Type: Law Bulletins
Date: 05/23/2012

GAO Report Suggests Fraud and Abuse Laws May Hinder Implementation of Financial Incentive Programs

On March 30, 2012, the Government Accountability Office (“GAO”) published a report entitled “Medicare: Implementation of Financial Incentive Programs under Federal Fraud and Abuse Laws.”  The report was a response to a request from certain members of Congress who had asked the GAO to review how federal laws and regulations may affect the development of financial incentive programs  designed to promote quality and efficiency.  In conducting the study, the GAO interviewed officials from the Centers for Medicare and Medicaid Services (“CMS”), The United States Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”), the United States Department of Justice (“DOJ”), legal experts, and representatives of health care industry groups and health systems. 

The GAO noted that although results to date have been mixed, some experts believe that financial incentive programs have the potential to increase quality and efficiency.  However, the GAO also noted that financial incentives may affect a physician’s judgment, introducing a profit motive that may lead to inappropriate referrals or reductions or limitations in services, and thereby implicating the health care fraud and abuse laws.  One health system reported that it was able to implement a financial incentive program to reward physicians who met certain quality measures by structuring the program to comply with the Stark “bona fide employment” exception.  However, to expand the program to non-employed physicians (who constituted 90% of the medical staff), the health system had to implement a separate program through its health plan.  The GAO noted that 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 contractors.   Legal experts surveyed by the GAO noted that the fair market value standard found in many Stark exceptions would be difficult to apply to incentive programs that involve meeting a clinically based outcome measure.  Similarly, legal experts reported that Stark exceptions that prohibit compensation to a physician from reflecting the volume or value of referrals made by the physician may require that financial incentive programs 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.

The Civil Monetary Penalty (“CMP”) law also presents a potential barrier to implementing financial incentive programs.  Any hospital financial incentive program that encourages physicians through payments, indirectly or directly, to reduce or limit clinical services violates the CMP law.  However, the OIG has indicated that hospitals may align incentives with physicians to achieve cost savings through means that do not violate the CMP law.  For instance, hospitals may pay physicians a fixed fee that is fair market value for specific services rendered.  The OIG has indicated that even if such a 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.  The GAO gave as an example a program that rewards physicians for completing hospital rounds by a specific time.  Such a program may well result in patients being evaluated for discharge earlier and thus allow the hospital to reduce costs, but the payments would not themselves be tied to a reduction of limitation of services.  Nevertheless, stakeholders indicated that concerns about the CMP law have dissuaded them from implementing even financial incentive programs that were expressly based on specific clinical evidence and quality measures, since such programs could still be viewed as incentivizing the reduction or limitation of services.

The GAO noted that neither the OIG nor the DOJ took any enforcement actions against financial incentive programs in fiscal years 2005 through 2010.  Nevertheless, the GAO reported that stakeholders with whom it spoke reported that the laws, regulations, and agency guidance have created challenges for financial incentive program design and implementation, causing some health systems to terminate or refrain from implementing these programs.  Further, CMS acknowledged that existing Stark law exceptions may not be sufficiently flexible to encourage a wider array of incentive programs that promote quality and achieve cost savings.  However, CMS is hamstrung by the statutory requirement that any Stark exceptions pose “no risk” of program or patient abuse—a high bar that limits CMS’ ability to create new regulatory exceptions.  Thus, a 2008 attempt by CMS to create a new exception covering financial incentive programs has not been finalized, in part due to commenters’ concerns about the number of safeguards needed in the proposed rule to meet the “no risk” standard.  In addition, unlike under the Stark and anti-kickback statutes, the CMP law does not include any statutory exceptions nor does it give the OIG the authority to create regulatory exceptions.

The GAO noted that some positive steps have been taken to create room under the fraud and abuse laws for financial incentive programs, including:

  • OIG Advisory Opinions stating that certain gainsharing arrangements present a low risk of program abuse and would, therefore, not be subject to sanctions.
  • The Medicare Hospital Gainsharing Demonstration project.
  • The Medicare Shared Savings Program (“MSSP”) authorized under The 2010 Patient Protection and Affordable Care Act (“PPACA”), under which HHS is authorized to waive fraud and abuse laws as may be necessary to carry out the MSSP.
  • CMS’ Innovation Center, which is developing programs that use financial incentives and include safeguards used in CMS demonstrations and the MSSP.

The GAO concludes that CMS and the OIG recognize that properly structured financial incentive programs have the potential to improve quality and reduce costs but that improperly structured programs can disguise payments for referrals or adversely affect patient care.  The GAO notes that there are no exceptions or safe harbors specifically for financial incentive programs, and 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.  Thus, stakeholders’ concerns may hinder the implementation of financial incentive programs to improve quality and efficiency on a broad scale. 

A copy of the GAO report may be found here.  If you have questions about the report, or about the legal issues in implementing financial incentive programs, please contact a member of the Health and Life Sciences Practice Group.


1For purposes of the study, the GAO used the term “financial incentive program” to refer to pay-for-performance programs, shared savings programs, and gainsharing arrangements.

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