oversight

Medicare: Implementation of Financial Incentive Programs under Federal Fraud and Abuse Laws

Published by the Government Accountability Office on 2012-03-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Requesters




March 2012
             MEDICARE

             Implementation of
             Financial Incentive
             Programs under
             Federal Fraud and
             Abuse Laws




GAO-12-355
                                              March 2012

                                              MEDICARE
                                              Implementation of Financial Incentive Programs
                                              under Federal Fraud and Abuse Laws
Highlights of GAO-12-355, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
GAO has long expressed concern that           Certain financial incentive programs are permitted within the framework of federal
increases in Medicare spending are            fraud and abuse laws, but stakeholders GAO spoke with reported that the laws,
unsustainable and do not necessarily          regulations, and agency guidance have created challenges for program design
enhance health care quality.                  and implementation. The Stark law and anti-kickback statute, which restrict
Traditional Medicare provider payment         financial relationships among providers, have statutory and regulatory exceptions
systems reward the volume of services         and safe harbors, respectively, that permit financial incentive programs that meet
instead of the quality or efficiency of       specific criteria. However, there are no exceptions or safe harbors specifically for
care by paying physicians for each            financial incentive programs intended to improve quality and efficiency, and legal
service provided. Some health
                                              experts reported that the constraints of existing exceptions and safe harbors
systems, which can be hospitals,
                                              make it difficult to design and implement a comprehensive program for all
physicians, health plans, or a
combination, use financial incentive
                                              participating physicians and patient populations. The CMP law prohibits hospitals
programs to reward physicians for             from paying physicians to reduce or limit services, and OIG has interpreted the
improving quality and efficiency with         law to apply to the reduction or limitation of any services, whether or not those
the goal of better outcomes for patients      services are medically necessary. The CMP law does not include statutory
and savings for hospitals and payers.         exceptions to this prohibition, and OIG does not have the authority to create
Federal laws that protect patients and        exceptions through regulation. Through its advisory opinion process, OIG,
the integrity of federal programs,            however, has indicated that it would not impose sanctions for specific financial
including Medicare, limit health              incentive programs that otherwise violated the CMP law but presented a low risk
systems’ ability to implement financial       of fraud and abuse. Legal experts stated that innovative arrangements are
incentive programs. These fraud and           difficult to structure and that the advisory opinion process is burdensome.
abuse laws include the physician self-
referral law, or Stark law; the anti-         Through alternative approaches, HHS has approved implementation of otherwise
kickback statute; and the Civil               prohibited financial incentive programs that incorporate safeguards, under its
Monetary Penalties (CMP) law. The             statutory authority to conduct demonstrations and other initiatives. Specifically,
Centers for Medicare & Medicaid               CMS has conducted demonstration projects to test financial incentive programs
Services (CMS) and the Office of              that reward quality and efficiency. These demonstration projects included
Inspector General (OIG) within the            safeguards, such as linking payments to quality measures, to protect program
Department of Health and Human                and patient integrity. CMS has incorporated safeguards into the Medicare Shared
Services (HHS), and the Department of         Savings Program, which allows eligible providers to participate as accountable
Justice oversee and enforce these             care organizations to share savings with the Medicare program. As specifically
laws.                                         authorized for the Medicare Shared Savings Program, CMS and OIG will waive
GAO examined how federal fraud and            fraud and abuse laws for, among other things, the distribution of shared savings
abuse laws affect the implementation          in the Medicare Shared Savings Program, subject to certain requirements. The
of financial incentive programs,              Center for Medicare and Medicaid Innovation within CMS is also implementing
stakeholders’ perspectives on their           programs to test financial incentives.
ability to implement these programs,          GAO’s work suggests that stakeholders’ concerns may hinder implementation of
and alternative approaches through            financial incentive programs to improve quality and efficiency on a broad scale.
which HHS has approved
                                              Stakeholders—government agencies and health care providers—likely will
implementation of these programs.
                                              continue to have different perspectives about the optimal balance between
GAO analyzed relevant laws and
agency guidance and documentation;            innovative approaches to improve quality and lower costs and retaining
and interviewed agency officials, legal       appropriate patient safeguards. HHS reviewed a draft of this report and in its
experts, and provider stakeholders.           written comments, clarified its position on CMS’s authorities to create exceptions
                                              and issue waivers to permit certain financial incentive programs, noting that its
                                              authority to issue waivers is broader than its authority to create Stark exceptions.
                                              We modified the draft to reflect the Department’s position.
View GAO-12-355. For more information,
contact James Cosgrove at (202) 512-7114 or
cosgrovej@gao.gov.

                                                                                       United States Government Accountability Office
Contents


Letter                                                                                                   1
                       Background                                                                        6
                       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                                   18
                       HHS Has Approved Otherwise Prohibited Financial Incentive
                         Programs That Incorporate Safeguards, under Demonstration
                         Project and Other Authorities                                                 32
                       Concluding Observations                                                         36
                       Agency Comments and Our Evaluation                                              37

Appendix I             Comments from the Department of Health and Human Services                       41



Appendix II            GAO Contact and Staff Acknowledgments                                           44



Related GAO Products                                                                                   45



Table
                       Table 1: Summary of Federal Fraud and Abuse Laws and
                                Enforcement Mechanisms                                                 14




                       Page i             GAO-12-355 Health Care Financial Incentive Program Implementation
Abbreviations

ACO                        accountable care organization
CMP                        Civil Monetary Penalties
CMS                        Centers for Medicare & Medicaid Services
CT                         computed tomographic
DOJ                        Department of Justice
FCA                        False Claims Act
GDP                        gross domestic product
HEDIS                      Healthcare Effectiveness Data Information Set
HHS                        Department of Health and Human Services
IOM                        Institute of Medicine
MCO                        managed care organization
OIG                        Office of Inspector General
PIP                        physician incentive plan
PPACA                      Patient Protection and Affordable Care Act
SAB                        Special Advisory Bulletin
SSA                        Social Security Act



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Page ii                 GAO-12-355 Health Care Financial Incentive Program Implementation
United States Government Accountability Office
Washington, DC 20548




                                   March 30, 2012

                                   Congressional Requesters

                                   For many years the United States has devoted an increasing proportion
                                   of its gross domestic product (GDP) and federal budget to the provision of
                                   health care services. National health expenditures rose from
                                   approximately 7 percent of GDP in 1970 to approximately 18 percent—
                                   $2.5 trillion—in 2009. Over this same period, the proportion of federal
                                   budget outlays devoted to health care increased even more rapidly from
                                   approximately 8.3 to 26.9 percent. 1 Medicare spending, which represents
                                   a large share of federal health care expenditures, is projected to increase
                                   from approximately $519 billion in 2010 to approximately $922 billion in
                                   2020. 2 We have long expressed concern that the increases in Medicare
                                   spending are unsustainable, especially in light of evidence that suggests
                                   that greater spending does not necessarily translate to better health care
                                   quality. 3

                                   The Medicare Payment Advisory Commission, Institute of Medicine
                                   (IOM), and other experts have recommended that payments for health
                                   care should contain stronger incentives for quality and efficiency. IOM, in
                                   its 2001 report “Crossing the Quality Chasm: A New Health System for
                                   the 21st Century”, recommended that payment methods should, among
                                   other things, provide an opportunity for providers to share in the benefits
                                   of quality improvement, align financial incentives with the implementation
                                   of care processes based on best practices and the achievement of better
                                   patient outcomes, and enable providers to coordinate care for patients
                                   across settings and over time. However, current provider payment



                                   1
                                    Office of the Actuary, Centers for Medicare & Medicaid Services, National Health
                                   Expenditure Tables, table 1, accessed October 18, 2011,
                                   https://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf. Total federal
                                   budget outlays obtained from U.S. Budget for Fiscal Year 2011, Table 3.2—Outlays By
                                   Function and Subfunction: 1962–2015, accessed January 25, 2011,
                                   www.gpoaccess.gov/usbudget/fy11/sheets/hist03z2.xls.
                                   2
                                    Medicare is the federal health insurance program serving individuals aged 65 and older,
                                   individuals under 65 with certain disabilities, and individuals diagnosed with end-stage
                                   renal disease. In 2011, Medicare covered 48.9 million beneficiaries.
                                   3
                                    GAO, The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update,
                                   GAO-10-468SP (Washington, D.C.: Mar. 2, 2010).




