By Terry Baynes

NEW YORK, Jan 16 (Reuters) - The Justice Department on Wednesday cleared the way for a New York hospital association to adopt a program that compensates physicians for reducing the cost of patient care.

The Greater New York Hospital Association, which represents around 250 healthcare facilities in New York and nearby states, sought to adopt a so-called "gainsharing" program to give doctors a financial incentive to lower healthcare costs to hospitals.

For New York hospitals that participate in the program, the association, with the help of a medical technology company, will analyze the costs of inpatient services performed by specific physicians. Physicians whose costs go down or remain low share a portion of the savings.

Gainsharing is designed to bring doctors' and hospitals' incentives in line, according to the hospital group. Physicians order medical products and services while hospitals pay for them. Gainsharing encourages doctors to consider the hospital's resources in their decision-making process.

Historically, federal regulators have been suspicious of gainsharing programs. In 1999, the Office of the Inspector General, a unit of the U.S. Department of Health and Human Services, found that gainsharing violated the Civil Monetary Penalties law, which prohibits a hospital from paying a doctor to limit medical care for Medicare or Medicaid patients.

But starting in 2001, the Office of the Inspector General shifted its position and approved the first of many gainsharing programs for specific hospitals, under strict conditions. Now the Greater New York Hospital Association is seeking to adopt such a program for its participating members.

The hospital association was concerned that the arrangement would be seen by the government as limiting competition by setting caps on physician compensation at numerous hospitals, so the group reached out to the Justice Department for clearance.

In a letter to the hospital association's lawyer, the Justice Department said that the proposal on its face did not run afoul of antitrust laws. Under the plan, each individual hospital determines how to use the performance data to reward physicians, and each hospital sets its own cap on the compensation.

The agency's letter did caution, "If (the Greater New York Hospital Association) uses those provisions as a pretense for coordinating hospital payments to physicians, such conduct would be subject to prosecution under the antitrust laws."

Catherine Martin, a healthcare lawyer at Adelman Sheff & Smith, said gainsharing programs have typically been adopted by individual institutions but that the concept makes sense for a large association.

"There's a lot to the management of it. Hospitals have to gather the data, pool the data and make sure that patient protections are still in place," she said.

The Greater New York Hospital Association and its lawyer, Colin Kass of Proskauer Rose, did not immediately provide a comment.

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