[Federal Register Volume 72, Number 171 (Wednesday, September 5, 2007)]
[Rules and Regulations]
[Pages 51012-51099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4252]
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Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Parts 411 and 424
Medicare Program; Physicians' Referrals to Health Care Entities With
Which They Have Financial Relationships (Phase III); Final Rule
Federal Register / Vol. 72, No. 171 / Wednesday, September 5, 2007 /
Rules and Regulations
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 411 and 424
[CMS-1810-F]
RIN 0938-AK67
Medicare Program; Physicians' Referrals to Health Care Entities
With Which They Have Financial Relationships (Phase III)
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
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SUMMARY: This final rule is the third phase (Phase III) of a final
rulemaking amending our regulations regarding the physician self-
referral prohibition in section 1877 of the Social Security Act (the
Act). Specifically, this rule finalizes, and responds to public
comments regarding, the Phase II interim final rule with comment period
published on March 26, 2004, which set forth the self-referral
prohibition and applicable definitions, interpreted various statutory
exceptions to the prohibition, and created additional regulatory
exceptions for arrangements that do not pose a risk of program or
patient abuse (69 FR 16054).
In general, in response to public comments, in this Phase III final
rule, we have reduced the regulatory burden on the health care industry
through the interpretation of statutory exceptions and modification of
the exceptions that were created using the Secretary's discretionary
authority under section 1877(b)(4) of the Act to promulgate exceptions
for financial relationships that pose no risk of program or patient
abuse.
DATES: Effective date: This final rule is effective on December 4,
2007.
FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer, (410) 786-4620.
Lisa Ohrin, (410) 786-4565.
SUPPLEMENTARY INFORMATION: To help readers locate information in this
final rule, we are providing the following Table of Contents.
I. Background
II. General Comments
A. General
B. Compliance With the Anti-Kickback Statute
III. Definitions--Sec. 411.351
A. Employee
B. Entity
C. Fair Market Value
D. ``Incident to'' Services
E. Physician in the Group Practice
F. Radiology and Certain Other Imaging Services and Radiation
Therapy
G. Referral
H. Rural Area
IV. Group Practice--Sec. 411.352
V. Prohibition on Certain Referrals by Physicians and Limitations on
Billing--Sec. 411.353
VI. Financial Relationship, Compensation, and Ownership or
Investment Interest--Sec. 411.354
A. Ownership
B. Compensation
C. Special Rules on Compensation
VII. General Exceptions to the Referral Prohibition Related to Both
Ownership/Investment and Compensation--Sec. 411.355
A. Physician Services
B. In-office Ancillary Services
C. Services Furnished by an Organization (or Its Contractors or
Subcontractors) to Enrollees
D. Reserved
E. Academic Medical Centers
F. Implants Furnished by an Ambulatory Surgical Center
G. EPO and Other Dialysis-Related Drugs Furnished in or by an
End-Stage Renal Dialysis Facility
H. Preventive Screening Tests, Immunizations, and Vaccines
I. Eyeglasses and Contact Lenses Following Cataract Surgery
J. Intra-family Rural Referrals
VIII. Exceptions to the Referral Prohibition Related to Ownership or
Investment Interests--Sec. 411.356
A. Publicly-traded Securities and Mutual Funds
B. Hospitals Located in Puerto Rico
C. Rural Providers
D. Ownership Interest in a Whole Hospital
IX. Exceptions to the Referral Prohibition Related to Compensation
Arrangements--Sec. 411.357
A. Rental of Office Space
B. Rental of Equipment
C. Bona Fide Employment Relationships
D. Personal Service Arrangements
E. Physician Recruitment
F. Isolated Transactions
G. Remuneration Unrelated to Designated Health Services
H. Group Practice Arrangements with a Hospital
I. Payments by a Physician
J. Charitable Donations by a Physician
K. Nonmonetary Compensation
L. Fair Market Value Compensation
M. Medical Staff Incidental Benefits
N. Risk-sharing Arrangements
O. Compliance Training
P. Indirect Compensation Arrangements
Q. Referral Services
R. Obstetrical Malpractice Insurance Subsidies
S. Professional Courtesy
T. Retention Payments in Underserved Areas
U. Community-Wide Health Information Systems
X. Reporting Requirements--Sec. 411.361
XI. Miscellaneous (Other)
XII. Provisions of the Final Rule
XIII. Technical Corrections
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis
A. Overall Impact
B. Anticipated Effects
C. Alternatives Considered Regulation Text
I. Background
Section 1877 of the Social Security Act (the Act), also known as
the physician self-referral law: (1) Prohibits a physician from making
referrals for certain ``designated health services'' (DHS) payable by
Medicare to an entity with which he or she (or an immediate family
member) has a financial relationship (ownership or compensation),
unless an exception applies; and (2) prohibits the entity from filing
claims with Medicare (or billing another individual, entity, or third
party payer) for those referred services. The statute establishes a
number of specific exceptions and grants the Secretary the authority to
create regulatory exceptions for financial relationships that pose no
risk of program or patient abuse. The current version of section 1877
of the Act, which applies to referrals for 11 DHS, has been in effect
and subject to enforcement since January 1, 1995.
This is Phase III of a final rulemaking under section 1877 of the
Act. Proposed regulations were published in the Federal Register on
January 9, 1998 (63 FR 1659). Phase I of the final rulemaking was
published in the Federal Register on January 4, 2001 (66 FR 856)
(``Phase I'') as a final rule with comment period, and Phase II of the
final rulemaking was published in the Federal Register on March 26,
2004 (69 FR 16054) (``Phase II'') as an interim final rule with comment
period. Due to a printing error, a portion of the Phase II preamble was
omitted from the March 26, 2004 Federal Register publication. That
portion of the preamble, which addressed reporting requirements and
sanctions, was published on April 6, 2004 (69 FR 17933).
Except for two provisions, the regulations published in Phase I
became effective on January 4, 2002. We delayed the effective date of
Sec. 424.22(d), relating to home health services until April 6, 2001
(66 FR 8771.) We also delayed the effective date of the final sentence
of Sec. 411.354(d)(1) relating to the definition of ``set in advance''
until the publication of Phase II; ultimately, it never became
effective. The regulations in Phase II became effective on July 26,
2004.
Phase I Covered--
Sections 1877(a) and 1877(b) of the Act (the general
prohibition against physician self-referral and the exceptions
applicable to both ownership and compensation arrangements);
[[Page 51013]]
The statutory definitions at section 1877(h) of the Act;
Certain additional regulatory definitions; and
A number of new regulatory exceptions promulgated using
the Secretary's authority under section 1877(b)(4) of the Act.
Phase II Covered--
All provisions of section 1877 of the Act;
Additional regulatory definitions;
Additional new regulatory exceptions issued pursuant to
the Secretary's authority under section 1877(b)(4) of the Act; and
Responses to the public comments on the January 1998
proposed rule and the Phase I regulations.
This Phase III final rule responds to comments on Phase II and,
thus, addresses the entire regulatory scheme. In developing Phase III
of this rulemaking, we have carefully considered the history and
structure of section 1877 of the Act, as well as the comments to the
Phase II interim final rule. As with Phase I and Phase II, we believe
that Phase III of this rulemaking addresses many of the industry's
primary concerns, is consistent with the statute's goals and
directives, and protects beneficiaries of Federal health care programs.
In particular, we have attempted to preserve the core statutory
prohibition, while providing sufficient flexibility to minimize the
impact of the rule on many common business arrangements. We have
endeavored to simplify the rules and provide additional guidance in
response to comments, as well as to reduce any undue burden on the
regulated community by modifying exceptions created using the
Secretary's authority under section 1877(b)(4) of the Act to promulgate
additional exceptions regarding financial relationships that pose no
risk of program or patient abuse. As we did in Phase II, in evaluating
our regulatory options, we have applied the same criteria that we
discussed in detail in the Phase I rule (66 FR 859-863, 69 FR 16056.)
The reasons for dividing the rulemaking into Phases I and II are
explained in Phase I (66 FR 859-860). The reason for this Phase III
final rule is explained in Phase II (69 FR 16055-16056) and in this
preamble. Phases I, II, and III of this rulemaking are intended to be
read together as a unified whole. Phase I contains a legislative and
regulatory history of the physician self-referral law, which is not
repeated here (66 FR 857-859). Unless otherwise expressly noted, to the
extent the preamble in Phase III uses different language to describe a
concept addressed in Phase I or Phase II, our intent is to elucidate
that discussion, not to change its scope or meaning. For clarity and
ease of access for the general public to the entire set of physician
self-referral regulations, we are republishing in its entirety in this
Phase III final rule the regulatory text for Sec. Sec. 411.350 through
411.361 (omitting Sec. Sec. 411.370 through 411.389 relating to
advisory opinions, which were the subject of a separate rulemaking and
remain unchanged, except for a technical correction to Sec. 411.370
discussed below in section XIII). Please note that, for ease of
reference, the regulatory text for Sec. 411.357 includes paragraphs
(v) and (w) relating to the exceptions for arrangements involving
donations of electronic prescribing and electronic health records
technology, respectively. Those two exceptions were proposed and
finalized in a separate rulemaking (70 FR 59182, 71 FR 45140.)
This Phase III preamble is generally organized to track the statute
and current regulations. We first address the definitions (although
certain key definitions, such as ``isolated transaction,'' are
addressed in the discussions of the exceptions to which they mainly
relate), then the general prohibition, then the exceptions. Summary
discussions are intended to aid the reader in understanding the
regulations. More detailed discussions of particular points are
included in the responses to public comments for each topic.
II. General Comments
A. General
Comment: We received numerous comments regarding both ownership and
compensation arrangements in which the commenter requested confirmation
that the particular arrangement described in the comment met the
requirements of an exception and, thus, did not violate section 1877 of
the Act.
Response: In this final rule, we provide guidance with respect to
the provisions of Phase I and Phase II. When possible, we respond to
commenters' specific inquiries regarding compliance with the physician
self-referral law. However, several of the inquiries failed to provide
sufficient facts to enable us to evaluate or respond to the inquiry.
Moreover, we consider several other inquiries to be in the nature of a
request for a binding opinion, which, as provided in Sec. 411.386, can
be made only through the issuance of a formal advisory opinion.
B. Compliance With the Anti-Kickback Statute
Comment: Numerous commenters objected to the inclusion of the
requirement that arrangements must not violate the Federal anti-
kickback statute (section 1128B(b) of the Act; 42 U.S.C. 1320a-7b(b),
hereinafter referred to as the anti-kickback statute), which appears in
the regulatory exceptions created pursuant to the Secretary's authority
under section 1877(b)(4) of the Act. According to the commenters, the
condition is unnecessary and undercuts our efforts to create ``bright
lines.''
Response: We disagree with the commenters for the reasons set forth
in Phase I (66 FR 863) and Phase II (69 FR 16108). Wherever possible,
we have attempted to create bright-line rules. However, given the
limitations on our regulatory authority under section 1877(b)(4) of the
Act, inclusion of the anti-kickback statute condition is necessary to
ensure that the exceptions promulgated under that authority do not pose
a risk of program or patient abuse. Moreover, because parties'
arrangements must not violate the anti-kickback statute irrespective of
whether they satisfy the other requirements of an exception, any
additional burden associated with the requirement is minimal.
Comment: Two commenters suggested that the exceptions under the
physician self-referral law and safe harbors under the anti-kickback
statute should more closely parallel each other. The first commenter
stated that, without parallel safe harbors under the anti-kickback
statute and exceptions to the physician self-referral law, the
physician self-referral law exceptions will be underutilized and
ineffective. The second commenter suggested that an arrangement that
meets an exception under the physician self-referral law should be
deemed to be within a safe harbor under the anti-kickback statute.
Response: We addressed the issue raised by the first commenter in
Phase II (69 FR 16115). As explained in detail there, we do not believe
it is feasible to except financial relationships solely because they
fit in an anti-kickback statute safe harbor. The second commenter's
suggestion is outside the scope of this rulemaking and our authority.
We note that several of the regulatory exceptions under the physician
self-referral law do, in fact, correspond to safe harbors issued by the
Office of Inspector General (OIG). For example, the exceptions for the
donation of electronic prescribing items and services (Sec.
411.357(v)) and electronic health records software and
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information technology and training services (Sec. 411.357(w))
correspond to safe harbors issued by the OIG. In addition, the
exceptions for referral services and obstetrical malpractice insurance
subsidies in Sec. 411.357(q) and (r), respectively, mirror anti-
kickback statute safe harbors.
Comment: One commenter asserted that the exceptions in Sec.
411.357(q) and (r) that cross-reference safe harbors relating to
referral services and obstetrical malpractice insurance subsidies,
respectively, are too narrow. The commenter stated that any arrangement
that has received a favorable advisory opinion from the OIG, even if
the agreement in question does not fall within a safe harbor, should be
permitted under the self-referral law.
Response: Under section 1877(b)(4) of the Act, we may issue
additional exceptions (that is, exceptions not specified in the
statute) only where doing so would create no risk of program or patient
abuse. As noted above, it is not feasible to except financial
relationships under section 1877 of the Act solely because they fit in
an anti-kickback statute safe harbor, nor would it be feasible or
appropriate to do so because an arrangement is the subject of a
favorable OIG advisory opinion on a different statute. As we explained
in Phase II, in some instances, it is appropriate for us to refer to
the criteria in an anti-kickback safe harbor when creating an exception
under the physician self-referral law (69 FR 16115).
III. Definitions--Sec. 411.351
We received public comments only on the specific definitions set
out below. In addition to technical changes to several definitions, we
are adding definitions for ``downstream contractor,'' ``physician
organization,'' and ``rural area'' and modifying the definitions of
``fair market value,'' and `` `incident to' services.'' The new
definitions of ``downstream contractor'' and ``physician organization''
are discussed in sections IX.D and VI.B, respectively, below, together
with the relevant provisions to which they apply.
A. Employee
We are making no changes to the definition of ``employee'' in this
Phase III final rule.
Comment: One commenter asked us to clarify that, in order to
qualify as an employee of a group practice, a group practice must
exercise control over the employee; that is, the group practice must
supply the equipment, personnel, and support necessary for the
individual to provide the service, and the group practice must control
how the work is done and have hiring and firing authority over the
individual providing services. The commenter asked for clarification on
this issue out of concern regarding arrangements in which a group
practice ``hires'' an individual as a part-time employee of the group
practice but, in reality, exercises no control over the individual.
Response: As set forth in section 1877(h)(2) of the Act and the
definition of ``employee'' at Sec. 411.351, an individual is
considered an ``employee'' for purposes of the physician self-referral
prohibition if the individual is considered an employee under the
common law rules applicable to determining the employer-employee
relationship, as applied for purposes of section 3121(d)(2) of the
Internal Revenue Code of 1986. We agree with the commenter that the
actual conduct of the relationship is determinative. To determine
whether an employer-employee relationship exists, the various factors,
including those regarding supervision, used by the Internal Revenue
Service (IRS) to determine employee status apply. Whereas the receipt
of a W-2 from an entity and the written terms of the arrangement are
relevant, neither controls whether an individual meets the definition
of ``employee'' for purposes of the physician self-referral law;
rather, the focus is on the actual relationship between the parties.
B. Entity
We are making no substantive changes to the definition of
``entity'' in this Phase III final rule.
Comment: One commenter objected to certain language in the
definition of ``entity'' specifying that, in general, a person or
entity is considered to be ``furnishing DHS'' if CMS makes payment to
that person or entity, either directly, upon assignment on the
patient's behalf, or upon reassignment in certain cases. According to
the commenter, some arrangements are structured so that referring
physicians own entities that lease space, equipment, staff, or
management services to entities that furnish DHS, and, in turn, submit
claims to Medicare. The commenter suggested that ``entity furnishing
DHS'' should be expanded to include entities that derive a substantial
amount of their revenues from the provision of services to entities
furnishing DHS.
Response: We note that, after the close of the Phase II comment
period, the Medicare Payment Advisory Commission (MedPAC), in its March
2005 Report to Congress, recommended that the Secretary ``should expand
the definition of physician ownership in the physician self-referral
law to include interests in an entity that derives a substantial
proportion of its revenue from a provider of designated health
services.'' Specifically, MedPAC wrote:
Physician ownership of entities that provide services and
equipment to imaging centers and other providers creates financial
incentives for physicians to refer patients to these providers,
which could lead to higher use of services. Prohibiting these
arrangements should help ensure that referrals are based on
clinical, rather than financial, considerations. It would also help
ensure that competition among health care facilities is based on
quality and cost, rather than financial arrangements with entities
owned by physicians who refer patients to the facility.
(See http://www.medpac.gov/publications/congressional_reports/Mar05_EntireReport.pdf, at page 170.) We agree with the commenter that
arrangements structured so that referring physicians own leasing,
staffing, and similar entities that furnish items and services to
entities furnishing DHS (also referred to herein as ``DHS entities''),
but do not submit claims raise significant concerns under the fraud and
abuse laws and would appear contrary to the plain intent of the
physician self-referral law. These structures are particularly
problematic because referrals by physician-owners of leasing, staffing,
and similar entities to a contracting DHS entity can significantly
increase the physician-owned entity's profits and investor returns,
creating incentives for overutilization and corrupting medical
decision-making. We intend to study further the types of arrangements
described by the commenter and MedPAC, as well as other types of
arrangements, to determine the best approach for addressing them in
order to protect against program and patient abuse. We would make any
change to address this issue, whether through the definition of
``entity'' or otherwise, in a separate rulemaking that is subject to
public comment.
We note that the arrangements described by MedPAC remain subject to
the physician self-referral prohibition. In most instances, these
structures will constitute indirect compensation arrangements with DHS
entities under Sec. 411.354(b) that must satisfy the requirements of
the indirect compensation arrangements exception in Sec. 411.357(p).
We intend to monitor these arrangements closely for compliance with the
physician self-referral law. These arrangements appear
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highly suspect under the anti-kickback statute; participants in such
arrangements should closely scrutinize the arrangements for compliance
with that statute also. Importantly, we note that the indirect
compensation arrangements exception in Sec. 411.357(p) includes a
requirement that the arrangement not violate the anti-kickback statute.
C. Fair Market Value
In Phase II, we created a ``safe harbor'' provision in the
definition of ``fair market value'' at Sec. 411.351 for hourly
payments to physicians for their personal services. The safe harbor
consisted of two methodologies for calculating hourly rates that would
be deemed ``fair market value'' for purposes of section 1877 of the
Act. The first methodology requires that the hourly payment be less
than or equal to the average hourly rate for emergency room physician
services in the relevant physician market, provided there are at least
three hospitals providing emergency room services in the market. The
second methodology requires averaging the 50th percentile national
compensation level for physicians in the same specialty, using at least
four of six specified salary surveys, and dividing the result by 2,000
hours to establish an hourly rate. If the relevant physician specialty
does not appear in one of the recognized surveys, the parties must use
the survey's reported compensation for general practice in order to be
within the safe harbor. We emphasized that use of the safe harbor was
entirely voluntary and that parties may establish fair market value
through other methods. We received a large number of comments
questioning the new safe harbor.
Comment: Several commenters disliked the compensation survey
methodology. In general, the commenters believed that the methodology
was too prescriptive, and they urged more flexibility. Commenters noted
that at least one of the listed surveys no longer exists, and that
another is out of date. Another commenter stated that many of the
survey companies will not sell their surveys to hospitals that do not
participate in the surveys. According to the commenters, the available
surveys are expensive. Another commenter asserted that other surveys,
including the American Medical Group Association survey and Modern
Healthcare's annual compilation of surveys, provide similar information
at less expense. Several commenters objected to the use of national
averages, because the national average masks significant regional
differences in physician compensation.
Some commenters suggested that the compensation survey methodology
be modified in other respects. One commenter urged us to expand the
fair market value safe harbor to compensation that falls within the
25th to the 75th percentile of physician compensation. Commenters
suggested that providers be able to use fewer than four surveys (for
example, averaging the 50th percentile of any two surveys). Several
commenters suggested that, where specialty-specific data is
unavailable, providers should be able to use data from a similar
specialty, rather than from general practitioners. According to the
commenters, the compensation of physicians in one type of specialty is
more similar to the compensation of physicians in other specialties
than to the compensation of general practitioners. One commenter asked
whether a contract could include a cost of living annual adjustment.
Response: We share the commenters' concerns regarding the
availability of the surveys identified in the safe harbor. We are aware
that several of the surveys are no longer available (or may not be
readily available to all DHS entities and physicians), making it
impractical to utilize the safe harbor. In addition, it may be
infeasible to obtain information regarding hourly rates for emergency
room physicians at competitor hospitals. Therefore, we are not
retaining the safe harbor within the definition of ``fair market
value'' at Sec. 411.351. We emphasize, however, that we will continue
to scrutinize the fair market value of arrangements as fair market
value is an essential element of many exceptions.
Reference to multiple, objective, independently published salary
surveys remains a prudent practice for evaluating fair market value.
Ultimately, the appropriate method for determining fair market value
for purposes of the physician self-referral law will depend on the
nature of the transaction, its location, and other factors. As we
explained in Phase II, although a good faith reliance on an independent
valuation (such as an appraisal) may be relevant to a party's intent,
it does not establish the ultimate issue of the accuracy of the
valuation figure itself (69 FR 16107). Our views regarding fair market
value are discussed further in Phase I (66 FR 944) and Phase II (69 FR
16107).
Because we are eliminating the safe harbor, it is unnecessary to
address the commenters' specific suggestions for identifying
permissible surveys and expanding the range of acceptable physician
compensation. With respect to the inquiry regarding cost of living
adjustments, we note that contracts for physician services may include
an annual salary adjustment, provided that the resulting compensation
is fair market value and otherwise complies with an exception.
Comment: A large number of nephrologists and groups representing
nephrologists complained that the application of the safe harbor to
their compensation for medical director duties at renal dialysis
centers is inappropriate, especially given that the physician self-
referral prohibition does not apply to dialysis services for which
payment is made under the ESRD composite rate. According to the
commenters, the hourly rate under the safe harbor would not adequately
compensate dialysis facility medical directors for the full array of
their skills and services. Several commenters expressed concern that,
notwithstanding the voluntary nature of the safe harbor, the
methodology would become the preferred valuation methodology to the
detriment of physicians.
Response: For the reasons noted in the preceding response, we have
eliminated the fair market value safe harbor in this Phase III final
rule. With respect to existing arrangements, nothing in the physician
self-referral regulations required use or application of the fair
market value safe harbor; it was a wholly voluntary provision.
Moreover, a physician's compensation arrangement with a dialysis
facility implicates section 1877 of the Act only to the extent that the
arrangement creates a direct or indirect financial arrangement with an
entity that furnishes DHS, such as a dialysis facility that furnishes
DHS not covered by the ESRD composite rate or a hospital that provides
dialysis (66 FR 923-924).
Comment: A number of commenters complained that the fair market
value safe harbor methodology based on local hourly rates for emergency
room physician services creates significant risk under the antitrust
laws.
Response: We have eliminated the fair market value safe harbor for
payments to physicians.
Comment: Two commenters asked us to comment on other valuation
methodologies.
Response: Nothing precludes parties from calculating fair market
value using any commercially reasonable methodology that is appropriate
under the circumstances and otherwise fits the definition at section
1877(h) of the Act and Sec. 411.351. Ultimately, fair market value is
determined based on facts and
[[Page 51016]]
circumstances. The appropriate method will depend on the nature of the
transaction, its location, and other factors. Because the statute
covers a broad range of transactions, we cannot comment definitively on
particular valuation methodologies. We refer the commenter to previous
discussions in Phase I and Phase II regarding valuation methodologies
(66 FR 944-945, 69 FR 16107).
Comment: One commenter wanted confirmation that a fair market value
hourly rate could be used to compensate physicians for both
administrative and clinical work. Another commenter asked whether the
rate could be used to determine an annual salary.
Response: A fair market value hourly rate may be used to compensate
physicians for both administrative and clinical work, provided that the
rate paid for clinical work is fair market value for the clinical work
performed and the rate paid for administrative work is fair market
value for the administrative work performed. We note that the fair
market value of administrative services may differ from the fair market
value of clinical services. A fair market value hourly rate may be used
to determine an annual salary, provided that the multiplier used to
calculate the annual salary accurately reflects the number of hours
actually worked by the physician.
D. ``Incident to'' Services
Under section 1877 of the Act, group practices are permitted to pay
profit shares and productivity bonuses to their physicians in ways that
other DHS entities cannot. Unlike other DHS entities, the statute
permits group practices to pay a physician in the group a share of the
overall profits of the group, or a productivity bonus based on services
personally performed or services ``incident to'' such personally
performed services, provided that the profit share or bonus is not
determined in any manner that is directly related to the volume or
value of the physician's referrals. At Sec. 411.351, we define
``incident to'' services to mean those services that meet the
requirements of section 1861(s)(2)(A) of the Act, the ``incident to''
billing rule in Sec. 410.26, and the relevant manual provisions, as
those provisions may be amended or replaced from time to time, all of
which set forth coverage criteria for ``services and supplies''
furnished ``incident to'' a physician's professional service.
In the calendar year (CY) 2002 physician fee schedule final rule
published on November 1, 2001 (66 FR 55246), we amended our ``incident
to'' billing regulation in Sec. 410.26 to provide that ``incident to''
services and supplies means those services and supplies that are
included in section 1861(s)(2)(A) of the Act and that are not
specifically listed in the Act as a separate benefit. In the CY 2003
physician fee schedule final rule (67 FR 79966), we clarified that only
those services that do not have their own separate and independently
listed benefit category may be billed as ``incident to'' a physician
service, except as otherwise expressly permitted by statute (for
example, physical therapy services to the extent authorized under
section 1862(a)(20) of the Act) (67 FR 79994). Consequently, diagnostic
x-ray tests, diagnostic laboratory tests, and other diagnostic tests,
all of which comprise a single benefit category under section
1861(s)(3) of the Act, may not be billed as ``incident to'' services
under section 1861(s)(2)(A) of the Act. Thus, under section 1877 of the
Act, a group practice physician may not receive a productivity bonus if
the bonus is calculated based on such diagnostic tests, unless the
physician personally performed the tests. Moreover, the bonus cannot be
related directly to the volume or value of DHS referrals. We discuss
the treatment of ``incident to'' services in further detail in section
IV below.
Given our intent to conform the physician self-referral regulations
as much as possible to existing Medicare coverage and payment rules, we
did not intend in Phase I or Phase II to distinguish between
``services'' and ``supplies'' furnished ``incident to'' a physician's
professional services. Accordingly, as discussed in more detail in
section IV of this preamble, we are revising the definition of ``
`incident to' services'' at Sec. 411.351 to clarify that the term
includes both services and supplies (such as drugs) that meet the
applicable requirements set forth in section 1861(s)(2)(A) of the Act,
Sec. 410.26 of our regulations, and relevant manual provisions. We are
also making a minor revision to make clear that the definition covers
the terms `` `incident to' services'' and ``services `incident to' ''
for purposes of these regulations.
Comment: A commenter asserted that our interpretation in the CY
2003 physician fee schedule final rule as to what services qualify as
``incident to'' services (67 FR 79993-79994) is inconsistent with a
previous interpretation we made in the CY 2002 physician fee schedule
final rule (66 FR 55268). The commenter contends that ``incident to''
services may include separately listed and independent services, such
as diagnostic tests. The commenter contends that our application of the
``incident to'' billing rules in the physician self-referral context
effectively prohibits group practice physicians from receiving a share
of the group's overall profits or a productivity bonus based on
diagnostic tests that were directly supervised by the physician or a
member of his or her group practice. The commenter requested that we
amend the definition of ``incident to'' at Sec. 411.351 to cover any
services, including services that are listed separately and
independently (such as diagnostic tests), that are directly supervised
by the physician or a physician in the group practice, provided that
they meet all of the other requirements under the ``incident to''
billing rules. According to the commenter, this interpretation appears
consistent with the Congress' intent under section 1877 of the Act to
favor group practice physicians with respect to the distribution of
profits and productivity bonuses.