                                   Page 1                 GAO-12-355 Health Care Financial Incentive Program Implementation
systems used by traditional Medicare create conflicting incentives and
contribute to the growth in spending by rewarding volume of services
regardless of quality and cost, 4 leading to duplication and overutilization
of services that is wasteful and potentially harmful. 5 Specifically, under
traditional Medicare, hospitals are paid a predetermined fixed amount for
each hospital stay regardless of the number of services provided, but
physicians receive payment for each service delivered and have little
incentive to coordinate the provision of care or control the volume of
services.

Physicians play a central role in the generation of health care
expenditures, and the incentive for physicians to order more services has
a broad impact on total spending. While the services they provide directly
to patients account for an estimated 20 percent of total health care
expenditures, their influence is estimated to account for up to 90 percent
of these expenditures because they either directly or indirectly control or
influence most of the health services that are provided. 6 For example,
physicians admit patients to hospitals, and they order services such as
imaging studies and laboratory tests. As some policy experts have noted,
many factors give physicians an incentive to order more services than
may be necessary, including a physician culture that values
meticulousness, the scarcity of data comparing the effectiveness of
different treatments and interventions, and the fear of malpractice
lawsuits. In conjunction with these factors, paying physicians for an
intervention that may only be justified by a slim clinical rationale adds a
strong financial incentive to deliver more services. 7




4
 Medicare Parts A and B, under which Medicare pays hospitals and physicians,
respectively, are known as traditional Medicare.
5
 For example, studies have shown that unnecessary imaging tests, such as computed
tomographic (CT) scans, can result in an increased cancer risk for patients. A 2007 study
estimated that up to 2 percent of all cancers in the United States may be attributable to
radiation from CT scans.
6
 GAO, Medicare: Per Capita Method Can Be Used to Profile Physicians and Provide
Feedback on Resource Use, GAO-09-802 (Washington, D.C.: Sept. 25, 2009).
7
 E.J. Emmanuel, and V.R. Fuchs. “The Perfect Storm of Overutilization.” Journal of the
American Medical Association, vol. 299, no. 23, (2008): 2789-2791.




Page 2                 GAO-12-355 Health Care Financial Incentive Program Implementation
Faced with these challenges, policymakers, health care providers, and
others have sought ways to improve the quality of care and at the same
time reduce costs. While the federal government examines various
reforms to payment mechanisms, some health systems 8 are
implementing financial incentive programs to promote the quality and
efficiency of care by rewarding physicians for meeting quality benchmarks
and improving efficiency. Proponents of these programs believe they
have the potential to result in better health outcomes for patients, and
savings for hospitals and third-party payers, such as private health plans
and public health programs including Medicare. Congress has included
various reforms in the Patient Protection and Affordable Care Act
(PPACA), including those that align incentives for hospitals and
physicians to improve health care quality and efficiency in conjunction
with efforts to develop collaborative care models for the Medicare
program. For example, PPACA requires that the Department of Health
and Human Services (HHS) establish a shared savings program—the
Medicare Shared Savings Program—that encourages coordination of
care under Medicare Parts A and B and promotes accountability for
patient populations. Under the Medicare Shared Savings Program,
eligible health systems that achieve savings for Medicare by improving
quality and efficiency may receive a share of the savings they generate
as financial incentive payments. 9 Health systems that implement other
financial incentive programs must comply with various federal laws in
their efforts to reward quality and efficiency.

A number of federal laws apply to financial relationships among hospitals,
physicians, health plans, and other entities. Among other things, these
laws limit health systems that deliver care to Medicare beneficiaries from
implementing financial incentive programs that could, for example,
influence providers to recommend medically inappropriate services or
withhold costly services that are medically necessary. These federal laws
were designed to protect patients and the integrity of federal health care
programs, including Medicare. They include, among others, the physician



8
 For the purposes of our study, health systems can include hospitals, physicians, and
health plans, or any combination thereof.
9
 Pub. L. No. 111-148, §§ 3022, 10307, 124 Stat. 119, 395, 940 (codified at 42 U.S.C.
§ 1395jjj). In addition to eligible health systems, other organizations may be included in
the Medicare Shared Savings Program. PPACA also includes numerous provisions
affecting Medicare payments, payment rules, covered benefits, and the delivery of care.




Page 3                  GAO-12-355 Health Care Financial Incentive Program Implementation
self-referral law (known as the Stark law), 10 the anti-kickback statute, 11
and the Civil Monetary Penalties (CMP) law. 12, 13 For purposes of this
study, we refer to these three laws as the fraud and abuse laws. Federal
agencies with oversight and enforcement responsibilities under these
laws—including the Centers for Medicare & Medicaid Services (CMS) and
the Office of Inspector General (OIG) within HHS—have issued
regulations and guidance regarding financial incentive programs, while
guarding against patient and program abuse. The Department of Justice
(DOJ) also enforces the anti-kickback statute. 14

You asked us to review how federal laws and regulations may affect the
development of collaborative health care delivery arrangements designed
to promote quality and efficiency, specifically financial incentive programs.
Our report examines (1) how federal fraud and abuse laws, regulations,
and guidance affect the implementation of financial incentive programs,
and the perspectives of stakeholders on their ability to implement such
programs; and (2) alternative approaches to the federal fraud and abuse
laws through which HHS has approved certain financial incentive
programs.

To determine how federal fraud and abuse laws, regulations, and
guidance affect the implementation of financial incentive programs, and
the perspectives of stakeholders on their ability to implement such
programs, we interviewed officials from CMS, HHS’s OIG, and DOJ who



10
  42 U.S.C. § 1395nn.
11
  42 U.S.C. § 1320a-7b(b).
12
  42 U.S.C. § 1320a-7a. The CMP law provides for penalties for a variety of activities
specified in the statute. In this report, we focus on the penalties that may apply to
hospitals that pay physicians to induce a reduction or limitation of services. 42 U.S.C.
§ 1320a-7a(b).
13
  These three laws apply to various federal health care programs. For example, the CMP
law applies to both the Medicare and Medicaid programs. For the purpose of our study,
we focused on Medicare because all three laws apply to Medicare, and GAO has
identified the program as being at high risk for fraud, waste, and abuse.
14
  Additionally, violations of the Stark law and anti-kickback statute may result in violations
of the civil False Claims Act (FCA), which provides for civil penalties and triple damages
for knowingly presenting or causing to be presented, a false or fraudulent claim for
payment or approval by the United States. DOJ is the government agency responsible for
enforcing the FCA. Private parties may also bring actions on behalf of the government,
which DOJ can elect to join. 31 U.S.C. §§ 3729-3733.




Page 4                   GAO-12-355 Health Care Financial Incentive Program Implementation
have responsibility for enforcing the federal fraud and abuse laws. 15 We
also analyzed relevant federal laws, regulations, and advisory opinions.
To obtain the stakeholders’ perspectives, we interviewed eight legal
experts about their experiences in advising clients in implementing
financial incentive programs, 16 and representatives from five health care
industry groups that represent hospitals, physicians, and the health
insurance industry. We also reviewed stakeholders’ published statements
on fraud and abuse laws. Additionally, we interviewed officials of 10
health systems to obtain illustrative examples of financial incentive
programs to improve quality and efficiency, 17 and a prominent financial
incentive program expert with experience designing financial incentive
programs to improve efficiency.

To identify alternative approaches to federal fraud and abuse laws
through which HHS has approved certain financial incentive programs,
we interviewed CMS officials, including officials responsible for Medicare
demonstrations, 18 for the Medicare Shared Savings Program, and from
the Center for Medicare and Medicaid Innovation (Innovation Center). We
also reviewed CMS documentation on selected Medicare
demonstrations 19 and proposed and final rules for the Medicare Shared




15
  As part of our work, for fiscal years 2005 through 2010, we requested that OIG identify
any Stark law or anti-kickback statute enforcement actions on the basis of providers’
implementation of pay-for-performance programs or gainsharing arrangements. Similarly,
we requested that DOJ officials identify any FCA settlements involving the Stark law or
anti-kickback statute against providers who implemented such programs during the same
time period.
16
  To determine which legal experts to interview, we identified individuals who have
counseled health systems on these issues, conducted a literature review to identify
individuals who made contributions to the study of federal fraud and abuse laws within the
context of health systems, and solicited recommendations from legal experts during
interviews.
17
  To select the health systems, we requested recommendations from legal experts and
industry group representatives. We also used a judgmental sampling technique to achieve
variation in the type of health system, such as physician groups, hospital-based systems,
and systems that include a health plan and size of the system.
18
 CMS uses demonstrations, which are typically time-limited programs, to test payment
methods.
19
  We identified relevant Medicare demonstrations and other projects through our research
and interviews with CMS officials on financial incentive program demonstrations.




Page 5                 GAO-12-355 Health Care Financial Incentive Program Implementation
                      Savings Program. 20 Finally, we reviewed the joint CMS and OIG notice
                      and final rule regarding the waiver of certain federal fraud and abuse laws
                      for the Medicare Shared Savings Program. 21

                      We conducted this performance audit from October 2010 through
                      February 2012 in accordance with generally accepted government
                      auditing standards. Those standards require that we plan and perform the
                      audit to obtain sufficient appropriate evidence to provide a reasonable
                      basis for our findings and conclusions based on our audit objectives. We
                      believe that the evidence obtained provides a reasonable basis for our
                      findings and conclusions based on our audit objectives.


                      Health systems may use a variety of financial incentive programs to
Background            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   Health systems may offer a variety of financial incentive programs to
Programs              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’




                      20
                       Medicare Program; Medicare Shared Savings Program: Accountable Care
                      Organizations, 76 Fed. Reg. 19,528 (Apr. 7, 2011); Medicare Program; Medicare Shared
                      Savings Program: Accountable Care Organizations, 76 Fed. Reg. 67,802 (Nov. 2, 2011).
                      21
                        Medicare Program; Waiver Designs in Connection with the Medicare Shared Savings
                      Program and the Innovation Center, 76 Fed. Reg. 19,655 (Apr. 7, 2011); Medicare
                      Program; Final Waivers in Connection with the Shared Savings Program, 76 Fed. Reg.
                      67,992 (Nov. 2, 2011).




                      Page 6                GAO-12-355 Health Care Financial Incentive Program Implementation
efforts in controlling the costs and improving or maintaining the quality of
patient care. These are often referred to as gainsharing arrangements. 22

Although results from financial incentive programs tried to date have been
mixed, some experts believe they have the potential to increase quality
and efficiency. 23 While pay-for-performance programs tend to have
explicit goals of quality improvement rather than efficiency improvement,
these programs can improve quality and efficiency by rewarding
physicians for adhering to clinical protocols. 24 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. 25

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.



22
  For the purposes of our study, we use the term “financial incentive program” to refer to
pay-for-performance programs, shared savings programs, and gainsharing arrangements.
23
   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.
24
  Pay-for-performance programs may result in increased costs if the clinical protocols
result in the use of more services or more expensive services.
25
  Since Medicare hospital payments are based in part on the estimated average hospital
cost per admission, reduced hospital costs, over time, may be reflected in Medicare’s
payment updates.




Page 7                  GAO-12-355 Health Care Financial Incentive Program Implementation
Federal Fraud and Abuse   Federal fraud and abuse laws designed to protect the integrity of services
Laws and Enforcement      that are reimbursed under federal health care programs, including
Mechanisms                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.

Stark Law                 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, 26
                          unless the arrangement satisfies a statutory or regulatory exception. 27, 28
                          Studies have found that these self-referrals encouraged overutilization
                          and increased health costs. 29, 30 The Stark law also prohibits these entities
                          that perform the designated health services from presenting, or causing to



                          26
                            A financial relationship is an ownership or investment interest—through equity, debt, or
                          other means—in the entity or a compensation arrangement between the physician or
                          immediate family member and the entity. CMS regulations further define financial
                          relationship as direct compensation, indirect compensation, direct ownership, and indirect
                          ownership. 42 C.F.R. § 411.354.
                          27
                               42 U.S.C. § 1395nn.
                          28
                           The Social Security Act (SSA) prohibits payments to states for Medicaid services that
                          would be prohibited by Medicare under the Stark law. 42 U.S.C. § 1396b(s).
                          29
                            See Medicare Program; Physician Ownership of, and Referrals to, Health Care Entities
                          that Furnish Clinical Laboratory Services, 57 Fed. Reg. 8,588 (proposed Mar. 11, 1992).
                          In June 1988, Congress mandated that the HHS OIG conduct a study on physician
                          ownership of and compensation from health care entities to which the physicians make
                          referrals. OIG reported that patients of referring physicians who owned or invested in
                          independent clinical laboratories received 45 percent more laboratory services than
                          Medicare patients generally. OIG found similar effects on utilization associated with the
                          existence of compensation arrangements between laboratories and physicians. Patients
                          of these physicians used 32 percent more laboratory services than all Medicare patients in
                          general. Based in part on the results of this study, Congress passed the Stark law in
                          November of 1989. Medicare and Medicaid Programs; Physicians’ Referrals to Health
                          Care Entities With Which They Have Financial Relationships, 63 Fed. Reg. 1659, 1661
                          (Jan. 9, 1998).
                          30
                            Similarly, GAO found that physicians with financial interests in entities to which they can
                          refer patients may have higher referral rates. See GAO, Medicare: Referrals to Physician-
                          Owned Imaging Facilities Warrant HCFA’s Scrutiny, GAO/HEHS-95-2 (Washington, D.C.:
                          Oct. 20, 1994).




                          Page 8                     GAO-12-355 Health Care Financial Incentive Program Implementation
be presented, claims to Medicare or billing any individual, third-party
payer, or other entity for these services. 31 The Stark law includes a
number of exceptions 32 and authorizes the Secretary of HHS to create
regulatory exceptions for financial relationships that do not pose a risk of
patient or program abuse. 33, 34 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
programs. 35 CMS is responsible for issuing regulations under the Stark
law and collecting payments made in violation of the law. OIG is
responsible for enforcing the Stark law’s civil monetary penalties.




31
     42 U.S.C. § 1395nn(a)(1)(B).
32
     42 U.S.C. §§ 1395nn(b)-(e).
33
 There are more than 20 Stark law statutory and regulatory exceptions that may apply
generally, to ownership or investment, or to compensation arrangements.
34
  42 U.S.C. § 1395nn(b)(4). Stark law regulations are located at 42 C.F.R. §§ 411.350-
411.389.
35
  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.




Page 9                    GAO-12-355 Health Care Financial Incentive Program Implementation
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, 36 subject to statutory exceptions and regulatory safe harbors
                        promulgated by OIG. 37 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. 38 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.

CMP Law                 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. 39 The statute does not contain



                        36
                          The anti-kickback statute applies to payments made under federal health care
                        programs. We focused on Medicare because all three laws apply to Medicare, and GAO
                        has identified the program as being at high risk for fraud, waste, and abuse.
                        37
                          42 U.S.C. § 1320a-7b(b). For the purposes of this study, we refer to anti-kickback
                        statutory exceptions and regulatory safe harbors as safe harbors.
                        38
                             42 U.S.C. §§ 1320a-7a(a)(7), 1320a-7(a)-(b).
                        39
                          42 U.S.C. § 1320a-7a(b). The CMP law applies to the Medicaid and Medicare programs.
                        We focused on Medicare because all three laws apply to Medicare, and GAO has
                        identified the program as being at high risk for fraud, waste, and abuse.




                        Page 10                   GAO-12-355 Health Care Financial Incentive Program Implementation
                               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. 40 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. 41 OIG is
                               responsible for enforcing the CMP law.

False Claims Act –             The False Claims Act (FCA) serves as another enforcement mechanism
Enforcement Mechanism for      for federal fraud and abuse laws. Claims that are submitted in violation of
Federal Fraud and Abuse Laws   the Stark law or the anti-kickback statute may also be considered false
                               claims and, as a result, create additional liability under the FCA. 42 FCA
                               prohibits certain actions, including the knowing presentation of a false
                               claim for payment by the federal government. 43 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.

                               Penalties under the FCA include triple damages, plus an additional
                               penalty for each false claim filed up to $11,000. 44 DOJ is charged with
                               enforcing the FCA and enforces the Stark law and the anti-kickback
                               statute through the FCA. FCA claims also may be brought by third parties



                               40
                                    H.R. Rep. No. 99-727, at 444 (1986), reprinted in 1986 U.S.C.C.A.N. 3607, 3841.
                               41
                                    42 U.S.C. §§ 1320a-7a(b), 1320a-7(b)(7).
                               42
                                    31 U.S.C. §§ 3729-3233.
                               43
                                    31 U.S.C. § 3729(a)(1)(A).
                               44
                                 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).




                               Page 11                   GAO-12-355 Health Care Financial Incentive Program Implementation
                   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. 45


Advisory Opinion   In response to requests for specific guidance from providers on whether
Authority          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. 46 CMS is required to
                   issue advisory opinions on the Stark law, 47 and OIG is required to issue
                   advisory opinions on the CMP law and the anti-kickback statute, among
                   other matters. 48 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




                   45
                    31 U.S.C. § 3730(d).
                   46
                     CMS and OIG consult with DOJ in issuing advisory opinions. CMS and OIG do not
                   consider requests that present a general question of interpretation or pose a hypothetical
                   situation through the advisory opinion process.
                   47
                     CMS will not address whether fair market value will be, or was, paid or received for
                   goods, services, or property, or whether an individual is a bona fide employee through the
                   advisory opinion process. 42 C.F.R. § 411.370(c).
                   48
                     42 U.S.C. § 1320a-7d(b)(2). OIG is prohibited from addressing whether fair market value
                   will be, or was, paid or received for goods, services, or property, or whether an individual
                   is a bona fide employee through the advisory opinion process. 42 U.S.C. § 1320a-
                   7d(b)(3). OIG has also issued compliance guidance and special advisory bulletins. OIG is
                   also authorized to issue special fraud alerts in response to a request to inform the public
                   of practices considered to be suspect or of particular concern. 42 U.S.C. § 1320a-7d(c).




                   Page 12                 GAO-12-355 Health Care Financial Incentive Program Implementation
agencies incur in responding to the request. 49 CMS has 15 days and OIG
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.




49
  OIG currently charges $86 per hour to prepare an advisory opinion. The actual cost of
an opinion will vary based upon the amount of work required to prepare the opinion.
Requesters may set a cap by designating the maximum amount that they are willing to
spend on an advisory opinion. OIG will stop processing the request once this amount is
reached, at which point, the requester has the option to withdraw the request or continue.




Page 13                 GAO-12-355 Health Care Financial Incentive Program Implementation
Table 1: Summary of Federal Fraud and Abuse Laws and Enforcement Mechanisms

Law                     Summary                          Exceptions                   Agency oversight               Penalties
Stark law               Prohibits physicians from    Statutory and                    Regulatory exceptions          Civil monetary penalties,
                        making referrals for certain regulatory                       created by, advisory           assessment of three times the
                        services to entities with    exceptions                       opinions issued by, and        amount claimed, denial of
                        which they have a financial                                   overpayment amounts            payments and refunds of amounts
                        relationship to prevent                                       collected by CMS;              collected from individuals, and
                        financial incentives from                                     enforced by OIG                exclusion from federal health care
                        affecting physicians’                                                                        programs
                        medical judgment; prevents
                        overutilization
Anti-kickback statute   Prohibits offers and receipts    Statutory                    Regulatory safe harbors        Criminal penalties; civil monetary
                        of remuneration to induce        exceptions and               created and advisory           penalties, assessment of three
                        or reward of referrals for       regulatory safe              opinions issued by OIG;        times the remuneration, and
                        services to prevent financial    harbors                      enforced by OIG and            exclusion from federal health care
                        incentives from affecting                                     DOJ                            programs
                        physicians’ medical
                        judgment; prevents
                        overutilization
CMP law                 Prohibits payments by        None                             Advisory opinions issued Civil monetary penalties and
                        hospitals to physicians to                                    by OIG; Enforced by      exclusion from federal health care
                        induce reduction or                                           OIG                      programs
                        limitation of services to
                        hospital patients to prevent
                        financial incentives from
                        affecting physicians’
                        medical judgment; prevents
                        underutilization
False Claims Act        Prohibits knowingly         None                              Enforced through        Civil penalties and triple damages
(FCA)—used as           presenting or causing to be                                   lawsuits brought by DOJ
enforcement             presented a false claim for                                   and whistleblowers
mechanism for           payment to the federal
federal fraud and       government; additional
abuse laws              mechanism to enforce the
                        Stark law and anti-kickback
                        statute
                                             Source: GAO analysis of the federal fraud and abuse laws and the FCA.




                                             Page 14                           GAO-12-355 Health Care Financial Incentive Program Implementation
CMS’s Demonstration and   CMS has general statutory authority to test new payment methods and
Waiver Authority          other alternatives to payment policies, with Medicare providers, through
                          demonstration projects. 50 Generally, such demonstrations are time-limited
                          to test program changes, but some have been extended. In connection
                          with such demonstration projects, the Secretary of HHS may waive
                          certain payment and reimbursement requirements, including the Stark
                          law. 51 The Secretary of HHS has also been required by statute to conduct
                          specific Medicare demonstrations, which provide implicit or express
                          authority for waivers of federal fraud and abuse laws. 52

                          In addition, PPACA requires that HHS establish the Medicare Shared
                          Savings Program, which will provide financial incentive payments to
                          eligible groups of providers and suppliers that join together in what are
                          called accountable care organizations (ACO) and that achieve savings for
                          Medicare by improving the quality and efficiency of care delivered to
                          assigned traditional Medicare beneficiaries. PPACA authorizes HHS to
                          waive fraud and abuse laws as may be necessary to carry out the
                          Medicare Shared Savings Program.

                          PPACA also established the Innovation Center within CMS specifically to
                          test innovative payment and service delivery models to reduce program
                          expenditures while preserving or enhancing the quality of care furnished
                          to Medicare and Medicaid beneficiaries. 53 The Innovation Center can test
                          new payment methods, including financial incentive programs, by


                          50
                            The SSA authorizes the Secretary of HHS to develop and engage in experiments and
                          demonstration projects to determine whether changes in methods of payment or
                          reimbursement would increase the efficiency and economy of Medicare health services
                          through the creation of additional incentives for these purposes without adversely affecting
                          the quality. 42 U.S.C. § 1395b-1(a)(1)(A).
                          51
                            The Stark law may be waived under this authority because it is a payment and
                          reimbursement provision located in title XVIII of the SSA. 42 U.S.C. § 1395b-1(b).
                          However, because the anti-kickback statute and CMP law are located in title XI of the
                          SSA, they cannot be waived under this authority.
                          52
                            See, e.g., 42 U.S.C. § 1395cc-3, which provides that the Secretary of HHS will establish
                          a demonstration program that examines health delivery factors that encourage the
                          delivery of improved quality in patient care, including the provision of incentives for
                          improving the quality and safety of care and achieving the efficient allocation of resources.
                          For demonstrations conducted under 42 U.S.C. § 1395cc-3, the Secretary of HHS may
                          waive the Stark law, anti-kickback statute, and CMP law.
                          53
                            Pub. L. No. 111-148, §§ 3021, 10306, 124 Stat. 119, 389, 939 (codified at 42 U.S.C.
                          § 1315a).




                          Page 15                 GAO-12-355 Health Care Financial Incentive Program Implementation
                        implementing models and expanding successful models nationwide. 54
                        The Secretary of HHS has the authority to waive certain federal fraud and
                        abuse laws for time-limited models, but not for successful model
                        expansions. 55


Medicare Managed Care   Medicare beneficiaries can opt to enroll in private plans administered by
Organizations           Medicare managed care organizations (MCO) to receive covered
                        benefits. 56 These MCOs, also known as Medicare Advantage Plans or
                        Medicare Part C, provide both hospital (Part A) and medical insurance
                        (Part B). 57 MCOs may offer lower out-of-pocket costs and more benefits
                        than traditional Medicare. Once enrolled, however, choices that
                        beneficiaries would traditionally make may be subject to the MCO’s
                        approval. For instance, MCOs may utilize primary care physicians as
                        gatekeepers to manage patient access to specialty services, may require
                        beneficiaries to pay higher out-of-pocket costs if they choose a provider
                        not on the preferred list, and may require patients and doctors to obtain
                        organizational approval for elective hospitalization, certain expensive
                        diagnostic tests, or specific medical procedures. 58

                        MCOs have an incentive to limit services because of the way they are
                        paid by Medicare. MCOs receive a monthly payment for each enrollee.
                        Medicare makes the same monthly payment to the MCO for the enrollee
                        regardless of how many or few services the enrollee actually uses. If an
                        MCO’s expenditures for its enrollees are less than its monthly payments,
                        the MCO retains the excess. To help protect beneficiaries, MCOs are
                        required to operate quality assurance programs. CMS is responsible for
                        monitoring MCOs to ensure that MCOs are providing quality, timely, and
                        appropriate services. In addition to day-to-day monitoring, CMS selects




                        54
                         42 U.S.C. § 1315a(b)-(c).
                        55
                         42 U.S.C. § 1315a(d).
                        56
                         See 42 U.S.C. § 1395w-21.
                        57
                         Nearly two-thirds of MCOs include Medicare prescription drug coverage (Part D).
                        58
                          M.A. Rodwin, Consumer Protection and Managed Care: Issues, Reform Proposals, and
                        Trade-Offs. 32 Hous. L. Rev. 1319 (1996).




                        Page 16               GAO-12-355 Health Care Financial Incentive Program Implementation
organizations each year for an on-site audit based on a risk assessment
and other criteria. 59

MCOs employ various techniques to control costs and manage health
service use, such as implementing financial incentive programs with their
providers. Like other financial incentive programs, MCOs’ physician
incentive plans (PIP) must comply with the Stark law and anti-kickback
statute. 60 However, unlike financial incentive programs between hospitals
and physicians, PIPs are not subject to the same provision of the CMP
law. Congress crafted a separate law, under which MCOs can implement
PIPs as long as payments are not made to reduce or limit medically
necessary services to individual patients. If physicians are placed at
substantial financial risk, that is more than 25 percent of their payment is
at risk, MCOs must provide stop-loss protection based on the number of
patients, and MCOs must also conduct periodic surveys of current and
prior enrollees to address enrollees’ access to and satisfaction with the
quality of services. MCOs must provide CMS with information about
financial incentive programs for approval. 61 MCOs that violate this
provision are subject to civil monetary penalties of up to $25,000 and
suspension of enrollment activities, Medicare payment, or marketing
activities. 62




59
  As part of its monitoring activities, CMS conducts financial audits, audits of plan bids,
and audits of the accuracy of health status data submitted by plans.
60
  “Physician incentive plan” means any compensation arrangement between an eligible
organization and a physician or physician group that may directly or indirectly have the
effect of reducing or limiting services provided with respect to individuals enrolled with the
organization.
61
  42 U.S.C. § 1395mm(i)(8). As initially enacted, the CMP law prohibited hospitals and
MCOs from paying physicians to reduce services, regardless of whether the services are
medically necessary. Congress subsequently amended the CMP law to remove MCOs
and passed a separate provision that permits MCOs to implement incentive plans as long
as plans do not induce the reduction or limitation of medically necessary services.
62
  42 C.F.R. § 422.752(a)(1).




Page 17                  GAO-12-355 Health Care Financial Incentive Program Implementation
                            Certain financial incentive programs are permitted within the framework of
Certain Financial           federal fraud and abuse laws through various Stark law and anti-kickback
Incentive Programs          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
Are Permitted under         the CMP law to prohibit hospitals from rewarding the reduction or
Federal Fraud and           limitation of services, but permits certain financial incentive programs
Abuse Laws,                 through its advisory opinion process. However, stakeholders we spoke
                            with reported that the laws, regulations, and agency guidance have
Regulations, and            created challenges for financial incentive program design and
Guidance, but               implementation, and some health systems have terminated or refrained
                            from implementing these programs. Neither OIG nor DOJ took any
Stakeholders                enforcement actions against financial incentive programs in fiscal years
Reported Challenges         2005 through 2010.

in Designing and
Implementing
Programs within This
Framework

Financial Incentive         CMS and OIG have acknowledged new exceptions and safe harbors may
Programs May Be             be necessary to facilitate financial incentive programs. CMS has
Permitted under Stark and   acknowledged that existing Stark law exceptions may not be sufficiently
                            flexible to encourage a wider array of nonabusive and beneficial incentive
Anti-kickback Exceptions    programs that both promote quality and achieve cost savings. CMS can
and Safe Harbors;           create additional exceptions as long as the exception does not pose a risk
Stakeholders Nevertheless   of program or patient abuse. 63 According to CMS officials, this “no risk”
Reported Challenges         requirement is high and limits their ability to create new regulatory
Structuring Permissible     exceptions to the Stark law. In 2008 CMS attempted to use its authority to
Programs                    propose a new exception covering financial incentive programs. 64
                            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


                            63
                             42 U.S.C. § 1395nn(b)(4).
                            64
                              Medicare Program; Revisions to Payment Policies Under the Physician Fee Schedule
                            and Other Revisions to Part B, 73 Fed. Reg. 38,502, 38,604 (proposed July 7, 2008).




                            Page 18               GAO-12-355 Health Care Financial Incentive Program Implementation
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. 65

The Stark law and anti-kickback statute apply variously to provider
financial relationships, and their respective exceptions and safe harbors
are not specific to financial incentive programs focused on quality and
efficiency, such as pay-for-performance or gainsharing arrangements,
between hospitals and physicians. As a result, financial incentive
programs that implicate these laws must be structured to fit into
applicable exceptions and may be structured to fit into applicable safe
harbors, 66 which some legal experts we spoke with characterized as
narrow in scope. 67 To illustrate, an official from an urban health system in
the Southwest told us that to improve the quality of care, they
implemented a financial incentive program to reward physicians who met
certain quality measures. To comply with the Stark law, the health system
structured its program to comply with the bona fide employment




65
  OIG received a letter from a provider stakeholder in response to the agency’s 2010
solicitation of new safe harbors requesting a safe harbor specifically for financial incentive
programs. The agency is considering but has not taken action on this request.
66
  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.
67
  Legal experts told us that while the anti-kickback statute is complicated, they find it
easier to comply with than the Stark law due to the anti-kickback statute’s intent
requirement.




Page 19                  GAO-12-355 Health Care Financial Incentive Program Implementation
exception. 68 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). 69 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. 70
Additionally, operating multiple financial incentive programs covering
different populations of physicians may create potential inefficiencies
through redundancy or conflicting program objectives.



68
  An official told us the health system was not concerned about implicating the anti-
kickback statute with the implementation of their program because of the anti-kickback
statute’s intent requirement. The Stark law’s bona fide employment exception conditions
the exception on the employment being for identifiable services, the remuneration paid
under the employment being consistent with fair market value and not determined in a
way that takes into account the volume or value of referrals, and the remuneration
provided being commercially reasonable even if no referrals were made to the employer.
42 C.F.R. § 411.357(c). Generally, the bona fide employment safe harbor permits
amounts paid by an employer to an employee who has a bona fide employment
relationship for the furnishing of services for which payment is made under Medicare.
42 C.F.R. § 1001.952(i).
69
  HEDIS contains 75 measures, including blood pressure control measures, cancer
screenings, immunizations, and comprehensive diabetes care measures.
70
  Legal experts we spoke with told us they can rely on the following Stark exceptions and
anti-kickback safe harbors: risk-sharing exception and safe harbor, personal services
arrangement exception and safe harbor, fair market value exception, indirect
compensation exception, prepaid plan exception, academic medical center exception,
physician incentive plan exception, and the managed care safe harbor.




Page 20                GAO-12-355 Health Care Financial Incentive Program Implementation
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. 71 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. 72 To comply with this requirement, financial
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.



71
 42 C.F.R. § 411.357(l).
72
 E.g., 42 U.S.C. §§ 1395nn(e)(2)(ii), 1395nn(e)(3)(A)(v), 1395nn(e)(5)(B).




Page 21                GAO-12-355 Health Care Financial Incentive Program Implementation
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. 73 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. 74
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



73
  U.S. Dept. of Health and Human Services, Office of Inspector General, OIG Adv.Op.
08-16 (Washington, D.C.: Oct. 14, 2008).
74
  In addition, the arrangement between the insurer and the hospital would reward the
hospital for meeting efficiency measures.




Page 22                GAO-12-355 Health Care Financial Incentive Program Implementation
                             data, which included data for Medicare patients, instead of using only
                             commercial patient data, to determine incentive payments for
                             physicians. 75 In its advisory opinion on the matter, however, OIG elected
                             not to impose sanctions for this program.

                             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        In addition to the Stark law and anti-kickback statute, hospitals must
That OIG Interpretation of   comply with the CMP law, which OIG interpreted in a 1999 Special
CMP Law Diminished           Advisory Bulletin (SAB) as prohibiting payments from hospitals to
                             physicians to induce a reduction or limitation in Medicare services for
Ability to Reward Any        hospital patients, even if the services are not medically necessary. 76 A
Service Reduction or         violation of the CMP law may result if the hospital knows that the payment
Limitation, Including        may influence the physician to reduce or limit services, even if the
Services Not Medically       payment is not tied to a specific patient or to an actual diminution in care.
Necessary                    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



                             75
                                OIG determined that the program also implicated the CMP law because adherence to
                             quality standards under the program could induce physicians to reduce or limit current
                             levels of items or services provided to Medicare patients, but elected not to impose
                             sanctions. For example, if adherence to a quality standard results in physicians
                             discontinuing an item or service sooner than would be their practice in the absence of the
                             financial incentive program, then a limitation of items or services would occur.
                             76
                               Publication of the OIG Special Advisory Bulletin on Gainsharing Arrangements and
                             CMPs for Hospital Payments to Physicians to Reduce or Limit Services to Beneficiaries,
                             64 Fed. Reg. 37,985 (July 14, 1999).




                             Page 23                 GAO-12-355 Health Care Financial Incentive Program Implementation
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. 77 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. 78
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



77
  In the SAB, OIG pointed to a congressional report noting that a committee of jurisdiction
believed that such incentive payments created a conflict of interest that may limit the
ability of the physician to exercise independent professional judgment in the best interest
of the patient. Additionally, OIG cited a 1986 GAO report that evaluated the potential for
abuse in financial incentive programs. See GAO, Medicare: Physician Incentive Payments
by Hospitals Could Lead to Abuse, GAO/HRD-86-103 (Washington, D.C.: July 22, 1986).
78
  U.S. Dept. of Health & Human Services, Office of Counsel to the Inspector General,
Recent Commentary Distorts HHS IG’s Gainsharing Bulletin, available at
http://oig.hhs.gov/fraud/docs/alertsandbulletins/bnagain.htm.




Page 24                 GAO-12-355 Health Care Financial Incentive Program Implementation
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. 79 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



79
  These financial incentive programs would need to comply with the Stark law and
anti-kickback statute.




Page 25                GAO-12-355 Health Care Financial Incentive Program Implementation
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, 80 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
payments only to quality measures. 81 Although the program retained the



80
  In our work on physician profiling, a review of the literature suggested that without other
incentives, feedback alone has no more than a moderate influence on physician
performance. However, the potential influence of feedback from CMS regarding Medicare
costs is uncertain, and may be greater than that of feedback from other sources, because
Medicare reimbursement typically represents a larger share of physicians’ practice
revenues than that from other insurers. Factors that appear to influence the effectiveness
of feedback include its source, frequency, and intensity. See GAO-09-802. CMS is
implementing a feedback program with physicians. GAO, Medicare Physician Feedback
Program: CMS Faces Challenges with Methodology and Distribution of Physician Reports,
GAO-11-720 (Washington, D.C.: Aug. 12, 2011).
81
  This legal expert told us that clients tend to be conservative and are reluctant to move
forward with the financial incentive program even when he advises them that the
arrangement would not violate the CMP law.




Page 26                 GAO-12-355 Health Care Financial Incentive Program Implementation
                            efficiency measures, such as medically inappropriate days, these
                            measures were tied to widely used clinical standards, 82 no payment was
                            tied to them, and they were used only to collect information on physician
                            performance. 83


OIG Permits Certain         In its 1999 SAB, OIG interpreted the CMP law to prohibit gainsharing
Financial Incentive         arrangements in response to hospitals’ implementation of “black box”
Programs through Its        gainsharing arrangements in the 1990s. In OIG’s view, those gainsharing
                            arrangements, in which physicians were paid for overall cost savings
Advisory Opinion Process,   without the hospitals determining the specific actions the physicians took
but Stakeholders Reported   to generate the savings, posed a high risk of abuse. 84 According to OIG,
Challenges in               the black box gainsharing arrangements provided little accountability,
Implementing These          insufficient safeguards against improper referral payments, and lacked
Programs                    objective performance measures to ensure that quality of care was not
                            adversely affected. 85 In various documents addressing the matter, OIG
                            has noted its concern with the potential effect gainsharing has on the
                            quality of care provided to Medicare patients. Specifically, OIG’s concerns


                            82
                              Specifically, this financial incentive program included the InterQual criteria as its
                            measures. The InterQual criteria represent criteria to evaluate the appropriateness of
                            medical care, based on an assessment of the patient’s clinical status, and include, as part
                            of clinical or quality protocols, standards for appropriate admissions and avoidable days of
                            stay. Additionally, CMS uses the InterQual criteria as part of its inpatient services auditing
                            program.
                            83
                              The legal expert who described this arrangement told us that the program had reduced
                            the average length of stay by 2 days while maintaining quality of care for patients
                            84
                              OIG was concerned that in order to retain or attract high-referring physicians, hospitals
                            would be under pressure from competitors and physicians to increase the percentage of
                            savings shared with the physicians, manipulate the hospital accounts to generate
                            phantom savings, or otherwise game the arrangement to generate income for referring
                            physicians.
                            85
                               OIG advisory opinions have noted that many gainsharing arrangements contain features
                            that heighten the risk that payments will lead to inappropriate reductions or limitations of
                            services. These features include, but are not limited to, a lack of a demonstrable direct
                            connection between individual actions and any reduction in the hospital’s out-of-pocket
                            costs and any corresponding gainsharing payment; the individual actions that would give
                            rise to the savings are not identified with specificity; there are insufficient safeguards
                            against the risk that other, unidentified actions, such as premature hospital discharges,
                            might actually account for any savings; the quality-of-care indicators are of questionable
                            validity and statistical significance; and there is no independent verification of cost
                            savings, quality-of-care indicators, or other essential aspects of the arrangement. See,
                            e.g., U.S. Dept. of Health & Human Services, Office of Inspector General, OIG Adv.Op.
                            05-04 (Washington, D.C.: Feb. 10, 2005).




