The nation’s transition to value-based payment is creating an environment that is increasingly favorable to gainsharing, where hospitals and physicians share cost savings obtained through collaborative efforts to reduce waste, improve quality, and increase efficiency.



At a Glance

  • Gainsharing initiatives stalled in the past due to legal concerns, but they are enjoying a renaissance as part of broader initiatives, such as accountable care organizations and bundled payments.
  • In the past, with so much of the focus on the legal aspects of gainsharing, the potential of gainsharing to preserve physician choice, reduce costs, and maintain or improve quality may have been underestimated.
  • A gradual gainsharing rollout tailored to the needsof various clinical areas can boost an organization’s prospects for success.

Gainsharing is an approach to improving processes and reducing costs that emerged in the healthcare industry in the late 1990s, in which physicians’ efforts to improve performance were rewarded with a share in the financial savings associated with those efforts. Legal obstacles to gainsharing materialized in 1999, however, when the U.S. Department of Health & Human Services Office of Inspector General (OIG) released a special advisory bulletin stating that the government could impose a civil monetary penalty (CMP), or fine, on a hospital that pays a physician or physicians for reducing or limiting services to Medicare or Medicaid beneficiaries under their care. In the OIG’s view, such activity, prohibited under the anti-kickback statute, was an all-too-likely consequence of gainsharing arrangements. Broad adoption of gainsharing was effectively stalled by hospitals’ concerns about incurring federal CMPs as a result of entering into gainsharing agreements with physicians. 

The OIG subsequently issued a series of 14 gainsharing advisory opinions that provided guidance for hospitals, indicating that it would not impose sanctions so long as the arrangements meet certain criteria. The OIG requirements are stringent, but they are not insurmountable. The experiences of one hospital that modeled its gainsharing program after the OIG’s guidance in the 14 advisory opinions offers clear evidence of how gainsharing can be effectively used to reduce costs, with respect to physician preference items, in particular.

Tracing a Gainsharing Program’s Trajectory

St. Luke’s Health System—an 864-licensed-bed health system in Boise, Idaho—implemented a five-year gainsharing program, based on the OIG’s criteria, to lower costs in the three areas where it had experienced the highest spend: cardiovascular, orthopedic, and spine services. St. Luke’s modeled its program after the safeguards laid out in the other advisory opinions rather than applying for its own opinion. As a result of the program, St. Luke’s was able to save a total of $11.2 million over the program’s duration, from 2007 through 2012. 

Before implementing the gainsharing program, St. Luke’s conducted an initial cost analysis, which disclosed that the health system was spending $39 million annually on supplies and implants for patients requiring coronary, cardiac rhythm management, open heart, total joint, and spine services. The health system’s senior executives launched a gainsharing program with the goals of achieving more competitive pricing, applying clinical criteria around appropriate utilization, and engaging physicians to lead cost reduction and quality improvement efforts. They assembled a multidisciplinary gainsharing team to lead the initiative, which included hospital administrators, physicians, clinicians, supply chain managers, and the gainsharing program administrator. This team worked together to track clinical and supply data related to physician preference items and to share the data with physicians. To keep the project manageable, the team started small, focusing on the cardiovascular service line during the first two years of the initiative and addressing orthopedic and spine implants later.

To tackle cardiovascular service line costs related to physician preference items, the gainsharing team issued a request for proposal (RFP) to vendors asking them to match a specific price or agree to market-share price for these items. This one step resulted in St. Luke’s saving $1 million during the initiative’s first two years. In the third year, the system switched from two-year to one-year contracts for cardiovascular implants, saving another $1.25 million in the cardiovascular service line alone. The cardiology department now negotiates only one-year contracts with its high-dollar supply vendors because technology and pricing change rapidly, and they don’t want to be locked into a long-term agreement. 

During the initiative’s third year, the gainsharing team began to address physician practice patterns and utilization. For example, physicians wanted to target a particular type of contrast used for certain patients during coronary angiography. Cardiologists drove down usage of higher-cost materials from 14 percent to 4 percent in the third year. The following year, they decreased usage by another 3 percent. By the end of the fourth year, 99 percent of cath lab patients were receiving a lower-cost contrast, while the quality of outcomes remained high and utilization continued to reflect best practices. The department also established utilization criteria for vascular closure devices, saving $80,000 in one year. 

When St. Luke’s extended the initiative to its orthopedic and spine practices, the annual savings grew to $7.5 million. The team focused on leveling prices for similar types of technology and on providing physicians with information to help them compare costs for similar products and different types of implants. 

Tailoring the Gainsharing Program to Cardiovascular Services

The gainsharing team came to realize that even greater savings could be achieved by developing a unique approach for each clinical area participating in the gainsharing initiative. 