Response: We are not amending the definition of ``incident to''
services at Sec. 411.351 as suggested by the commenter. We believe it
would be confusing to define ``incident to'' services differently for
physician self-referral purposes than for billing purposes. As we
stated in Phase I, we intend to interpret the physician self-referral
law in a manner that conforms to existing Medicare coverage and payment
rules (66 FR 859). We specifically noted in Phase I (66 FR 909) and in
the Phase II definition of ``incident to services'' (69 FR 16128) that
the ``incident to'' services on which group practice physicians could
be compensated must comply with existing billing requirements as they
may be amended from time to time.
We do not believe that our ``incident to'' billing rule in Sec.
410.26 is inconsistent with the language of section 1877(h)(4)(B)(i) of
the Act. Although ``incident to'' services are referrals for purposes
of section 1877 of the Act, we believe that the Congress intended that
these services nonetheless may be considered when calculating a
physician's productivity bonus. For those services that are
appropriately billed ``incident to'' under current Medicare rules, the
group practice physician to whose personally performed services the
``incident to'' services are incidental (that is, the ordering
physician) may be paid a productivity bonus or profit share consistent
with the special rules for such compensation set forth in Sec.
411.352(i).
As we discussed in the CY 2003 physician fee schedule final rule,
we interpret Sec. 410.26(a)(7) literally; that is, ``incident to''
services and supplies
[[Page 51017]]
covered under section 1861(s)(2)(A) of the Act means services and
supplies not having their own independent and separately listed
statutory benefit category (67 FR 79994.) The commenter provided the
example of diagnostic tests performed under the direct supervision of a
physician and meeting the requirements under the ``incident to''
billing rules. Regardless of the physical possibility of diagnostic
tests being performed under the direct supervision of a physician and
meeting the requirements of certain billing rules, because these
services have an independent and separately listed statutory benefit
category (section 1861(s)(3) of the Act), they cannot be billed as
``incident to'' a physician service. (We note that we are deleting
Sec. 411.355(a)(3) because it is redundant and incorrectly suggests
that diagnostic tests may be billed as ``incident to'' services.)
E. Physician in the Group Practice
We are modifying the definition of ``physician in the group
practice'' to clarify that an independent contractor physician must
furnish patient care services for the group under a contractual
arrangement directly with the group practice.
Comment: A commenter asked that the definition of ``physician in
the group practice'' be revised to delete the condition that a
physician who is an independent contractor of a group practice is
considered to be in the group practice only when he or she is
performing services on the group practice's premises. The commenter
noted that section 952 of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) revised the
reassignment provisions in section 1842(b)(6) of the Act to permit
independent contractor physicians to reassign their claims to a group
practice for services performed off-premises (Sec. 424.80(b)(2)).
Response: Section 1842(b)(6) of the Act generally prohibits Part B
payment to any person or entity other than the beneficiary who received
the service or the physician or other supplier who furnished the
service. This section of the Act also enumerates specific exceptions,
known as the reassignment exceptions, to this general rule. Prior to
section 952 of the MMA, we were prohibited from making payment to an
entity that received reassigned payments from a contractor physician or
other contractor supplier, unless the physician or other supplier
performed the service at issue on the premises of the entity billing
for the service. Section 952 of the MMA amended section 1842(b)(6) of
the Act, so that we are allowed to make payment to an entity that has
received reassigned payments pursuant to a contractual arrangement,
provided that the contractual arrangement meets the program integrity
and other safeguards that the Secretary may determine are appropriate.
Thus, although section 1842(b)(6) of the Act grants us general
authority to honor certain reassignments made pursuant to a contractual
arrangement, it does not require us to honor those we believe are
potentially abusive. We note that section 952 of the MMA does not apply
exclusively to arrangements with group practices, and, therefore,
retains meaning in the context of reassignments between other parties.
For these reasons, we do not believe that section 952 of the MMA
requires us to change our definition of ``physician in the group
practice'' so that an independent contractor physician qualifies as a
``physician in the group practice'' irrespective of whether he or she
is performing services on or off the group practice's premises. We draw
attention to Sec. 424.80(a), which, in implementing section 952 of the
MMA, we amended to state that nothing in Sec. 424.80 relieves a
party's obligations under certain other rules, including the physician
self-referral rules.
We continue to believe that it is appropriate to consider an
independent contractor physician a ``physician in the group practice''
only when he or she is performing services in the group practice's
facilities and, thus, has a clear and meaningful nexus with the group's
medical practice. The term ``physician in the group practice'' is
central to the definition of a group practice and significant for
purposes of two important exceptions in section 1877 of the Act: The
physician services exception and the in-office ancillary services
exception. These exceptions enable physicians to make referrals for DHS
within their group practices provided that certain requirements are
satisfied. Accordingly, the strong nexus with a group practice created
by the requirement that an independent contractor physician practice in
a group practice's facilities ensures that the physician is truly
practicing ``in the group.''
Comment: Two commenters expressed the need for clarification of the
requirements for qualification as a ``physician in the group
practice.'' These commenters asserted that a ``physician in the group
practice'' is permitted to furnish only supervision services (which are
not separately reimbursed by Medicare), and that any services for which
a group practice actually bills Medicare must be provided by a member
of the group. The commenters requested that we confirm their
interpretation of the rules regarding billing for services of
physicians in a group practice and members of a group practice. In the
alternative, the commenters suggested that we require that any
separately-billable services furnished by a ``physician in the group
practice'' be provided in the same building where the group practice
provides its full range of services, thus prohibiting a ``physician in
the group practice'' from providing services in a centralized building.
According to the commenters, this change would ensure that independent
contractor physicians have a sufficient nexus to the group practice to
justify the group's utilization of the in-office ancillary services
exception.
Response: The commenters are mistaken that, as defined at Sec.
411.351, a ``physician in the group practice'' (who can be either a
member of the group or an independent contractor) may furnish only non-
billable supervision services. The definition makes clear that a
``physician in the group practice'' can include an independent
contractor who is ``furnishing patient care services.'' ``Patient care
services'' is defined at Sec. 411.351 to encompass a broad range of
billable and non-billable services.
In order to qualify as a ``group practice'' under Sec. 411.352,
only members of the group practice (and not independent contractor
physicians in the group practice) are required to furnish
``substantially the full range of patient care services that the
physician routinely furnishes, including medical care, consultation,
diagnosis, and treatment, through the joint use of shared office space,
facilities, equipment and personnel.'' In other words, an independent
contractor ``physician in the group practice'' may furnish billable
services, and may furnish services--in the group practice's
facilities--that comprise less than the full range of the patient care
services that he or she usually furnishes. This enables a group
practice to hire, on a contract basis, a specialist or other physician
without jeopardizing the group's ability to qualify as a group practice
and utilize the in-office ancillary services exception, even if the
contracted physician works for several physician practices or
facilities. We note that qualifying as a group practice is not in and
of itself sufficient to comply with the physician self-referral rules,
and that use of the in-office ancillary services exception requires
compliance with all of the conditions of that exception.
[[Page 51018]]
Under our regulations, an independent contractor physician is a
``physician in the group practice'' only when he or she is performing
services in the group practice's facilities. We are concerned about
reports that some group practices purport to rely on the in-office
ancillary services exception in Sec. 411.355(b) when they: (1)
Nominally comply with the centralized building requirements in Sec.
411.355(b)(2)(ii) and (b)(2)(iii); (2) contract with independent
contractor physicians to furnish or supervise services in the
centralized building as ``physicians in the group practice''; (3)
accept reassignment of the right to payment from those physicians; and
(4) realize profits based on the services they refer to the independent
contractor ``physicians in the group practice'' stationed in the
centralized building. In the physician fee schedule proposed rule for
CY 2007, we proposed changes to our reassignment rules and to the
definition of ``centralized building'' to address potentially abusive
arrangements (71 FR 48981, 49054-49057). We are reviewing the public
comments to our proposal and intend to issue a final rulemaking on this
subject.
Comment: One commenter noted that the definition of ``member of the
group'' at Sec. 411.351 specifically excludes leased employees who do
not meet the definition of an ``employee'' at Sec. 411.351. The
commenter questioned whether a leased employee who does not meet the
definition of an employee may nevertheless meet the definition of a
``physician in the group practice.'' The commenter noted that an
independent contractor physician may be a ``physician in the group
practice'' and asserted that there does not appear to be any
distinction between an independent contractor and a leased employee who
does not meet the definition of an ``employee'' that would justify
excluding the latter type of individual from being a ``physician in the
group practice.''
Response: The definition of ``physician in the group practice''
clearly encompasses only members (that is, owners and employees) and
independent contractors. We are not persuaded to include other types of
employment relationships (such as arrangements involving a group
practice ``leasing'' or borrowing a physician who is an employee or
contractor of some other entity. In order to fit within the definition
of ``physician in the group practice,'' an independent contractor must
have ``a contractual arrangement with the group practice.'' We
interpret this to require that the contractual arrangement be directly
between the group practice and the independent contractor physician,
and not between the group practice and another entity, such as a
staffing company. We are expressly incorporating this interpretation
into the regulations by modifying the definition of ``physician in the
group practice'' at Sec. 411.351.
Group practices receive favorable treatment under the physician
self-referral law with respect to physician compensation. Accordingly,
we believe that, in order to qualify as a group practice and receive
such favorable treatment, the group practice's physicians must have a
strong and meaningful nexus to the group practice. An independent
contractor in direct contractual privity with a group practice has such
a nexus; employees leased from other entities do not. We believe this
justifies excluding a leased employee from being a ``physician in the
group practice,'' contrary to the commenter's assertion that there is
no distinction between an independent contractor and a leased employee.
Moreover, we are concerned about potentially abusive arrangements, such
as a situation in which a physician is employed by (and receives one W-
2 from) a staffing company that leases the physician to numerous group
practices, none of which has to enter into an individual contract with
the physician but all of which can consider the physician a ``physician
in the group practice'' with the attendant benefits of such
categorization.
F. Radiology and Certain Other Imaging Services and Radiation Therapy
In Phase II, we defined ``radiology and certain other imaging
services'' to exclude radiology procedures that are integral to the
performance of a nonradiological medical procedure and performed during
the nonradiological procedure, or immediately following the
nonradiological procedure when necessary to confirm placement of an
item placed during the nonradiological procedure (69 FR 16103). We
declined to include nuclear medicine in the DHS category of ``radiology
and certain other imaging services,'' but stated that we would continue
to study the issue. One commenter stated that it disagreed with our
decision. Based on this comment and further study, in the CY 2006
physician fee schedule proposed rule, we proposed to include diagnostic
nuclear medicine services within the meaning of ``radiology and certain
other imaging services,'' and to include therapeutic nuclear medicine
services within the meaning of ``radiation therapy and supplies'' (70
FR 45854-45856). We adopted our proposal in the CY 2006 physician fee
schedule final rule (70 FR 70283-70289), effective January 1, 2007.
We are making no changes to the definition of ``radiology and
certain other imaging services'' in this Phase III final rule.
Comment: One commenter noted that, in Phase II, we specifically
declined to exclude ophthalmic A-scans and B-scans from the definition
of ``radiology and certain other imaging services'' (69 FR 16103). The
commenter disagreed with our conclusion, particularly with respect to
A-scans. The commenter stated that the applicable standard of care
dictates that A-scans are integral to cataract and other refractive
surgeries and that they are not diagnostic in nature because they guide
how surgery will be performed, not whether surgery will be performed.
According to the commenter, although the scan is not done during the
operation, it is an integral part of the surgery and raises little risk
of abuse or overutilization because it will be done only if cataract
surgery has already been prescribed.
Response: An A-scan involves the transmission of high-frequency
sound waves through the eye and the measurement of their reflection
from ocular structures. An A-scan provides a one-dimensional picture,
most commonly used to measure the eye length and provide the data
needed to calculate the power of the optical correction of the
intraocular lens implant for cataract surgery. A B-scan, which is a
two-dimensional cross section view of the eye, is used if the view
inside the eye is obstructed by blood, an extremely dense cataract, or
other cloudy media.
The definition of ``radiology and certain other imaging services''
at Sec. 411.351 does not include radiology procedures that are
integral to the performance of a nonradiological medical procedure and
performed: (1) During the nonradiological medical procedure, or (2)
immediately following the nonradiological medical procedure when
necessary to confirm placement of an item placed during the
nonradiological medical procedure. The commenter correctly states that
often an A-scan (and a B-scan, as appropriate) is a pre-operative
procedure performed prior to cataract surgery (which is a scheduled
elective surgery). These scans are not performed during or just after
cataract surgery. A-scans and B-scans are included in the definition of
``radiology and certain other imaging services'' because, even though
they are integral to the performance of a nonradiological medical
procedure, they are not performed during the nonradiological medical
procedure or
[[Page 51019]]
immediately following it to confirm placement of an item placed during
the nonradiological medical procedure. However, in the CY 2008
Outpatient Prospective Payment System notice of proposed rulemaking, we
proposed to exclude from the definition of ``radiology and certain
other imaging services'' at Sec. 411.351 radiology procedures that are
``covered ancillary services'', as defined at Sec. 416.164(b) of this
chapter for purposes of the revised ASC payment system. The term
``covered ancillary services'' includes certain radiology services that
are integral to, and performed on the same day as, a covered ambulatory
surgical procedure.
Comment: One commenter stated that it welcomed the exclusion from
the definition of ``radiology and certain other imaging services'' of
radiology services performed immediately after nonradiology services.
The commenter asserted that it is standard protocol to order a CT scan
in the aftermath of prostate brachytherapy in order to ensure that the
radioisotopes have been placed properly. The commenter asserted that,
although some may prefer to perform this service immediately after the
procedure, it is better from a clinical standpoint to wait several
weeks because the additional time allows for the prostate to become
less swollen, thereby enabling the physician to determine more
accurately whether the seeds were placed correctly. Therefore, the
commenter suggested that we expand the exclusion from the definition to
also include a CT scan taken within 6 weeks after the prostate
brachytherapy to confirm proper placement of the isotopes.
Response: We decline to adopt the commenter's proposal. As we
stated in Phase I, where the radiology procedure is performed after the
nonradiology procedure (as opposed to radiology procedures integral to
and performed during a nonradiological procedure), referring physicians
have discretion in choosing the entity that provides the radiology
service independent of the entity providing the nonradiology procedure
(66 FR 929). In Phase II, we excluded from the definition of
``radiology and certain other imaging services'' radiology procedures
performed immediately after the nonradiology procedure in order to
confirm placement of an item because we believed there would be no risk
of program or patient abuse by doing so (69 FR 16103). Where a
radiology procedure is not performed immediately after the nonradiology
procedure to confirm placement of an item, we believe there is a risk
that the referring physician may direct referrals to an entity with
which he or she has a financial interest, the very conduct addressed by
the statute. As we noted in Phase II, depending on the facts and
circumstances, exceptions, such as the in-office ancillary services
exception in Sec. 411.355(b) or the rural provider exception in Sec.
411.356(c)(1), may apply to referrals for radiology services furnished
before or after the nonradiology procedure (69 FR 16103).
We note also that, depending on the facts and circumstances, CT
scans or other imaging ordered in the aftermath of prostate
brachytherapy may qualify as ``necessary and integral'' ancillary
services so as to come within the consultation exclusion from the
definition of ``referral.'' We question whether a CT scan or other
imaging performed as late as 6 weeks after the brachytherapy would be
``necessary and integral'' to the brachytherapy, but decline to say
that such a CT scan or other imaging could never be ``necessary and
integral'' to the original procedure (and, thus, not be considered a
``referral'' for purposes of the physician self-referral law); rather,
the specific facts and circumstances control.
G. Referral
Section 1877(h)(5)(c) of the Act defines ``referral'' as a request
by a physician for an item or service for which payment may be made
under Medicare Part B, including a request for a consultation and any
DHS ordered or performed by the consulting physician or under the
supervision of the consulting physician, and the request or
establishment of a plan of care by a physician that includes the
furnishing of DHS, with certain exceptions for a small subset of
services provided or ordered by pathologists, diagnostic radiologists,
and radiation oncologists in accordance with a consultation requested
by another physician.
In Phase I, we defined ``referral'' to exclude services personally
performed by a physician who ordered the services, but to include DHS
provided by the physician's employees or contractors or by other
members of the physician's group practice (66 FR 871-872). In Phase II,
we confirmed that a ``referral'' includes services performed by others
``incident to'' the physician's services (69 FR 16063). Phase II also
clarified that the definition of ``referral'' excludes referrals for
necessary and integral DHS ordered and appropriately supervised by a
radiation oncologist pursuant to a consultation (69 FR 16065).
We received several comments addressing the issue of services
performed by a physician's employees that are ``incident to'' the
physician's personally-performed services. Other comments addressed the
exclusions from the definition of ``referral'' for certain DHS
requested by radiologists, pathologists, and radiation oncologists
pursuant to a consultation. We are making no changes to the definition
of ``referral'' in this Phase III final rule.
Comment: Several commenters requested clarification of the
statement in Phase II regarding whether there is a ``referral'' when
antigens are prepared and furnished by a physician, or whether there is
a ``referral'' when a physician refills an implantable pump (69 FR
16063). The response in Phase II appeared, in the commenters' view, to
indicate that, if a physician personally prepares and furnishes
antigens or personally refills an implanted pump for a patient, there
is no ``referral'' for purposes of the physician self-referral statute.
From this statement, the commenter concluded that the physician could
bill for these DHS without consideration as to whether the referrals
satisfy the requirements of an exception.
Response: In Phase II, we stated that the definition of
``referral'' excludes services personally performed or provided by the
referring physician, but specifically includes any services performed
or provided by anyone else (69 FR 16063). This interpretation is
codified in the definition of ``referral'' at Sec. 411.351. It is
possible for a physician to order and personally furnish antigens to a
patient and to order a refill for, and personally refill, an
implantable pump. In such instances, there would be no ``referral'' for
a designated health service, and no exception is needed.
We note that the furnishing of durable medical equipment (DME) and
supplies by a referring physician requires a different analysis than
the mere refilling of an implantable pump. There are few, if any,
situations in which a referring physician would personally furnish DME
and supplies to a patient, because doing so would require that the
physician himself or herself be enrolled in Medicare as a DME supplier
and personally perform all of the duties of a supplier as set forth in
the supplier standards in Sec. 424.57(c).
DME suppliers are entities that provide services under the specific
Part B benefit for the provision of medical equipment and supplies for
use in the patient's home. These entities must be enrolled with the
appropriate Medicare contractor as a DME supplier and must meet all of
the professional supplier standards and quality standards that we
require through regulations and
[[Page 51020]]
administrative or program instructions. The enrollment requirements and
professional supplier standards are not waived in those situations in
which a physician furnishes DME directly to the patient. The services
to be personally performed by the physician would include, but not be
limited to, the following, as appropriate--
Personally fit the item for the beneficiary;
Provide necessary information and instructions concerning
use of the DME;
Advise the beneficiary that he or she may either rent or
purchase inexpensive or routinely purchased DME;
Explain the purchase option for capped rental DME;
Explain all warranties;
(Usually) deliver the DME to the beneficiary at home; and
Explain to the beneficiary at the time of delivery how to
contact the physician in his or her capacity as a DME supplier by
telephone.
A referring physician claiming to provide DME personally would need
to maintain adequate documentation to establish that the physician
personally performed these and other required DME supplier activities.
All of these supplier requirements would need to be satisfied in order
for a physician to be considered to be providing personally DME items
and supplies. This is true for all DME furnished by a physician,
including, for example, continuous positive airway pressure (CPAP)
equipment. We believe that it is highly unlikely that a referring
physician would meet the criteria for personally performed services
when dispensing CPAP or other DME equipment. Thus, the dispensing of
CPAP equipment by a physician would almost always constitute a
``referral'' for purposes of the physician self-referral statute, as
would the dispensing of CPAP equipment by anyone else affiliated with
the referring physician, such as a nurse or physician assistant. We
note that CPAP equipment is DME that does not qualify for the in-office
ancillary services exception.
Comment: One commenter suggested that a ``referral'' should not
include ``incident to'' services requested by a physician and performed
by an employee or contractor, unless the services are performed by an
employee or contractor who is licensed to provide the services without
physician supervision and who could otherwise bill separately for the
services. The commenter also requested that we provide further
education to physicians on how these ``incident to'' services would fit
into the in-office ancillary services exception.
Response: The commenter provided no support for its suggestion, nor
did the commenter explain why the in-office ancillary services
exception does not provide adequate protection under the circumstances
described. We decline to change our interpretation of ``referral'' as
requested by the commenter. As we stated in Phase II:
We are adhering to our original determination that ``incident to''
services performed by others, as well as services performed by a
physician's employees, are referrals within the meaning of section
1877 of the Act. * * * As a practical matter, although ``incident
to'' services and employee services are included in the definition
of ``referrals'' for purposes of section 1877 of the Act, many of
those referrals will fit in the in-office ancillary services
[exception] or another exception.
(69 FR 16063.) We continue to conclude that requests for DHS performed
by a physician's employees or independent contractors are ``referrals''
within the meaning of the physician self-referral prohibition, although
these referrals may satisfy the requirements of an exception, including
the in-office ancillary services exception in Sec. 411.355(b).
Comment: Several commenters pointed out that, although we stated in
Phase II that we were expanding the consultation exclusion to protect
ancillary services that were necessary and integral to the provision of
radiation therapy, the regulation text did not include any language to
that effect (69 FR 16065). One commenter requested that the regulatory
definition be amended to conform to the preamble discussion. Another
commenter complained that the expansion of the consultation exclusion
to include ancillary services that are necessary and integral to
radiation oncology would increase utilization and Federal health care
program costs and defeat the purposes of section 1877 of the Act. Two
commenters, one representing brachytherapy providers, requested that
interventional radiologists be permitted to provide diagnostic imaging
services that are necessary and integral to their procedures.
Response: In Phase II, we intended to revise the definition of
``referral'' at Sec. 411.351 to exclude from the definition ancillary
services that are necessary and integral to the provision of radiation
therapy, but inadvertently neglected to amend the regulatory text. In
the CY 2006 physician fee schedule final rule published November 21,
2005, we made a technical correction that modified the language in
paragraph (2) of the definition of ``referral'' at Sec. 411.351 to
clarify that ancillary services necessary for and integral to the
provision of radiation therapy are also protected by the consultation
provision (70 FR 70330). We believe that the clarification was
necessary to effectuate the statutory exclusion, and that it is
sufficiently narrow to prevent abuse. No additional change is needed.
We do not believe that it is appropriate to exclude from the
definition of ``referral'' ancillary testing necessary and integral to
interventional radiology procedures performed as a result of a
consultation. Interventional radiologists perform minimally invasive
procedures using imaging for guidance. Examples of these procedures
include angiography, angioplasty, biopsy, stenting, cryotherapy, and
embolization. Because it is our understanding that interventional
radiology is surgical in nature, we believe that any necessary and
integral services would be ancillary to a surgical procedure, rather
than to a radiology procedure. Thus, the consultation provision would
not apply. Depending on the facts and circumstances, diagnostic imaging
services performed by interventional radiologists may fit within the
exclusion from the definition of ``radiology and certain other imaging
services'' for radiology procedures that are integral to the
performance of a nonradiological medical procedure and performed during
the procedure or immediately following the procedure to confirm
placement of an item placed during the procedure.
Comment: One commenter asked us to clarify whether the consultation
exclusion for radiation oncologists in the definition of ``referral''
at Sec. 411.351 protects radiation oncology services personally
performed by the radiation oncologist or by a radiation oncologist in
the same group practice. The commenter noted that Phase II expanded the
consultation exclusion from the definition of ``referral'' to permit
radiation therapy requested by a radiation oncologist to be performed
by or under the supervision of the radiation oncologist, or under the
supervision of a radiation oncologist in the same group practice (69 FR
16131). The commenter stated that, read literally, the exclusion from
the definition of ``referral,'' as amended, would allow a radiation
oncologist in the consulting radiation oncologist's group practice to
supervise the radiation therapy, but not to perform it.
Response: The commenters' reading of the definition of ``referral''
at Sec. 411.351 is correct. The consultation exclusion for radiation
oncologists in
[[Page 51021]]
the definition of ``referral'' protects only radiation oncology
services personally performed or supervised by the radiation oncologist
or services supervised by a radiation oncologist in the same group
practice. Requests by a pathologist for clinical diagnostic laboratory
tests and pathological examination services and requests by a
radiologist for diagnostic radiology services are treated similarly.
Comment: Several commenters asked that we expand the consultation
provision to include ``walk-in'' patients (that is, patients who are
seen by a physician without having been referred to that physician by
another physician), as well as patients referred by other physicians.
According to the commenters, there is no reason these patients are more
likely to receive unnecessary treatment.
Response: We decline to make the change suggested by the
commenters. We believe that walk-in patients for pathology, radiology,
and radiation oncology are not common. Moreover, the fact that a
patient ``walks in'' to a physician's office (whether a pathologist,
radiologist, radiation oncologist, or other type of physician) is not
determinative under the physician self-referral law with respect to DHS
referrals made by the physician whose services are sought by the walk-
in patient. Thus, even if a patient initially self-refers to a
pathologist, radiologist, or radiation oncologist, subsequent orders of
items or services by the pathologist, radiologist, or radiation
oncologist are referrals of DHS. Moreover, these referrals are subject
to potential overutilization or other abuse.
As we noted in Phase I (66 FR 874), the Congress regarded the
specialists excepted under the definition of ``consultation'' as
physicians who were not initiating a referral for services, but merely
implementing the request of another physician who has already
determined that the patient is likely to need the specialist's
services. In these situations, the Congress indicated its belief that
overutilization would not be likely. As we noted in Phase II (69 FR
16064), the statutory consultation exception ``creates a narrow
exception for a small subset of services provided or ordered by certain
specialists in accordance with a consultation requested by another
physician.'' The additional protection against overutilization of
diagnostic radiology, pathology, and radiation therapy services
implicit when a radiologist, pathologist, or radiation oncologist
merely implements a determination made by another physician that the
patient is likely to need the specialist's services (and those services
meet the requirements of a consultation) are not present in the case of
a patient who ``walks in'' for these services.
We are mindful that services provided to walk-in patients will not
meet the definition of ``consultation,'' and any subsequent DHS will,
therefore, be the subject of a referral by the pathologist,
radiologist, or radiation oncologist. Depending on the circumstances,
these referrals may satisfy the requirements of an exception to the
prohibition on physician self-referral. As noted in Phase II in
response to similar concerns about self-referred patients (69 FR
16066), changes made to the in-office ancillary services exception in
Phase II should, in many circumstances, enable DHS referrals for self-
referred patients to fit in that exception.
Comment: Several commenters requested that we clarify that the
consultation exclusion covers the technical component of DHS ordered by
hospital-based pathologists and radiologists pursuant to a
consultation. Another commenter suggested that DHS ordered by
anesthesiologists pursuant to a consultation should also be excluded
from the definition of a referral.
Response: We have previously considered the first issue and
continue to believe that, where a physician orders the technical
component of a designated health service (for example, an x-ray) and
someone other than the physician performs the technical component,
there is a referral to which section 1877 of the Act applies (66 FR
871, 69 FR 16063). However, the commenters are correct with respect to
the technical component of a designated health service ordered by a
hospital-based pathologist, radiologist, or radiation oncologist, if
the requirements of the consultation exclusion otherwise apply.
Specifically, the technical components of DHS ordered by these types of
physicians pursuant to a consultation are subject to the consultation
exclusion from the definition of a ``referral'' at Sec. 411.351.
With respect to extending the consultation provision to DHS ordered
by anesthesiologists, we note that the statutory exception is limited
to pathologists, radiologists, and radiation oncologists who meet
certain criteria. We do not have the authority to extend the statutory
consultation exception in the definition of ``referral'' to specialists
other than those enumerated by the Congress. Moreover, we are not
persuaded that any special regulatory exception is warranted for DHS
referrals made by an anesthesiologist to an entity with which he or she
(or his or her immediate family member) has a financial relationship.
Depending on the circumstances, anesthesiologist referrals for DHS may
qualify for an existing exception, including, for example, the
exception for personal service arrangements or the exception for bona
fide employment relationships.
Comment: One commenter asked that the consultation exclusion from
the definition of ``referral,'' which, according to the commenter,
protects tests performed by other pathologists, radiologists, or
radiation oncologists in the same group practice, be expanded to
protect services furnished by physicians who are employees of the same
entity, such as a hospital. The commenter gave the example of a
hospital-employed radiologist who receives an order for diagnostic
services and subsequently directs a second radiologist employed by the
same hospital to perform the services. According to the commenter,
there is no possibility of abuse in this situation, and the change is
necessary to permit hospital-employed pathologists, radiologists, and
radiation oncologists to provide coverage for each other.
Response: We do not agree that an expansion of the consultation
exception is warranted. Where physicians have a common hospital
employer that bills for the technical components of a test (that is,
the hospital is the DHS entity), the hospital and the referring
physicians may avail themselves of the exception for bona fide
employment relationships in Sec. 411.357(c). With respect to any
professional component of the services that are DHS, the hospital
should be able to bill pursuant to a reassignment (which would make the
hospital the DHS entity), and the arrangement could be structured to
satisfy the requirements of the exception for bona fide employment
relationships.
H. Rural Area
The term ``rural area'' is used throughout the physician self-
referral regulations. For ease of reference and to simplify the
regulations, we are moving the definition to Sec. 411.351. For
physician self-referral purposes, we are defining ``rural area'' as an
area that is not an urban area as defined at Sec. 412.62(f)(1)(ii).
The definition is consistent with the definition in the statutory
exception for rural providers at section 1877(d)(2) of the Act.
IV. Group Practice--Sec. 411.352
The determination of which organizations qualify as group practices
for purposes of section 1877 of the Act is critical for several
exceptions, including the in-office ancillary services exception. In
addition, section 1877 of the Act allows group practices more
flexibility in compensating physicians
[[Page 51022]]
(for example, only group practice physicians may be compensated in a
manner that takes into account services furnished ``incident to'' a
physician's personally performed services).
Phase I addressed the requirements for qualification as a group
practice under section 1877(h)(4) of the Act. (The regulatory
requirements appear in Sec. 411.352.) Most commenters commended the
changes made in Phase I. In Phase II, we made several minor changes to
Sec. 411.352.
This Phase III final rule makes one minor change to Sec. 411.352
to reflect more closely the statutory scheme and our original intent in
the Phase I final regulation that the ``incident to'' services need not
themselves be personally performed by the referring physician: we are
changing the parenthetical language in Sec. 411.352(i)(1) to permit a
physician in the group to be paid a productivity bonus based on
services that he or she has personally performed, or services
``incident to'' such personally performed services or both.
Comment: One commenter asked for confirmation that a separate
corporation that is formed by a hospital and that has as its primary
purpose being a physician group and employing physicians would meet the
single legal entity requirement even if the physicians are divided into
different divisions based on specialty.
Response: A separate corporation formed by a hospital to employ
physicians can constitute a single legal entity, provided that the
specialty divisions are not separate legal entities and the arrangement
otherwise satisfies the requirements of Sec. 411.352.
Comment: One commenter asked that we clarify that a medical
foundation qualifies as a group practice.
Response: For the reasons noted in Phase I (66 FR 902-903) and
Phase II (69 FR 16077), including those discussed below, we do not
believe it is feasible to make a blanket determination that all medical
foundations qualify as group practices. Moreover, we see no need to
revisit the requirements for qualification as a group practice under
Sec. 411.352 or the discussion in Phase II regarding whether a
foundation can meet those requirements.
The commenter has failed to convince us that many typical
foundation-model practice arrangements satisfy the requirements for
qualification as a group practice. Section 1877(h)(4)(A) of the Act
defines ``group practice'' to include, inter alia, two or more
physicians legally organized as a foundation. In one common variation
of a foundation-model arrangement, it is the foundation, and not the
physicians, that owns the medical practice; thus, the physicians are
not legally organized as a ``foundation'' as that term is used in
section 1877(h)(4)(A) of the Act. Instead, the foundation owns and
operates all elements of the practice. However, because it cannot
provide physician services, the foundation employs or contracts with
physicians to furnish patient care services (66 FR 902.) In States in
which a foundation (or other corporation) may provide physician
services, a medical foundation may be a group practice if all of the
group practice requirements are satisfied.
As we noted in Phase II, if a particular foundation-model
arrangement meets the single legal entity test (and has at least two
physician employees), it may qualify as a group practice under Sec.
411.352 and use the in-office ancillary services exception in Sec.
411.355(b), provided that all other requirements of Sec. 411.352 and
the in-office ancillary services exception are met (69 FR 16077).
Comment: Two commenters inquired about the application of the
indirect compensation arrangements exception and personal service
arrangements exception to foundation-model practices. One commenter
questioned whether foundation-model structures create indirect
compensation arrangements between referring physicians and the DHS
entity that owns the foundation, thus implicating the indirect
compensation arrangements exception requirements.
Response: With respect to the application of the indirect
compensation arrangements exception and personal service arrangements
exception to arrangements involving medical foundations, we reiterate
that an arrangement need not satisfy the requirements of a specific
exception to comply with the physician self-referral rules. An entity
may rely on any exception that an arrangement satisfies (66 FR 916,
919; 69 FR 16086.) With the new ``stand in the shoes'' provision
(discussed below in section VI.B), many arrangements involving
foundation-model structures may be deemed to be direct compensation
arrangements and potentially qualify for the personal service
arrangements exception. Whether a particular arrangement constitutes an
indirect compensation arrangement pursuant to Sec. 411.354(c) will
continue to depend on the specific facts and circumstances of the
arrangement.
Comment: One commenter asserted that a ``typical'' medical
foundation arrangement is structured as follows: a nonprofit medical
foundation owns and operates a nonprofit health care clinic and
contracts with a medical group (organized as a professional
corporation) to provide the professional services of the group's
employed physicians at the foundation's clinic. The medical foundation
pays the group aggregate compensation that is then divided among the
group's physicians. The commenter inquired whether the medical group
can qualify as a group practice within the meaning of the physician
self-referral rules if the medical foundation bills and collects for
the professional services of the medical group using a provider number
assigned to the foundation.
Response: As we observed in Phase II (69 FR 16077), foundation-
model physician practices exist in a variety of forms, depending on
jurisdiction and other factors; therefore, it is difficult to
generalize about these arrangements. Nothing in the physician self-
referral regulations precludes a foundation-model physician practice
from qualifying as a ``group practice'' if it can satisfy every element
of the requirements in Sec. 411.352.
The fact that a medical foundation bills and collects for the
professional services of the physicians in the medical group who
provide services at the foundation's clinic using a billing number
assigned to the foundation rather than a billing number assigned to the
group does not necessarily disqualify the medical group from satisfying
the requirements of Sec. 411.352. However, the fact that professional
services of members of the medical practice are billed by the
foundation using a billing number assigned to the foundation pursuant
to a reassignment may affect the ability of the medical practice to
satisfy the ``substantially all'' test in Sec. 411.352(d), which
requires that substantially all (that is, at least 75 percent) of the
patient care services of the physicians who are members of the group
practice (for example, owners or employees) are provided through the
group and are billed under a billing number assigned to the group and
amounts so received are treated as receipts of the group. Where
professional services are provided to a foundation clinic pursuant to a
services contract between the group practice and the foundation, a
group practice may count such services as services the physician
provides through the group. For further explanation of the
``substantially all'' test, see 66 FR 904-905 and 69 FR 16079.
We note that, if a foundation-model practice qualifies as a group
practice under Sec. 411.352, the practice may be able to use the
physician services or in-office ancillary services exceptions for
[[Page 51023]]
DHS referrals where the group practice is the entity furnishing the DHS
(that is, where the DHS are billed under the group practice's billing
number, not the foundation's billing number). Referrals of DHS billed
by the foundation would not qualify for these exceptions.
Comment: One commenter asserted that faculty practice plans should
be entitled to the same treatment as group practices with respect to
methodologies for compensating the plan physicians. According to the
commenter, the inclusion of faculty practice plans as entities eligible
under the statutory definition of ``group practice'' in section
1877(h)(4)(A) of the Act evidences the Congress's intent that faculty
practice plans be treated as group practices. The commenters asserted
that the failure to include faculty practice plans as group practices
disadvantages physicians in academic practice.
Response: Nothing in the regulations prevents a faculty practice
plan from qualifying as a group practice if it can satisfy the
conditions in Sec. 411.352 (66 FR 917). If these conditions are
satisfied, the faculty practice plan may avail itself of the physician
services exception in Sec. 411.355(a) and the in-office ancillary
services exception in Sec. 411.355(b) for DHS referrals within the
faculty practice plan, as well as the special rule for productivity
bonuses and profit shares in Sec. 411.352(i). We note that neither the
physician services exception, nor the in-office ancillary services
exception, would protect referrals by faculty practice plan physicians
to other components of an academic medical center, such as the
affiliated hospital. In such circumstances, the academic medical center
services exception may be useful.
Comment: One commenter asked for clarification of the unified
business test requirement that a group practice have centralized
decision-making by a body representative of the group practice and its
application to a nonprofit corporation. Under IRS rules, a majority of
the board of a tax-exempt, nonprofit corporation must be composed of
disinterested representatives of the community. The commenter suggested
that, in these situations, the individuals that are representative of
the group practice should not have to constitute a majority of the
board.
Response: The regulations in Sec. 411.352(f)(1)(i) require that
the decision-making body be representative of the group practice and
that the decision-making body, not the group practice, maintain
effective control over the group's assets and liabilities. Nothing in
the regulations requires that a majority of the decision-making body be
physicians (although this might be a reasonable and prudent way to
ensure fair representation). In Phase II, we noted that ``there must be
substantial `group level' management and operation,'' but did not
prescribe any particular process (69 FR 16080). Nothing in the
regulations would preclude a tax-exempt, nonprofit group practice with
a majority of its board composed of disinterested representatives of
the community from satisfying the requirements of Sec.
411.352(f)(1)(i) if the board maintains effective control over the
group's assets and liabilities and is representative of the group
practice.
Comment: Several commenters requested confirmation that a group
practice can compensate its members (including employed physicians) and
``physicians in the group practice'' by directly taking into account
the volume and value of items and services that are provided ``incident
to'' the physicians' professional services. Commenters questioned the
interplay between language in Sec. 411.352(g) that prohibits group
members from receiving any compensation based directly or indirectly on
the volume or value of referrals by the physician and the special rule
for productivity bonuses and profit shares in Sec. 411.352(i), which
provides:
A physician in a group practice may be paid a share of overall
profits of the group, or a productivity bonus based on services that
he or she has personally performed (including services ``incident
to'' those personally performed services as defined [at] Sec.
411.351), provided that the share or bonus is not determined in any
manner that is directly related to the volume or value of referrals
of DHS by the physician.
Response: The ``volume or value of referrals'' provision in Sec.
411.352(g) (section 1877(h)(4)(A)(iv) of the Act) describes a ban, for
purposes of the group practice definition, on compensating members of
the group practice in any way that relates directly or indirectly to
the volume or value of their DHS referrals. Notwithstanding this
restriction, the ``special rule'' in Sec. 411.352(i) (section
1877(h)(4)(B)(i) of the Act) permits group practices to compensate
their physicians using profit shares and productivity bonuses that
indirectly relate to DHS referrals without jeopardizing their ability
to qualify as a group practice.
Specifically, in order to qualify as a group practice, a physician
practice may not compensate a physician who is a member of the practice
directly or indirectly based on the volume or value of referrals by the
physician. However, under the special rule for profit shares and
productivity bonuses, a group practice may pay a physician in the group
practice a share of overall profits of the group provided that the
share is not determined in any manner that is directly related to the
volume or value of referrals of DHS by the physician. A group practice
may also pay a physician in the group practice a productivity bonus
based on services that the physician has personally performed or
services ``incident to'' such personally performed services, or both,
provided that the bonus is not determined in any manner that is
directly related to the volume or value of referrals of DHS by the
physician.
With respect to productivity bonuses based on ``incident to''
services, we stated in Phase I (66 FR 909) our view that group practice
physicians can receive compensation directly related to the physician's
personal productivity and to services incident to the physician's
personally performed services. We noted that the services would have to
comply with the requirements of section 1861(s)(2)(A) of the Act and
section 2050 of the Carriers Manual (now section 60.1 of the CMS
Internet-only Manual, publication 100-02, Medicare Benefit Policy
Manual, Chapter 15 (Covered Medical and Other Health Services)) or
other HHS rules and regulations affecting ``incident to'' billing. That
is, the services would have to be directly supervised by the physician
under the ``incident to'' billing rules (the physician must be present
in the office suite and immediately available). We believe that this
heightened supervision requirement provides some assurance that the
``incident to'' DHS would not be the primary incentive for a self-
referral. In Phase II, we reaffirmed this interpretation and indicated
that we were revising the regulations to make clear that productivity
bonuses can be based directly on ``incident to'' services that are
incidental to a physician's personally performed services (69 FR
16080).
Based on comments to the Phase II rule, we believe additional
regulatory text refinement is warranted. Accordingly, we have revised
Sec. 411.352(i) to read:
A physician in the group practice may be paid a share of overall
profits of the group, provided that the share is not determined in
any manner that is directly related to the volume or value of
referrals of DHS by the physician. A physician in the group may be
paid a productivity bonus based on services that he or she has
personally performed (or services ``incident to'' such personally
performed services), provided that the bonus is not determined in
any manner that is
[[Page 51024]]
directly related to the volume or value of referrals of DHS by the
physician (except that the bonus may directly relate to the volume
or value of DHS referrals by the physician if the referrals are for
services ``incident to'' the physician's personally performed
services).
The revised regulatory text makes clear that productivity bonuses can
be based directly on ``incident to'' services that are incidental to
the physician's personally performed services, even if those ``incident
to'' services are otherwise DHS referrals (for example, physical
therapy or outpatient prescription drugs). The productivity bonus
cannot be directly related to any other DHS referrals, such as
diagnostic tests or hospital admissions. We note that in Phase II (69
FR 16080), we also indicated that overall profit shares could relate
directly to ``incident to'' services. Upon further reflection, we have
concluded that this interpretation is inconsistent with the clear
statutory language, which includes ``incident to'' services only in the
context of productivity bonuses, and with our Phase I interpretation
(66 FR 908-909). Thus, we are withdrawing our statement in Phase II at
69 FR 16080 with respect to overall profit shares and ``incident to''
services. Because an overall profit share under Sec. 411.352(i)(2)
means the aggregation of profits derived from DHS of the group as a
whole or of a component of at least five physicians, an overall profit
share will necessarily include profits from DHS that are billed as
``incident to'' services (66 FR 876,909). Under this Phase III final
rule, profits must be allocated in a manner that does not relate
directly to DHS referrals, including any DHS that is billed as an
``incident to'' service. We note that the regulations provide a number
of methods that satisfy this requirement.
Comment: One commenter requested clarification that ``incident to''
drugs may be factored directly into productivity bonuses, given that
Sec. 411.352(i) speaks only of ``services'' and not ``items.''
Response: A physician in a group practice may be paid a
productivity bonus based on services and supplies furnished ``incident
to'' a physician's personally performed services. We defined ``
`incident to' services'' at Sec. 411.351 to mean those services that
meet the requirements of section 1861(s)(2)(A) of the Act and Sec.
410.26 of our regulations, both of which set forth coverage criteria
for ``services and supplies'' furnished incident to a physician's
professional services. Given our intent to conform the physician self-
referral regulations as much as possible to existing Medicare coverage
and payment rules, we did not intend in Phase I or Phase II to
distinguish between ``services'' and ``supplies'' furnished incident to
a physician's professional services. Accordingly, we are revising the
definition of `` `incident to' services'' at Sec. 411.351 to clarify
that the term includes both services and supplies (such as drugs) that
meet the applicable requirements set forth in section 1877(h)(4)(B)(i)
of the Act and Sec. 410.26 of our regulations.
Comment: One commenter stated that many group practices, in order
to avoid taxes, do not allocate ``profits'' to their members, but
distribute ``bonuses.'' The commenter asked if the group practice has
complied with Sec. 411.352(i) if it calculates its ``bonuses'' in a
manner that complies with the profit-sharing requirements.
Response: A group practice may compensate physicians with overall
profit shares or productivity bonuses, or some combination of the two,
provided that the allocation methodology complies with Sec.
411.352(i)(2) or (i)(3), respectively. Whether the characterization of
funds distributed to physicians as ``bonuses'' rather than ``profits''
meets IRS rules is outside the scope of this rulemaking.
Comment: A commenter requested that the minimum size of a group
practice component for purposes of profit-sharing under Sec.
411.352(i)(2) be fewer than the current requirement of at least five
physicians where the grouping constitutes an identifiable specialty or
practice focus within the group practice. According to the commenter,
one of every four orthopedic groups has two or three physicians, and
many larger groups have subspecialties of fewer than five members.
Response: We stated in Phase I (66 FR 908) and Phase II (69 FR
16080-16081) that we saw no reason to reduce the minimum number of
physicians in a component for profit-sharing purposes. We maintain this
position. Our concern remains that smaller components increase the risk
of overutilization of DHS and other abuse by strengthening the ties
between an individual physician's compensation and his or her
referrals. Setting the minimum number of physicians in a group practice
component at five reduces the likelihood that a physician will be
directly compensated for his or her own referrals.
V. Prohibition on Certain Referrals by Physicians and Limitations on
Billing--Sec. 411.353
Section 411.353 sets out the basic prohibition on physician self-
referral under section 1877 of the Act. Two provisions, Sec.
411.353(e) and Sec. 411.353(f), address the potentially harsh results
from inadvertent violations of the prohibition. Section 411.353(e),
which was added in Phase I, provides that payment may be made to an
entity that submits a claim to Medicare for DHS if the entity did not
have actual knowledge of, and did not act in reckless disregard or
deliberate ignorance of, the identity of the physician who referred the
DHS to the entity, provided that the claim otherwise complies with all
applicable Federal laws and regulations. Section 411.353(f), which was
added in Phase II, permits DHS entities to submit claims and receive
payment for DHS furnished during certain instances of temporary
noncompliance. Specifically, Sec. 411.353(f) permits DHS entities to
submit claims and receive payment for such claims if: (1) The
arrangement had been in full compliance with an applicable exception
for at least 180 consecutive calendar days immediately preceding the
date on which the financial relationship became noncompliant; (2) the
financial relationship fell out of compliance for reasons beyond the
entity's control and the entity promptly moved to address the
noncompliance; and (3) the financial relationship does not violate the
anti-kickback statute and complies with all applicable Federal and
State laws, rules, and regulations. Section 411.353(f) applies only to
DHS furnished during the time it takes the entity to rectify the
noncompliance, which must not exceed 90 consecutive calendar days
following the date on which the financial relationship became
noncompliant. We specified that an entity could not use the exception
in Sec. 411.353(f) more than once every 3-years with respect to the
same referring physician, and the provision could not be used if the
exception with which the financial relationship previously complied was
either Sec. 411.357(k) or (m) (regarding nonmonetary compensation and
medical staff incidental benefits, respectively). In general,
commenters welcomed the protections of Sec. 411.353(e) and (f), but
asked that they be broadened. We are making no substantive changes to
Sec. 411.353(e) or (f) in this Phase III final rule.
Comment: Some commenters asked for clarification regarding how long
a DHS entity would be precluded from submitting claims for DHS referred
by a physician with whom the DHS entity had a financial relationship
that failed to comply with an exception and for which Sec. 411.353(f)
or Sec. 411.357(f) either may not be applicable or may not
[[Page 51025]]
provide what the commenters believed would be sufficient protection.
Response: The statute provides no explicit limitation on the
billing and claims submission prohibition. We are addressing this issue
in another rulemaking.
Comment: Some commenters objected to our decision not to extend to
referring physicians the protection of Sec. 411.353(e) (regarding
payments made to an entity that does not have knowledge of the identity
of the physician who made the referral for DHS). The commenters
acknowledged that a referring physician would not be subject to
sanction under section 1877 of the Act unless the physician knowingly
caused an improper claim or bill to be submitted (or knowingly engaged
in a circumvention scheme). The commenters were concerned, however,
that the referring physician who had no such intent could nevertheless
be subject to liability under the civil False Claims Act, 31 U.S.C.
3729.
Response: Liability under the civil False Claims Act requires that
the violator act knowingly. Only a physician who knowingly causes the
submission of a bill or claim for a service for which payment may not
be made under section 1877 of the Act would be subject to sanction
under the civil False Claims Act for such conduct. Similarly, as the
commenters' observe, a referring physician would not be subject to
sanction under section 1877(g) of the Act unless the physician
knowingly causes an improper claim or bill to be submitted (or
knowingly engages in a circumvention scheme). Accordingly, we are not
expanding the provision as suggested by the commenters.
Comment: Several commenters asked that we extend for a longer
period of time the 90-day window in Sec. 411.353(f)(2), which permits
a physician and DHS entity that are parties to an arrangement that no
longer satisfies the requirements of an exception to refer and submit
claims, respectively, for DHS. Some commenters asked that the window
run from the date of noncompliance until 30 or 90 days after the date
on which the noncompliance was discovered. Commenters asserted that the
other requirements of the exception, namely that the arrangement had to
have been in compliance with an exception for at least 180-consecutive
calendar days immediately preceding the date on which the financial
relationship became noncompliant and that the noncompliance was due to
actions beyond the control of the DHS entity, were sufficient to
protect against possible program or patient abuse. One commenter
suggested that the expanded noncompliance window be conditioned on the
good faith of the DHS entity and the immateriality or inadvertence of
the noncompliance. One commenter acknowledged that starting the window
from the time of discovery of the noncompliance may provide an
incentive for hospitals and physicians to remain ignorant about
noncompliant arrangements, but stated that this ``minor'' risk could be
mitigated by a condition that would negate the use of the exception if
that behavior exists. Another commenter recommended that, in a
situation in which an arrangement is out of compliance, but the
physician is unable to make referrals due to a disability, active
military duty, or some other reason, the time for correcting the
noncompliance be tolled until the point at which the physician is again
reasonably able to make referrals.
Response: We disagree with the commenters that proposed a
``discovery-based'' rule, as well as with the commenter that
recommended that the period in which noncompliance must be corrected be
tolled during the time in which (for whatever reason) referrals are not
being made. Section 1877 of the Act is intended to deter inappropriate
financial relationships through a strict liability regime. A discovery-
based rule is contrary to the statutory scheme. Moreover, such a rule
creates a perverse incentive not to diligently monitor and enforce
compliance. Tolling the time period for rectifying the noncompliance
while a physician is unable to make referrals due to disability,
military duty, or another reason is not necessary because it is not
likely that the parties would violate the physician self-referral
statute if no referrals are being made.
The commenters' suggestions would create substantial enforcement
problems because it may be difficult to establish the date on which the
noncompliance was discovered. Imposing standards regarding the
materiality of the noncompliance or the good faith of the parties would
present similar enforcement difficulties and would be contrary to the
statutory scheme. Finally, we do not believe that extending the
noncompliance window in Sec. 411.353(f)(2) beyond the current 90-days
is either warranted or necessary. Parties to an arrangement should
monitor the continued compliance of the arrangement with the conditions
of an applicable exception. We note, however, as discussed below at
section IX.D, that we are establishing a 6-month holdover provision for
personal service arrangements that otherwise meet the requirements in
Sec. 411.357(d). We believe that this provision, along with the
holdover provisions already available in the exceptions for the rental
of office space and equipment in Sec. 411.357(a) and (b), should
provide adequate relief to parties to arrangements of these types that
would otherwise temporarily fall out of compliance with the physician
self-referral law.
Comment: A hospital trade association asked that we delete the
requirement in Sec. 411.353(f)(1)(ii) that the noncompliance be due to
reasons beyond the entity's control. Several commenters sought
clarification as to what actions were beyond the control of the DHS
entity. Two commenters asked whether a physician's failure to sign
promptly a written contract that the hospital had sent in a timely
manner and that otherwise complied with the personal service
arrangements exception would be considered beyond the hospital's
control. One commenter asked whether, in evaluating the failure to
continue to satisfy the requirements of an exception, it made a
difference that the hospital needed the services immediately, such as
for on-call coverage. Specifically, the commenter gave the example of
the provision of needed on-call coverage services prior to the formal
execution of a written agreement for those services. Another commenter
suggested that we clarify that an arrangement is eligible for the
temporary noncompliance exception if it falls out of compliance with an
exception due to the actions of a third party, such as the actions of
the government through a change in the regulations or the removal of a
Health Professional Shortage Area (HPSA) designation of an area for
purposes of the physician retention exception.
Response: We discussed in detail the application of the temporary
noncompliance exception in Phase II (69 FR 16057.) We are not repeating
that explanation here. With respect to the inquiry regarding on-call
coverage for which there is an immediate need, we reiterate that the
DHS entity may avail itself of the temporary noncompliance exception
only when the arrangement was in full compliance with an exception to
the physician self-referral law under Sec. 411.355, Sec. 411.356, or
Sec. 411.357 prior to the temporary noncompliance. In the example
provided by the commenter, the arrangement was never in compliance with
the law, and therefore the temporary noncompliance exception would be
unavailable to the DHS entity. With respect to the second commenter's
example regarding noncompliance occurring due to loss of a HPSA
designation, as we noted in Phase II,
[[Page 51026]]
such noncompliance would be considered beyond the entity's control (69
FR 16057). With respect to other instances of noncompliance caused by
third parties, a determination of whether such noncompliance was beyond
the entity's control would have to be made on a case-by-case basis.
Finally, we do not believe it necessary or practical to give specific
guidance on documentation of the steps taken to rectify temporary
noncompliance. Entities should maintain adequate and contemporaneous
documentation of all financial relationships with referring physicians,
including--
The terms of each arrangement;
Whether and how an arrangement fell out of compliance with
an exception;
The reasons for the arrangement falling out of compliance;
Steps taken to bring the arrangement into compliance;
Relevant dates; and
Similar information.
Comment: Two commenters recommended eliminating the requirement in
Sec. 411.353(f) that the arrangement must have been in compliance with
an applicable exception for 180 consecutive calendar days immediately
preceding the date on which the financial relationship became
noncompliant. According to the commenter, the program is adequately
protected by the requirement that the noncompliance had to occur for
reasons beyond the entity's control.
Response: For the reasons noted in Phase II, we are retaining the
requirement that the arrangement must have been in compliance with an
exception under Sec. 411.355, Sec. 411.356, or Sec. 411.357 for 180
consecutive calendar days (69 FR 16057). We continue to believe that
the requirement is necessary to ensure that the temporary noncompliance
exception is not subject to abuse.
Comment: A commenter recommended that enforcement officials
exercise their discretion by declining to pursue minor and technical
violations. Another commenter stated that we should consider adding an
exception that would permit physicians to refer for DHS and DHS
entities to submit and receive payment for DHS claims if, in our sole
discretion, there was no abuse. The commenter suggested that such an
exception should be available only after: (1) receipt by the entity of
a favorable advisory opinion; or (2) a voluntary disclosure by the
entity or upon audit or investigation by the government.
Response: The physician self-referral law is a strict liability
statute, and we therefore do not have authority to waive the nonpayment
sanction under the statute for ``minor'' and ``technical'' violations,
or violations stemming from non-abusive arrangements. We lack the
statutory authority to promulgate the exception suggested by the
commenter, but we are open to creating additional regulatory exceptions
that pose no risk of program or patient abuse.
VI. Financial Relationship, Compensation, and Ownership or Investment
Interest--Sec. 411.354
Section 411.354 defines the financial arrangements that are subject
to the statutory prohibition. The section defines direct and indirect
ownership and investment interests, and direct and indirect
compensation arrangements. The section also establishes a number of
rules governing various aspects of compensation arrangements.
In Phase I, we established a three-part, ``bright line'' test for
defining an ``indirect compensation arrangement'' that incorporates a
knowledge element. To satisfy the knowledge element, a DHS entity must
have actual knowledge of, or act in reckless disregard or deliberate
ignorance of, the fact that the referring physician receives aggregate
compensation that varies with or otherwise reflects the volume or value
of referrals or other business generated for the DHS entity. Phase I
established a corresponding new exception for indirect compensation
arrangements. By (1) defining the universe of ``indirect compensation
arrangements'' that potentially trigger disallowance of claims and
penalties, and (2) creating an exception for the subset of ``indirect
compensation arrangements'' that would not trigger disallowance or
penalties, we structured the treatment of indirect compensation
arrangements under section 1877 of the Act to parallel closely the
treatment of direct compensation arrangements.
Phase I also established several special rules applicable to
certain key requirements in the various definitions and exceptions
related to compensation arrangements, including when an arrangement was
``set in advance'' and whether time-based or unit-based compensation
methodologies took into account ``the volume or value'' of referrals or
``other business generated between the parties.'' Finally, Phase I
established that, in some limited instances, it is permissible for an
employer, managed care organization, or entity with which a physician
contracts to require a physician to refer to a particular DHS entity as
part of certain compensation arrangements.
Phase II addressed concerns raised by commenters regarding the
Phase I definitions of the various types of financial relationships.
The modifications set forth in Phase II included--
Clarifying the meaning of direct and indirect ownership
and affirming that, absent unusual circumstances, common ownership of
an entity does not create an ownership interest by one common investor
in another (69 FR 16061);
Clarifying the relationship between the ``indirect
compensation arrangement'' definition and the ``volume or value'' and
``other business generated'' standards (69 FR 16061);
Revising the definition of ``referring physician'' at
Sec. 411.351 to provide that a referring physician is treated as
``standing in the shoes'' of his or her wholly-owned professional
corporation (PC) (69 FR 16125).
We also solicited comments on whether to permit a physician to
``stand in the shoes'' of a group practice of which he or she is a
member (69 FR 16060). (Our response to comments on this issue is set
forth in detail below in section VI.B of this preamble.)
In response to Phase II, we received comments regarding aspects of
the ownership provisions. Most comments, however, related to various
aspects of the ``indirect compensation arrangement'' definition and the
related exception.
We are making two substantive and several minor changes to Sec.
411.354. First, we are revising the regulation text in Sec.
411.354(b)(3)(v) to provide that an ownership or investment interest
does not include a security interest in the equipment of a hospital
held by a physician who both sold the equipment to the hospital and
financed its purchase through a loan to the hospital. (However, such
transactions will create compensation arrangements.) Second, we are
amending the regulations in Sec. 411.354(c) to add a ``stand in the
shoes'' provision under which referring physicians will be treated as
``standing in the shoes'' of their group practices (and certain other
physician organizations) for purposes of applying the rules that
describe direct and indirect compensation arrangements in Sec.
411.354. As explained in greater detail below in response to comments,
this change will reduce the risk of fraud and abuse by closing an
unintended loophole in the definition of ``indirect compensation
arrangement'' (by deeming more arrangements to be direct compensation
arrangements) and will ease compliance by simplifying the analysis of
many arrangements. This revised approach is conceptually an extension
of the Phase II rule that treated referring physicians as standing
[[Page 51027]]
in the shoes of their professional corporations.
In addition, we are making non-substantive changes to clarify that
we do not interpret ``otherwise reflects'' and ``takes into account''
(with respect to referrals and as these terms are used in certain
exceptions) as having separate and different meanings. That is, the
terms were used interchangeably in Phase II, and we have made
conforming changes for consistency. Other changes are discussed below.
A. Ownership
Comment: One commenter stated that secured loans should not
automatically create an ownership or investment interest in the entity
granting the security interest (absent other indicia of ownership such
as voting or other governance rights, profit participation, etc.). For
example, a contract for a physician's sale of equipment to a hospital
on an installment payment basis will commonly include a security
interest in the equipment in case of nonpayment. According to the
commenter, under the Phase II rule, such a security interest would
create an ownership interest in part of a hospital, and thus create a
prohibited financial relationship (69 FR 16063). The commenter believed
that this interpretation is at odds with our indication in Phase II
that a one-time sale using installment payments that are protected by a
security interest could be eligible for the isolated transactions
exception in Sec. 411.357(f). The commenter asserted that this type of
arrangement should instead be viewed as a compensation arrangement,
potentially qualifying for the isolated transactions exception. The
commenter referenced our Phase II remarks with respect to the types of
transactions that qualify for the protection of the exception for
isolated transactions at Sec. 411.357(f) (69 FR 16098).
Response: In Phase II, we indicated that loans or bonds secured by,
or otherwise linked to, a particular piece of equipment or the revenue
of a department or other discrete hospital operations would be
considered an ownership interest in part of a hospital (69 FR 16063).
We also stated that a one-time sale of property (which could be
equipment), using installment payments that are appropriately secured,
for example by a security interest taken in the property, could qualify
for the isolated transactions exception in Sec. 411.357(f) if all
other requirements of the exception are satisfied (69 FR 16098). After
reconsidering the issue, we do not believe that the Congress intended a
security interest taken by a physician in equipment sold to a hospital
and financed by a loan from the physician to the hospital to create an
ownership or investment interest in the hospital's property or a
portion of the hospital's property (subject to a contrary provision in
the security instrument or agreement of the parties). Instead, such a
transaction is more appropriately analyzed as a compensation
arrangement that must satisfy the requirements of an applicable
exception if the physician-seller refers DHS to the hospital-purchaser.
We have modified Sec. 411.354(b)(3), accordingly. We continue to
believe that loans or bonds secured by, or otherwise linked to, the
revenue of a department or other discrete hospital operations would be
considered an ownership interest in a part of a hospital. Such
interests would not qualify for protection under the whole hospital
exception in Sec. 411.356(c)(3).
Comment: A commenter objected to the treatment of bonds as an
ownership interest in Sec. 411.354(b)(1) and suggested that there
should be an exception for bonds issued by a tax-exempt entity that has
a non-participatory interest. For example, an ownership interest should
not include a bond issued by a tax-exempt entity if interest is not
calculated on the earnings of the institution.
Response: Section 1877 of the Act includes as a ``financial
relationship'' both ownership and investment interests, except for
those specifically excluded under sections 1877(c) and (d) of the Act.
Section 1877 of the Act provides that ownership or investment interests
can be through equity, debt, or other means. Because bonds are an
investment interest based on debt, the purchase of bonds (regardless of
whether the issuing entity is tax-exempt) creates an ownership or
investment interest for purposes of the physician self-referral law.
Comment: One commenter stated that some physicians were
interpreting improperly the language in the Phase I preamble regarding
the exclusion of any interest in a retirement plan from the definition
of ``ownership or investment interest'' in Sec. 411.354(b)(3).
According to the commenter, some physicians are using retirement plans
to purchase DHS entities to which they refer patients for DHS. The
commenter requested clarification of our position.
Response: We agree with the commenter that the purchase of
ownership interests in DHS entities by physicians through their
retirement funds is inconsistent with the statutory intent. In addition
to the information provided by this commenter, we have heard
anecdotally that some physicians are purchasing ownership interests in
DHS entities through their retirement plans. In the CY 2008 Physician
Fee Schedule notice of proposed rulemaking (72 FR 38122), we proposed
revisions to Sec. 411.354(b)(3) to address the issue of ownership in a
retirement plan. We may finalize that proposal, or a similar change to
the regulation, in a future rulemaking. We caution that, depending on
the facts, arrangements involving a DHS entity owned through a
physician's retirement plan may be part of an indirect compensation
arrangement between the referring physician and the DHS entity
(pursuant to Sec. 411.354(c)) that would need to satisfy the
requirements of the exception in Sec. 411.357(p) for indirect
compensation arrangements. In many cases, the referring physician would
receive compensation from the retirement plan that takes into account
the referrals to the DHS entity owned by the retirement plan. The
arrangements described by the commenter are also problematic under the
anti-kickback statute.
Comment: A commenter asked whether a guaranty of a loan constitutes
an ownership interest in the debtor and, if so, what exception would be
available.
Response: A guaranty does not create an ownership interest, but a
guaranty usually creates a compensation arrangement between the
guarantor and the debtor.
B. Compensation
Phase II discussed at some length the definition of an indirect
compensation arrangement. Some commenters on the Phase II rule
requested further clarification, particularly regarding--
The treatment of an indirect compensation arrangement;
The relationship between the definition of ``indirect
compensation arrangement'' and the exception for indirect compensation
arrangements; and
The relationship between the exception for indirect
compensation arrangements and other exceptions.
Many commenters sought clarification regarding the application of
the indirect compensation arrangement definition in the context of
financial arrangements in which a group practice was interposed between
the entity furnishing DHS and the referring physician. According to
some commenters, in most of these arrangements, there would not appear
to be an indirect compensation arrangement within the meaning of the
regulation, because the physician's compensation from the group
practice would likely be based on his or her
[[Page 51028]]
productivity in the group practice, and not tied to referrals to the
DHS entity with which the group practice has a financial arrangement.
Other commenters stated that they continued to find the definition
difficult to understand and apply.
In Phase II, we specifically solicited comments with respect to
whether we should permit physicians to ``stand in the shoes'' of their
group practices for purposes of determining whether they have a direct
or indirect compensation arrangement with a DHS entity (69 FR 16060).
This Phase III final rule includes new provisions in Sec. 411.351 and
Sec. 411.354 that address compensation arrangements in which a group
practice (or other ``physician organization,'' as newly defined at
Sec. 411.351) is directly linked to the physician in a chain of
financial relationships between the referring physician and a DHS
entity. Under the Phase I and II regulations, such arrangements did not
fit in the definition of a direct compensation arrangement (66 FR 868,
69 FR 16059-16060); rather such arrangements would have been analyzed
under the as ``indirect compensation arrangements'' under Sec.
411.354(c)(2). If an arrangement meets the definition of an ``indirect
compensation arrangement,'' it must comply with the exception for
indirect compensation arrangements at Sec. 411.357(p) if the physician
refers DHS to the entity.
This approach creates two issues. First, industry representatives
have claimed that resorting to the indirect compensation arrangements
definition and exception adds an unnecessary step when determining
compliance with the physician self-referral prohibition. These parties
believe that it would be easier, more efficient, and consistent with
the purposes of the physician self-referral law to examine the
relationship between the hospital and the group practice for compliance
with a physician self-referral exception. They urge that a referring
physician should ``stand in the shoes'' of his or her group practice,
which acts on behalf of its physician members and contractors. This
would, in turn, enable the parties to analyze the arrangement between
the DHS entity and the group practice (for example, a lease of office
space, personal service arrangement, or fair market value arrangement)
under the various direct compensation arrangements exceptions, without
using the indirect compensation arrangements definition or exception.
We agree.
Second, we are concerned about reports that parties may be
construing the definition of an indirect compensation arrangement too
narrowly, resulting in determinations that arrangements that involve
financial incentives for referring physicians fall outside the ambit of
the physician self-referral law. In particular, we are concerned that
arrangements between DHS entities and group practices are often viewed
as outside the application of the statute. The new ``stand in the
shoes'' provisions should close this unintended loophole by treating
compensation arrangements between DHS entities and group practices as
if the arrangements are with the group's referring physicians. This
approach incorporates a commonsense understanding of the relationship
between group practices and their physicians. Thus, if a DHS entity
leases office space to a group practice, the lease will be deemed to be
a direct compensation arrangement with each physician in the group
practice, and the lease will need to fit in the exception for rental of
office space in Sec. 411.357(a) if the DHS entity wants to submit
claims for DHS referrals from those physicians. For purposes of the
``stand in the shoes'' provision, we are including in the definition of
``physician organizations,'' in whose shoes the referring physician
will stand, the referring physician's professional corporation,
physician practice, or group practice.
Specifically, under the new provision, a physician is deemed to
have a direct compensation arrangement with an entity furnishing DHS if
the only intervening entity between the physician and the DHS entity is
his or her physician organization. In addition, for purposes of the
definition of ``indirect compensation arrangement,'' a physician will
be deemed to stand in the shoes of the physician organization with
which he or she has a direct financial relationship (that is, the
physician organization with which he or she is directly linked). When a
physician stands in the shoes of his or her physician organization, he
or she will be deemed to have the same compensation arrangement (with
the same parties and on the same terms) as the physician organization
has with the DHS entity. We have included language in the regulations
in Sec. 411.354(c)(3)(i) to make clear that ``parties'' refers to the
physician organization and all of its physician members, employees, and
independent contractors. In the preceding example, the arrangement for
the rental of office space would need to satisfy all of the
requirements of the exception in Sec. 411.357(a), including, for
example, the requirement that the rental charges not take into account
the volume or value of referrals or other business generated between
the parties. The ``parties'' to the arrangement would be the hospital
and the group practice, including all members, employees, and
independent contractors of the group practice. Thus, if the lease
arrangement takes into account referrals or other business generated by
the group practice (or any of its physicians) the arrangement will not
be protected.
We are mindful that many existing arrangements involving
relationships with an interposed physician organization between the DHS
entity and the referring physician, like the one discussed in the
example above, may have been properly structured to comply with the
indirect compensation arrangements exception in Sec. 411.357(p). It is
not our intent to require that those arrangements be reexamined and
revised to comply with a direct compensation arrangements exception.
Except as provided below, as of the effective date of this Phase III
final rule, all compensation arrangements must be analyzed under the
``stand in the shoes'' provisions in Sec. 411.354 to determine what
type of compensation arrangement exists (direct or indirect) and what
corresponding exceptions might be available. However, arrangements that
were entered into prior to the publication date of this Phase III final
rule and that satisfied the requirements of the indirect compensation
arrangements exception in Sec. 411.357(p) on the date of the
publication of this Phase III final rule need not be amended during the
original term of the arrangement or the current renewal term (that is,
the renewal term the arrangement is in on the date of publication of
this Phase III final rule) to comply with the requirements of another
exception. Those arrangements may continue to use the exception in
Sec. 411.357(p) during the original or current renewal term of the
agreement as if the ``stand in the shoes'' doctrine does not apply.
We are not making any changes at this time to the treatment of
arrangements that, after application of the ``stand in the shoes''
provision, still do not meet the definition of a direct compensation
arrangement. Those arrangements will continue to require analysis under
the indirect compensation arrangements definition. In other words,
arrangements involving an intervening entity other than a physician
organization (for example, a chain that runs DHS entity to management
company to referring physician) or involving more than one intervening
entity (for example, a chain that runs DHS entity to management company
to group practice to referring physician) would continue to be
[[Page 51029]]
analyzed under the Phase I and II rules for indirect compensation
arrangements and the indirect compensation arrangements exception.
Although we remain concerned that arrangements that interpose such
entities are subject to abuse, we believe that we would benefit from
additional public input on the best way to apply a ``stand in the
shoes'' rule to these indirect relationships. We note that an
arrangement that may not qualify as either a direct or an indirect
compensation arrangement for purposes of the physician self-referral
statute may still be suspect under the anti-kickback statute.
We believe that this new provision will address the concerns raised
in the comments, including comments discussed below in section VI.B, as
well as simplify compliance with the physician self-referral
regulations generally. Our responses to specific comments are discussed
below.
Comment: A number of commenters requested further clarification,
for purposes of the indirect compensation arrangement definition,
regarding the circumstances under which compensation received by a
physician may ``otherwise reflect'' the volume or value of the
physician's referrals to an entity furnishing DHS. Specifically, these
comments addressed situations in which the physician has a direct
financial relationship with an ``intervening entity'' that, in turn,
has a direct relationship with the DHS entity to which the physician
refers patients for DHS. Several commenters believed that payments by a
hospital to a group practice for the recruitment of a physician should
not implicate the general prohibition with respect to referrals made by
physicians in the group other than the recruited physician, provided
that the physicians in the group are not compensated based on the
volume or value of their referrals to the hospital making the
recruitment payment. Another commenter stated that, if we interpret the
``otherwise reflect'' language to mean that a fixed payment may
``reflect'' the volume or value of referrals if that payment exceeds
fair market value, we should state that clearly. However, the commenter
noted that such an interpretation would be very problematic, because
the volume and value standard is critical to many of the statutory and
regulatory exceptions.
Response: First, in Phase II, we clearly stated that fixed
compensation (that is, one lump payment or several individual payments
aggregated together) can take into account or otherwise reflect the
volume or value of referrals (for example, if the payment exceeds the
fair market value for the items or services provided) (69 FR 16059).
Whether the compensation does, in fact, take into account or otherwise
reflect the volume or value of referrals will require a case-by-case
determination based on the facts and circumstances.
Many of the commenters' concerns regarding indirect compensation
arrangements involving payments to group practices will become moot,
given our decision to adopt a ``stand in the shoes'' policy, as
described above. Many arrangements will need to satisfy a direct
exception, and the group practice's method of compensating a physician
will be irrelevant for purposes of determining compliance with an
exception.
Comment: Several commenters described financial arrangements
between DHS entities and group practices that did not meet the
definition of an indirect compensation arrangement. The commenters
requested confirmation that, if there is no direct or indirect
financial relationship (as defined in the regulations) between a DHS
entity and a physician, section 1877 of the Act is not implicated.
Response: Section 1877 of the Act prohibits only referrals from a
physician to entities furnishing DHS with which the physician (or an
immediate family member) has a financial relationship as defined at
Sec. 411.354.
We believe that the commenters' inquiries are addressed by the
modifications we are making in this Phase III final rule regarding the
treatment of certain compensation arrangements between entities
furnishing DHS, group practices, and physicians in those group
practices. Specifically, as discussed above, we are adding new
provisions in Sec. 411.354 to treat a physician as ``standing in the
shoes'' of his or her group practice or physician organization.
Conceptually, this new provision has the effect of treating many
compensation arrangements that previously would have been treated as
indirect compensation arrangements as direct compensation arrangements
and requiring them to satisfy the requirements of an exception for
direct compensation arrangements. It also has the effect of treating
some arrangements that may not previously have met the definition of
either a ``direct compensation arrangement'' or an ``indirect
compensation arrangement'' as a direct compensation arrangement for
which an exception is needed. As many commenters to Phase II
recognized, indirect compensation arrangements are clearly subject to
the physician self-referral prohibition.
Comment: One commenter sought clarification concerning the
interplay between the use of the ``volume or value'' standard in the
definition of an indirect compensation arrangement and the exception
for indirect compensation arrangements. Specifically, the commenter
asked how any indirect compensation arrangement could satisfy the
exception's requirement that the arrangement not take into account the
volume or value of referrals ``in any manner,'' given that, by
definition, the compensation must vary with, or otherwise reflect, the
volume or value of referrals.
Response: In Phase II, we responded to a similar comment. In that
rule (69 FR 16069), we stated:
For purposes of determining whether an indirect compensation
arrangement exists under the definition at Sec. 411.354(c), the
inquiry is whether the aggregate compensation to the referring
physician reflects the volume or value of DHS referrals or other
business generated by the referring physician, even if individual
time-based or unit-of-service based payments would otherwise be
permissible (that is, the payments are fair market value at
inception and do not vary over the term of the agreement). In short,
many time-based or unit-of-service based fee arrangements will
involve aggregate compensation that varies based on volume or value
of services and thus will be ``indirect compensation arrangements''
under Sec. 411.354(c). However, in determining whether these
arrangements fit into the indirect compensation arrangements
exception at Sec. 411.357(p), which does not include an aggregate
requirement, the relevant inquiry is whether the individual payments
are fair market value not taking into account the volume or value of
referrals or other business generated by the referring physician
(and do not change after inception). In other words, the issue is
whether the time-based or unit-of-service based fee is fair market
value and not inflated to compensate for the generation of business.
In short, the definition looks to the aggregate compensation (that is,
compensation that combines each individual payment under the
arrangement), whereas the exception looks at individual payments
without aggregating them.
Comment: One commenter asked that we clarify that the conversion of
a direct compensation arrangement that does not meet a direct
compensation arrangements exception into an indirect compensation
arrangement that meets the indirect compensation arrangements exception
is not a prohibited circumvention scheme.
Response: We are unclear about the exact nature of the arrangements
described by the commenter. If an
[[Page 51030]]
arrangement between a referring physician (or immediate family member)
and a DHS entity meets the definition of an ``indirect compensation
arrangement'' and, in fact, satisfies the requirements of the indirect
compensation arrangements exception in Sec. 411.357(p), referrals made
between the referring physician (or immediate family member) and the
DHS entity are not prohibited. The arrangement must satisfy the
exception in operation, not just on the face of the documentation.
Efforts to circumvent improperly the statute in any form may evidence
improper intent for purposes of the physician self-referral statute,
which may be relevant to enforcement actions for civil monetary
penalties and false claims if the financial arrangement does not
satisfy the requirements of an exception. Moreover, such efforts are
also relevant in analyzing the intent of the arrangement for purposes
of the anti-kickback statute. We note that the indirect compensation
arrangements exception includes a condition that the arrangement not
violate the anti-kickback statute. In addition, arrangements that
interpose a leasing or other entity between the DHS entity and the
referring physician may involve illegal kickbacks, even if they do not
come within the definition of an indirect compensation arrangement.
Comment: A hospital association asserted that some hospitals
collect information regarding physicians' financial relationships for
purposes of monitoring conflicts of interest and suggested that we not
use such information in determining whether a DHS entity satisfies the
knowledge criteria in Sec. 411.354(c)(2)(iii) for purposes of the
indirect compensation arrangements definition.
Response: Any information in the possession of a hospital may be
relevant in assessing whether the hospital knew or had reason to know
of an indirect financial relationship involving a referring physician.
Comment: A commenter requested clarification of the example in
Phase II regarding an indirect financial relationship involving a
physician who has an ownership interest in a hospital that contracts
for services with a clinical laboratory to which the physician refers
(69 FR 16060). The commenter questioned our analysis, asserting that
the hospital would not be receiving compensation that would vary with
the volume or value of referrals, because the hospital would be paying
for services furnished. The commenter requested further clarification.
Response: As we stated in Phase II, the arrangement referenced by
the commenter normally would not create an indirect compensation
arrangement. Absent unusual circumstances, the hospital would not
receive aggregate compensation that reflects the volume or value of
referrals because the hospital would not be receiving any compensation
from the clinical laboratory (assuming the contracted charges for the
laboratory services are at fair market value) (69 FR 16060). However,
if the laboratory charged the hospital less than fair market value for
its services (resulting in remuneration to the hospital), the
arrangement could meet the definition of an indirect compensation
arrangement between the referring physician and the laboratory
(depending on the facts and circumstances). The arrangement would not
satisfy the requirements of the indirect compensation arrangements
exception because payments for the laboratory services were not at fair
market value.
C. Special Rules on Compensation
Section 411.354(d) sets forth rules regarding several key terms,
including ``set in advance,'' ``the volume and value of referrals,''
and ``other business generated between the parties.'' These terms are
used in many of the compensation arrangements exceptions. In addition,
Sec. 411.354(d)(4) provides that, in certain circumstances, it is
permissible for a physician's compensation from an employer, or under a
managed care or other contract, to be conditioned on referrals to
particular entities, notwithstanding the general ban in many exceptions
on compensation that takes into account the volume or value of
referrals.
In Phase I, we provided that compensation would be considered ``set
in advance'' if the aggregate compensation or a time-based or per-unit
of service-based amount is set in advance in the initial agreement in
sufficient detail so that it can be effectively verified (66 FR 959).
In Phase II, we modified the special rule to provide that compensation
would also be considered ``set in advance'' if the specific formula for
calculating the compensation is set out in an agreement between the
parties before the furnishing of the items or services, and the formula
is set forth in sufficient detail so that it can be effectively
verified and is not changed during the course of the agreement in any
manner that reflects (or takes into account) the volume or value of
referrals or other business generated. The principal impetus for
deeming formula-based compensation to be ``set in advance'' came from
comments from associations representing physicians that urged us to
accommodate common percentage compensation arrangements. This Phase III
final rule retains flexibility for utilizing unit-based and percentage-
based compensation formulae for arrangements.
In Phase I, we stated that unit-based compensation would be deemed
not to take into account ``the volume or value of referrals'' if the
compensation is fair market value and does not vary during the course
of the arrangement in any manner that takes into account DHS referrals
(66 FR 876). Similarly, in Phase I, we stated that unit-based
compensation would be deemed not to take into account ``other business
generated between the parties'' if the compensation is fair market
value and does not vary during the course of the arrangement in any
manner that takes into account other business generated by the
referring physician, including private pay health care services (66 FR
877). We made no changes in Phase II with respect to either the
``volume or value'' or ``other business generated'' deeming provisions.
The Phase I special rules on compensation permitted entities
furnishing DHS to condition physician compensation in certain
circumstances on the physician's compliance with referral restrictions,
if certain conditions were satisfied. Phase II clarified that the
required referral provision applies to employment, managed care, and
personal service arrangements only, and set forth new requirements
specifying that: (1) the required referrals must relate solely to the
physician services covered by the arrangement; and (2) the referral
requirement must be reasonably necessary to effectuate the legitimate
purpose of the compensation arrangement (69 FR 16069). In this Phase
III final rule, we are amending the regulatory text in Sec.
411.354(d)(4) to include expressly contracts for personal services.
Comment: Two commenters sought clarification that percentage-based
compensation arrangements, the methodologies of which were fixed at the
outset of the contract and did not vary during the term of the
agreement, would satisfy the ``set in advance'' standard in Sec.
411.354(d)(1) and be deemed not to take into account the ``volume or
value'' of referrals or ``other business generated between the
parties'' pursuant to Sec. 411.354(d)(2) and (d)(3), respectively. One
commenter requested that the text of Sec. 411.354(d)(2) and (d)(3) be
revised to reference percentage-based compensation specifically.
Another commenter asked if compensation based on a percentage of
collections satisfied
[[Page 51031]]
the requirements of the regulation, and another commenter asked about
compensation that includes a percentage of the net revenues of a
business unit for which the physician is responsible.
Response: To satisfy the requirements of many compensation
arrangements exceptions, compensation must be ``set in advance,''
consistent with fair market value, and not take into account the volume
or value of referrals or other business generated by the referring
physician.
The first two commenters are correct that, under the Phase II
special rule in Sec. 411.354(d), percentage-based compensation
arrangements can be considered ``set in advance'' if the methodology is
fixed at the outset of the contract with sufficient specificity and not
changed during the course of the agreement in a manner that reflects
referral volumes or other business generated.
With respect to the comments about percentage of collections and
percentage of revenues compensation methodologies, such methodologies
may be able to meet the ``set in advance'' test, depending on the
facts. However, such compensation arrangements must also meet the other
terms of a relevant exception, such as the terms excluding compensation
that takes into account the volume or value of referrals or other
business generated between the parties. This would involve, among other
things, testing the arrangements against the deeming provisions in
Sec. 411.354(d)(2) and Sec. 411.354(d)(3) related to ``volume or
value of referrals'' and ``other business generated between the
parties''; these deeming provisions apply only to unit-based
compensation and require that unit-based compensation be fair market
value and unrelated to referrals. We cannot determine based on the
facts provided whether the arrangements would comply with an exception.
We are not persuaded that Sec. 411.354(d)(2)and (d)(3) should be
revised to reference specifically percentage-based compensation
arrangements.
Comment: Three commenters objected to Sec. 411.354(d)(4), which
provides that a physician's compensation from an employer or under a
managed care or other contract may be conditioned on referrals to
particular entities in certain circumstances. Two of the commenters
also objected to our response to a comment in Phase II that stated that
a hospital may require its employees to refer patients to its home
health agency if the requirements in Sec. 411.354(d)(4) are satisfied
(69 FR 16089). According to all three commenters, Sec. 411.354(d)(4)
conflicts with section 4321 of the Balanced Budget Act of 1997 (BBA
1997), which amended section 1861(ee)(2) of the Act, and which relates
to hospitals' obligations under the discharge planning process to
patients in need of home health services. Section 1861(ee)(2) of the
Act requires the Secretary to develop guidelines and standards for the
discharge planning process in order to ensure a timely and smooth
transition to the most appropriate type of setting for post-discharge
care. Section 4321 of BBA 1997 amended section 1861(ee)(2) of the Act
to require, among other things, that the discharge plan advise the
patient of participating home health agencies that serve the area in
which the patient resides and that it identify any home health agency
to which the patient is referred in which the hospital has a
disclosable financial interest.
One commenter stated that allowing an entity to condition
employment on an agreement to refer patients to a particular provider
may implicate the Federal anti-kickback statute, and may encourage a
violation of Federal and State antitrust laws or State unfair trade
practices laws. The commenter suggested that we delete Sec.
411.354(d)(4).
Response: Section 411.354(d)(4) does not conflict with the
requirements of section 1861(ee)(2) of the Act, as amended by section
4321 of BBA 1997. Under section 4321 of BBA 1997, as part of the
discharge plan, a hospital is required to provide a patient needing
home health services or skilled nursing facility services a list of
local home health agencies or skilled nursing facilities, as
appropriate. If, after being provided the list, the patient expresses a
choice as to the particular provider from which he or she wishes to
receive treatment, the hospital and the patient's treating physician
are required to honor that choice. Nothing in Sec. 411.354(d)(4)(iv)
permits a physician and the employing or contracting entity to override
a patient's choice of provider. To the contrary, Sec.
411.354(d)(4)(iv) affirmatively requires that the arrangement between
the physician and the entity honor a patient's choice. Section
411.354(d)(4)(iv) requires that the arrangement must provide that the
physician is not obligated to refer to a particular provider,
practitioner, or supplier if: the patient expresses a preference for a
different provider, practitioner, or supplier; the patient's insurer
determines the provider, practitioner, or supplier; or the referral is
not in the patient's best medical interests in the physician's
judgment. Section 411.354(d)(4)(v) further provides that the
requirement to make referrals to a particular provider, practitioner,
or supplier must relate solely to the physician's services covered by
the scope of his or her employment or contract.
Whether an arrangement implicates the anti-kickback statute is a
matter for the Department of Justice (DOJ) and the OIG. Arrangements
that include referral requirements may implicate the anti-kickback
statute and should be closely scrutinized to ensure that no purpose of
the compensation is to induce or reward referrals. An arrangement that
fully complies with the requirements of Sec. 411.354(d)(4), however,
does not necessarily raise concerns under Federal and State antitrust
or unfair trade practices statutes. Accordingly, we are not persuaded
that the potential for implication of the anti-kickback statute or the
Federal and State antitrust laws noted by the commenters warrants
withdrawal of Sec. 411.354(d)(4).
Comment: Commenters asked whether an agreement between an entity
furnishing DHS and a referring physician could be amended during the
first year of the agreement and still satisfy the ``set in advance''
requirement. According to one commenter, the definition of ``set in
advance'' implies that an amendment is permissible, provided that the
amendment is not related to the volume or value of referrals or other
business generated between the parties. According to the commenter, the
implication is that any number of amendments for other, bona fide
reasons is permissible.
Response: The commenter is correct that amendments are permissible
under the ``set in advance'' definition if they are made for bona fide
reasons unrelated to the volume or value of referrals or other business
generated between the parties. However, parties must still satisfy all
requirements of an exception, including any requirements bearing on
amendments of agreements. (See discussion in section IX.A below.)
VII. General Exceptions to the Referral Prohibition Related to Both
Ownership and Compensation--Sec. 411.355
A. Physician Services
Section 1877(b)(1) of the Act specifies that the general
prohibition does not apply to physician services (as defined in section
1861(q) of the Act) that are furnished: (1) Personally by another
physician in the same group practice as the referring physician; or (2)
under the supervision of another physician in the same group practice
as the referring physician. In Phase I, we interpreted the
[[Page 51032]]
exception to apply to referrals to, or physician services supervised
by, a ``member of the group practice'' or an independent contractor who
qualifies as a ``physician in the group practice'' as defined at Sec.
411.351 (69 FR 879). We made no changes to this exception in Phase II.
In this Phase III final rule, we are making no substantive
modifications to this exception; however, we are deleting Sec.
411.355(a)(3), which incorrectly suggests that diagnostic tests are
``incident to'' services. As we clarified in the CY 2003 Physician Fee
Schedule final rule published December 31, 2002, any diagnostic service
that has its own benefit category cannot be billed as an ``incident
to'' service (67 FR 79994). In addition, Sec. 411.355(a)(3) is
repetitive of Sec. 411.355(a)(2) and, therefore, is unnecessary.
Comment: One commenter suggested that we amend the physician
services exception by deleting from Sec. 411.355(a) ``physician in the
same group practice'' (as defined at Sec. 411.351) from among the
types of physicians who can be the ``referring physician.'' According
to the commenter, this change would clarify that referrals within a
group practice to independent contractor pathologists who perform
services for the group in off-site ``pod labs'' are impermissible under
the physician services exception. According to the commenter, the
development of the concept of ``physician in the group practice'' was
not intended to allow group practices simply to refer to independent
contractors for whose services the group could then bill on
reassignment.
Response: The physician services exception in section 1877(b)(1) of
the Act and Sec. 411.355(a) enables group practice physicians to make
referrals within their group practices for physician services that are
DHS and that are performed or supervised by either a member of the
group practice or by a ``physician in the group practice.'' A
``physician in the group practice'' is considered to be in the group
practice only when he or she is performing services in the group
practice's facilities. Accordingly, although professional services
performed by a member of the group practice may be provided on or off
the group practice's site for purposes of this exception, professional
services performed by an independent contractor physician must be
performed in the group practice's facilities. Thus, the exception is
not applicable to services provided by independent contractors in off-
site locations that are not group facilities.
However, we do not believe that it is appropriate to ban group
practices from referring to any independent contractor physician. We
appreciate the commenter's concerns regarding independent contractor
pathologists who perform services for the group practice in off-site
``pod labs'' and continue to study the issue. At this time, we decline
to make the change to the physician services exception requested by the
commenter. We note that, in addition to physician self-referral
considerations, the provision of off-site services by group practices
raises significant concerns under the anti-kickback statute.
B. In-office Ancillary Services
The in-office ancillary services exception is one of the most
important exceptions to the physician self-referral prohibition.
Generally, it permits a physician or group practice to order and
provide DHS, other than most durable medical equipment (DME), in the
office of the physician or group practice, provided that the DHS is
truly ancillary to the medical services furnished by the group
practice. The statutory exception has four main components--
The nature of the DHS;
The personnel who perform or supervise the DHS;
The location where the DHS are provided; and
The manner in which the DHS are billed.
The Phase I rule interpreted the statutory provision by permitting
great flexibility in the provision of ancillary services in the ``same
building'' (as defined at Sec. 411.351) where a physician or a group
practice routinely provides the full range of their medical services,
while limiting the availability of the ``centralized building'' (as
defined at Sec. 411.351) option to premises that are used on an
exclusive and full-time basis. With respect to the other requirements,
the Phase I rule clarified the types of DHS that could be provided
under the exception and relaxed the supervision requirements by
incorporating the Medicare coverage and payment supervision rules and
permitting independent contractor physicians to provide supervision on
a group practice's premises.
In response to public comments urging a more ``bright-line'' test,
Phase II revised the criteria for determining when services are
furnished in the ``same building'' where the physician or group
furnishes the full range of their medical services. Under the revised
location requirement, DHS qualify for the exception if they are
furnished in the ``same building'' in which--
The referring physician or his or her group practice has
an office that is normally open to patients at least 35 hours per week,
and the referring physician or one or more members of the referring
physician's group practice regularly practices medicine and furnishes
physician services to patients in that office at least 30 hours per
week; or
The referring physician or his or her group practice has
an office that is normally open to patients at least 8 hour per week,
the referring physician regularly practices medicine and furnishes
physician services to patients in that office at least 6 hours per
week, and the patient receiving the DHS usually receives physician
services from the referring physician or members of the referring
physician's group practice at this location; or
The referring physician or his or her group practice has
an office that is normally open to patients at least 8 hours per week,
the referring physician or one or more members of the referring
physician's group practice regularly practices medicine and furnishes
physician services to patients at least 6 hours per week, and the
referring physician is present and orders the DHS during a patient
visit on the premises or a member of the referring physician's group
practice is present while the DHS are furnished.
In each of the three alternative tests, the minimum hourly
requirement for furnishing physician services must include some
physician services that are unrelated to the furnishing of DHS payable
by Medicare, any other Federal health care payer, or a private payer,
even though the physician services may lead to the ordering of DHS.
We received numerous comments on aspects of the in-office ancillary
services exception. We are making no substantive changes to the in-
office ancillary services exception. We respond to issues of concern to
the commenters below.
We also received a large number of comments from physical and
occupational therapists and groups representing physical and
occupational therapists objecting to the in-office ancillary services
exception, asserting that the exception has a detrimental effect on
their practice. The in-office ancillary exception is a statutory
exception and we have no discretion to eliminate the exception as
requested by these commenters. However, we may propose additional
changes to the exception in a future rulemaking.
Comment: Several commenters requested further guidance regarding
the amount of physician services that would be considered unrelated to
the furnishing of DHS for purposes of satisfying the requirement that
at least
[[Page 51033]]
``some'' physician services furnished in the same ``building'' are
unrelated to the furnishing of DHS.
Response: For the reasons previously set forth in Phase II, we
decline to provide a quantitative measure of ``some'' non-DHS (69 FR
16073). The critical factor is that the premises are used for the
regular provision of the group practice's physician services, even if
on a part-time basis, with respect to the requirements in Sec.
411.355(b)(2)(i). In evaluating whether ``some'' physician services
unrelated to DHS are performed in the building, we will take into
account the nature of the group's overall practice (for example, the
specialties of the group's physicians) and the referring physician's
full range of practice. Creating a satellite office that appears to
satisfy the ``same building'' requirements, but in fact is merely a
sham arrangement, will result in claims denial. For example, renting
office space part-time in a freestanding imaging facility purportedly
to provide physician services unrelated to DHS at the facility location
would be considered a sham if few or no such services were actually
contemplated or provided. In addition, a part-time arrangement cannot
meet the centralized building test. As we have noted in other contexts,
the operation of an arrangement, not its form on paper, is
determinative. Thus, for purposes of the in-office ancillary services
exception, all of the conditions related to supervision, location, and
billing must be strictly satisfied with respect to each claim for DHS
submitted to the Medicare program.
Comment: A physician professional association requested
clarification regarding whether the requirements relating to the
quantity and type of physician services necessary to satisfy the ``same
building'' requirement can be met by including services provided to
patients physically present in remote locations via telemedicine.
Specifically, the commenter requested ``additional guidance * * * for
practitioners with offices in rural locations in which they may not be
physically present but nonetheless provide the requisite amount and
types of care.''
Response: We assume that the comment pertains to the situation in
which a patient is present in one location and a physician, who is
present in another location during an appointment with the patient,
orders an item or service that he or she wishes to be furnished in the
office in which the patient is located. We do not consider the ordering
physician to be located in the rural office with the patient for
purposes of satisfying any of the ``same building'' tests in Sec.
411.355(b)(2)(i). Rather, the physician's time spent performing
telemedicine services is counted for purposes of the ``same building''
requirement as time spent in the location where the physician is
physically present. However, there are three alternate methods for
meeting the ``same building'' test that provide considerable
flexibility, even in situations where physicians provide some services
via telemedicine. For example, in the case of a referring physician who
is a member of a group practice, time spent by other physician members
of the group at the patient's location would count toward the ``same
building'' requirement.
Comment: A commenter stated that it appreciated Phase II's added
flexibility of the three alternative tests for determining whether
services furnished in the ``same building'' meet the requirements of
the in-office ancillary services exception. The commenter stated,
however, that it was concerned that requiring physician presence,
either by the referring physician when ordering, or by a member of the
group practice when furnished, may be too onerous for some group
practices. According to the commenter, it may be difficult for a group
practice to distinguish its operations as clearly meeting one test or
another, as well as to track and document its compliance with the
alternative tests.
Response: We believe that it should not be difficult for a group to
distinguish and document the nature of the services furnished by the
physicians at its various locations. To the extent that some additional
complexity was added by Phase II, it is a necessary consequence of
allowing additional flexibility through the three alternative tests.
Comment: One commenter asked for further guidance on physicians who
provide DHS to their patients in a shared space in the same building.
Specifically, the commenter asked whether the physicians could use
simultaneously the facilities (for example, an imaging suite, clinical
laboratory, or physical therapy office) and simply share the costs and
administration of the DHS without having to separately lease the
facilities for specific blocks of time determined in advance.
Response: A physician sharing a DHS facility in the same building
must control the facility and the staffing (for example, the
supervision of the services) at the time the designated health service
is furnished to the patient. To satisfy the in-office ancillary
services exception, an arrangement must meet all of the requirements of
Sec. 411.355(b), not merely on paper, but in operation. As a practical
matter, this likely necessitates a block lease arrangement for the
space and equipment used to provide the designated health service.
Shared facility arrangements must be carefully structured and operated
(for example, with respect to billing and supervision of the staff
members who provide DHS in the facility). We note that common per-use
fee arrangements are unlikely to satisfy the supervision requirements
of the in-office ancillary services exception and may implicate the
anti-kickback statute.
Comment: Several commenters strongly criticized the centralized
building prong of the in-office ancillary services exception. They
requested that the rule be changed to require, in addition to full-time
use of the facility, that the arrangement meet a ``commercially
reasonable'' test. According to the commenters, the Phase II rule
permits numerous abusive arrangements that are designed solely to
permit group practices and physicians to refer and bill for DHS that
section 1877 of the Act would otherwise prohibit. Commenters objected
to group practices developing satellite DHS facilities, sometimes in
different states, specifically to capture ancillary income. Several
commenters identified ``condominium'' pathology laboratories that rent
space to urology groups as the types of abusive arrangements that are
proliferating. On the other hand, one commenter complained that the
requirement that the centralized building be occupied exclusively by
the group practice is too restrictive.
Response: Section 1877 of the Act permits group practices to
furnish DHS in a centralized building. However, we recognize that part-
time, shared, off-site facilities are readily subject to abuse. To
address this obvious potential for abuse, the Phase I final rule
included the requirement that a centralized building be used on an
exclusive basis (66 FR 881). In the CY 2007 update to the physician fee
schedule, we proposed additional requirements for the centralized
building test (71 FR 49056-49057). We will address those proposals in a
separate rulemaking. In the meantime, we caution parties to
arrangements such as those described by the commenters that, as with
shared facilities in the same building, off-site arrangements must
fully comply with the in-office ancillary services exception in
operation, not only on paper. In other words, compliance is required
with respect to every DHS claim filed. ``Condominium'' arrangements are
[[Page 51034]]
particularly vulnerable to non-compliance, and staff and operations at
the off-site facility should be closely monitored. For example, a
supervising physician who is an independent contractor of a group
practice must be in the group practice's specific premises at the
specific time a designated health service is furnished (and supervised)
for a group practice patient. Moreover, these arrangements raise
substantial concerns under the anti-kickback statute.
Comment: Several commenters commended us for the flexibility
provided by the in-office ancillary services exception. A number of
other commenters complained that the exception effectively vitiated the
prohibition on physician self-referral.
Response: The in-office ancillary services exception allows a
physician to provide DHS to his or her own patients, which may appear
to undercut the purpose of the physician self-referral prohibition.
Nevertheless, the statutory exception evidences intent by the Congress
to permit a physician to furnish DHS to his or her own patients if
certain conditions are met. We are considering whether certain types of
arrangements, such as those involving in-office pathology labs and
sophisticated imaging equipment, should continue to be eligible for
protection under the in-office ancillary services exception.
Comment: One commenter requested that we confirm that compliance
with the in-office ancillary services exception is not necessary if an
arrangement complies with the rural provider exception in Sec.
411.356(c)(1).
Response: Compliance with the in-office ancillary services
exception is not necessary with respect to referrals from owners or
investors if an ownership or investment interest complies with the
rural provider exception in Sec. 411.356(c)(1). As a reminder, the
rural provider exception protects ownership and investment interests
only; it does not protect compensation arrangements. Thus, if the group
practice submits claims for DHS referred by employed or contracted
physicians, an exception, such as the in-office ancillary services
exception, must apply.
Comment: A commenter suggested that, where group practices or
physicians in the same building share DHS facilities, the in-office
ancillary services exception should be restricted to clinical
laboratory and imaging services that are necessary on an urgent basis.
Response: Without further review, we do not believe that it is
appropriate or feasible to restrict the in-office ancillary services
exception as suggested by the commenter. We will continue to monitor
the situation to determine whether to propose additional restrictions
to safeguard against program or patient abuse.
Comment: One commenter requested that we confirm that a hospital-
employed physician would be treated the same as any other sole
practitioner for purposes of satisfying the in-office ancillary
services exception (that is, whether any non-group practice physician
meeting the same requirements of personal supervision or personal
performance and location may fit within the exception). The commenter
asserted that when the facts are the same (that is, supervision,
location, and other requirements are satisfied), it should not matter
whether the employer is a group practice or a hospital. The commenter
believed that hospitals in States that prohibit the corporate practice
of medicine are disadvantaged because they cannot set up a group
practice to employ the physician (who, presumably, could utilize the
in-office ancillary services exception).
Response: As set forth in section 1877(b)(2) of the Act, the in-
office ancillary services exception applies only to certain DHS
furnished by a physician or group practice; it does not apply to
inpatient or outpatient hospital services billed by a hospital
employer. In order to utilize the in-office ancillary services
exception, a hospital-employed physician, such as the one described by
the commenter, must meet all of the requirements set forth in Sec.
411.355(b). If a hospital-employed physician's referred DHS are billed
by the hospital employer, the in-office ancillary services exception
would not apply. The hospital would be the entity furnishing the DHS
(not the physician or a group practice), and the hospital-employed
physician would not meet the billing requirement in Sec.
411.355(b)(3). We are not persuaded to create a similar exception for
hospital-employed physicians. We see no disadvantage as described by
the commenter. Hospitals may use other exceptions, including the
exception for bona fide employment relationships, to protect legitimate
arrangements with referring physicians.
Comment: One commenter requested clarification that the in-office
ancillary services exception did not override our policies on
reassignment and purchased diagnostic tests. Another commenter
requested clarification that the rules on purchased diagnostic tests
and purchased test interpretations were not altered by our
implementation of section 952 of the MMA.
Response: The physician self-referral rules do not supersede
Medicare payment and billing rules and policies, including rules on
reassignment, supervision, or purchased diagnostic tests; however, the
physician self-referral rules do affect their application. For example,
following enactment of section 952 of the MMA, we amended Sec. 424.80
of our regulations to provide that an independent contractor physician
may reassign to an entity his or her right to bill Medicare, regardless
of whether the services were performed on the premises of the entity
(as required prior to section 952 of the MMA) or off the premises of
the entity. However, where the independent contractor physician who
wishes to reassign to a DHS entity with which he or she has a financial
relationship, it is not enough that the rules on reassignment are met.
Rather, the rules on physician self-referral must also be satisfied.
For example, where an independent contractor physician wishes to
reassign his or her right to receive Medicare payment for DHS to a
group practice to which he or she will refer DHS, an exception such as
the physician services exception or the in-office ancillary services
exception must be met. The services performed by the independent
contractor in this example must be performed in the group practice's
facilities (see the definition of ``physician in the group'' at Sec.
411.351).
Conversely, the fact that an arrangement complies with the
physician self-referral rules does not negate the relevancy of other
rules, such as the rules on reassignment and purchased diagnostic
tests. For example, where an independent contractor physician furnishes
DHS in a centralized building of a group practice and the other
requirements of the in-office ancillary services exception are
satisfied, the anti-markup rules would nonetheless apply if the service
at issue is a diagnostic test of the type that is covered under the
provision at Sec. 414.50 and the physician and the group have effected
a valid reassignment (including completing the 855-R).
We are amending Sec. 411.350 to state clearly that nothing in the
physician self-referral rules alters a party's obligation to comply
with--
The rules regarding reassignment of claims (Sec. 424.80);
The rules regarding purchased diagnostic tests (Sec.
414.50);
The rules regarding payment for services and supplies
``incident to'' a physician's professional services (Sec. 410.26); or
Any other applicable Medicare laws, rules, or regulations.
[[Page 51035]]
We note that Sec. 424.80 states that nothing in that section
alters a party's obligation to comply with the physician self-referral
statute and other authorities.
Comment: Commenters asked whether, in order to satisfy the
requirements of the in-office ancillary services exception, a physician
who is an independent contractor with a group practice must perform DHS
supervision services on the premises of the group practice, regardless
of coverage policies.
Response: For purposes of compliance with the physician self-
referral rules, independent contractor physicians are ``physicians in
the group practice'' only when performing services on the group
practice's premises, regardless of whether reassignment or coverage
rules would allow an independent contractor physician to perform
services off the premises of the billing entity. Therefore, in order to
satisfy the requirements of the exception, an independent contractor
must supervise services on the premises of the group practice.
Comment: Section 1877(b)(2)(B) of the Act and Sec. 411.355(b)(3)
require that, in order for the in-office ancillary services exception
to apply, the services must be billed by one of the following: The
physician performing or supervising the service; the group practice of
which the performing or supervising physician is a member under a
billing number assigned to the group practice; the group practice if
the supervising physician is a ``physician in the group practice''
under a billing number assigned to the group practice; or by an entity
that is wholly-owned by the physician or the group practice under the
entity's own billing number or under a billing number assigned to the
physician or group practice. Two commenters asked for clarification
that the billing requirement in the in-office ancillary services
exception in Sec. 411.355(b)(3) can be satisfied by an entity (that
is, a billing entity) that is wholly-owned by the group members in
their individual capacities (as opposed to being owned by the group
practice), but structured to mirror the group practice (for example,
ownership of the billing entity is contingent on membership in the
group practice). According to the commenters, the separate structure is
common to avoid tax liability.
Response: We disagree with the commenters. Section 1877(b)(2)(B) of
the Act and the corresponding regulations in Sec. 411.355(b)(3)(iv)
require that the supervising physician, the referring physician, or the
group practice must wholly own the billing entity. The arrangement
described by the commenters would not satisfy this requirement. The
regulations make clear that claims submitted by a wholly-owned entity
must be submitted under a billing number assigned to the entity or
under a billing number assigned to the physician or group practice.
Moreover, the arrangement may not comply with our rules on
reassignment. Under our longstanding policy, only individuals may
reassign benefits. If the commenter is, in effect, asking whether a
physician member or a ``physician in the group practice'' is allowed to
reassign benefits to the group, which would then reassign benefits to
the billing entity, we do not believe that the arrangement would comply
with our rules on reassignment. Nothing in the regulations prohibits
the use of an independent billing company in an administrative capacity
to process and submit claims on behalf of billing physicians or group
practices under billing numbers assigned to them.
C. Services Furnished by an Organization (or Its Contractors or
Subcontractors) to Enrollees
Section 1877(b)(3) of the Act creates an exception for services
provided pursuant to certain Medicare managed care arrangements. In
Phase I, we interpreted the provision broadly and updated the
references to covered managed care plans in light of changes to the
Medicare program. In Phase II, we again expanded the exception, which
appears at Sec. 411.355(c), to include Medicaid managed care plans.
This Phase III final rule makes no changes to Phase II.
Comment: Comments submitted on behalf of Alaskan tribal health
organizations requested that we create an exception for referrals made
by physicians under compensation arrangements with tribal health care
providers. According to the commenter, the native tribal organizations
have assumed much of the responsibility for carrying out the programs
of the Indian Health Service. In discharging that responsibility, the
tribes have developed a comprehensive, integrated health care system
that utilizes primary, secondary, and tertiary caregivers and clinics
staffed by employees, independent contracting practitioners, Federal
employees, and commissioned officers. The commenter asserted that,
because of limited funds, utilization of services is carefully
monitored and strictly controlled, giving them many characteristics of
managed care organizations. According to the commenter, services are
prioritized so that only certain services are covered, and firm
policies exist requiring prior authorization for non-emergent care and
notice for emergency care at non-tribal or Indian Health Service
facilities. The commenter stated that the tribal health care providers
have three principal types of compensation arrangements. First, and
most frequently, the providers have physician employees. Second, the
providers have personal service arrangements with physicians. Third,
the providers enter into agreements with the Indian Health Service
under which Federal employees are assigned to work for a specific
tribal health program, and under which the providers are responsible
for the costs of such employees. The commenter asserts that monitoring
and reviewing the myriad compensation arrangements with physicians in
the Alaska tribal health network consumes scarce time and financial
resources. In light of the system's integration and strong elements of
managed care, the commenter urged that referrals in the network be
protected.
Response: We agree that many of the arrangements between the Indian
Health Service and various Indian nations have many of the
characteristics of managed care. However, when Medicare services are
furnished, the exception in Sec. 411.355(c) for services furnished to
enrollees of a prepaid health plan would not apply. We decline to
create an exception at this time to address the commenter's concerns
for two reasons. First, we question whether we have the legal authority
to expand the exception in Sec. 411.355(c) or to create a new
exception without first proposing such an expansion or new exception
through a notice of proposed rulemaking. Second, the commenter has not
supplied us with an adequate explanation thus far as to why existing
exceptions such as those for bona fide employment relationships (Sec.
411.357(c)) or personal service arrangements (Sec. 411.357(d)) would
be insufficient to protect the arrangements at issue. The commenter
appears to recognize that these exceptions are available, but states
that monitoring and reviewing the compensation arrangements consumes
scarce time and financial resources. We believe, however, that the
parties should be able to design model structures for the compensation
arrangements, which would be applicable for existing and newly hired
physicians. Monitoring and reviewing for compliance is necessary and
prudent to ensure compliance with the physician self-referral law,
other fraud and abuse laws, and other Medicare rules and regulations.
[[Page 51036]]
D. Reserved
There is no regulation at Sec. 411.355(d). Section 411.355(d)
continues to be ``reserved'' in this Phase III final rule.
E. Academic Medical Centers
In Phase I, we created a new exception for payments to faculty of
academic medical centers that meet certain conditions that ensure that
the arrangements pose no risk of fraud or abuse (66 FR 916). The
exception required that the referring physician: (1) Is a bona fide
employee of a component of an academic medical center on a full-time or
substantial part-time basis; (2) is licensed to practice medicine in
the State(s) in which he or she practices medicine; (3) has a bona fide
faculty appointment at the affiliated medical school; and (4) provides
either substantial academic or substantial clinical teaching services
for which the referring physician receives compensation as part of his
or her employment relationship with the academic medical center. In
addition, the exception required the total compensation paid to the
referring physician for the previous 12-month period from all academic
medical center components to be set in advance, in the aggregate not
exceed fair market value for the services provided, and not be
determined in a manner that takes into account the volume or value of
any referrals or other business generated within the academic medical
center.