                            Page 27                 GAO-12-355 Health Care Financial Incentive Program Implementation
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
opinions on specific gainsharing arrangements. 86 In these opinions, OIG
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



86
  U.S. Dept. of Health & Human Services, Office of Inspector General, OIG Adv.Op. 01-01
(Washington, DC: Jan. 11, 2001); OIG Adv.Op. 05-01 (Jan. 28, 2005); OIG Adv.Op. 05-02
(Feb. 10, 2005); OIG Adv.Op. 05-03 (Feb. 10, 2005); OIG Adv.Op. 05-04 (Feb. 10, 2005);
OIG Adv.Op. 05-05 (Feb. 18, 2005); OIG Adv.Op. 05-06 (Feb. 18, 2005); OIG Adv.Op.
06-22 (Nov. 9, 2006); OIG Adv.Op. 07-21 (Dec. 28, 2007); OIG Adv.Op. 07-22 (Dec. 28,
2007); OIG Adv.Op. 08-09 (July 31, 2008); OIG Adv.Op. 08-15 (Oct. 6, 2008); OIG
Adv.Op. 08-21 (Nov. 25, 2008); OIG Adv.Op. 09-06 (June 23, 2009).




Page 28                GAO-12-355 Health Care Financial Incentive Program Implementation
use of certain supplies or devices. 87 The arrangements included similar
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




87
  Examples of cost-saving measures included in gainsharing arrangements permitted by
OIG: Product standardization and substitution include standardizing the types of cardiac
catheterization devices, such as stents and balloons, which are used by the physicians,
and substituting types of items and services for which product substitution will have no
appreciable clinical significance, such as utilizing reusable warming blankets to maintain
body temperature. Opening packaged items only when needed includes having
disposable equipment available to the physician, but only opening the packaging when
needed. Use-as-needed measures include limiting the use of a specific medication given
to many surgical patients preoperatively to prevent hemorrhaging to patients that are at
higher risk of perioperative hemorrhage as indicated by objective clinical standards.




Page 29                 GAO-12-355 Health Care Financial Incentive Program Implementation
•   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 [SAB] 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




Page 30             GAO-12-355 Health Care Financial Incentive Program Implementation
developing arrangements. 88 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. 89 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.


88
  In addition to legal fees, health systems looking to develop financial incentive programs,
including gainsharing arrangements, may have other expenses such as consulting fees
and other internal system costs. One legal expert we spoke with told us that his clients’
reluctance to implement these gainsharing arrangements was due, in part, to business
considerations. Specifically, the costs associated with developing the arrangement may
outweigh the potential quality and efficiency benefits of the arrangement. According to
him, these costs are inherent to the development of gainsharing arrangements and not
due to the requirements of OIG advisory opinions.
89
  One legal expert told us that during this review process, a program can be started while
waiting for the advisory opinion to be issued; however, money cannot be shared with the
physicians during this time. Instead, the money can be put in an escrow account and
distributed after a favorable advisory opinion is issued.




Page 31                 GAO-12-355 Health Care Financial Incentive Program Implementation
                       HHS has permitted implementation of certain financial incentive programs
HHS Has Approved       that otherwise might not be permitted under federal fraud and abuse laws,
Otherwise Prohibited   but it has required safeguards to protect program and patient integrity.
                       CMS has conducted these programs through authorized demonstration
Financial Incentive    projects, the Medicare Shared Savings Program, and the Innovation
Programs That          Center. These demonstration projects and programs are designed for
Incorporate            specific types of providers and health systems, and some health systems
                       may not be willing or eligible to participate.
Safeguards, under
Demonstration          CMS has conducted demonstration projects to test financial incentive
                       programs that include safeguards to protect program and patient integrity.
Project and Other      For example, CMS, as authorized by the Deficit Reduction Act of 2005, 90
Authorities            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. 91 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,


                       90
                        Pub. L. No. 109-171, § 5007, 120 Stat. 4, 34 (2006).
                       91
                        This project began October 1, 2008, and expired on September 30, 2011.




                       Page 32               GAO-12-355 Health Care Financial Incentive Program Implementation
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; 92 legal structure and governance
requirements; 93 patient-centeredness; 94 monitoring; 95 disclosure and
transparency requirements; 96 and program integrity screens. 97 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.




92
 There are 33 quality measures across four domains: Patient/Caregiver Experience, Care
Coordination/Patient Safety, Preventive Health, and At-Risk Population.
93
  Each ACO must establish a mechanism for shared governance and have a leadership
and management structure that includes clinical and administrative systems. An ACO’s
governing body should include ACO participants and a Medicare beneficiary.
94
  Among other things, an ACO must have processes in place to promote patient
engagement that address the following: compliance with beneficiary experience of care
survey requirements; compliance with the beneficiary representation requirements; a
process for evaluating the health needs of the ACO’s population, including consideration
of diversity in its patient populations and a plan to address the needs of its population;
communication of clinical knowledge/evidence-based medicine to beneficiaries in a way
that is understandable to them; beneficiary engagement and shared decision making that
takes into account the beneficiaries’ unique needs, preferences, values, and priorities; and
written standards for beneficiary access and communication, and a process for
beneficiaries to access their medical records.
95
   CMS will use a range of methods to monitor and assess the performance of ACOs,
including but not limited to any of the following, as appropriate: (1) analysis of specific
financial and quality measurement data reported by the ACO as well as aggregated
annual and quarterly reports; (2) analysis of beneficiary and provider complaints; and
(3) audits, including, for example, analysis of claims, chart review (medical record),
beneficiary survey reviews, coding audits, and on-site compliance reviews.
96
  In addition to the data ACOs must report to CMS, ACOs must report specified
information publicly.
97
  According to CMS officials, among other things, CMS will screen ACOs and ACO
participants during its review of ACO applications and throughout the course of the ACOs’
participation in the Medicare Shared Savings Program against the List of Excluded
Individuals and Entities (those excluded from federal health care programs).




