One emerging trend in health care is a movement away from a fee-for-service payment system and toward rewarding performance or "value-based purchasing." In other words, it is an approach to attempt to pay providers for quality outcomes, rather than for quantity of services provided. This is a theme that permeates the Patient Protection and Affordable Care Act (PPACA). One major example of PPACA’s encouragement of value-based purchasing is the establishment of the Medicare Shared Savings Program, which allows for sharing of saved costs by the government and providers through accountable care organizations (ACOs), while, for now, retaining the traditional fee-for-service payment model.

While there is the incentive for possible increased remuneration in arrangements designed to reward improving quality, one concern of providers is how to structure such arrangements without running afoul of the federal fraud and abuse laws.

On January 7, the Department of Health and Human Services (HHS), Office of Inspector General (OIG) posted the lengthy advisory opinion (No. 12-22) that examined an arrangement involving payment of a performance bonus to a cardiology group for implementing certain patient service, quality and cost savings measures at a local hospital’s cardiac catheterization lab.

After an extensive analysis of the requestor’s certified facts, the OIG determined that although the arrangement implicated the civil monetary penalty provisions of the Social Security Act and the federal Anti-Kickback Statute, the OIG would not seek sanctions under the particular circumstances of this arrangement, specifically due to the safeguards in place.

The opinion is particularly timely and relevant given the federal government’s current push toward value-based purchasing. Although OIG opinions may only be relied on by those to whom they are issued, this opinion does help provide critical input to those interested in implementing a quality improvement-based payment concept.

Factual Background

The opinion was requested by a large, acute care hospital located in a rural, medically underserved area. The hospital operates four cardiac catheterization laboratories. The hospital entered into a co-management agreement with a physician group consisting of 18 physicians, six of whom perform procedures in the cath labs. The group bills insurers (including Medicare) for the professional cardiology services rendered, while the hospital bills for the nonprofessional fees generated in the cath labs. The group refers patients to the hospital for various medical services.

The basic terms of the management agreement were that it lasted for a term of three years. The group provided extensive management and medical direction services to the hospital in exchange for a twofold payment. The payment included an annual fixed-fee component and a potential annual performance-based bonus (which had a maximum annual amount equal to the fixed-fee annual component). These payments are to be made to the group. To the extent the payments result in dividends payable to the group’s shareholders, they are paid by the group based on a pro rata share of ownership. The performance fee consists of the following components: employee satisfaction (5 percent); patient satisfaction (5 percent); improved quality of care (30 percent); and a cost reduction component (60 percent). The group may also receive an additional payment if this hospital is designated as a Thomson Reuters Top 50 Cardiovascular Hospital.

The hospital established a three-tier baseline measure for each component of the performance-based bonus. If the group fails to meet the lowest baseline, it receives no payment for that measure. Conversely, if the group meets the lowest baseline, it receives 50 percent of the total compensation available for that component. If it meets a middle benchmark, it receives 75 percent. If it achieves the highest benchmark, it receives 100 percent. The opinion provided extensive detail on the measures that the group must achieve for each component of the performance fee, which includes items such as comparison of results to national data and achieving certain set objective measures (such as amount of time for patient "door-to-balloon time").

The hospital further certified that it bases purchasing decisions on the best interests of patient care and utilizes products proven to be safe and effective. The hospital made other extensive certifications relative to assurances that patient care and safety would not be compromised in order to achieve the cost savings.

OIG Analysis

The OIG began by noting that although the payments such as the performance bonus here are designed to improve quality, such arrangements between referring entities may be misused to "induce limitations or reductions in care or to disguise kickbacks for federal health care program referrals." However, when properly structured, such arrangements may serve legitimate business and medical purposes. The OIG continued to state its concerns relative to such arrangements including: "stinting" patient care; cherry-picking healthier patients to the neglect of sicker patients; payments being made to induce referrals; and causing unfair competition among hospitals.

The OIG noted that hospital cost-savings programs may implicate at least three areas of federal law: the civil monetary penalty for reductions or limitations of services provided to Medicare and Medicaid beneficiaries under the Social Security Act, the Anti-Kickback Statute and the Stark Law. The OIG expressed only its opinion on the first two, as the Stark Law is outside its scope of authority.

The OIG first addressed the civil monetary penalty (CMP) and concluded that it is implicated by the cost savings component of the performance fee bonus. The fixed fee and other components of the performance fee, according to the OIG, did not implicate the CMP. Under the Social Security Act, a civil monetary penalty may be assessed against any hospital that knowingly makes a payment to induce a physician to limit services to Medicare or Medicaid beneficiaries.

Although the OIG found that the CMP was implicated, it determined that the cost savings component of the performance fee provided sufficient safeguards that the OIG would not seek sanctions. Some of the rationales on which the OIG based this decision are as follows:

• The hospital certified that the arrangement would not adversely affect patient care and, in this regard, monitored this issue in numerous ways.

• Based on the structure of the arrangement, there was a low risk that the standardized implementation of certain cost savings measures would be used in medically inappropriate circumstances. Each physician was given access to the devices and supplies he or she deems most medically appropriate.

• There is a limited amount of financial incentive tied to the cost savings component.

• Receipt by the group of the performance fee was conditioned upon the physicians not stinting on care, increasing referrals to the hospital, cherry-picking patients or accelerating discharges.

The OIG next analyzed the arrangement under the federal Anti-Kickback Statute. Briefly, the statute makes it a crime to knowingly and willfully offer, pay, solicit or receive any remuneration to induce or reward referrals for services payable under the federal health care programs. Violation of the statute is a felony, punishable by a fine of up to $25,000 and/or imprisonment of up to five years. There are safe harbors to the statute, whereby if a transaction fits squarely within the harbor there will be no prosecution. Failure to meet a safe harbor does not automatically constitute a violation of the statute, but the transaction must be analyzed under the circumstances.

The OIG examined the transaction for compliance with the safe harbor for personal services and management contracts. However, because the performance fee portion of the payment is not set forth in advance, this safe harbor could not be met. Therefore, the OIG examined the totality of the circumstances. In doing so, it reiterated its concerns that compensation arrangements between physicians and hospitals are used to disguise remuneration to reward or induce referrals to the hospital. The OIG ultimately concluded that, having studied this arrangement, although it could result in illegal remuneration if the requisite intent were present, the OIG would not impose sanctions.

The following were part of the OIG’s rationale in so concluding:

• The hospital certified that the compensation being paid to the group was fair market value for the substantial amount of management services provided.

• The compensation payable does not change based upon the volume of patients treated.

• Because the hospital has the only cardiac cath lab within a 50-mile radius and because the group only provided cardiac catheterization services at the hospital’s cath lab, it was unlikely the payment was offered as an incentive to refer business to the hospital rather than competing laboratories.

• Due to the high level of specificity for the measures, it is more likely the arrangements help ensure quality rather than induce referrals.

• The management agreement was limited in duration to three years.

For readers interested in further details of the arrangement and the OIG’s analysis, the opinion is available at

Vasilios J. Kalogredis is the president and founder of Kalogredis Sansweet Dearden & Burke, a health care law firm, and Professional Practice Consulting Inc., a health care consulting firm, in Wayne, Pa. He can be contacted at 800-688-8314 or at

Karilynn Bayus is an associate at the firm. Her practice involves litigation of health care-related matters. Bayus graduated from Temple University’s Beasley School of Law in 2006. She may be reached at