adjust criteria when necessary; and (10) recognize sub-performers and assist those who are committed to achievement. Additional details may be found at www.jcaho.org. Not surprisingly, the JCAHO guidelines are very similar to the features the OIG desires to see in any hospital-physician cost-savings incentive arrangement as described above.

CMS Issues Final Medicare Part C & D Rules (Prescription Drug Benefits)
CMS adopted the final rules to implement the new prescription drug benefit (Part D) and enhanced health plan choices under the Medicare Advantage program (Part C) of the Medicare Modernization Act. In addition to describing the financial impact on beneficiaries of the changes to Part C and the new Part D, the final rules also impact health plans, what options they must offer and how they will be permitted to compete for Medicare business. Prescription drug plans and Medicare Advantage plans will be required to provide basic coverage, but may also offer additional plans with supplemental coverage. According to CMS, plans with supplemental coverage will allow beneficiaries to add to the Medicare-subsidized standard coverage using some of the contributions that they, their health plans, employers, unions, and others already make today. The final rules require prescription drug plans to have cost management programs that lower prescription drug costs for beneficiaries, such as the use of medication therapy management programs and a coordination of benefits systems. Beginning on January 1, 2006, a new regional Medicare Advantage PPO will be an additional plan choice for Medicare beneficiaries. The final rules also establish competitive bidding for health plans for Medicare Part A and B. Finally, consistent with CMS's recent drive to improve quality of health care for beneficiaries, by 2006, each Medicare Advantage plan (other than a Medicare Advantage private fee-for-service plan or an MSA plan) will be required to have ongoing chronic care and quality improvement programs. Local and regional Medicare Advantage plans are required to provide for the collection, analysis, and reporting of data that permits the measurement of health outcomes and other quality indicators.

The rules leave many gaps and unanswered questions to additional subregulatory guidance that will challenge CMS to prepare for the January 1, 2006 benefit start date. Perhaps the biggest unanswered question is whether beneficiaries will be able to understand the benefit and choose to enroll.