For cardiovascular services, St. Luke’s developed a market-share agreement in which vendors agreed to lower pricing in exchange for purchasing a higher percentage of product from them. In year three, the system signed contracts with three vendors rather than two for its cardiac rhythm management devices, in which St. Luke’s made market-share commitments to purchase 60 percent of its devices from one vendor and 20 percent each from the other two vendors. In year five, the health system stopped working with one of the vendors and added another, negotiating market-share agreements of 70 percent with its primary vendor and 15 percent each with the remaining two vendors. Physicians were aware of their commitment levels and adhered to the agreements. St. Luke’s also negotiated favorable contract clauses, such as prohibiting a vendor from increasing prices during a contract year if new technologies were introduced. 

The RFP process included a review of product quality, vendor service levels, and cost-savings potential across the entire St. Luke’s system. This process included an opportunity for physicians to request a new product or vendor, which allowed all physicians to try the product and provide feedback. Vendors were given a limited time frame to present their new technology or products to physicians. Physicians gave feedback about the service provided by the vendors’ representatives. Cost savings were applied to various market share scenarios, which physicians and administration reviewed to understand the impact of their product selection decisions. 

Having a gainsharing program in conjunction with an internal RFP process not only maximized savings, but also kept the health system on target for earning the best prices in the market. Health system leaders also gained critical insight into which vendors delivered not only competitive pricing, but also high-quality products. 

Using the Right Joint Construct on the Right Patient

Turning its attention to joint implants, the St. Luke’s gainsharing team—with physician support—decided to work with fewer joint implant vendors than previously in an effort to secure less variation in pricing. The team developed construct agreements in which the hospital purchases an implant and all associated hardware at a designated price rather than paying for each part individually, which tends to result in greater variability and can be more expensive. In selecting vendors for implants, physicians focused on 17 constructs: seven for total knees, five for total hips, and five for partial hips.

Since implementing the gainsharing program, the St. Luke’s team has seen an improvement in the orthopedic surgeons’ demand matching, or use of the right construct for the right patient. For example, when performing a hip replacement on a 90-year-old patient with limited mobility, surgeons typically do not use the same expensive, high-impact hip that would be used on a 40-year old patient who is an avid tennis player.

Holding the Line on Spine Implant Costs

Spine surgery was the largest implant expense spend area and the area with the highest potential for savings. From a cost reduction standpoint, it was also the most challenging of the gainsharing initiative’s three areas of focus due to variations in practice patterns among physicians and the use of multiple vendors. The spinal surgery landscape also had changed in recent years, with new technologies and surgical approaches resulting in substantially expanded spine vendor catalogs. These factors, along with a highly variable case mix among patients, made standardization and construct pricing difficult. 

St. Luke’s addressed these factors by using gainsharing as a collaborative vehicle for change. System leaders shared information with physicians to initiate active discussions around physician practice patterns. As part of this process, the team presented clinical and cost data to a formal group of physicians and administrators, who were responsible for the oversight and implementation of the savings initiatives. In addition, physicians became advocates and champions for implementing clinically based changes with their peers. 

Physician and system leaders also discussed the impact of new technology and how to manage new technology needs collaboratively with physicians. To manage the myriad items in vendor catalogs, the goal is to move to an item-categorized capitated pricing model (meaning the system will only pay $210 for a pedicle screw, regardless of which vendor manufactures the screw, for example).

Recognizing That Gainsharing Is a Team Effort

The gainsharing program was a success largely because the health system recognized that a gainsharing program should be collaborative, involving physicians, clinicians, department managers, and system leaders, rather than solely the responsibility of a hospital’s purchasing and supply chain management departments. It was for this reason that St. Luke’s leaders viewed creating a multidisciplinary gainsharing team as a critical first step for such an initiative. To ensure all participants remained engaged, the team met monthly or quarterly (depending on what stage they were at in the process) to evaluate clinical outcomes, vendors’ service, and cost savings. During the meetings, the team discussed cost-savings scenarios and evaluated the pros and cons of different products. 

The team immediately recognized that collecting and recording clinical quality and operational data for the gainsharing program would be one of the biggest challenges. The organization needed to make a commitment to securing accurate and timely clinical data, including patient demographics, co-morbidities, and outcomes, to ensure that these data improved or remained constant. 

It was also important to compile physician data so physicians could compare their performance with that of their peers. Originally, the gainsharing team shared blinded data with physicians as a way to stimulate discussion. Initial concerns that physicians would not like these comparisons were quickly allayed. The data allowed physicians to compare costs to perform procedures in the context of clinical results. Over time, the team recognized the importance of updating the reports to make them more meaningful and to provide actionable results. St. Luke’s received positive feedback about the comparative reports from the physicians, who then asked for the data to be unblinded. 

To keep hospital administrators apprised of progress, the gainsharing team updated the system’s heart and vascular board on a quarterly basis and gave the C-suite an annual progress report with details about dollar and percentage savings. 