Phase II made several changes to broaden the applicability of the
academic medical centers exception. We expanded the definition of an
academic medical center to allow hospitals or health systems that
sponsor four or more medical education programs to qualify as a
component of an academic medical center. We revised the exception to
include not-for-profit supporting organizations (whose primary purpose
is supporting the teaching mission of the academic medical center) as a
potential component of an academic medical center. We revised the
regulatory text to make clear that the majority of physicians on the
medical staff must be on the faculty of an affiliated medical school
and that the aggregation of faculty from any affiliated medical school
is permitted. We expanded the exception modestly to cover DHS referrals
within an academic medical center if the money the academic medical
center pays to the referring physician for research is used for
teaching services in addition to bona fide research (if consistent with
the terms and conditions of the grant). To guard against fraud and
abuse, we declined to extend the protection of the exception to DHS
referrals to an academic medical center if the academic medical center
pays the referring physician for research and the research funds are
used for indigent care or community service. Finally, we modified the
requirement that the relationship among the components of the academic
medical center be set out in a written agreement; the revised provision
allows the relationship to be memorialized in multiple writings.
In Phase II, we also added a ``safe harbor'' provision that deems
any referring physician who spends at least 20 percent of his or her
professional time or, in the alternative, 8 hours per week providing
academic services or clinical teaching services to be compliant with
the requirement in Sec. 411.355(e)(1)(i)(D) that the physician provide
``substantial academic services or clinical teaching services.'' We
also deleted the requirement, formerly in Sec. 411.355(e)(2)(ii), that
the faculty practice plan (or plans) be organized as a tax-exempt
organization under either section 501(c)(3) or (c)(4) of the Internal
Revenue Code.
In Phase II, we made clarifications to the academic medical centers
exception, including: (1) that the referring physician may be on the
faculty of the affiliated medical school or the accredited academic
hospital; (2) that an academic medical center may have more than one
affiliated faculty practice plan (and that the faculty practice plans
may be affiliated with other components such as the teaching hospital,
the medical school, or the accredited academic hospital); (3) that a
hospital or health system under Sec. 411.355(e)(2)(i) may be the same
hospital that meets the ``affiliated hospital'' requirement in Sec.
411.355(e)(2)(iii); and (4) that the substantial services test may be
met through either academic services or clinical teaching services, or
a combination of both. We declined to extend the protection of the
exception to services referred by a physician who is not an employee of
a component of an academic medical center, where the referring
physician does not provide substantial academic services or clinical
teaching services (as may be the case with volunteer and primary care
physicians), or where the referring physician does not meet the other
requirements in Sec. 411.355(e)(1)(i).
This Phase III final rule adopts the Phase II rule with minor
clarifications. For example, for purposes of determining whether the
majority of physicians on the medical staff consists of faculty
members, the affiliated hospital must include or exclude all physicians
holding the same class of privileges at the affiliated hospital.
Comment: One commenter asked us to clarify that the academic
medical centers exception protects payments to physicians for the
provision of indigent care or community service. The commenter sought
an explanation of our statement in Phase II that payments to referring
physicians for indigent care or community service may be structured to
fit other exceptions. (69 FR 16110-16111.)
Response: Nothing in Sec. 411.355(e) prohibits academic medical
centers from compensating faculty members for the provision of indigent
care or community service, provided that the funds do not derive from
research funding (see Sec. 411.355(e)(1)(iii)(C)); the total
compensation paid to the referring physician is fair market value and
satisfies the other requirements of Sec. 411.355(e)(1)(ii); and the
physician also performs the requisite clinical teaching or academic
services under Sec. 411.355(e)(1)(i)(D). The Phase II language
referenced by the commenter was in response to a suggestion that we
revise the definition of ``academic medical center'' at Sec.
411.355(e)(1)(iii). Section 411.355(e)(1)(iii) provided that, to
qualify as an academic medical center for purposes of the exception,
all research grant money paid to a referring physician must be used
solely to support bona fide research. The Phase II comment suggested
that we revise the provision to include the use of research money for
teaching, indigent care, and community service (as opposed to for bona
fide research only). (69 FR 16110-16111.) We agreed in part with the
commenter and revised the provision in Sec. 411.355(e)(1)(iii) to
require that any money paid to a referring physician for research must
be used solely to support bona fide research or teaching, which are
core academic medical center functions. However, we declined to extend
the provision to cover the use of research money for indigent care and
community service, explaining that research grants can be subject to
potential abuse. (66 FR 917.) We note that the academic medical center
exception is available for DHS furnished by academic medical centers
that pay physicians to provide indigent care and community service,
provided that all other provisions of the exception are met and the
money used for the payments does not come from research grant funds. If
an academic medical center pays a physician using research funds and
the payments are used for purposes other than bona fide research or
teaching, the academic medical
[[Page 51037]]
center would not satisfy the conditions of Sec. 411.355(e)(1)(iii),
and the exception would be unavailable for any DHS furnished by the
academic medical center.
Comment: A commenter stated that the requirement in Sec.
411.355(e)(1)(ii) that the total compensation paid by all components of
an academic medical center to the referring physician be ``set in
advance'' was unnecessary. According to the commenter, the flows of
money within an academic medical center support the missions of patient
care, education, and research, which are the core of any academic
medical center. The commenter asserted that the other criteria for
meeting the exception provide adequate assurances that abuses will not
occur. Because the exception is available only to bona fide employees
of an academic medical center component, the criteria for compensation
should mirror those for the exception for bona fide employment
arrangements, which does not require that compensation be set in
advance.
Response: The commenter misunderstands the purpose of the academic
medical centers exception. It is designed to protect compensation
received by the physician from all components of the center, not only
the component with which he or she has an employment relationship.
Therefore, although the employment exception may protect the
compensation the physician receives from the component that employs the
physician, it does not protect the physician's aggregate compensation.
We disagree with the commenter that the ``set in advance'' requirement
for aggregate compensation from all components of the academic medical
center is unnecessary. We believe that it is appropriate to treat
physician compensation under the academic medical center exception the
same as compensation for independent contractor physicians under the
exception for personal service arrangements. (69 FR 16066.)
Comment: One commenter asked that we clarify that the condition in
Sec. 411.355(e)(1)(ii), which requires that the total compensation to
referring physicians be set in advance, does not require that the
actual amount of the compensation be set in advance. The commenter also
asked that we confirm its understanding that our use of ``total''
compensation was intended to reflect that faculty physicians in an
academic medical center setting may be paid by more than one component
of the academic medical center and that each such payment arrangement
must meet each of the requirements of the exception, namely that the
compensation be set in advance, not exceed fair market value for the
services provided, and that it not take into account the volume or
value of referrals or other business generated by the referring
physician within the academic medical center.
Response: The commenter is correct that the actual dollar amount of
the referring faculty physician's compensation need not be set in
advance. It is sufficient if the contribution of each component of the
academic medical center to the aggregate compensation uses a
methodology that qualifies under Sec. 411.354(d). The commenter is
also correct that, where a physician is paid by more than one component
of the academic medical center, each such payment arrangement must not
take into account the volume or value of referrals or other business
generated by the referring physician within the academic medical
center. The commenter is incorrect, however, that the exception
requires that compensation paid by each component must satisfy a fair
market value test. Rather, Sec. 411.355(e)(1)(ii) states that the
aggregate (that is, the total from all components) compensation cannot
exceed fair market value for the services provided. We have clarified
the language of Sec. 411.355(e)(1)(ii).
Comment: An association of medical schools asserted that, due to
the numerous and complex criteria of the academic medical center
exception, we should provide advisory opinions to entities that submit
a request for a definitive opinion as to whether they meet those
criteria.
Response: We believe that the criteria set forth in the academic
medical centers exception are clear and that most entities should be
able to determine whether they qualify as an academic medical center.
We believe that an advisory opinion, although appropriate in some
circumstances, would normally not be needed. In addition, institutions
that do not satisfy the definition of an academic medical center may be
able to comply with one or more of the other physician compensation
arrangements exceptions.
Comment: A commenter asked for clarification regarding Sec.
411.355(e)(2)(iii), which defines an academic medical center to include
an affiliated hospital in which, among other things, ``a majority of
the physicians on the medical staff consists of physicians who are
faculty members.'' The regulation provides that any faculty member
``may'' be counted for purposes of this requirement, including courtesy
and volunteer faculty. The commenter sought confirmation that an
affiliated hospital may exclude courtesy staff when determining whether
the majority of the physicians on its medical staff are faculty members
of the affiliated medical school.
Response: An affiliated hospital may exclude courtesy staff when
determining whether the majority of the physicians on its medical staff
are faculty members of the affiliated medical school or on the faculty
of the educational programs at the accredited affiliated hospital. We
are modifying Sec. 411.355(e)(2)(iii) to clarify that, if a hospital
elects to include or exclude a physician holding a particular class of
privileges (for example physicians holding courtesy privileges), the
hospital must include or exclude, respectively, all individual
physicians with the same class of privileges at the affiliated hospital
when determining whether the majority of the physicians on its medical
staff are faculty members of the affiliated medical school or are on
the faculty of the educational programs at the accredited academic
hospital.
Comment: One commenter stated that the requirement in Sec.
411.355(e)(2)(iii) that faculty members order the majority of hospital
admissions is difficult for many accredited hospitals to control and,
effectively, renders most community hospitals ineligible for the
academic medical center exception. According to the commenter,
community hospitals that sponsor four or more approved education
programs (and which potentially could constitute an academic medical
center) frequently provide substantial services unrelated to those
training programs, particularly if there are few other hospitals
serving that area.
Response: We believe that the requirement that faculty members
order the majority of admissions is a good measurement of a hospital
being sufficiently integrated into an academic medical center. As we
noted in Phase II, it is important to ensure that the relationship
between the components is sufficiently focused on the academic medical
center's core mission (69 FR 16109). The tests for affiliated hospital
faculty and admissions set forth in Sec. 411.355(e)(2)(iii) are strong
indicators of that core relationship. The academic medical centers
exception is designed to supplement--not supplant--other exceptions,
such as the exception for bona fide employment relationships in Sec.
411.357(c) and the exception for personal service arrangements in Sec.
411.357(d). To the extent that a hospital or other entity cannot take
advantage of the academic medical centers exception, it should be able
to
[[Page 51038]]
structure its legitimate compensation arrangements with physicians to
meet another exception.
Comment: One commenter stated that a newly-affiliated hospital
might not qualify as an academic medical center because it fails to
meet ``the two majority tests'' in Sec. 411.355(e)(2)(iii) (that is,
the majority of physicians on the medical staff are faculty members and
the majority of admissions are made by faculty members). According to
the commenter, the hospital may execute an academic affiliation
agreement under which it increases the number of physicians on its
medical staff who are faculty members so that it meets the requirement
that a majority of its medical staff are faculty members, but the
hospital would not immediately meet the requirement that a majority of
admissions are made by the faculty (as the new faculty will begin
admitting only upon execution of the agreement). The commenter
requested guidance that would clarify when a hospital could rely on the
academic medical centers exception in such circumstances.
Response: We disagree that the regulation is unclear as to when a
compensation arrangement between a physician and a newly-affiliated
hospital will satisfy the academic medical centers exception. We
believe that the regulation is clear that all conditions must be met at
the time the referral is made. To the extent that the commenter is
suggesting that we allow a transition period during which the two
majority tests would not apply or would be relaxed, we decline to do
so. If an arrangement does not meet the academic medical centers
exception, another exception may be available.
Comment: Two commenters asked for clarification regarding the
applicability of Sec. 411.357(p), the indirect compensation
arrangements exception, in the academic medical center setting. One of
the commenters asserted that many academic medical centers have
organizational structures that enable them to satisfy the requirements
of the exception for indirect compensation arrangements, citing the
situation where a referring physician does not have a direct financial
relationship with an affiliated hospital. For example, a hospital
component of an academic medical center could be an organization
separate and distinct from the university that operates the faculty
practice plan as a wholly-owned division of the university in
connection with the university's school of medicine. According to the
commenter, any financial arrangements between the hospital and the
university with respect to the physicians in the faculty practice plan
would be indirect. Moreover, if the physicians were salaried employees
of the university, with no compensation paid from the hospital to the
physicians, there would be no direct or indirect compensation
arrangement within the meaning of the definition at Sec. 411.354(c)(2)
if the physician's compensation did not vary with or otherwise reflect
the physician's referrals to the hospital. According to the commenter,
even if this arrangement were construed as being an ``indirect
compensation arrangement'' (which the commenter did not believe was the
case), it would qualify for the exception for indirect compensation
arrangements in Sec. 411.357(p) if the physician's compensation were
fair market value and not determined in any manner that takes into
account the volume or value of referrals or other business generated by
the physician for the hospital. The second commenter simply asked that
we confirm that the exception for indirect compensation arrangements
applies in the academic medical center setting.
Response: The definition of ``indirect compensation arrangement''
at Sec. 411.354(c)(2) and the exception for indirect compensation
arrangements in Sec. 411.357(p) are potentially applicable to
arrangements involving academic medical centers and physicians. As we
have stated previously and in this Phase III final rule, parties
generally may utilize any exception that the arrangement between them
satisfies. If the academic medical centers exception applies to the DHS
referrals at issue, it would not be necessary for another exception to
apply. With respect to the situation described by the commenter, as
discussed above, we have revised Sec. 411.354 to clarify the
application of the indirect compensation definition at Sec.
411.354(c)(2) and the indirect compensation arrangements exception in
Sec. 411.357(p).
F. Implants Furnished by an Ambulatory Surgical Center
In Phase I, we established a new exception in Sec. 411.355(f) for
implants furnished by an ambulatory surgical center (ASC) when acting
as an entity furnishing DHS. The new exception was intended to allow a
physician-owner of an ASC that is not in a rural area (and thus not
covered by the rural provider exception) to order and perform surgeries
that implant DME, prosthetics, or prosthetic devices that are not
reimbursed as part of the composite ASC payment rate. The new exception
was necessary because many implantable items are DHS but are not
bundled in the ASC composite rate. Without the exception, an ASC (which
is often owned by one or more physicians) would become a DHS entity
when it furnishes the implant. We did not make any changes to Sec.
411.355(f) in Phase II, nor are we making any in this Phase III final
rule.
Comment: One commenter referenced the discussion in Phase II where
we noted that the exception in Sec. 411.355(f) applies only when the
implant is billed by the ASC and that, when the physician submits the
claim for the implant, the physician is the entity furnishing DHS (69
FR16111). The commenter asked whether the exception in Sec. 411.355(f)
applies if the ASC furnishes and submits the claim for the implant
procedure, but the physician furnishes and submits the claim for the
device.
Response: The exception does not apply in the situation described
by the commenter. Under Medicare payment policy (section 10.3-10.4 of
the CMS Internet-only Manual, publication 100-04, Claims Processing
Manual, Chapter 14 (ambulatory surgical centers)), whenever an implant
is performed during an ASC procedure, the provider/supplier (that is,
the ASC) must bill for the implanted item. We did not mean to imply
that any individual or entity other than the ASC may bill for an item
implanted during an ASC procedure.
G. EPO and Other Dialysis-Related Drugs Furnished in or by an End-Stage
Renal Disease Facility
Phase I created a new exception in Sec. 411.355(g) for epoetin
(EPO) and certain other dialysis-related outpatient prescription drugs
furnished in or by an end-stage renal dialysis (ESRD) facility. The
drugs that may qualify for this exception were initially identified by
CPT and HCPCS codes in Phase I (66 FR963-964), and updates to that list
appear on our Web site and in annual updates published in the Federal
Register. There were no changes to Sec. 411.355(g) in Phase II, nor
are we making any in this Phase III final rule.
Comment: A commenter wrote that the list of ESRD drugs in Sec.
411.355(g) was incomplete. The commenter asked that the exception be
expanded to include all drugs furnished as part of a dialysis
treatment, whether in a home or at a facility. Alternatively, the
commenter asked that the exception include by reference our Single Drug
Pricer file. [The Single Drug Pricer file is a drug-pricing file used
prior to January 1, 2004 that contains the allowable price for each
drug covered ``incident to'' a physician's service. This includes the
allowable price for drugs furnished by independent dialysis facilities
that are separately billable
[[Page 51039]]
from the composite rate and for clotting factors to inpatients.] The
commenter voiced concern that a dialysis center with physician-owners
or other financial relationships with physicians would not be able to
deliver the same convenient, quality care that could be provided by a
center without these relationships.
Response: We believe that the list of ESRD drugs, as updated
annually, is complete and that we are acting within the constraints of
the statute. Section 1877(h)(6) of the Act specifically includes
outpatient prescription drugs as DHS. However, we established a broad
exception in Sec. 411.355(g) using our authority under section
1877(b)(4) of the Act, which allows the Secretary to establish an
exception if there is no risk of program or patient abuse. We intend
for the exception to include drugs that have to be administered at the
time of dialysis ``that are required for the efficacy of dialysis.''
(69 FR 16117.) For the reasons stated in Phase II, we believe that we
cannot further expand the list as suggested by the commenter without
creating a risk of program or patient abuse (69 FR 16117-16118).
Although we do not want to burden Medicare beneficiaries unnecessarily
by making them go elsewhere for intravenous drugs, the Congress
prohibited physician self-referrals for outpatient prescription drugs,
and we are concerned that expanding the list of drugs subject to this
exception may lead physicians to order intravenous administration of a
drug when oral administration is as effective, or to not choose the
most cost-effective appropriate drug.
To the extent that individuals or organizations believe that
specific drugs should qualify for the exception because they are
required for the efficacy of dialysis and must be administered at the
time of dialysis, they may contact us. We also note that the list of
drugs that qualify for this exception is updated annually in the
Physician Fee Schedule, and comments on the list are accepted upon
publication of the proposed rule for the Physician Fee Schedule. We
note that the Single Drug Pricer file is no longer in use.
H. Preventive Screening Tests, Immunizations, and Vaccines
In Phase I, we created a new regulatory exception for certain
preventive screening tests, immunizations and vaccines furnished under
circumstances that do not pose a risk of abuse (66 FR 923). The
exception requires that: (1) The preventive screening tests,
immunizations, and vaccines are subject to CMS-mandated frequency
limits; (2) the arrangement does not violate the anti-kickback statute;
(3) the arrangement does not violate any Federal or State law or
regulation governing billing or claims submission; and (4) the
preventive screening tests, immunizations, and vaccines are covered by
Medicare and listed as eligible for this exception on the list of CPT/
HCPCS codes. Phase I included a listing of the CPT and HCPCS codes for
screening tests that qualify for the exception if all of the other
requirements of the exception are satisfied.
In Phase II, we made no major changes to the exception (69 FR
16116). We did, however, decline to expand the exception to protect
referrals for diagnostic Pap smears or mammography tests, as we were
unpersuaded that these types of referrals would not pose a risk of
program or patient abuse. We clarified in Phase II that we recognized
that some of the vaccines covered under the exception may be paid by
Medicare using a different reimbursement system than the fee schedule
required under the exception. To avoid confusion we deleted the
requirement that the preventive screening tests, immunizations, or
vaccines be reimbursed by Medicare under a fee schedule.
We received no comments to Phase II regarding Sec. 411.355(h) and
are making no changes in this Phase III final rule.
I. Eyeglasses and Contact Lenses Following Cataract Surgery
In Phase I, we created a new regulatory exception for eyeglasses
and contact lenses following cataract surgery (66 FR 923). The
exception requires that: (1) The eyeglasses or contact lenses are
provided in accordance with Medicare coverage and payment policies
(Sec. 410.36(a)(2)(ii) and Sec. 414.228, respectively); (2) the
arrangement does not violate the anti-kickback statute; and (3) the
arrangement does not violate any Federal or State law or regulation
governing billing or claims submission.
Phase II made no changes to Sec. 411.355(i) (nor were any comments
received on Phase I). We received no comments to Phase II regarding
this exception. We are not making any changes to Sec. 411.355(i) in
this Phase III final rule.
J. Intra-Family Rural Referrals
Phase II created a new exception in Sec. 411.355(j) for certain
referrals from a referring physician to his or her immediate family
member or to a DHS entity with which the physician's immediate family
member has a financial relationship. The exception requires that the
patient being referred reside in a rural area and that there is no
other person or entity available to furnish the referred DHS in a
timely manner, in light of the patient's condition, either: (1) At the
patient's residence (in the case of home health services or other DHS
required to be furnished in the patient's home); or (2) within 25 miles
of the patient's residence (in the case of services furnished outside
the patient's home). In addition, the exception requires that the
referring physician make reasonable inquiries as to the availability of
other persons or entities and that the financial relationship does not
violate the anti-kickback statute or any other Federal or State law or
regulation governing billing and claims submission. We are making one
modification to Sec. 411.355(j) in this Phase III final rule.
Specifically, we are modifying the exception to include an alternative
distance test based on transportation time from the beneficiary's
residence.
Comment: One commenter stated that, notwithstanding the exception
in Sec. 411.355(j), the prohibition on intra-family referrals leads to
unfair results, especially where one of the family members is a general
practitioner or surgeon and the other is a pathologist or a
radiologist, and the pathologist or radiologist is part of a group of
physicians that provides services for local hospital inpatients and
outpatients. The commenter asserted that, in these circumstances, the
general practitioner or surgeon is unable to refer hospital patients
for pathology or radiology services to the family member's group
practice. In addition, the commenter stated that a physician should not
be prohibited from referring patients to a member of his or her
immediate family (for example, a brother or sister) if the referring
physician receives no economic benefit from the referral. The commenter
suggested that we accept an attestation from the referring physician
that he or she receives no economic benefit from referrals to the
family member.
Another commenter asserted that CMS should revise the intra-family
rural referral exception (or modify the definition of ``referral'') to
allow a physician to make referrals to an immediate family member (or
his or her employer) provided that the immediate family member has an
excepted financial arrangement under which the family member does not
receive remuneration that takes into account the volume or value or
referrals or other business generated by the family member.
[[Page 51040]]
Response: Section 1877(a) of the Act prohibits referrals for DHS to
entities in cases in which a physician ``or an immediate family member
of such physician'' has a financial relationship with the entity,
unless an exception applies. The law does not authorize a case-by-case
inquiry into whether the referring physician actually benefits from
referrals to entities with which an immediate family member has a
financial relationship.
We recognize the commenters' concerns, but section 1877(b)(4) of
the Act allows us to create an exception only if there is no risk of
program or patient abuse. We are not expanding the exception in Sec.
411.355(j) in the manner recommended by the commenters because we do
not believe that it would be consistent with congressional intent, nor
do we believe that we could do so without creating a risk of program or
patient abuse.
Comment: One commenter asked that we modify Sec. 411.355(j) to
include patients in any medically underserved area or Healthcare
Professional Shortage Area (HPSA). The commenter also requested that we
modify the exception to permit a referring physician to refer to an
immediate family member (or to an entity furnishing DHS with which the
immediate family member has a financial relationship) after the
referring physician determined, following reasonable inquiry, that
there was no other available person or entity to furnish the referred
DHS.
Response: The definition of rural is sufficiently broad to
encompass many HPSAs and medically underserved areas, and we do not
believe that the change suggested by the commenter regarding HPSAs and
medically underserved areas is necessary. With respect to the
commenter's second inquiry, we have reconsidered Sec. 411.355(j) as it
pertains to the availability of services in a rural area. We believe
that a test that takes into account distance, posted speed limits, and
weather conditions would be an appropriate alternative to a test that
considers only whether a provider is a specific distance from a
patient's home. Therefore, we are modifying Sec. 411.355(j) to permit
parties to utilize an alternative test that allows a physician to refer
a patient to an immediate family member (or to a DHS entity with which
the immediate family member has a financial relationship) for DHS if
the DHS cannot be provided otherwise within 45 minutes transportation
time from the patient's home at the time the referral for the DHS is
made. We are making no changes to the 25-mile rule in Sec. 411.355(j).
Referring physicians are free to choose either of the tests (that is,
25 miles from the beneficiary's residence or 45 minutes transportation
time from the beneficiary's residence) when determining whether a DHS
referral may be made to an immediate family member under Sec.
411.355(j). However, whichever test the physician chooses must be
applied both for purposes of Sec. 411.355 (j)(1)(ii) (determining
distance or transportation time from available services) and Sec.
411.355(j)(2) (the physician's reasonable inquiry as to the
availability of persons or entities to provide the needed DHS).
The new alternative test requires a case-by-case analysis of the
conditions that exist at the time of the referral for the DHS. Although
a bright-line test may be preferred by many physicians, we do not
believe that such a test always provides sufficient flexibility to
ensure that our beneficiaries receive needed DHS in a timely manner and
in a location that is convenient to the beneficiary. The modification
to Sec. 411.355(j) would permit some intra-family referrals when the
distance to the closest non-family member physician (or entity) is less
than 25 miles from the beneficiary's residence.
We note that, when the new alternative test is utilized, because
compliance will be determined on a case-by-case basis, an intra-family
referral that is permitted at one time (for example, in the winter
months when snow covers mountain roads and limits access) may not be
permitted at a different time (for example, in the summer months when
roads are clear and a non-family member physician (or entity) is
available to provide the needed DHS within 45 minutes transportation
time from the beneficiary's residence). Physicians utilizing the 45
minutes transportation time test should maintain documentation of the
information used in determining the transportation time. Resources
including websites that provide detailed mileage and drive time (such
as Mapquest or MapBlast) and published weather reports (either online
or in print, for example, in the newspaper) should be consulted when
determining a beneficiary's transportation time from his or her
residence to the location of the available DHS.
Comment: One commenter noted that we stated in Phase II that the
exception ``does not take into account the quality of other available
DHS entities'' and that other laws exist to address quality issues. The
commenter asserted that this statement suggests that the physician
would not be able to refer to an immediate family member if there is
another entity furnishing DHS within 25 miles of the patient's
residence, even if that entity does not participate in the patient's
health plan or has lesser qualifications (for example, no board
certification). The commenter requested that we clarify what we meant
by this statement.
Response: For the reasons noted in Phase II, we do not believe that
it is feasible to craft an objective, qualitative measure in the
exception for intra-family rural referrals as suggested by the
commenter. As we stated in Phase II, this exception ``looks to timely
availability of DHS, [but] it does not take into account the quality of
other available DHS entities'' (69 FR 16084). However, in a situation
such as that described by the commenter in which the only entity that
can furnish the DHS needed by a beneficiary within 25 miles of or 45
minutes transportation time from the beneficiary's home does not
participate in Medicare, the entity should be treated as if it does not
exist. In other words, the beneficiary constructively cannot obtain
needed DHS within 25 miles of or 45 minutes transportation time from
his or her home.
Comment: We received two comments concerning urban hospitals that
have exclusive arrangements with a radiology group practice for
performing the professional component of radiology services. The
commenters were concerned that a physician in the community would not
be able to refer patients to the hospital for radiology services when
the physician's immediate family member is a member of the group
practice with the exclusive arrangement.
The first commenter asserted that the prohibition on referring
Medicare patients to immediate family members is a severe hardship for
the patients of physicians with immediate family members who are
radiologists, radiation therapists, or pathologists, and that many such
family situations exist. The commenter noted that a physician could
refer a patient to an immediate family member for other types of
physician services without implicating the physician self-referral
rules and, therefore, it is difficult to understand why radiologists,
radiation therapists, and pathologists are treated differently. This
commenter recommended that we either not consider the professional
component of a service to be a designated health service, or allow
referrals if the physician's immediate family member personally
performs the DHS.
