Getting a Grip on Gainsharing

Mark Prodger

May 1, 2006

12 Min Read
Getting a Grip on Gainsharing

Originally Published MX May/June 2006


To prepare for the possible proliferation of gainsharing among healthcare providers, medtech manufacturers must first understand the principles of the practice.

Mark Prodger

The recent flood of attention given to gainsharing arrangements in the healthcare industry has uncovered mixed sentiments and led to much speculation about the repercussions the practice is likely to have on the medical device industry. Proponents of gainsharing say the practice will enable hospitals to save money by buying in volume from particular medtech manufacturers or distributors. However, gainsharing has met with a great deal of resistance from medtech manufacturers and patient advocacy groups, which have expressed concerns related to hospitals' access to the latest advances in medical technology.

A recent study, conducted by Market Strategies Inc. (MSI; Livonia, MI), suggests that gainsharing could be both good news and bad news for medical device manufacturers. On one hand, gainsharing appears to have the potential to deliver increased levels of sales exclusivity, with a resultant increase in market share for individual companies. This increase, however, has an associated cost: a reduction in the average selling prices of devices.

The study, undertaken in response to marketplace confusion surrounding gainsharing, set out to provide medical device manufacturers with a better understanding of how physicians and hospitals perceive gainsharing arrangements, if and how current gainsharing arrangements are working, and what issues and implications the arrangements have for medtech companies. To gain insight into these areas, MSI researchers conducted in-depth interviews with cardiovascular physicians and senior hospital administrators, some of whom currently participate in gainsharing arrangements (see sidebar).

Gainsharing Background

Although the structure of gainsharing initiatives can vary, most in place today involve hospitals or hospital systems and the physicians in their cardiology and cardiac surgery departments. With input from the physicians, the hospital standardizes its use of various devices, such as stents, balloons, interventional guidewires and catheters, vascular closure devices, diagnostic devices, pacemakers, and defibrillators. For instance, although physicians may use any pacemaker they choose, participating physicians agree to use pacemakers from one certain company whenever clinically appropriate. The hospital then negotiates lower prices with that company because it can assure the manufacturer a higher market share for its pacemakers. The subsequent cost savings are distributed among the hospital and the physicians.

Gainsharing arrangements were ruled illegal in 1999 in light of a statute that prohibits hospitals from making any payment to a physician as encouragement to reduce or limit services provided to patients under the physician's care. In 2001, the Office of Inspector General allowed the first gainsharing arrangement, and in February 2005, six additional arrangements were approved. Most recently, in early January 2006, a gainsharing demonstration project was approved as part of the Deficit Reduction Omnibus Reconciliation Act of 2005. According to the bill, the Centers for Medicare and Medicaid Services will create six gainsharing pilot programs, two of which will be in rural areas. The pilot programs will be activated no later than January 1, 2007, and remain active through December 2009. A final report with key findings and outcomes is to be submitted to Congress before May 1, 2010.

Key Findings

According to the MSI study, those participating in gainsharing arrangements share the belief that change within the healthcare industry is imminent and hospitals need to prepare for more-challenging times ahead. One senior hospital administrator at a gainsharing hospital noted, "I think we're going to see a lot of consolidation on the payer side, and it's going to get ugly again for providers. That's going to force the smart hospitals to work with their physicians any way they can, legally and ethically, to gain their loyalty. The whole pay-for-performance issue is really going to come into its own." This point of view has several implications for the role of gainsharing in the hospital setting.

Standardizing Care. Gainsharing has frequently been characterized as agreements among hospitals and physicians whereby physicians are provided with financial incentives to employ cost-saving measures, primarily through the use of least-costly medical devices on which hospitals have chosen to standardize. According to the survey, however, hospital administrators participating in gainsharing perceive these arrangements as being less about standardization of product use and more about standardization of patient care.

One administrator participating in a gainsharing arrangement said, "While we're not standardizing the products necessarily, we are standardizing how the care is delivered. And what has come out of a lot of this are changes in physician practices, standing orders, and more standardization of treatment."

Physicians participating in the study agree with hospital administrators. "I think it's going to make people start to really think about what they are doing," said a physician at a gainsharing hospital. "I'm using less blood, not because it is cheaper—I mean, I appreciate that it is—but I'm using less blood because I believe that's the best thing because of the adverse side effects associated with that."

Access to Devices. Most gainsharing physicians said they have not felt pressured or been required to make significant changes in the way they practice. Rather, they said gainsharing has allowed—but not required—them to use more cost-effective products in place of more-expensive models of identical quality, thus creating efficiencies while maintaining a high standard of patient care. Most physicians participating in arrangements said gainsharing requires medical device manufacturers to provide them with more data, allowing them to make more-informed decisions about how they will deliver patient care. The physicians also said there has been little impact on the brands of medical devices to which they have access.

"We use basically the same medical devices," said a physician participating in a gainsharing arrangement. "My understanding was the device companies really came down on price. I think everyone is actually participating, so I think it just basically became a more-efficient, cost-effective thing."

Physicians not participating in gainsharing, however, have a different perspective. Many are concerned such an agreement will require them to use less-costly devices that will ultimately result in compromised patient care. "There's going to be some people that are going to take this as an excuse to say, 'Well, I can shortchange here and make money for me,'" said a physician who is not participating in a gainsharing arrangement.

This perception was also a key finding in a nationwide survey of physicians commissioned in October 2005 by industry association AdvaMed (Washington, DC). The survey concluded that more than 70% of the 324 responding physicians agreed with the statement "Hospitals should not limit physicians' choice of medical devices and offer a financial benefit to those physicians just to save the hospital money."

The differences of opinion among physicians in each study could be the result of several factors. The MSI study findings were based on 30-minute, in-depth interviews with physicians from only the cardiovascular services segment, which is the specialty focus of hospitals with gainsharing arrangements currently in place. Physicians included in the AdvaMed survey were reportedly from a broad spectrum of specialties and were asked to respond to a single, close-ended question. The report did not indicate whether any of the responding physicians participated in gainsharing arrangements.

Despite the seemingly different conclusions, the two studies revealed a similar finding in that physicians and hospital administrators alike made it clear they are not willing to make compromises that negatively affect patient care. No physicians interviewed by MSI were supportive of having their choices of medical devices limited, with or without a financial benefit. Furthermore, the MSI study found that physicians who currently participate in gainsharing arrangements perceive they have not been required to limit their choices and continue to have access to all the products previously available.

Selling Prices. With the focus of gainsharing on cost reduction, a natural area of concern for medical device manufacturers is lower average selling prices. The MSI study results suggest these concerns are well founded. Hospital administrators, both those experienced with gainsharing and those who are not, perceive there is great disparity of pricing for like devices from one hospital to the next. They also believe device manufacturers—in this case, cardiovascular product manufacturers—enjoy very high margins. Many hospital administrators who participated in the study said medical device companies would have to offer lower prices and accept lesser profit margins if they want to maintain and grow market share in gainsharing accounts. One hospital administrator participating in a gainsharing arrangement said, "I believe medical device companies have room to reduce prices further. I think that our philosophy is not that we want them to not make a profit. We want both sides and the patients—all of us—to have the best possible scenario. We understand they (medical device companies) need to make a profit. I think the degree of profit is what's in question."

Physicians who participated in the study also said device companies will be pressured to lower prices as hospitals and physicians align their objectives. Many envision that certain device manufacturers will be aggressive and reduce prices to gain market share. One physician participating in gainsharing said, "I think that hospitals (with gainsharing arrangements) are engaging their physicians in discussions and are very motivated to try to get the prices down, and that they'll use these types of meetings and avenues to try to push for having the physicians onboard and help them lower prices."

Another physician participating in a gainsharing arrangement stated, "I think that a company comes and makes a deal with a hospital, giving them a cheaper price, and as a result of that, the hospital offers them greater exclusivity. I mean, this is the only device we're going to use if you give us the right price. So that company obviously will come very low in their price, and that will force the other companies to do the same."

Implications for Manufacturers

Figure 1. Physician perceptions regarding the significance of the impact gainsharing has on various factors related to healthcare delivery. The significance was rated on a scale of 1 to 10, with 10 being very significant and 0 being not significant at all. Source: Market Strategies Inc. (Livonia, MI).(click to enlarge)

The physician and administrator perceptions revealed in the MSI study have implications for not only individual device manufacturers, but also for the medtech industry as a whole (see Figure 1). "The more alignment we have, the more leverage we have, and the more pressure it's going to create for both payers and medical device suppliers," said a hospital administrator participating in a gainsharing arrangement. "We're (hospitals and physicians) going to lock arms together."

Medical device manufacturers that work with hospitals and physicians to lower costs, not only through lower selling prices but also through other cost-reduction programs, will have an advantage and likely an opportunity to increase market share. It will be important for device manufacturers to clearly understand how gainsharing works and the motivations of its key stakeholders, including hospital administrators and physicians. Appealing to the needs of these stakeholders will be crucial in gaining favor in gainsharing arrangements.

Physicians participating in gainsharing say they have retained their ability to make choices about the devices they use to care for their patients. As more data are made available to physicians, similar devices within certain categories are perceived by physicians as being interchangeable. Where this is the case, physicians are willing to use less-costly devices. "There are certain pacemakers that would do just as good a job for the basic need," said a gainsharing physician. "They may not have all the bells and whistles, but I don't think it's going to affect that much."

In light of this perception, it will be increasingly important for suppliers to provide more and better data to demonstrate clinical benefits and justify use of more-expensive devices. One physician said, "I think it (gainsharing) will allow for physician access to new technology not based on marketing data, but based on high-quality, independent clinical data . . . the technology will need to be more-firmly established, more so than a glossy brochure. I think it will be data driven."

Some physicians and hospital administrators said they believe savings from gainsharing will result in increased expenditures by hospitals on new and proven technologies. "Reduced pricing would increase access (to new technologies)," said a physician not participating in a gainsharing arrangement. "If the hospital is saving money in one aspect, this makes money available to look at new products." If this opinion is widespread, it offers medical device manufacturers an opportunity to develop special services and programs that enhance patient care and lower hospital costs, allowing hospital funds to be allocated to support the adoption, use, and purchase of new technologies.

Overall, hospital administrators say they feel enormous pressure to reduce costs in order to remain competitive in their markets. Medical device manufacturers that consider administrators as key stakeholders and work with them to develop and leverage cost-effective and profitable programs may also be winners in the gainsharing environment.


Based on findings from the MSI study, gainsharing appears to be well accepted by those participating to date. There is still a long way to go before gainsharing becomes a standard among hospitals—if it ever does—but there are indications that potential for this proliferation does exist. In any case, hospital administrators will continue to look for new and creative ways to reduce hospital costs while maintaining the standard of patient care. Medical device manufacturers that understand the details of gainsharing and what it can mean for their businesses will not only be better positioned to compete, but may actually uncover opportunities to leverage gainsharing to bolster market share and business growth.

Mark Prodger is a vice president for the medical devices and technology division of Market Strategies Inc. (Livonia, MI), a healthcare-focused market research and consulting firm.

Copyright ©2006 MX

Sign up for the QMED & MD+DI Daily newsletter.

You May Also Like