Health Care Programs: Fraud and Abuse; Civil Money Penalties for Hospital Physician Incentive Plans

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1003

RIN 0991-AA45

Health Care Programs: Fraud and Abuse; Civil Money Penalties for

Hospital Physician Incentive Plans

AGENCY: Office of Inspector General (OIG), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement section 9313(c) of the

Omnibus Budget Reconciliation Act (OBRA) of 1986, as amended by section

6003(g)(3)(D)(i) of OBRA of 1989 and sections 4204(a)(3) and 4731(b)(1)

of OBRA of 1990, by prohibiting a hospital (or a rural primary care

hospital) from knowingly making incentive payments to a physician as an

inducement to reduce or limit services provided to Medicare or Medicaid

program beneficiaries who are under the care of that physician. Both a

hospital who knowingly makes such payments and the physician who

knowingly accepts such incentive payments would each be subject to

civil money penalties (CMPs) of up to $2,000 for each individual for

whom payments are made

DATES: To assure consideration, pubic comments mut be mailed or

delivered to the address provided below by January 30, 1995. Comments

are available for public inspection December 15, 1994.

ADDRESSES: Address comments in writing to: Office of Inspector General,

Department of Health and Human Services, Attention: LRR-45-P, room

5246, 330 Independence Avenue, SW., Washington, DC 20201.

If you prefer, you may deliver your comments to room 5551, 330

Independence Avenue, SW., Washington, DC. In commenting, please refer

to file code LRR-45-p. Comments will be available for public inspection

in Room 5551, 330 Independence Avenue, SW., Washington, DC on Monday

through Friday of each week from 9 a.m. to 5 p.m., (202) 619-3270.

FOR FURTHER INFORMATION CONTACT:

Joel J. Schaer, Office of Inspector General, (202) 619-0089.

SUPPLEMENTARY INFORMATION:

I. Background

A. Prospective Payment System to Hospitals

Prior to 1984, the Medicare and Medicaid programs generally paid

hospitals their reasonable costs of providing covered medical services

to program beneficiaries. The general concern over this payment method

was that the reimbursement system did not give hospitals sufficient

incentives to provide health care in an economical and efficient

manner. Under the system, incentives existed for hospitals to encourage

physicians to admit more program patients for longer hospital stays,

and to utilize more services for patients while they were there.

Public Law 98-21, the Social Security Amendments of 1983,

established a new hospital prospective payment system (PPS) for

reimbursing inpatient hospital services under Medicare. The prospective

payment system has also been embraced by many State Medicaid programs.

Under PPS, hospitals are paid a pre-established fee for treating

program patients based on any of 492 diagnosis related groups (DRGs)

that address a particular diagnosis. Under PPS, a hospital generally

receives the same fee regardless of the patient's length-of-stay or the

amount of services furnished the individual. This change in payment

systems substantially altered hospital incentives in the provision of

medical care.

With PPS permitting hospitals to profit from Medicare and Medicaid

patients when such patients are treated at a lower cost than the

present payment level, many hospitals have had a new range of financial

incentives made available to them for (1) underproviding services to

program beneficiaries, and (2) shortening their length-of-stay by

discharging them too early.

B. Use of Physician Incentive Plans

In recent years, hospitals have developed and employed a wide range

of physician incentive plans that give physicians, as well as the

hospital, financial incentives to reduce or limit services provided to

program beneficiaries. Since it is the physician who ultimately

controls the level, amount and duration of inpatient hospital services

provided, many of these incentive plans have been designed to encourage

physicians to alter their practice patterns and to reduce their

patient's length-of-stay, as well as the quantity and medically

necessary level of care provided these individuals, in order to

increase the hospital's profitability.

C. General Accounting Office Report

Because of the close link between a physician's incentive payments

and the treatment of individual patients, certain features of physician

incentive plans that could compromise quality of care provided to

beneficiaries prompted a General Accounting Office (GAO) review of a

number of plans under which hospitals make incentive payments to

physicians for lowering the costs of treatment. In its report,

``Physician Incentive Payments by Hospitals Could Lead to Abuse'' (HRD-

86-103), July 1986), GAO specifically set about reviewing a number of

existing and proposed hospital physician incentive plan arrangements in

an effort to assess their impact on the cost and care provided Medicare

patients.

The GAO report highlighted several general characteristics or

aspects of physician incentive plans that, individually or

collectively, have tended to give physicians an incentive to reduce

quality of care to program beneficiaries. Among those characteristics

cited by GAO as significantly affecting physicians' financial

incentives to undertreat or provide substandard care were: (1) The

length of the period over which the physician's cost performance is

assessed to determine the level of incentive payment, (2) the number of

physicians over which cost performance is calculated to determine if an

incentive plan is paid, and (3) the use of arrangements under which the

physician is paid a percentage of savings or profits.