[[Page 51041]]
The second commenter suggested that we modify the definition of
``radiology and certain other imaging services'' to permit referrals in
the situation described above, or that we modify the definition of
``referral'' so that the referral in this situation would be deemed a
referral to the hospital rather than to the group practice in which the
immediate family member practices. The commenter offered what it
considered to be program safeguards that could be included in a new
exception or a modification of an existing exception or definition.
Response: We note that the comments pertained to situations in
which the patient would not be located in a rural area and, thus, the
exception in Sec. 411.355(j) for intra-family referrals would not be
applicable. We decline to adopt either of the suggestions offered by
the first commenter.
We do not believe that it would be consistent with congressional
intent to include as DHS only the technical component, and not the
professional component, of radiology, radiation therapy, or pathology
services. The physician self-referral rules treat radiology, radiation
therapy, and pathology services differently than other physician
services because section 1877(h)(6) of the Act specifically includes
these services, which have a significant professional component, as
DHS, whereas other physician services specifically are not subject to
the physician self-referral prohibition.
We are not modifying the exception for intra-family rural referrals
because we are authorized under section 1877(b)(4) of the Act to create
regulatory exceptions only where doing so would pose no risk of program
or patient abuse, and we do not believe that the fact that the family
member would personally perform the services, by itself, would remove
all risk of abuse. For the same reasons, we do not believe that it is
appropriate to modify the definition of ``referral'' as requested by
the commenter. Where the requirements of the exception for intra-family
rural referrals cannot be satisfied, the parties to the arrangement can
take certain actions to avoid any potential problems arising from
intra-family referrals. For example, where the referral to the group
practice comes from a physician whose immediate family member is a
physician in the group practice, the group practice could forward the
referral to a physician outside the group to perform the service and
bill for it. Alternatively, the group practice could have one of the
physicians in the group practice (other than the family member) perform
the service and bill for it directly (instead of reassigning his or her
right to bill to the group practice).
VIII. Exceptions to the Referral Prohibition Related to Ownership or
Investment Interests--Sec. 411.356
A. Publicly-Traded Securities and Mutual Funds
Section 1877(c) of the Act creates an exception for ownership in
certain publicly-traded securities and mutual funds that may own DHS
entities to which the physician may refer patients. As we explained in
the 1998 proposed rule, ``we believe that the purpose of this exception
is to allow physicians or family members to acquire stock in large
companies if the transaction does not particularly favor the physicians
over other purchasers'' (63 FR 1698). To qualify for the exception in
section 1877(c)(1) of the Act:
(1) The securities must be securities that may be purchased on
terms generally available to the public;
(2) The securities must (i) be listed on the New York Stock
Exchange, the American Stock Exchange, or any regional exchange in
which quotations are published on a daily basis, or (ii) be foreign
securities listed on a recognized foreign, national, or regional
exchange, or (iii) be traded under the automated inter-dealer quotation
system operated by the National Association of Securities Dealers; and
(3) The securities must be in a corporation that had shareholder
equity exceeding $75 million at the end of the corporation's most
recent fiscal year or on average during the previous three fiscal
years.
In addition, section 1877(c)(2) of the Act permits ownership of
investments in mutual funds with total assets exceeding $75 million at
the end of the most recent fiscal year or the average of the last three
fiscal years. Investment securities include shares or bonds,
debentures, notes, or other debt instruments.
In Phase II, we interpreted the statutory provision in section
1877(c)(1) of the Act, which requires that the investment securities be
those that ``may be purchased on terms generally available to the
public,'' to mean that the ownership interest must be in securities
that are generally available to the public at the time of the DHS
referral (69 FR 16081). We are making no changes in this Phase III
final rule to Sec. 411.356(a) (regarding publicly-traded securities)
or Sec. 411.356(b) (regarding mutual funds).
Comment: One commenter supported our clarification that the
investment interest must be available to the public at the time the
referral is made and not at the time the interest is acquired. However,
the commenter was concerned that it will be difficult for either the
physician or the entity furnishing DHS to determine if the entity is in
compliance.
Response: We disagree. The inquiry turns on objective facts that
are readily ascertainable to the physician or the entity furnishing
DHS.
B. Hospitals Located in Puerto Rico
Section 1877(d)(1) of the Act provides that an ownership or
investment interest in a hospital located in Puerto Rico is not
considered a financial relationship within the meaning of section 1877
of the Act. In the January 1998 proposed rule, we proposed to
incorporate this exception into our regulations at Sec. 411.356(c)(2)
(63 FR 1667). We received no comments to Sec. 411.356(c)(2) and made
no changes in Phase I to the exception. Phase II similarly made no
changes to the exception (69 FR 16082). We received no comments on
Phase II regarding Sec. 411.356(c)(2) and are making no changes to the
exception in this Phase III final rule.
C. Rural Providers
Section 1877(d)(2) of the Act provides an exception for ownership
or investment interests in entities that furnish DHS in a rural area if
substantially all of the DHS are furnished to individuals residing in a
rural area. Section 507 of the MMA amended section 1877(d)(2) of the
Act to specify that, for the 18-month period beginning on December
8,2003, the rural provider exception was not available for specialty
hospitals. Section 507 of the MMA defined the term ``specialty
hospital'' in new section 1877(h)(7) of the Act. The moratorium expired
on June 7, 2005.
In the January 1998 proposed rule, we defined a ``rural provider''
as an entity that furnishes at least 75 percent of its total DHS to
residents of a rural area. Consistent with the statute, the proposed
rule provided that, although the DHS entity (that is, the ``rural
provider'') need not be located in a rural area, the exception applied
only in the case of DHS furnished in a rural area. The proposed rule
would have defined rural area as an area that is not considered to be
an urban area pursuant to Sec. 412.62(f)(1)(ii) (that is, an area
outside of a Metropolitan Statistical Area (MSA)).
Phase II adopted the January 1998 proposed rule without change.
This Phase III final rule makes no substantive changes to Sec.
411.356(c)(1).
[[Page 51042]]
Comment: One commenter asked for confirmation that, if an entity
furnishing DHS qualified for the rural ownership exception in Sec.
411.356(c), the arrangement did not also have to meet the in-office
ancillary services exception in Sec. 411.355(b).
Response: The commenter is correct with respect to the referring
physician's ownership or investment interest. Any compensation
arrangement would have to meet a compensation arrangements exception,
such as the in-office ancillary services exception in Sec. 411.355(b).
We address this issue more fully in section VI.B of this preamble.
Comment: A commenter complained that it was difficult to determine
if a specific location qualified as ``rural'' for purposes of the
exception. The commenter suggested that we provide a list of rural zip
codes on our Web site. Another commenter asked that we clarify the
definition of ``rural.'' The commenter recommended that we provide our
own definition of ``rural'' rather than cross-referencing to other
statutes. The commenter also requested confirmation that the definition
of rural does not include Micropolitan Statistical Areas.
Response: We decline to create a list of all zip codes in counties
that are considered rural for physician self-referral purposes because
the amount of resources that would be required to create and update a
list of zip codes is significantly greater than the effort required for
health care entities with physician ownership to determine whether they
are furnishing DHS in a rural area to patients who reside in a rural
area. However, we explain below how a health care entity would
determine whether a particular location is in a rural area.
For physician self-referral purposes, a location is in a rural area
if it is not located in a MSA. This test differs from the rural/urban
test that a hospital uses for wage index purposes. To determine whether
an entity is furnishing DHS in a rural area for physician self-referral
purposes, see the current list of MSAs on the Web site of the Office of
Management and Budget (OMB). This list, which includes the constituent
cities and counties of each MSA, currently may be accessed at
(www.whitehouse.gov/omb) by typing in ``update of statistical area
definitions,'' and by then locating the list entitled ``Metropolitan
Statistical Areas.'' We also will provide a link to the OMB Web site on
our physician self-referral Web site.
A Micropolitan Statistical Area is an area containing a single
urbanized core population of at least 10,000 but less than 50,000. (65
FR 82230, 82233.) Micropolitan Statistical Areas are not within MSAs;
thus, for purposes of the physician self-referral rules, Micropolitan
Statistical Areas are not considered urban and are, therefore, rural
areas.
The rural provider exception in section 1877(d)(2) of the Act
applies to rural areas as defined in section 1886(d)(2)(D) of the Act
(regarding the computation of urban and rural standardized amounts
under the inpatient hospital prospective payment system). The non-
codified material following section 1886(d)(2)(D) of the Act states
that ``the term `urban area' means an area within a [MSA] (as defined
by [OMB]) or within such similar area as the Secretary has recognized
under subsection (a) by regulation * * *.'' In Phase II, we defined a
``rural area'' as ``an area that is not an urban area pursuant to Sec.
412.62(f)(1)(ii) of this chapter,'' that is, an area outside a MSA (69
FR 16082-16083). Although we no longer use MSAs to determine urban
areas for purposes of the inpatient hospital prospective payment
system, we decline to adopt a categorization other than MSAs for
physician self-referral purposes.
Comment: A commenter stated that DHS entities serving patients
located in rural areas that subsequently are classified as urban should
continue to receive some protection. The commenter related a situation
in which an existing hospital/physician joint venture owned a MRI
machine. The county in which the joint venture served patients
previously was not a constituent county in a MSA and thus was
considered to be located in a rural area for physician self-referral
purposes. However, the county was later reclassified as a constituent
county of a MSA and physician-investor referrals to the joint venture
would now violate the physician self-referral provisions. The commenter
stated that it was no longer able to satisfy the rural provider
ownership exception, despite the fact that the area was designated as
medically underserved and the only other MRI machine was located 30
miles away. The commenter requested that we adopt alternative criteria
for the exception in Sec. 411.356(c)(1) that would address the
situation, such as location in a medically underserved area in which
the nearest DHS entity (except for the one owned by the physician) is
at least 30 miles away.
Response: The rural provider ownership exception is statutory. A
physician who invests in an entity furnishing DHS in a rural area takes
a risk that the area will subsequently be classified as an urban area.
Section 1877(b)(4) of the Act allows us to create an exception only
if there is no risk of program or patient abuse. We do not believe that
an across-the-board exception for a medically underserved area in which
the nearest DHS entity (except for the one owned by the physician) is
at least 30 miles away is appropriate because we cannot determine that,
even with this restriction, there would be no risk of program or
patient abuse. Physician ownership of DHS entities is at the heart of
the physician self-referral law and is precisely the conduct at which
the statute is aimed. The Congress provided limited exceptions for
ownership of DHS entities, expressly carving out a rural provider
exception with a very specific definition of ``rural.''
D. Ownership Interest in a Whole Hospital
Section 1877(d)(3) of the Act provides that, with respect to DHS
provided by a hospital, an ownership or investment interest in a
hospital (and not merely in a subdivision of the hospital) is not a
financial relationship within the meaning of section 1877 of the Act if
the referring physician is authorized to perform services at the
hospital. Section 507 of the MMA amended section 1877(d)(3) of the Act
to provide that, effective for the 18-month period beginning on
December 8, 2003, the ownership or investment interest must not be in a
specialty hospital. Section 507 defined the term ``specialty hospital''
in a new subsection 1877(h)(7) of the Act. The moratorium expired on
June 7, 2005.
The January 1998 proposed rule interpreted the requirement that the
DHS be ``provided by the hospital'' to mean that the services had to be
furnished by the hospital and not by another hospital-owned entity,
such as a skilled nursing facility or a home health agency (63 FR
1698). We stated that the exception protects only services provided by
an entity that is a ``hospital'' under the Medicare conditions of
participation and that the referring physician must be authorized to
perform services at the hospital to which he or she wishes to refer. In
addition, the interest must be in the whole hospital, not in a part or
department of the hospital. We further explained that a physician can
have an ownership or investment interest in a hospital by virtue of
holding an interest in an organization (such as a health system) that
owns a chain of hospitals that includes the particular hospital,
because the statute does not require the
[[Page 51043]]
physician to have a direct ownership or investment interest in the
hospital. (63 FR 1713.)
The Phase I final rule adopted the proposed rule with incidental
conforming changes. Phase II made no changes other than conforming
amendments to incorporate the provisions of section 507 of the MMA.
This Phase III final rule makes no changes to Sec. 411.356(c)(3). We
discuss issues related to the moratorium in section XI, below.
Comment: Two commenters objected to our decision to limit the
protection of Sec. 411.356(c)(3) to referrals to the hospital, rather
than extending the protection to separately-licensed subsidiary
providers or suppliers, such as a hospital's wholly-owned home health
agency, skilled nursing facility, or durable medical equipment
supplier. According to one commenter, the requirement that services be
provided directly by the hospital is not found in the language of the
statute and does not serve a public policy purpose. The second
commenter stated that, if a physician owns an interest in the whole
hospital, the exception should apply to referrals for all services
provided by the hospital and its affiliates or subsidiaries because the
nexus between a physician's referrals and his or her return on
investment is extremely limited or non-existent, thereby causing little
or no risk of program or patient abuse.
Response: For the reasons stated in Phase II, we believe that our
interpretation of the statute is faithful to its language and purpose
(69 FR 16084-81605). As we explained in Phase II, we believe that the
better reading of the statute is that the Congress intended to protect
ownership and investment interests in a hospital with respect to
services furnished by the hospital. Therefore, we decline to modify the
exception. Further, we do not believe that the Congress intended to
create a blanket exemption for physician ownership in for-profit
hospital conglomerates, which would, in our view, intensify rather than
diminish the incentive to refer due to increased profit opportunities.
Comment: One commenter stated that, whereas CMS has some legitimate
concerns that expanding the exception in Sec. 411.356(c)(3) to cover
all services provided by a hospital and its affiliates or subsidiaries
could result in an overbroad exception, we should consider that the
definition of an ownership interest is very broad and includes a
security interest. Thus, a physician's security interest ``in a
hospital,'' even if extremely attenuated, could result in a prohibition
on referrals to other entities owned by the hospital. Therefore, if we
decline to expand the exception to cover ownership in providers owned
by a hospital, we should consider allowing the exception to cover
ownership in providers owned by a hospital where such ownership derives
only from a security interest in the hospital.
Response: It is unclear whether the commenter is referring to a
security interest in equipment sold to a hospital or a security
interest in the hospital itself. As noted in section VI.A of this Phase
III final rule, we are clarifying that a security interest in equipment
sold to a hospital by a physician and financed through a loan to the
hospital by the physician is not an ownership interest in the hospital,
but rather a compensation arrangement. A security interest in the
hospital itself is an ownership interest in the hospital (and an
indirect ownership interest in any subsidiary owned by the hospital).
We decline to expand the exception to protect the referrals of a
physician who has, by virtue of a security interest in the hospital, an
ownership interest in DHS entities owned by a hospital.
IX. Exceptions to the Referral Prohibition Related to Compensation
Arrangements--Sec. 411.357
A. Rental of Office Space and Equipment
Sections 1877(e)(1)(A) and (e)(1)(B) of the Act set forth
exceptions for certain lease arrangements for space and equipment that
meet six specific criteria:
(i) The lease is in writing, signed by the parties, and specifies
the space or equipment covered by the lease;
(ii) The space or equipment rented or leased does not exceed what
is reasonable and necessary for the legitimate business purposes of the
lease or rental (except that space leases may include appropriately
prorated payments for common areas), and, when used by the lessee, is
done so exclusively;
(iii) The rental or lease term is at least 1 year;
(iv) The rental charges over the term of the lease are set in
advance, consistent with fair market value, and not determined in a
manner that takes into account the volume or value of any referrals or
other business generated between the parties;
(v) The lease would be commercially reasonable even if there were
no referrals between the parties; and
(vi) The lease meets other requirements set forth by the Secretary
to protect against program or patient abuse.
``Fair market value'' is defined at section 1877(h)(3) of the Act
as the value of rental property for general commercial purposes (not
taking into account the property's intended use). For rentals or leases
where the lessor is a potential source of patient referrals to the
lessee, fair market value means general commercial value not taking
into account intended use or the additional value the prospective
lessee or lessor would attribute to the proximity or convenience to the
lessor. The August 1995 final rule established Sec. 411.357(a) and (b)
(exceptions for the rental of office space and rental of equipment,
respectively), which tracked the statutory language, including the
definition of ``fair market value.''
In the January 1998 proposed rule, we proposed several
clarifications to the statutory provisions. Leases could be terminated
for cause within the initial 1-year period, provided that the parties
did not enter into another lease until after the expiration of the
original term (63 FR 1713). Any renewal of a lease would have to be for
at least 1 year, thereby precluding holdover month-to-month leases (63
FR 1713). Subleases would be prohibited unless the sublease itself
satisfied the conditions of the exception (63 FR 1714). Capital leases
would not qualify for the exceptions (63 FR 1714). ``Per click'' (for
example, per-use or per-service) equipment rental payments would
qualify for the equipment rental exception, unless the payments were
for the use of the equipment on patients referred by the lessor-
physician (63 FR 1714).
Phase II adopted the provisions of the January 1998 proposed rule,
with several changes (69 FR 16085). Specifically--
Leases or rental agreements may be terminated with or
without cause during the term of the agreement as long as no further
agreement is entered into between the parties within the first year of
the original lease term. (Any new lease would need to satisfy the
requirements of an exception on its own terms (Sec. 411.357(a)(2) for
space leases or Sec. 411.357(b)(3) for equipment leases.)
Month-to-month holdover leases for up to 6 months,
immediately following the expiration of an agreement of at least 1 year
that met the conditions of a rental exception, will continue to satisfy
the requirements of the exception if the holdover is on the same terms
and conditions as the immediately preceding lease (Sec. 411.357(a)(7)
for space leases or Sec. 411.357(b)(6) for equipment leases).
[[Page 51044]]
All leases or rental agreements, whether operating or
capital, are eligible for the lease exceptions if they meet the
applicable criteria.
A lease (or sublease) is considered to satisfy the
``exclusive use test'' provided that the lessee (or sublessee) does not
share the rented space or equipment with the lessor during the time it
is rented or used by the lessee (or sublessee) (Sec. 411.357(a)(3) for
space leases or Sec. 411.357(b)(2) for equipment leases). (We note
that a subleasing arrangement could create a separate indirect
compensation arrangement between the lessor and a sublessee that would
need to be evaluated under the indirect compensation rules.)
``Per-click'' rental payments are permitted for DHS
referred by the referring physician provided that the payments are fair
market value and do not take into account the volume or value of
referrals or other business generated by the referring physician, as
those concepts are defined at Sec. 411.351 and Sec. 411.354.
We are making no substantive changes to Sec. 411.357(a) or (b).
Comment: Two commenters sought clarification as to whether lease
agreements between physicians and entities furnishing DHS may be
amended prior to the stated termination of the agreement. The
commenters asked about several different scenarios involving amendments
to lease agreements prior to their expiration, specifically:
(1) Whether the parties to an agreement may amend an agreement
during or after the first year of a multi-year agreement if the
amendment is not related to the volume or value of referrals or other
business generated between the parties;
(2) Whether an amended agreement must continue for an additional
term of at least 1 year following the amendment even if the termination
date of the original agreement would occur in less than 1 year;
(3) Whether a ``without cause'' termination clause in a multi-year
agreement is permissible and whether the parties could simply amend an
agreement they wish to change, rather than go through the formality of
terminating the original agreement and entering into a new agreement;
and
(4) Whether there is a limit on the number of amendments that may
be made in the first year of an agreement.
Response: In order to satisfy the requirements of Sec. 411.357(a)
and (b), rental charges for the rental of office space and equipment
must be set in advance, consistent with fair market value, and not
determined in a manner that takes into account the volume or value of
referrals or other business generated between the parties. In addition
to these and other requirements, the written agreement must provide for
at least a 1-year term. An amended lease agreement must comply with
these four criteria, as well as the remaining conditions of the
exception. Changes to the rental charges (including changes to the
methodology for calculating the rental charges) and changes to certain
other terms that are material to the rental charges (for example, a
change to the amount of space rented) may jeopardize compliance with
one or more of these four criteria, and thus, Sec. 411.357(a) or (b).
Because rental charges, including the methodology used to calculate
rental charges, must be ``set in advance,'' as defined at Sec.
411.354(d)(1), parties may not change the rental charges at any time
during the term of the agreement. Parties wishing to change the rental
charges must terminate the agreement and enter into a new agreement
with different rental charges and/or other terms; however, the new
agreement may be entered into only after the first year of the original
lease term (regardless of the length of the original term). In
addition, the new lease must be for a term of at least 1 year and must
comply with all other criteria in the relevant rental exception. As we
stated in Phase II (69 FR 16085), leases or rental agreements may
provide for termination with or without cause.
Parties may amend a lease agreement multiple times during or after
the first year of its term, provided that the rental charges are not
changed and all other requirements of the exception are satisfied.
However, changes to terms that are material to the rental charges, such
as the amount of space leased, may cause the rental charges to fall out
of compliance with the fair market value and ``volume and value of
referrals'' requirements. For example, if the original rental charges
were $5,000 per month for 200 square feet of space and the amended
lease added 100 square feet of space but did not require additional
payment beyond the original monthly payment of $5,000, the rental
charges under the new agreement likely would not be consistent with
fair market value and may take into account the volume or value of
referrals or other business generated between the parties.
An amended agreement need not continue for an additional 1 year
following its amendment if the original termination date of the
agreement would occur sooner. Rather, because the exceptions in Sec.
411.357(a) and (b) require a term of 1 year from the inception of the
lease or rental agreement, the amended agreement may terminate upon the
original expiration date, provided that the original term of the
agreement is at least 1 year. As we noted above, rental charges may not
be amended.
If the parties merely wish to end an arrangement prior to the
original termination of the written agreement, as we stated in Phase
II, they may terminate without cause at any time (subject to the terms
of the agreement, of course), provided that the parties do not enter
into a new lease agreement within the first year of the original term
and any new agreement complies with an exception (69 FR 16085-16086).
As we also stated (69 FR 16085), leases and rental agreements may
provide for termination with or without cause.
Comment: One commenter asked for clarification regarding the
termination of a lease. The commenter wanted confirmation that the
prohibition on entering into a new lease agreement in Sec.
411.357(a)(2) applied only to a new lease for the same office space.
According to the commenter, the parties should not be prohibited from
entering into a personal service arrangement or even a lease agreement
for different office space.
Response: The commenter is correct that the prohibition on entering
into a new lease applies to only a new lease for all or part of the
same office space. The parties are not prohibited from entering into a
personal service arrangement or a lease agreement for completely
different office space.
Comment: One commenter described a ``time-share'' leasing
arrangement under which a physician or group practice pays the lessor
for the right to use office space exclusively on a turn-key basis,
including support personnel, waiting area, furnishings, and equipment,
during a schedule of time intervals for a fair market value rate per
interval of time or in the aggregate. The commenter suggested that,
although this arrangement may qualify under the exceptions for the
rental of space and equipment, it would be addressed more appropriately
in the fair market value exception (Sec. 411.357(l)) or payments by a
physician exception (Sec. 411.357(i)). The commenter urged us to
clarify that such ``time-share'' arrangements may qualify under Sec.
411.357(l) or (i).
Response: We disagree with the commenter. As we stated in Phase II,
we decline to permit space leases to be eligible for the fair market
value exception in Sec. 411.357(l) (69 FR 16086). Similarly, we are
not persuaded that
[[Page 51045]]
Sec. 411.357(i) should protect space leases (69 FR 16099).
Comment: A number of commenters sought clarification regarding the
application of Sec. 411.357(a)(3) and (b)(2) to office-sharing
arrangements in which several physicians and/or groups share facilities
and some limited equipment without exclusivity. According to these
commenters, sharing of facilities is extremely common for physicians
and may not readily fit into the leasing exceptions.
Response: Irrespective of whether the office-sharing arrangements
described by the commenters are common, both the statute and our
regulations require that the lessee have exclusive use of the leased
space or equipment when the lessee uses the space or equipment. In
effect, Sec. 411.357(a)(3) and (b)(4) require that space and equipment
leases be for established blocks of time.
Comment: One commenter asked that we clarify that a sublessor and
sublessee may share common areas. Another commenter requested guidance
with respect to what is meant by ``common areas'' for the purposes of
the exception. One commenter questioned whether the ability to share
``common space'' permitted parties to share actual office space (for
example, exam rooms) if the arrangement is at fair market value.
Response: As we stated in Phase II, common areas may be shared if
the rent is appropriately prorated (69 FR 16086). By common areas, we
mean foyers, central waiting rooms, break rooms, vending areas, etc.,
to the extent that the areas are, in fact, used by the sublessee. (That
is, the sublessee cannot pay rent for a break room that it will never
use). Common areas do not include exam rooms. Common areas that contain
certain limited equipment may be shared, such as hallways used by non-
physician staff to weigh patients or draw fluid samples. Permissible
equipment in shared common areas is limited to the type that is not
usually separately leased (for example, scales). Non-exclusive
arrangements, other than for common space (as described above), do not
satisfy the requirements of Sec. 411.357(a)(3) and (b)(2).
Comment: Several commenters expressed concern about the language in
Sec. 411.357(a)(3) and (b)(2) prohibiting a lessee from sharing space
or equipment with a lessor or any person or entity related to the
lessor. The commenters requested guidance on specific shared leasing
arrangements, including whether the physician self-referral law
prohibits the subleasing of space or equipment by a physician from a
physician employed by or a group owned by a hospital.
Response: To prevent parties from circumventing the exclusive use
requirement, we modified the space and equipment rental exceptions in
Phase II (69 FR 16086) to preclude the sharing of rented office space
or equipment with the lessor or any person or entity related to the
lessor, including group practices, group practice physicians, or other
entities owned or operated by the lessor. Determining whether a lessee
is sharing space or equipment with a person or entity related to the
lessor will require a case-by-case review of the facts. Nothing in
Sec. 411.357(a)(3) or (b)(2) prohibits physicians from subleasing
space or equipment from a hospital, a hospital-owned group, or
physicians employed by a hospital, provided that the sublessee has
exclusive use of the space or equipment that is the subject of the
sublease and all other requirements of the exception(s) are satisfied.
Comment: One commenter asked how tenant improvements should be
addressed for purposes of compliance with the exception for the rental
of office space. Specifically, the commenter asked whether the costs of
any capital improvements should be allocated over the useful life of
the improvements or be passed on in their entirety to the physician
lessee who requested the improvements during the term of his or her
lease.
Response: For accounting purposes, tenant improvements should be
accounted for in accordance with generally accepted accounting
practices. For purposes of determining the fair market value for rental
charges, whether the costs of capital improvements should be allocated
over the useful life of the improvements or be passed on in their
entirety to the physician lessee who requested them will depend upon
the facts and circumstances of the particular case. Specifically, if a
lessor provides improvements for the benefit of a physician lessee that
are unlikely to be chargeable to a subsequent tenant, the lessor should
allocate the entire cost of these improvements to the lessee for whose
unique benefit they are made. Improvements that the lessor reasonably
expects would be chargeable to subsequent lessees may be allocated over
their expected useful life.
Comment: A number of commenters welcomed the flexibility provided
by Sec. 411.357(a)(7) and (b)(6) with regard to lessees who hold over
upon the expiration of space and equipment leases. The commenters
requested confirmation that lessors could enforce leases that imposed
higher fees during holdover tenancies, provided that the provisions
were contained in the written lease at the time of initial or renewal
execution of the lease. One commenter asked that the holdover grace
period be extended indefinitely, provided that, during the holdover
period, the lessor continually was taking steps to evict the lessee.
Response: We agree that lessors can charge a holdover rental
premium, provided that the amount of the premium was set in advance in
the lease agreement (or in any subsequent renewal) at the time of its
execution and the rental rate (including the premium) remains
consistent with fair market value and does not take into account the
volume or value of referrals or other business generated between the
parties. We decline to permit the holdover grace period to last for the
length of time that the landlord is taking steps to evict the tenant as
suggested by the commenter. We believe that the 6-month holdover period
permitted in the regulations is sufficient.