Page 33                  GAO-12-355 Health Care Financial Incentive Program Implementation
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. 98 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, 99 CMS and OIG require that the ACO does
not limit or reduce medically necessary services. 100 The waiver covers the
distribution of savings accrued during the period in which the ACO is



98
  Medicare Program; Final Waivers in Connection with the Shared Savings Program,
76 Fed. Reg. 67,992 (Nov. 2, 2011). CMS and OIG included the following additional
waivers for ACOs participating in the Medicare Shared Savings Program: (1) an “ACO
pre-participation” waiver of the fraud and abuse laws that applies to ACO-related start-up
arrangements in anticipation of participating in the Medicare Shared Savings Program,
subject to certain limitations, including limits on the duration of the waiver and the types of
parties covered; (2) an “ACO participation” waiver of the fraud and abuse laws that applies
broadly to ACO-related arrangements during the term of the ACO’s participation
agreement under the Medicare Shared Savings Program and for a specified time
thereafter; (3) a “compliance with the Stark law” waiver of the anti-kickback statute and
CMP law for ACO arrangements that implicate the Stark law and meet an existing
exception; and (4) a “patient incentive” waiver of the anti-kickback statute and the
provision of the CMP law addressing inducements to beneficiaries for medically related
incentives offered by ACOs under the Medicare Shared Savings Program to beneficiaries
to encourage preventive care and compliance with treatment regimes.
99
  In order for the fraud and abuse laws to be waived for the distribution or use of shared
savings under this particular waiver, the ACO must meet the following conditions: (1) the
ACO has entered into a participation agreement and remains in good standing under its
participation agreement; (2) the shared savings are earned by the ACO pursuant to the
Medicare Shared Savings Program; (3) the shared savings are earned by the ACO during
the term of its participation agreement, even if the actual distribution or use of the shared
savings occurs after the expiration of that agreement; (4) the shared savings are (a)
distributed to or among the ACO’s ACO participants, its ACO providers or suppliers, or
individuals and entities that were its ACO participants or its ACO providers or suppliers
during the year in which the shared savings were earned by the ACO, or (b) used for
activities that are reasonably related to the purposes of the Medicare Shared Savings
Program; and (5) payments of shared savings distributions made directly or indirectly from
a hospital to a physician are not made knowingly to induce the physician to reduce or limit
medically necessary items or services to patients under the direct care of the physician.
100
   Payments made by a hospital to induce a physician to reduce or limit medically
necessary care without providing acceptable alternative medically necessary care would
not qualify for the waiver. For example, payments to discharge patients without regard to
appropriate care transitions or payments to use a drug or device known to be clinically
less effective do not qualify for the waiver.




Page 34                  GAO-12-355 Health Care Financial Incentive Program Implementation
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. 101

CMS officials told us the Innovation Center is also developing programs
that use financial incentives and include safeguards used in CMS
demonstrations and the Medicare Shared Savings Program. The
programs will include safeguards such as using patient-centered factors
including beneficiary survey results, provider profiles, and risk scores to
monitor the success of these programs. For example, the Innovation
Center has selected 32 organizations to participate in the Pioneer ACO
Model. 102 Unlike ACOs formed under the Medicare Shared Savings
Program, 103 the Pioneer ACO Model is targeted at organizations that are
already coordinating care for a significant portion of patients under
financial risk-sharing contracts and are positioned to transform both their
care and financial models from fee-for-service to a value-based model. 104
CMS plans to safeguard against a reduction in necessary care in the


101
   According to HHS, PPACA provided the Department broad waiver authority for financial
incentive programs under the Medicare Shared Savings Program. HHS used this authority
to allow many relationships that would have been covered under CMS’s proposed 2008
Stark law exception.
102
  See Medicare Program; Pioneer Accountable Care Organization Model: Request for
Applications, 76 Fed. Reg. 29,249 (May 20, 2011).
103
   The Pioneer ACO Model and the Medicare Shared Savings Program are distinct
programs, and ACOs cannot participate in both programs; however, both programs share
the same goals to improve care for individuals, improve health for populations, and slow
growth in expenditures. The Pioneer ACO Model will complement the Medicare Shared
Savings Program by testing models that may later be adopted in the Medicare Shared
Savings Program.
104
   The Pioneer ACO Model offers multiple payment options. In the first 2 years, all
payment options involve fee-for-service payments during the performance year with the
opportunity to generate shared savings or shared losses at year-end (with higher levels of
risk than in the Medicare Shared Savings Program). In the third year, Pioneer ACOs that
have shown savings over the first 2 years will be eligible to receive population-based
payments. Population-based payment is a per beneficiary per month payment intended to
replace a significant portion of the ACO’s fee-for-service payment with a prospective
payment.




Page 35                GAO-12-355 Health Care Financial Incentive Program Implementation
               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.


               CMS and OIG recognize that properly structured financial incentive
Concluding     programs have the potential to improve quality and reduce costs but that
Observations   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


               Page 36             GAO-12-355 Health Care Financial Incentive Program Implementation
                     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.


                     HHS provided written comments on a draft of this report, which are
Agency Comments      reprinted in appendix I. HHS and DOJ provided technical comments
and Our Evaluation   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


                     Page 37            GAO-12-355 Health Care Financial Incentive Program Implementation
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.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
date of the report. At that time we will send copies of the report to the
Secretary of Health and Human Services and the U.S. Attorney General.
This report also will be available at no charge on the GAO Web site at
http://www.gao.gov.




Page 38            GAO-12-355 Health Care Financial Incentive Program Implementation
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.




James Cosgrove
Director, Health Care




Page 39            GAO-12-355 Health Care Financial Incentive Program Implementation
List of Addressees

The Honorable Max Baucus
Chairman
Committee on Finance
United States Senate

The Honorable Michael F. Bennet
United States Senate

The Honorable Al Franken
United States Senate

The Honorable Kirsten Gillibrand
United States Senate

The Honorable Kay Hagan
United States Senate

The Honorable Mark Udall
United States Senate

The Honorable Tom Udall
United States Senate

The Honorable Mark R. Warner
United States Senate




Page 40              GAO-12-355 Health Care Financial Incentive Program Implementation
Appendix I: Comments from the Department
             Appendix I: Comments from the Department of
             Health and Human Services



of Health and Human Services




             Page 41               GAO-12-355 Health Care Financial Incentive Program Implementation
Appendix I: Comments from the Department of
Health and Human Services




Page 42               GAO-12-355 Health Care Financial Incentive Program Implementation
Appendix I: Comments from the Department of
Health and Human Services




Page 43               GAO-12-355 Health Care Financial Incentive Program Implementation
Appendix II: GAO Contact and Staff
                  Appendix II: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  James Cosgrove, (202) 512-7114, cosgrovej@gao.gov
GAO Contact
                  In addition to the contact named above, Christine Brudevold, Assistant
Staff             Director; Helen Desaulniers, Assistant General Counsel; Jasleen Modi;
Acknowledgments   Elizabeth T. Morrison; Sarah Resavy; Lillian Shields; Hemi Tewarson;
                  and Jennifer Whitworth made key contributions to this report.




                  Page 44                 GAO-12-355 Health Care Financial Incentive Program Implementation
Related GAO Products
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             Medicare Physician Feedback Program: CMS Faces Challenges with
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             Washington, D.C.: August 12, 2011.

             Value in Health Care: Key Information for Policymakers to Assess Efforts
             to Improve Quality While Reducing Costs. GAO-11-445. Washington,
             D.C.: July 26, 2011.

             High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February
             2011.

             Medicare: Private Sector Initiatives to Bundle Hospital and Physician
             Payments for an Episode of Care. GAO-11-126R. Washington, D.C.:
             January 31, 2011.

             Medicare: Per Capita Method Can Be Used to Profile Physicians and
             Provide Feedback on Resource Use. GAO-09-802. Washington, D.C.:
             September 25, 2009.

             Medicare Physician Payment: Care Coordination Programs Used in
             Demonstration Show Promise, but Wider Use of Payment Approach May
             Be Limited. GAO-08-65. Washington, D.C.: February 15, 2008.

             Medicare: Focus on Physician Practice Patterns Can Lead to Greater
             Program Efficiency. GAO-07-307. Washington, D.C.: April 30, 2007.

             Medicare: Advisory Opinions as a Means of Clarifying Program
             Requirements. GAO-05-129. Washington, D.C.: December 8, 2004.

             Medicare: Referrals to Physician-Owned Imaging Facilities Warrant
             HCFA’s Scrutiny. GAO/HEHS-95-2. Washington, D.C.: October 20, 1994.

             Medicare: Physician Incentive Payments by Prepaid Health Plans Could
             Lower Quality of Care. GAO/HRD-89-29. Washington, D.C.:
             December 12, 1988.

             Medicare: Physician Incentive Payments by Hospitals Could Lead to
             Abuse. GAO/HRD-86-103. Washington, D.C.: July 22, 1986.




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             Page 45                GAO-12-355 Health Care Financial Incentive Program Implementation
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