Gainsharing agreements save money but pose risks

(Editor's note: This is the first of a two-part series on the risks of gainsharing agreements and how to structure them safely. This month's report outlines the potential danger and next month's conclusion will explain how to make sure a gainsharing agreement is structured properly to reduce the risk.)

Gainsharing agreements are becoming increasingly popular as hospitals and other health care organizations look for ways to cut costs and improve profitability, but health care attorneys caution that these arrangements bring many risks and must be structured very carefully.

These agreements allow hospitals to have more say in what medical devices physicians use, which in turn yields savings by streamlining the purchasing process and focusing on items that are of the same quality but cost less, explains Scott Buchholz, JD, CPHRM, an attorney with Dummit Briegleb in San Diego. Buchholz spoke on the topic at the recent meeting of the American Society for Healthcare Risk Management in San Antonio.

"A hospital works with physicians to reduce the number of medical device vendors it purchases from and to increase efforts to make more efficient use of surgical supplies, including multiple use of certain surgical equipment," he says.

The financial benefits can be significant, but Buchholz says risk managers should watch out for the downside of gainsharing. Federal and state laws and regulations can be a problem, he notes. For starters, the Federal Civil Monetary Penalty Statute imposes financial penalties upon hospitals that knowingly make payment directly or indirectly to a physician as an inducement to reduce or limit services to Medicare or Medicaid beneficiaries.

"That can be a key," Buchholz says. "Any evidence that the gainsharing was an inducement to reduce or limit services is a big risk."

OIG says some arrangements OK

The federal anti-kickback statute also prohibits anyone from knowing and willingly paying or receiving any payment for referring patients for the provision of items or services for which payment may be made under a federal health care program. And, the federal self-referral law, commonly known as the Stark law, prohibits physicians from referring Medicare and Medicaid patients for the provision of certain "designated health services" to an entity with which a physician has made a financial relationship.

However, Buchholz says the federal government has made clear that gainsharing can be acceptable as long as you follow certain guidelines. The Office of Inspector General (OIG) issued advisory opinions in February 2005 in which it approved hospital/physician gainsharing agreements. (See the advisory opinion at Previous advisory opinions had discouraged gainsharing agreements, but Buchholz says the OIG now recognizes that hospitals have a legitimate interest in aligning with physicians to reduce or eliminate unnecessary or inflated hospital costs.

Another attorney cautions that the OIG advisory opinion is quite limited. Frank Sheeder, JD, an attorney with the firm of Brown McCarroll in Dallas says the February 2005 opinion was a departure from the OIG's long-established positions against gainsharing arrangements. "The facts on which the advisory opinions were based were limited, and lawyers are still skeptical about whether the government will actually soften its stance to a point that gainsharing becomes more widespread," he says. "Hospitals should proceed with caution in this area because of the potential to violate these separate and punitive federal statutes, which can include criminal sanctions."

The widely held views as to why gainsharing arrangements can be problematic are that they can limit access to care and treatment, and supplant the physician's clinical judgment, Sheeder explains. A patient could bring a suit against a hospital on the basis that he or she was victimized in that way by a gainsharing practice, he says.

In addition to regulatory concerns, Buchholz says risk managers also should be concerned about tort liability. Case law traditionally has held that hospitals are not sellers of products used during a medical procedure but rather they are providing a service only, he explains. The hospitals' involvement with the purchase of a medical device is seen as incidental to providing a service. But gainsharing agreements, if they are not used carefully, could lead courts to the opposite conclusion, he warns.

That conclusion would have dire implications for hospitals because they would be subject to increased liability exposure under strict liability and breach of warranty. Hospitals already are named in lawsuits alleging defective medical products, but Buchholz says those claims usually are easily defeated. State tort reform also offers protection by placing caps on damages for professional negligence. However, indiscreet use of gainsharing could change all those safety nets, Buchholz says.

"The ease of defeating such lawsuits or protections offered by tort reform could be circumscribed should courts begin to view hospitals as being in the chain of commerce as product sellers," he says.


For more information on gainsharing agreements, contact:

  • Scott Buchholz, Dummit Briegleb Boyce & Buchholz, 525 B St., Suite 1400, San Diego, CA 92101-8114. Telephone: (619) 231-7738. E-mail:
  • Frank Sheeder, Brown McCarroll, 2001 Ross Ave., Suite 2000, Dallas, TX 75201. Telephone: (214) 999-6100. E-mail: