Advisory Opinion 08-16, the text of which is linked below, involved a nonprofit hospital’s Pay for Performance (P4P) program with a commercial insurer and certain physicians on the hospital’s medical staff. Under the P4P program, the insurer pays the hospital bonus compensation calculated as percentage of the annual base compensation it otherwise pays to the hospital if the hospital meets specified quality and efficiency standards. The insurer can pay the hospital a maximum amount of bonus compensation of 4% of the annual base compensation. To receive bonus compensation in 2008, the hospital must meet quality standards for all hospital patients (including Medicare, Medicaid, and privately insured patients). The patients must be admitted to the hospital with six specified conditions or procedures, by reporting data and meeting quality targets derived from the Specifications Manual for National Hospital Quality Measures published by The Joint Commission (the Quality Measures Manual).

The physician component of the program calls for the hospital to enter into a quality enhancement professional services agreement with a physician entity for an initial term of three years, subject to automatic renewal for additional terms. Under the quality enhancement agreement, the hospital will pay the physician entity a portion not to exceed 50% of the bonus compensation the hospital receives from the commercial insurer for meeting the quality targets. The hospital and physician entity will negotiate a specific fair market value percentage to be paid to the physician entity from year to year. Upon receipt of its payment, the physician entity will distribute the hospital payment to its physician members on a per capita basis. The program also includes a cap on payments to the physician entity, which is tied to the base compensation paid by the commercial insurer to the hospital. Any increase in patient referrals to the hospital due to an increase in annual base compensation receive d by the hospital from the commercial insurer would not increase the annual payment to the physician entity. In addition, the hospital will monitor the implementation of quality targets throughout the program to ensure that they do not result in inappropriate reductions or limitations on patient care—and the hospital will terminate application of any quality target determined to have an adverse effect on patient care. Likewise, the hospital will terminate physicians with significant referral increases to the hospital from participation in the program. The hospital will also inform all patients admitted to the hospital with one of the specified conditions subject to quality targets about the program in writing.

In its analysis of the hospital payments to the physician entity under the CMP law, the OIG declined to impose penalties due to the presence of the following program safeguards designed to reduce the risk of fraud and abuse:

·         The quality targets are based on credibly medical evidence indicating that they improve patient care;

·         If a quality standards is contraindicated for a particular patient, the hospital payment to the physicians will not be reduced;

·         The quality targets are reasonably related to the practices and patient population of the hospital; and

·         The hospital will monitor the quality targets and their implementation throughout the program to avoid inappropriate limits on patient care or services.

The OIG also noted that the base compensation and bonus compensation paid by the commercial insurer to the hospital, as well as the physicians’ quality efforts, involved all hospital patients admitted with the specified conditions—not just those patients insured by the commercial insurer.

Similarly, the OIG declined to impose administrative sanctions under the anti-kickback statute based on the presence of the following program safeguards:

·         The membership of the physician entity will be limited to physicians who have been on the active medical staff for at least one year, thereby minimizing the likelihood that the arrangement will attract referring physicians or increase referrals from existing physicians;

·         Compensation paid to the physician entity will be subject to a cap tied to the base compensation paid by the private insurer to the hospital in the base year so that increases in patient referrals to the hospital will not increase hospital payments to the physician entity;

·         The physician entity’s distribution of hospital payments to its physician members will be on a per capita basis—and participation in the program will be offered to all physicians, not just high-referring physicians (these factors will serve to reduce the risk of rewarding individual physicians for referrals to the hospital);

·         The commercial insurer will oversee the arrangement to ensure that hospital payments to physicians are based on meeting the quality standards based on the Quality Measures Manual published by The Joint Commission with input from CMS; and

·         The program will be limited to a three-year term (the OIG expressed no opinion on the potential future renewal terms of the program but nevertheless suggested that payments in subsequent terms should not be based on improvements achieved in prior years such that incentives for achievement of new improvements should be included in future terms).

Advisory Opinion 08-16 is available at this link: