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R. Mark Hodges is a shareholder with Wise Carter Child and Caraway. He practices primarily in the area of healthcare law

Market and regulatory forces are creating an increasing need for cooperative efforts between hospitals and their medical staffs. Cost containment, outcomes analysis, quality metrics and other pay for-performance (P4P) initiatives incentivize strategic alliances between physicians and the hospitals at which they practice. Whether this represents a fundamental change in the healthcare delivery system or simply the latest healthcare industry fad remains to be seen.

CMS is moving increasingly toward tying benefits to quality outcomes. These quality outcomes, in turn, are based on clinical and cost factors which are difficult to achieve without the concerted involvement of hospitals and their medical staffs. For example, the CMS pilot projects for cardiac services put at risk a percentage of a facility’s payment based on its achievement of certain quality measure goals, focused on medical outcomes and complication and survival rates for cardiac patients.

To achieve concerted clinical action, many hospitals are contracting with members of their medical staffs to assist in identifying and monitoring specific quality measures and in developing management plans for improving performance and quality measure scores. These agreements run the gamut, from medical director agreements (paying physicians by the hour to assist with quality initiatives in their specialty) to full management agreements where particular departments or service lines are turned over to physician specialists for operational management.

Call coverage is another area where hospital and medical staff cooperation is essential. Faced with EMTALA obligations in their emergency departments, hospitals must rely on the medical staff to provide call coverage for specialties that will be available when needed in the emergency department. In its 2004 final EMTALA regulations, CMS passed on the opportunity to further define the respective responsibilities of the hospital and medical staff to provide call coverage in the emergency department, leaving the matter to be negotiated between each individual hospital and its medical staff. Since EMTALA requires hospitals to maintain an on-call list and to have backup procedures when a particular specialty is not covered for purposes of emergency department call, the negotiation of call coverage arrangements continues to be a challenging issue. Specialties that are more frequently needed in the emergency department, such as orthopedics and general surgery, are increasingly demanding to be paid for call coverage.

Each contractual arrangement between a hospital and its physicians raises legal and compliance issues that must be addressed. While P4P and other CMS initiatives have the effect of pushing hospitals and their medical staffs toward contractual arrangements, the contracting providers still face the Medicare Anti-kickback Statute (AKS), the Stark Physician Referral Law and other federal regulatory schemes that are designed to limit contractual arrangements between hospitals and referring physicians. Each contractual arrangement must fit within a Stark exception to avoid rendering every referral from the contracting physician to the hospital a Stark violation and must also be examined under the AKS to avoid the criminal sanctions it carries.

Another regulatory hurdle is the Civil Monetary Penalty Statute (CMP), which, among other things, prohibits incentivizing the withholding of care and services. This statute illustrates the tension between different policy positions advanced by CMS. The DRG system, where hospitals are paid a fixed amount per in-patient stay based on diagnosis code regardless of the amount of time the patient is in the hospital, was designed to contain costs and to encourage earlier discharge of patients. Physicians, who are still paid on a fee for service basis, do not have an obvious financial incentive for early discharge like the hospitals have under the DRG system. Yet, a quality measures agreement that rewards physicians for decreasing the average length of stay for hospital patients would generally be considered a violation of the CMP on the theory it could incentivize the withholding of care.

Similarly, CMS policy advocates hospital cost savings on supplies and equipment. One proven way to achieve these savings is to involve in the acquisition process the physicians who utilize the supplies and equipment purchased by the hospital. Gain-sharing agreements reward specialists on the medical staff for standardizing the range of equipment and supplies they use and for implementing a variety of measures, such as limiting the number of instruments that are opened until they are needed, to save costs for the hospital. Resulting savings or “gains” are then shared between the physicians and hospital pursuant to a contractual arrangement.

CMS has given its blessing to a number of gain-sharing arrangements in advisory opinions issued under the AKS. However, in each of those advisory opinions, CMS has limited its determination specifically to the arrangement before it and has also expressed concerns that the AKS is still implicated in the arrangement.
Moreover, one CMS proposed amendment to the Stark regulations would effectively outlaw all gain-sharing arrangements by prohibiting any payments to physicians based on cost savings and other factors that are not direct payments for physician services. While that regulation was not enacted, CMS still has not created a Stark exception for gain-sharing arrangements and they must still be dealt with under existing Stark exceptions where the gain-sharing compensation is one component of a personal services agreement.

In summary, the healthcare industry must continue to navigate the regulatory rules designed to limit contractual relationships between healthcare entities and their referral sources, even as other CMS policy initiatives encourage hospital-physician contractual arrangements to maximize efficiency, profitability and overall quality of care. This is true whether the latest CMS initiatives present a fundamental change in the healthcare system or just another industry fad.




R. Mark Hodges is a shareholder with Wise Carter Child and Caraway. He practices primarily in the area of healthcare law with an emphasis in the areas of healthcare litigation, regulatory compliance/enforcement defense, and medical practice management and transactions.



June 2008

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