OIG Issues Green Light to Hospital "Pay for Quality" Arrangement

15 October 2008 Publication
Authors: Anil Shankar

Legal News Alert: Health Care

The health care industry’s increasing emphasis on quality of care and improving outcomes has created a need for innovative business models that align the interests of physicians and hospitals without conflicting with fraud and abuse laws. In Advisory Opinion 08-16, the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) approved, for the first time, a hospital program to pay physicians for achieving quality of care by sharing the financial benefits received by the hospital through pay-for-performance (P4P) programs offered by third-party payors. Now, hospitals are able to align financially with their medical staffs to drive quality of care improvements at the hospital.

The approved arrangement consists of a Quality Enhancement Professional Services Agreement (Agreement) between a hospital and a physician-owned professional limited liability corporation (PLLC), which is open to all active staff members at the hospital in the relevant departments. Under the Agreement, physicians who join the PLLC will provide specific quality-related services to the hospital in order to improve the quality of care provided to the hospital’s patients. These services include developing policies and procedures, reviewing and monitoring quality of care in the hospital, providing care in accordance with hospital quality targets, ensuring adequate peer review if quality targets are not achieved, and auditing medical records to track compliance with quality activities. In exchange for these services, the hospital will pay the PLLC (which then distributes the payment(s) to the member physicians on a per capita basis) a percentage of the P4P award received by the hospital for achieving specific quality targets established by payors. This arrangement permits the physicians to participate in the proceeds received by the hospital for providing high-quality care, which benefits the hospital, physicians, and patients.

Structuring the P4P Agreement
Although the Agreement does raise issues under the civil money penalties and Anti-Kickback statutes, the parties included several safeguards designed to reduce the risk of federal health care program abuse. First, only physicians who have been members of the hospital’s active medical staff for at least one year are eligible to become owners of the PLLC, a requirement intended to reduce the risk of physicians joining the medical staff of the hospital (and moving their patients there) in order to join the PLLC and participate in the potential quality-bonus payments. Second, the physician-owners of the PLLC receive distributions on a per capita basis; there are no payments made to induce patient referrals to the hospital. Third, the payments by the hospital to the PLLC are capped based upon historical activity levels of the payor(s) at the hospital to ensure that physicians are not provided a financial incentive to refer additional patients to the hospital. Fourth, the hospital will provide written disclosure of its arrangement with the PLLC to its patients. Fifth, the hospital will monitor both the quality of care provided and the volume and case mix of its patients to ensure that the financial rewards of the program do not reduce quality or inappropriately change referral patterns of the physician participants. Finally, the quality targets that can be incentivized under the program are limited to those listed by the Centers for Medicare & Medicaid Services and Joint Commission in the Specifications Manual for National Hospital Quality Measures, which represent the consensus of the medical community as to the appropriate standard of care.

The OIG deemed these safeguards sufficient to approve the Agreement, and they can serve as a guide for future arrangements. The OIG’s approval of the Agreement demonstrates a willingness to allow hospitals to pursue this promising method of aligning hospitals and physicians so that they can better work together to drive quality of care improvements.

Although the OIG approved the Agreement in Advisory Opinion 08-16, this approval extends only to those parties who submitted the OIG Advisory Opinion request and, technically, only they may rely on it. Other manifestations of this model must be structured carefully with the advice of legal counsel to survive regulatory scrutiny.

The primary benefit of the arrangement is that it will likely improve quality of patient care by sharing the rewards for higher quality care with the medical staff that are primarily responsible for delivering it, and who are better suited to initiate, innovate, or carry out required actions. Performing well on quality metrics requires the participation and performance of the entire medical staff in relevant departments. Sharing the financial rewards for achieving those metrics with physicians is a positive way to incentivize broad compliance with specific quality standards. While physicians are under no obligation to join the arrangement, the physicians who do have strong incentives for assisting non-participating physicians to achieve the quality metrics, since the benefits of the arrangement are tied to the quality performance outcomes of the hospital, not to individual physicians. Participating physicians thus have a vested interest in encouraging the recommended medical practices among all physicians on the medical staff and in engaging in meaningful peer review.

The arrangement also should benefit both hospitals and physicians financially. Physicians are able to replace declining incomes through an arrangement that does not compete with the hospital. For hospitals, the participation of physicians to help improve the quality of care should allow hospitals to receive the highest quality outcomes, thus improving reimbursement from the payors under P4P arrangements. P4P programs are widely considered an important part of the future of health care funding, and hospitals that successfully participate in these programs gain a significant advantage in obtaining a share of those funds. Under this structure, hospitals can actively participate in P4P arrangements with payors, knowing that they can perform well under the arrangement(s), thus allowing both hospitals and physicians to improve their revenue yet maintain their focus on their core business.

This arrangement also provides assistance in minimizing compliance risks now associated with quality of care, thus reducing the risk of enforcement actions for quality failures. Government regulators have identified quality of care violations as an enforcement priority under the False Claims Act, resulting in many multimillion dollar settlements with the government because of alleged substandard quality of care and unnecessary procedures. The 2009 OIG Work Plan has identified two specific enforcement initiatives focused on quality of care: a review of the reliability of hospital-reported quality measurement data and a review of the incidence of, and payments for, serious medical errors or “never events.” This new structure provides hospitals with a way to engage physicians proactively to improve quality, which assists the hospitals in avoiding costly public enforcement actions based upon quality failures. 

Legal News Alert is part of our ongoing commitment to providing up-to-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals: 

Janice A. Anderson
Chicago, Illinois

Charles B. Oppenheim
Century City, California

Richard K. Rifenbark
Century City, California

Anil Shankar
Los Angeles, California

Cheryl L. Wagonhurst
Los Angeles, California

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