Financial Regulations in Healthcare

Since the hospital prospective payment system ("PPS") was introduced in the mid-1980s, hospitals have been trying to develop a means by which they can align their financial incentives with those of their physicians. PPS limits hospitals to a fixed reimbursement amount based on diagnosis, with some adjustment based on the resources used by the patients under certain limited circumstances. However, physicians remain reimbursed based on a fee schedule, so that the more they do, the more they get paid. Therefore, physicians do not have the same incentives to limit costs for treatment that hospitals do. Other health care providers; including nursing homes, dialysis facilities, ambulatory surgery centers, and managed care plans, now share with hospitals that discrepancy in incentives. These providers are struggling to find a way to align their incentives with those of their physicians. (Sadin, 2002)

One method that is currently enjoying a significant amount of interest is something called "gainsharing" or "disease management" programs.

Photograph of James S. Bell

Profit Sharing

St. Katharine's church, Gosfield, Essex

These programs are intended to give physicians a stake in controlling the entity's costs through financial incentives. This appears, at first glance, to be a natural reaction to the problem of divergent incentives. In any industry other than health care, a gainsharing program would be simple to implement. However, the health care industry, because of its highly regulated environment, presents special challenges for implementing gainsharing programs. (Imberman, 1995)

The first of these challenges is the Stark law. The Stark law prohibits physicians who have a financial relationship with an entity from referring patients for certain types of services to that entity. A gainsharing relationship would clearly be considered a financial relationship falling within the Stark law. Consequently, any hospital or other entity that provides designated health services must find an applicable exception.

The only exception that has the potential to validate a gainsharing...