As a result of its report on physician incentive plans, GAO

specifically recommended that:

Such plan payments should be based on the cost performance

of a group of physicians rather than by individual physicians.

Payments should be based on performance over a relatively

long period of time, e.g., over a one year period, as opposed to a

single month or quarter.

Incentive payments should not be based on the hospital's

profits resulting from treating any individual patient.

Any physician payment system of this type by a hospital

should include a strong program of utilization and quality of care

review.

The GAO recommended that physician incentive plans that do not

include these characteristics should be prohibited. However, the GAO

also noted that no combination of characteristics in a physician

incentive plan could guarantee that the plan would not be abusive.

II. Provisions of the Proposed Rule

A. The Omnibus Budget Reconciliation Act of 1986

The passage of Public Law 99-509, the Omnibus Budget Reconciliation

Act (OBRA) of 1986, provided new authority (section 1128A(b) of the

Social Security Act) to the Secretary to impose civil money penalties

for certain incentive payments made to physicians by hospitals, risk-

sharing health maintenance organizations (HMOs) and competitive medical

plans. Specifically, section 9313(c) of OBRA 1986 prohibited the making

of direct or indirect payments by a hospital or an eligible risk-

sharing organization ``to a physician as an inducement to reduce or

limit services provided'' to individuals entitled to Medicare or

Medicaid program benefits ``under the direct care of the physician.''

Under this provision, hospitals and risk-sharing entities that

knowingly made such payments, and physicians who knowingly received

such payments, would be subject to civil money penalties of up to

$2,000 for each individual for whom payments were made. Section

6003(g)(3)(D)(i) of Public Law 101-239, OBRA of 1989, amended this

authority by including the term ``rural primary care hospitals'' under

this provision.

Sections 4204(a)(3) and 4731(b)(1) of Public Law 101-508, OBRA of

1990, repealed the prohibition of physician incentive plans in HMOs and

other risk-sharing organizations and enacted requirements for

regulating plans by these organizations. The statutory provisions

regarding physician incentive plans in HMOs and other risk-sharing

organizations are now set forth in section 1876(i) of the Social

Security Act. The Department, through the OIG and the Health Care

Financing Administration, has published in the Federal Register

proposed regulations implementing the statutory provision regarding

HMOs and other risk-sharing organizations (57 FR 59024, December 14,

1992). That rule is currently being finalized.

These proposed regulations only address physician incentive plans

by hospitals (and rural primary care hospitals), reflecting the present

scope of section 1128A(b) of the Act.

B. Civil Money Penalties for Hospital Physician Incentive Plans

These proposed regulations would amend 43 CFR part 1003, Civil

Money Penalties, Assessments and Exclusions, by codifying the OIG's

authority to levy CMPs against any hospital (including a rural primary

care hospital as defined in section 1861(mm(1) of the Act) and

physician who knowingly violates the prohibition on the use of

physician incentive plans.

1. Structure and Nature of Incentive Plans to be Prohibited

The precise structure and application of a physician incentive plan

will ultimately determine whether CMPs would be assessed against a

hospital or physician under this provision. There are certain incentive

payments to physicians, based on cost savings, that are specifically

designed to limit or reduce services normally provided by a hospital to

a patient. Such incentive plans, tied to the overall costs of patient

treatment or on a patient's length-of-stay without regard to how

specific reductions are made, could be viewed as inducements to reduce

patient services, and thus may be subject to CMPs under these

regulations. Most DRG incentive plans, for example, under which payment

to individual physicians is tied to DRG reimbursement, appear to be

based on payments designed as inducements to reduce or limit services

provided once a patient has been admitted. This type of incentive plan

might also serve to influence the type of patient admitted to a

particular hospital, thereby encouraging the physician to admit

patients with less complicated conditions to a hospital offering

incentives and directing patients with more complicated conditions

elsewhere. These types of incentive plans offered by hospitals to

individual physicians related to the cost of services provided would be

prohibited under this provision and subject to CMPs.

2. Incentive Plans Not Relating to Direct Patient Care

These regulations would generally apply only to those physicians

having direct care responsibilities. In the legislative history

accompanying this provision, Congress stated its intention that the

statutory prohibition ``not apply to hospital incentive arrangements

with physicians who function in a management or supervisory capacity

with respect to the operation of a hospital department (such as

radiology or clinical laboratory services) insofar as the purpose of

the arrangement is limited to encouraging efficiency in the operation

of the department'' (House Report No. 99-727; page 445). Congress

believed that incentive plan payments aimed at this group of physicians

should be exempted as long as such arrangements encourage efficiency in

the operation of a specific department and do not affect direct patient

care responsibilities.

We believe, for example, there may be certain types of hospital

incentive plans to physicians, such as those designated to reward the

timely review and completion of medical records which do not impact on

direct patient care responsibilities or do not affect patient referral

patterns, that may be acceptable and therefore not be subject to civil

money penalties under this provision.

We believe, however, that it is impossible and impractical for the

OIG to specifically indicate in regulations what specific criteria may

make up an acceptable hospital physician incentive plan. In setting

forth these proposed regulations, we are adopting a similar approach to

that which we have used for other existing CMP authorities of closely

following the statutory language. As with all CMP cases, the OIG will

review and assess the nature and scope of each suspect incentive plan

on a case-by-case basis to determine its specific intent and

acceptability. An alternative approach would be to specify those kinds

of incentive plans that may be exempt from CMP liability. We welcome

comments on identifying those types of incentive plans that may not

specifically affect direct patient care responsibilities, and thus

would not be implicated by the statute.

III. Additional Information

A. Regulatory Impact Statement

The Office of Management and Budget has reviewed this proposed rule

in accordance with the provisions of Executive Order 12866. As

indicated above, these proposed regulations serve to promulgate the

statutory requirement of establishing new CMP authorities against

hospitals and physicians who engage in certain types of financial

incentive plans that may increase program expenditures or reduce the

quality of care provided to program beneficiaries. As indicated above,

this proposed rule closely tracks the language and scope of the

underlying statutory provision, and would serve primarily to clarify

departmental policy with respect to the OIG's CMP and assessment

authorities. The rulemaking would not substantially affect the scope of

activity subject to CMPs by the statute.

Specifically, the rule sets forth the penalties established by

statute to be imposed against hospitals providing financial incentives

to limit medical care to Medicare and Medicaid patients, and against

physicians receiving such payments. Such payments place Medicare and

Medicaid patients at risk due to the physicians' potential financial

interest in limiting necessary medical care. This rule is not designed

to curtail or jeopardize a hospital's legitimate cost-savings or

competitive activities which do not provide financial incentives to

limit services. We believe that the great majority of providers and

practitioners do not engage in those types of prohibited practices

addressed in these proposed regulations and the underlying statute.

Therefore, we believe that the aggregate economic impact of these

provisions should be minimal, and should only affect those who have

engaged in behavior that violates the currently effective statute. As

such, this proposed rule such have no direct effect on the economy or

on Federal or State expenditures.

In addition, we generally prepare a regulatory flexibility analysis

that is consistent with the Regulatory Flexibility Act (5 U.S.C. 601

through 612), unless the Secretary certifies that a proposed regulation

would not have a significant economic impact on a substantial number of

small entities. We have determined, and the Secretary certifies, that

this proposed rule would not have a significant economic impact on a

number of small business entities, and therefore, we have not prepared

a regulatory flexibility analysis.

B. Response to Comments

Because of the large number of comments we normally receive on

proposed regulations, we cannot acknowledge or respond to such comments

individually. However, in preparing the final rule, we will consider

all comments received timely and respond to the major issues in the

preamble of that rule.

List of Subjects in 42 CFR Part 1003

Administrative practice and procedure, Fraud, Grant programs--

health, Health facilities, Health professions, Maternal and child

health, Medicaid, and Medicare, Penalties.

TITLE 42--PUBLIC HEALTH

CHAPTER V--OFFICE OF INSPECTOR GENERAL--HEALTH CARE, DEPARTMENT OF

HEALTH AND HUMAN SERVICES

42 CFR Chapter V, part 1003 would be amended as forth below:

PART 1003--CIVIL MONEY PENALTIES, ASSESSMENTS AND EXCLUSIONS

1. The authority citation for part 1003 would continue to read as

follows:

Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7a, 1320b-10,

1395u(j), 1395u(k), 1395dd(d)(1), 1395mm, 1395ss(d), 1396b(m),

11131(c) and 11137(b)(2).

2. Section 1003.100 would be amended by republishing paragraph

(b)(1) introductory text; by adding and reserving paragraphs

(b)(1)(viii) through (b)(1)(xi); and by adding new paragraph

(b)(1)(xii) to read as follows:

Sec. 1003.100 Basis and purpose.

(b) Purpose. * * *

(1) Provides for the imposition of civil money penalties and, as

applicable, assessments against persons who--

* * * * *

(viii)-(xi) [Reserved]

(xii) Have participated in a prohibited hospital physician

incentive plan as set forth in section 1128A(b) of the Act.