To help with contract negotiations, St. Luke’s used a business intelligence solution to determine whether it was purchasing medical devices at a fair price. A benchmarking tool provides visibility into what hospitals across the country are paying for a similar product, allowing the hospital to negotiate more competitive contracts. For example, an organization may receive a 20 percent discount off the list price for an item. Hospital leaders might believe they are doing a good job on contract negotiations until they learn that other hospitals of similar size are purchasing the same product at a 50 percent discount and that most hospitals receive a 30 percent discount. 

Transparency goes beyond sharing pricing and data with physicians and healthcare professionals. To comply with OIG requirements, St. Luke’s also informed patients that their physicians were participating in a gainsharing program and that the products patients received from their physicians were purchased through this program. The health system wanted to assure patients that the medical devices and supplies being used were high-quality products. 

Realizing the Full Potential of Gainsharing 

Over the years, legal aspects of gainsharing have diverted attention from operational and outcomes aspects of these programs. As a result, many healthcare finance leaders may not know about the potential gainsharing programs offer for preserving physician choice, reducing costs, and improving quality.

Gainsharing does not limit physician choices. There is a misperception that in a gainsharing initiative, the supply chain management department tells physicians they have to use a less expensive product, regardless of quality. In fact, St. Luke’s involved physicians early in the process to evaluate products and decision-making criteria. With this physician input, the system was able to move to construct agreements, in which the hospital purchases an implant and all associated hardware at a specific price, and capitated pricing, where it is ultimately up to the physicians to decide which products to use. 

Savings do not plateau after the first year. It might seem that after initial reductions, savings would plateau after the first year, but this isn’t true. St. Luke’s implemented a successful gainsharing program for five years and found that savings varied each year, depending on complexity and the sensitivity of the initiative. Indeed, this result is more in line with what should be expected from a dynamic gainsharing program that introduces new steps and targets each year, as opposed to simply paying physicians for the same savings each year, which is contrary to OIG guidance.

Physician payment does not drive engagement. According to one member of the gainsharing team, one of the top reasons why physicians joined the program was to ensure the purchase of high-quality products that could save the hospital money, and in turn, save patients money. The latter is important because insurance companies and Medicare pay only for a portion of procedure costs and patients are responsible for the balance. At St. Luke’s, savings were split between the hospital and the physicians: 45 percent went to the hospital, 45 percent went to the physicians, and 10 percent went to an educational fund for staff training.

Gainsharing programs should include private practice and employed physicians. Contrary to popular belief, physician employment alone does not result in high-quality, cost-effective care. Gainsharing actually works well in health systems that have private practice physicians or a mix of both employed and private physicians. The key is securing physician buy-in and a shared commitment to cost savings and quality improvement efforts. 

Cost savings and high-quality care go hand in hand. Regardless of whether an organization opts for a gainsharing or shared-savings program, it needs to demonstrate that patient outcomes either improve or stay the same. Collecting clinical data not only helps ensure that clinical quality is maintained, but also supports new collaborative programs with physicians. 

Gainsharing Evolves

Gainsharing has not gone away; it has simply become part of larger initiatives. Today, gainsharing is rarely a stand-alone program. It is a core element in broad Centers for Medicare & Medicaid Services (CMS) initiatives aimed at promoting accountable care organizations (ACOs) and bundled payments. Recent government opinions about gainsharing are no longer limited to discussions of rewarding physicians for cost savings efforts, but now also address rewards for performance improvement and patient satisfaction. For example, the most recent OIG advisory opinion, issued in December 2012, approved a comanagement agreement that included a performance bonus program that would reward physicians based on their scores for patient service, quality of care, and cost savings. 

At a time when hospitals are being asked to redouble their efforts to cut costs and improve quality, they should take a second look at gainsharing because it provides a framework for them to work with physicians on both fronts. Whether it is through establishing comanagement agreements, employing physicians, or forming ACOs, gainsharing rewards collaboration toward improvement.


Lani Berman is vice president for performance services at VHA Inc., Irving, Texas.


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Gainsharing Criteria Used by St. Luke’s Health System

The gainsharing arrangement at St. Luke’s Health System was designed around the following criteria:

  • Identify specific cost-saving actions in advance and be transparent about how savings were achieved.
  • Ensure that practice changes do not adversely affect patient care.
  • Guard against payment for referrals.
  • Use objective historical and clinical measures to establish baselines to protect against inappropriate reductions in services.
  • Allow individual physicians to make patient-by-patient determinations of the most appropriate device.
  • Have a full range of devices and supplies available for physicians to use.
  • Ensure that hospitals and physicians provide written disclosure of the arrangement to patients.
  • Have a limited duration and scope of financial incentives for the arrangement.
  • Request physician groups to distribute payments among their members on a per capita basis.
  • Apply the gainsharing arrangement to all covered procedures, regardless of insurance coverage.
  • Have an outside program administrator analyze and validate data.

Note: This list is provided for informational purposes only and is not intended to represent a comprehensive list of OIG gainsharing criteria. Get more information about OIG advisory opinions on gainsharing.


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