3. Section 1003.101 would be amended by adding a definition for the

terms hospital and prohibited arrangement alphabetically to read as

follows:

Sec. 1003.101 Definitions.

* * * * *

Hospital means a hospital as defined in section 1861(e) of the Act,

or a rural primary care hospital as defined in section 1861(mm)(1) of

the Act.

* * * * *

Prohibited arrangement means the making of payments, directly or

indirectly, overtly or covertly, in cash or in kind, to a physician--or

the acceptance of such payments by the physician--as an inducement to

reduce or limit services provided to individuals entitled to Medicare

or Medicaid benefits who are under the direct care of the physician.

* * * * *

4. Section 1003.102 would be amended by republishing paragraph (b)

introductory text; by adding and reserving paragraphs (b)(9) through

(b)(10); by adding new paragraphs (b)(11) and (b)(12); and by revising

paragraph (c)(2) to read as follows:

Sec. 1003.102 Basis for civil money penalties and assessments.

* * * * *

(b) The OIG may impose a penalty, and where authorized, an

assessment against any person (including an insurance company in the

case of paragraphs (b)(5) and (b)(6) of this section) whom it

determines in accordance with this part--

* * * * *

(9)-(10) [Reserved]

(11) Is a hospital who knowingly makes a payment, directly or

indirectly, overtly or covertly, in cash or in kind, to a physician as

an inducement to reduce or limit services provided to an individual who

is eligible for Medicare or Medicaid benefits and who is under the

direct care of the physician that knowingly accepts receipt of such

payment.

(12) Is a physician who knowingly receives a payment as described

in paragraph (b)(11) of this section.

(c) * * *

(2) In any case in which it is determined that more than one person

was responsible for:

(i) Presenting, or causing to be presented, a request for payment;

(ii) Participating in a prohibited arrangement; or

(iii) Giving false or misleading information as described in

paragraph (b) of this section, each such person may be held liable for

the penalty prescribed in this part.

* * * * *

5. Section 1003.103 would be amended by revising paragraph (a) to

read as follows:

Sec. 1003.103 Amount of penalty.

(a) Except as provided in paragraphs (b) through (f) of this

section, the OIG may impose a penalty of not more than $2,000 for each

item or service, or for each individual for whom payment under a

prohibited arrangement was made, that is subject to a determination

under Sec. 1003.102.

* * * * *

6. Section 1003.106 would be amended by adding a new paragraph

(a)(6); and by revising paragraph (b) introductory text; paragraph

(b)(2) introductory text; and paragraph (b)(2)(ii) to read as follows:

Sec. 1003.106 Determinations regarding the amount of the penalty and

assessment.

(a) * * *

(6) In determining the amount of any penalty in

Sec. 1003.102(b)(11) or (b)(12), the Department will take into

account--

(i) The nature of the payment designed to reduce or limit services

and the circumstances under which it was made;

(ii) The extent to which the payment encouraged the limiting of

medical care or the premature discharge of the patient;

(iii) The extent to which the prohibited arrangement caused actual

or potential harm to program beneficiaries;

(iv) The number of program beneficiaries affected by such incentive

payment;

(v) The extent and prior history of offenses by the hospital and

the physician(s) making or accepting such payment;

(vi) The financial condition of the hospital (or physician)

involved in the offering (or acceptance) of such prohibited incentive

payments; and

(vii) Such other matters as justice may require.

(b) Determining the amount of the penalty or assessment. In taking

into account the factors listed in paragraphs (a)(1) and (a)(5) of this

section, the following circumstances are to be considered--

* * * * *

(2) Degree of culpability. It should be considered a mitigating

circumstance if the claim or request for payment for the item or

service or incident was the result of an unintentional and unrecognized

error in the process the respondent followed in presenting claims or

requesting payment, and corrective steps were taken promptly after the

error was discovered. It should be considered an aggravating

circumstance if--

* * * * *

(ii) The respondent knew that the items or services were furnished

during a period that he or she had been excluded from participation and

that no payment could be made as specified in Sec. 1003.102(a)(3),

because payment would violate the terms of an assignment or an

arrangement with a State agency or other agreement or limitation on

payment under Sec. 1003.102(b), or the prohibited arrangement as set

forth in Sec. 1001.102(b)(11) caused harm to program beneficiaries or

actually limited services.

* * * * *

Dated: August 5, 1994.

June Gibbs Brown,

Inspector General.

Approved: August 17, 1994.

Donna E. Shalala,

Secretary.

[FR Doc. 94-29559 Filed 11-30-94; 8:45 am]

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