B. Rental of Equipment
The exception in Sec. 411.357(b) and the comments we received in
response to Phase II are discussed above in section IX.A in conjunction
with the exception in Sec. 411.357(a) for the rental of office space.
C. Bona Fide Employment Relationships
Section 1877(e)(2) of the Act sets forth an exception for payments
made by an employer to a physician (or immediate family member of the
physician) with whom the employer has a bona fide employment
relationship, if certain conditions are met. The August 1995 final rule
incorporated the provisions of section 1877(e)(2) of the Act into our
regulations in Sec. 411.357(c) without change (60 FR 41975, 41981).
The January 1998 proposed rule proposed to prohibit productivity
bonuses paid to employed physicians based on DHS personally performed
by the referring physician.
Phase II adopted the January 1998 proposed rule without the
limitation on productivity bonuses given the Phase I determination that
personally performed DHS are not referrals for purposes of section 1877
of the Act (69 FR 16087). We also declined to expand the definition of
employee at Sec. 411.351 in Phase II to include leased employees as
defined by State law (69 FR 16087).
We received no comments concerning the exception in Sec.
411.357(c) for bona fide employment relationships and we are making no
changes.
D. Personal Service Arrangements
Section 1877(e)(3) of the Act establishes an exception for personal
service arrangements that satisfy certain
[[Page 51046]]
requirements. The August 1995 final rule incorporated the personal
service arrangements exception into the regulations in Sec.
411.357(d). The January 1998 proposed rule would have retained the
exception and proposed technical corrections and some additional
interpretations (63 FR 1701).
Phase II adopted the January 1998 proposed rule with several
modifications. In Phase II, we qualified the requirement in Sec.
411.357(d)(1)(iv) that the term of an arrangement must be for at least
1 year to permit an arrangement to be terminated during the initial
term with or without cause, provided that the parties do not enter into
the same or substantially the same arrangement during the first year of
the original term of the agreement (69 FR 16090). In Phase II, we
modified the regulation to allow cross-referencing to a master list of
contracts, in addition to the existing option of incorporation of
multiple agreements by reference. We also added a requirement that a
master list (or lists) be made available for inspection by the
Secretary upon request (69 FR 16091). In Phase II, we declined to
extend the exception beyond contracts between DHS entities and
physicians or group practices. In addition, we declined to modify the
exception to allow physicians to hire independent contractors or use
wholly-owned companies to perform services they have contracted to
provide, due to the potential for abuse (69 FR 16090).
Phase II also made minor changes to the physician incentive plan
exception but did not expand significantly the exception. We clarified
that the exception applies to downstream subcontractor arrangements
related to health plan enrollees (69 FR 16090).
This Phase III final rule makes minor modifications to the personal
service arrangements exception, including the addition of a provision
in Sec. 411.357(d)(1)(vii) to permit a holdover personal service
arrangement similar to the holdover provisions in the exceptions for
the rental of office space and equipment. We modified Sec.
411.352(d)(2) to refer consistently to ``downstream contractor,'' a
term for which we added a definition at Sec. 411.351, as noted above.
Comment: One commenter asked how long the master list kept by an
entity must include a record of a personal service agreement between
the DHS entity and a referring physician. At some point, an expired
agreement becomes irrelevant, according to the commenter. The commenter
suggested 5 years after termination or expiration as the appropriate
retention period. Another commenter asked for clarification as to
whether the master list needs to include personal service agreements
between the DHS entity and the physician that involved ``similar or
related'' transactions, as opposed to all compensation and ownership
arrangements between the parties. The commenter also asserted that the
master list should have to include arrangements between the identical
parties only, and not, for instance, contracts with the physician's
family members.
Response: We note that the exception permits, but does not require,
the use of a master list. Parties seeking protection under this
exception must have a written agreement that covers all of the services
to be furnished to the entity by the physician (or an immediate family
member of the physician) or group practice. A master list may be used
to meet this requirement. The master list must include all personal
service arrangements with any physician, family member, or group
practice. The condition in the exception requiring that the arrangement
cover all services is not limited to ``similar or related'' services
between the entity and the physician, but covers all services. This
requirement is a bright-line rule that promotes transparency and is not
dependent on subjective determinations of similarity or relatedness.
Moreover, personal service arrangements with a physician's immediate
family members must be included on the master list because section
1877(d) of the Act treats a financial relationship with an immediate
family member of a physician the same as a financial relationship with
the physician.
Comment: Two comments involved physician incentive payments
referenced in Sec. 411.357(d)(2). One commenter asked that we define a
``downstream contractor'' as used in Sec. 411.357(d). A second
commenter asked that the physician incentive plan exception be expanded
to permit hospitals to pay physicians on a capitated or risk-sharing
basis for services to hospital patients who are not enrolled in a
managed care plan.
Response: We are revising the definition of ``physician incentive
plan'' at Sec. 411.351 to reference newly defined ``downstream
contractor.'' As defined at Sec. 411.351, and for purposes of Sec.
411.357(d)(2), a ``downstream contractor'' means both a ``first tier
contractor'' as defined at Sec. 1001.952(t)(2)(iii) and a ``downstream
contractor'' as defined at Sec. 1001.952(t)(2)(i). Therefore, for
physician self-referral purposes, a downstream contractor includes both
an individual or entity that has a contract directly with an eligible
managed care organization to provide or arrange for items and services
(that is, a first tier contractor) and an individual or entity that has
a subcontract directly or indirectly with a first tier contractor for
the provision of or arrangement for items or services that are covered
by an agreement between an eligible managed care organization and the
first tier contractor. We also note that, in Sec. 411.357(d)(2), we
used the terms ``downstream contractor'' and ``downstream
subcontractor'' interchangeably. We have revised Sec. 411.357(d)(2) to
use only the term ``downstream contractor''.
The commenter wants DHS entities to be allowed to provide
incentives to physicians for their services in connection with fee-for-
service patients provided that the incentives ``fit the general
structure of the [personal service arrangements] exception (for
example, no payment to reduce medically necessary services).'' We are
not persuaded to make such a change. In the exception for personal
service arrangements, the Congress included a statutory provision
permitting certain physician incentive plan payments (structured to
protect patient care) that would otherwise run afoul of the general
restriction on compensation determined in a manner that takes into
account the volume or value of referrals or other business generated
between parties. This provision facilitates certain managed care
arrangements that conceptually compensate physicians based on limiting
the volume of care provided or ordered by a ``gatekeeper'' physician.
The exception proposed by the commenter, for similar payments related
to fee-for-service patients, would pose a risk of program or patient
abuse. (For example, see section 1128A(b)(1) of the Act, which
authorizes civil monetary penalties for payments made by hospitals to
physicians to reduce or limit services to hospital patients.) However,
as we discussed in Phase II, compensation related to patient
satisfaction goals or other quality measures unrelated to the volume or
value of business generated by the referring physician and unrelated to
reducing or limiting services would be permitted under the personal
service arrangements exception, provided that all requirements of the
exception are satisfied (for example, compensation to reward physicians
for providing appropriate preventive care services where the
arrangement is structured to satisfy the requirements of the exception)
(69 FR 16091).
CMS is working on two demonstration projects that concern
[[Page 51047]]
hospital incentives paid to physicians in connection with the provision
of high quality care, as authorized under section 646 of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and
section 5007 of the Deficit Reduction Act of 2005 (DRA). In addition,
section 5001(b) of the DRA requires CMS to propose a demonstration for
FY 2009 that would provide incentives to hospitals for the provision of
high quality care. This will be a ``rewards sharing'' demonstration
under which hospitals will share money with physicians based on quality
of care rather than on reducing or limiting medically necessary
services.
Comment: Several commenters raised issues regarding the exceptions
for personal service arrangements and indirect compensation
arrangements as they are applied to relationships involving a DHS
entity, a group practice, and the physicians employed by the group
practice who refer patients to the DHS entity. One commenter requested
confirmation that, if a hospital contracts with a group practice for
the provision of services, the relevant analysis is whether the
arrangement meets the indirect compensation arrangements exception in
order to ensure that referrals from individual physician-employees in
the group practice are protected. One commenter asked for clarification
that the personal service arrangements exception does not apply to most
medical foundations because they typically contract with a group
practice which, in turn, employs or contracts with physicians. Another
commenter asserted that, if the personal service arrangements exception
would protect an arrangement directly between a DHS entity and a
physician, it should also be applicable to and protect an arrangement
pursuant to which the physician has an indirect relationship with the
DHS entity. Finally, one commenter asked for clarification that
compliance with either the personal service arrangements or indirect
compensation arrangements exception is sufficient to protect a
compensation arrangement.
Response: As discussed in section VI.B, we now consider a physician
to ``stand in the shoes'' of his or her group practice or physician
organization. In the hypothetical situations posed by the first two
commenters, the referring physician would stand in the shoes of the
group practice that employs the physician and be considered to have a
direct relationship with the hospital or the medical foundation,
respectively, on the same terms as the hospital's or medical
foundation's arrangement with the group practice. Thus, in the first
hypothetical situation, the financial relationship between the hospital
and the physician (who is standing in the shoes of the group practice)
must meet an exception in order for the physician to be able to refer
patients to the hospital. However, if the hospital contracts with a
medical foundation which, in turn, contracts with the group practice
which employs the physician (who stands in the shoes of the group
practice), compliance with the indirect compensation arrangements
exception would still be necessary for the physician to refer patients
to the hospital (assuming that the arrangement meets the definition of
an indirect compensation arrangement at Sec. 411.354(c)(2)). The chain
of financial relationships would be hospital--foundation--group
practice--physician. However, if the physician makes a referral to the
medical foundation's clinic (as opposed to a hospital with which the
medical foundation contracts) for DHS furnished by the clinic, then the
relationship between the physician (standing in the shoes of his or her
group practice) and the medical foundation's clinic would be deemed to
be a direct relationship (that is, medical foundation clinic--physician
standing in the shoes of his or her group).
As we noted in Phase II, the exception for personal service
arrangements would apply to payments made by a nonprofit medical
foundation under a contract with an individual physician to provide
health care services (69 FR 16077, citing H. R. Conf. Report No. 103-
213 at 814 (1993)). Upon the effective date of this final rule, when
the group practice physician stands in the shoes of the group practice
with which the medical foundation has contracted, the medical
foundation may apply the personal service arrangements exception to the
arrangement between it and the group practice in order to protect
referrals from the physician.
Finally, as we discussed in Phase I, where more than one exception
can apply to a financial relationship, the relationship needs to
satisfy the requirements of only one of the applicable exceptions (66
FR 916).
Comment: One commenter asked that we revise the exception in Sec.
411.357(d)(1) to permit a holdover personal service arrangement on
terms similar to those specified in the equipment and space lease
context.
Response: We agree and have modified the regulation accordingly by
adding a new provision in Sec. 411.357(d)(1)(vii).
Comment: One commenter asked for clarification regarding when and
on what terms a contract for personal services can be amended.
Response: A personal service contract can be amended in the same
manner as an office space or equipment lease as noted above in section
IX.A.
E. Physician Recruitment
Section 1877(e)(5) of the Act excepts remuneration provided by a
hospital to a physician to induce the physician to relocate to the
geographic area served by the hospital in order to be a member of the
hospital's medical staff. To qualify for the protection of the
exception, the following requirements must be satisfied--
The physician is not required to refer patients to the
hospital;
The amount of remuneration under the arrangement is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any referrals by the referring physician; and
The arrangement meets any other requirements imposed by
the Secretary to protect against program or patient abuse.
The August 1995 final rule incorporated the provisions of section
1877(e)(5) of the Act into our regulations in Sec. 411.357(e), with
the additional requirements that the arrangement and its terms be in
writing and signed by both parties, and that the physician not be
precluded from establishing staff privileges at another hospital or
referring to another entity. The January 1998 proposed rule would have
made minor editorial changes.
Based on public comments, Phase II substantially modified the rule
(69 FR 16094-16095) in the following respects--
A physician must relocate his or her practice, rather than
his or her residence. To be eligible for the exception, a physician
must be new to the hospital's medical staff and relocate to the
geographic area served by the hospital (defined as the lowest number of
contiguous postal zip codes from which the hospital draws at least 75
percent of its inpatients).
Relocation of a physician's practice to the geographic
area served by the hospital must involve either: (1) Relocating the
physician's office a minimum of 25 miles; or (2) establishing that at
least 75 percent of the physician's revenues from services provided by
the physician to patients (including services to hospital inpatients)
are derived from services provided to new patients.
Residents and physicians who have been in medical practice
less than 1 year will not be considered to have an established practice
and will, therefore,
[[Page 51048]]
be eligible for compensation under the physician recruitment exception
regardless of whether the physician actually moves his or her practice
location.
Federally qualified health centers may make recruitment
payments to physicians on the same basis as hospitals.
Recruitment payments made through existing group practices
(rather than directly to the recruited physician) are permitted under
certain conditions. (These conditions are designed to ensure that any
remuneration in connection with recruiting a new physician that flows
from the hospital through an existing group is remuneration for the
benefit of the recruited physician and does not inure to the benefit of
the group.)
We received a substantial number of comments regarding the
physician recruitment exception. We are making several changes to the
exception in response to the comments, and are clarifying our
interpretation of certain provisions as requested by commenters.
Because the exception in Sec. 411.357(e) applies to federally
qualified health centers and (now) rural health clinics in the same
manner as it applies to hospitals, references to ``hospital'' below
also implicitly include federally qualified health centers and rural
health clinics.
Amendments to the text of Sec. 411.357(e) include--
Permitting rural health clinics to utilize the exception;
Deeming the geographic area served by a hospital to be the
area comprised of all of the contiguous zip codes from which the
hospital's inpatients are drawn when the hospital draws fewer than 75
percent of its inpatients from contiguous zip codes;
Permitting a hospital located in a rural area to determine
the ``geographic area served by the hospital'' using an alternative
test that encompasses the lowest number of contiguous (or in some
cases, noncontiguous) zip codes from which the hospital draws at least
90 percent of its inpatients;
Permitting a more generous income guarantee under certain
circumstances in the case of a physician who is recruited to replace a
deceased, retiring or relocating physician;
Permitting group practices to impose certain practice
restrictions;
Permitting rural hospitals to recruit physicians into an
area outside of the hospital's geographic service area if it is
determined through a CMS advisory opinion that the area has a
demonstrated need for the recruited physician;
Exempting from the relocation requirement a physician who,
for the 2 years immediately prior to the recruitment arrangement, was
employed on a full-time basis by a Federal or State bureau of prisons
(or similar entity operating correctional facilities), the Department
of Defense or Department of Veterans Affairs, or facilities of the
Indian Health Service, provided that the physician did not maintain a
separate private practice in addition to such full-time employment;
Exempting from the relocation requirement those physicians
whom the Secretary has deemed in an advisory opinion not to have an
established medical practice comprised of a significant number of
patients who are or could become patients of the recruiting hospital;
Clarifying that a physician must relocate his or her
practice from outside the geographic service area to a location inside
the service area and either: (1) Move his or her medical practice at
least 25 miles; or (2) have a new medical practice that derives at
least 75 percent of its revenues from professional services furnished
to patients (including hospital inpatients) not seen or treated by the
physician at his or her prior medical practice site during the
preceding 3 years, measured on an annual basis (fiscal or calendar
year); and
Clarifying that Sec. 411.357(e)(4)(iii) pertains to any
type of income guarantee.
Comment: Many commenters requested clarification as to the effect
of Phase II on pre-existing recruitment arrangements that did not meet
the Phase II requirements. Commenters urged us to grandfather any pre-
existing recruitment arrangements.
Response: We posted guidance regarding pre-existing physician
recruitment agreements on July 14, 2004 on the physician self-referral
website in the form of a question and answer (www.cms.hhs.gov/physicianselfreferral). We are still not persuaded that we should
grandfather pre-existing arrangements. Thus, any arrangement that was
in effect as of July 26, 2004, should have been amended to comply with
Phase II, whether the arrangement was in a payout period or in a
forgiveness period.
Comment: Two commenters questioned the need for the requirement in
Sec. 411.357(e)(1) that the recruited physician not already be on the
medical staff. One commenter said it was unnecessary in light of the
relocation requirement. The other commenter stated that the requirement
should not apply to physicians who are not active or who are on the
hospital's courtesy staff only.
Response: We disagree with the first commenter. Section 1877(e)(5)
of the Act states that the recruited physician must ``relocate * * * in
order to be a member of the medical staff of the hospital.'' This
language makes clear that the recruited physician cannot already be a
member of the hospital's medical staff. We believe that the relocation
requirement is insufficient to establish that a physician who is
already a member of the hospital's active staff needs an incentive to
move his or her practice. We are not persuaded that permitting
recruitment of physicians who are not on a hospital's ``active''
medical staff, but who hold some type of medical staff privileges (for
example, courtesy privileges), poses no risk of program or patient
abuse. Moreover, defining ``active'' privileges is difficult, as many
hospitals use different terminology to refer to different types of
medical staff privileges.
Comment: One commenter objected to the conditions in Sec.
411.357(e)(1)(iii) and (e)(4)(v) that the remuneration not directly or
indirectly take into account the volume or value of actual or
anticipated referrals or other business generated by the recruit or the
physician practice, if it received any payments. According to the
commenter, hospital recruitment arrangements always anticipate
referrals to the hospital.
Response: We recognize that parties to a physician recruitment
arrangement may anticipate some referrals by the recruited physician.
In this context, the ``volume and value'' condition prohibits the
amount of assistance payable to the physician or the group practice
from taking into account, in any manner, the volume or value of past or
anticipated referrals to the hospital. The unconditional payment of
actual moving expenses, for example, would not take into account the
volume or value of referrals.
Comment: One commenter asserted that a Mississippi statute
prohibits physician employees of county- or city-owned hospitals from
having any contractual relationship with the hospital other than an
employment contract. Because of this restriction, these hospitals that
recruit physicians as employees are unable to enter into a recruitment
agreement that is separate and distinct from the employment agreement
between the hospital and the recruit. The commenter requested that, in
order to avoid placing community hospitals in a position where they
have to choose between obeying State law or our physician self-referral
regulations, we delete the word ``separate'' from the
[[Page 51049]]
phrase ``except as referrals may be restricted under a separate
employment or services contract'' in Sec. 411.357(e)(1)(iv).
Response: The commenter misunderstands the purpose of the quoted
language in Sec. 411.357(e)(1)(iv). This language appears in, and
pertains to, the physician recruitment exception, not the employment
exception (which would apply if the hospital was to employ the
recruited physician directly and all requirements of the exception were
satisfied). The purpose of the physician recruitment exception is to
allow hospitals, subject to certain conditions, to provide remuneration
directly or indirectly to physicians in order to induce them to
relocate their medical practices to the hospital's geographic service
area. The exception contemplates that recruited physicians will either
practice on their own or as part of a physician practice. The exception
does not contemplate that the recruited physicians will be employees of
the recruiting hospitals, although nothing in the exception
specifically precludes this result if all requirements of the exception
are satisfied. Section 411.357(e)(1)(iv) provides that, as a condition
of compliance with the recruitment exception, the recruited physician
must be allowed to establish staff privileges at any other hospital(s)
and to refer business to any other entities, except to the extent that
referrals may be restricted under a separate employment, managed care,
or services contract that complies with Sec. 411.354(d)(4). The
``separate employment contract'' contemplated in the regulation would
be between the recruited physician and, for example, a group practice
that employs the physician recruited by a hospital. Where a hospital
wishes to recruit a physician as an employee, it need comply only with
the requirements of the exception in Sec. 411.357(c) for bona fide
employment relationships, and, if it wishes to restrict the ability of
the physician-employee to refer patients to other entities, with the
requirements in Sec. 411.354(d)(4) (special rule on compensation).
Neither the employment exception nor the special rule on compensation
requires the employing hospital to set forth referral restrictions in
an agreement separate and distinct from the underlying employment
contract.
Comment: Several commenters objected to the explanatory language in
the Phase II preamble that appeared to condone credentialing
restrictions aimed at restricting a recruited physician from competing
with the recruiting hospital (69 FR 16095). Two commenters were
concerned that such language lends itself to ``economic credentialing''
and objected to what they characterized as an inconsistent
interpretation of what would be considered an inappropriate practice
restriction on physicians. One commenter asked for examples of what we
mean by ``reasonable credentialing restrictions.''
Response: The preamble discussion referenced by the commenters was
primarily concerned with clarifying that recruited physicians cannot be
prohibited from establishing staff privileges at other hospitals and
from referring to other hospitals, even if such hospitals are
competitors of the hospital that recruits the physician. We also
intended to convey that the exception does not prevent hospitals from
imposing reasonable credentialing restrictions on physicians when they
compete with the recruiting hospital. Such restrictions must not take
into account the volume or value of referrals. We take no position as
to the application of any other State or Federal law or regulation
pertaining to such credentialing restrictions. We merely intended to
clarify that the physician self-referral law and our regulations do not
prohibit reasonable credentialing restrictions that do not take into
account in any way the volume or value of referrals or other business
generated by the physician.
Comment: Some commenters asked that Sec. 411.357(e) be expanded to
protect recruitment of mid-level non-physician practitioners into a
hospital's service area, including into an existing group practice.
Other commenters asked that Sec. 411.357(e)(5) be expanded to protect
rural health clinics.
Response: Section 1877(e)(5) of the Act limits the recruitment
exception to physicians, and, under section 1877(b)(4) of the Act, we
cannot create a new exception unless there is no risk of program or
patient abuse.
The physician recruitment exception in Sec. 411.357(e) applies
only to payments made directly (or, in some circumstances, passed
through) to a recruited physician. Recruitment payments made by a
hospital directly to a non-physician practitioner would not implicate
the physician self-referral law, unless the non-physician practitioner
serves as a conduit for physician referrals or is an immediate family
member of a referring physician. Payments made by a hospital to
subsidize a physician practice's costs of recruiting and employing non-
physician practitioners would create a compensation arrangement between
the hospital and the physician practice for which no exception would
apply. These kinds of subsidy arrangements pose a substantial risk of
fraud and abuse.
We are, however, persuaded to modify the exception to include rural
health clinics, subject to the same conditions that apply to recruiting
hospitals. We do not believe that such an expansion poses a risk of
program or patient abuse. We have amended the regulation text
accordingly.
Comment: A number of commenters objected to the condition in Sec.
411.357(e)(1) that a hospital may recruit physicians only into the
``geographic area served by the hospital,'' which is defined at Sec.
411.357(e)(2) as the lowest number of contiguous zip codes from which
the hospital draws at least 75 percent of its inpatients. Commenters
noted that this condition prevents hospitals from recruiting physicians
into outlying parts of their service areas where there is likely to be
greater need. Some commenters asserted that this condition hurts rural
hospitals, and that it is very difficult for federally qualified health
centers to satisfy the condition. Still other commenters stated that
the restriction was unnecessary in light of the requirement that the
physician relocate at least 25 miles or establish a practice with 75
percent of revenues derived from professional services provided to
patients not seen or treated by the physician within the preceding 3
years. Although most of these commenters requested that we eliminate
this condition, some commenters suggested that, in the event the
geographic restriction is retained, we should revise the regulation.
Suggested revisions included: expanding the geographic area served by
the hospital to 90 percent of zip codes from which the recruiting
hospital draws its inpatients; making the 75 percent of inpatients/
least number of zip codes requirement a minimum service area;
permitting case-by-case determinations for good cause; and allowing a
hospital to use any methodology permitted by the State in which it is
located to determine the hospital's service area.
Response: We are not persuaded to eliminate the requirement that a
recruited physician establish his or her medical practice within the
geographic area served by the hospital; however, we are persuaded by
some of the commenters that suggested an expansion of the definition of
``geographic area served by the hospital.'' With respect to a hospital
located in a rural area, the ``geographic area served by the hospital''
may be the area composed of the lowest number of contiguous zip codes
from which the
[[Page 51050]]
hospital draws at least 90 percent of its inpatients. If the hospital
draws fewer than 90 percent of its inpatients from all of the
contiguous zip codes from which it draws inpatients, the ``geographic
area served by the hospital'' may include noncontiguous zip codes,
beginning with the noncontiguous zip code in which the highest
percentage of the hospital's inpatients resides, and continuing to add
noncontiguous zip codes in decreasing order of percentage of
inpatients. A rural hospital will continue to have the option of
determining the ``geographic area served by the hospital'' using the
methodologies applicable to all hospitals. We believe that this
expansion will address much of the concern that Phase II did not permit
recruiting into outlying portions of a rural hospital's service area.
We are also modifying the regulation by adding a new provision in Sec.
411.357(e)(5) to permit rural health clinics, rural hospitals, and
federally qualified health centers located in rural areas to recruit a
physician into an area outside the entity's geographic service area if
it is determined by the Secretary in an advisory opinion issued under
section 1877(g)(6) of the Act that the area has a demonstrated need for
the recruited physician.
Comment: Some commenters asked for clarification regarding what
they perceive as an inconsistency between the regulation text and the
preamble language in Phase II regarding whether a recruited physician
must relocate his or her practice from outside the geographic area
served by the hospital (as defined in the regulation) into the area, or
whether the physician may simply relocate his or her practice within
the geographic service area as long as the physician either: (1) Moves
the site of his or her practice a minimum of 25 miles; or (2) derives
at least 75 percent of the relocated practice's revenues from services
provided by the physician to new patients.
Response: With respect to the commenters' concern regarding what
they perceive as an inconsistency between the regulation text and the
preamble language in Phase II, we confirm that the final regulation
requires that the recruited physician relocate his or her medical
practice from outside the ``geographic area served by the hospital''
(as defined in the regulation) into the area, and that the recruited
physician must also either: (1) move the site of his or her practice a
minimum of 25 miles; or (2) derive at least 75 percent of his or her
practice's revenues from services provided by the physician to new
patients. To the extent that the Phase II preamble discussion
inadvertently suggested a different interpretation, we are clarifying
our intent here. Our interpretation here is consistent with the
regulatory text in Phase II. We are making additional conforming
changes in the regulatory text in Sec. 411.357(e)(2)(iv) for greater
clarity.
Comment: Commenters raised a number of specific questions
concerning the use of zip codes for purposes of determining the
geographic area served by a hospital, including:
(1) What is the appropriate geographic service area if the zip
codes contiguous to the hospital account for only 69 percent of the
hospital's inpatients? Specifically, the commenter asked what a
hospital should consider to be its geographic service area if the
contiguous zip codes proximate to the hospital account for only 69
percent of the hospital's inpatients and, due to the national
reputation of the hospital and its medical staff, the remainder of the
hospital's inpatients are drawn from distant, noncontiguous zip codes.
(2) What if there is a zip code ``hole'' in the contiguous area
(with the geographic service area resembling a donut)? May a hospital
recruit a physician to establish his or her medical practice location
in the zip code that forms the hole?
(3) What if multiple configurations of zip codes will satisfy the
75 percent requirement?
(4) How often can a hospital determine its service area and what,
if anything, must a hospital do if the service area changes after a
physician is recruited by the hospital?
(5) If a health system has two hospitals, is the geographic service
area determined at the hospital or system level?
Response: Phase II defined ``geographic area served by the
hospital'' at Sec. 411.357(e)(2) as the area composed of the lowest
number of contiguous zip codes from which the hospital draws at least
75 percent of its inpatients. As noted above, in this Phase III final
rule, we are amending Sec. 411.357(e) to permit a hospital located in
a rural area to determine its geographic service area using
noncontiguous zip codes if the hospital draws fewer than 90 percent of
its inpatients from all of the contiguous zip codes from which it draws
inpatients. Other than as determined using our new rule for hospitals
located in rural areas, the geographic area served by the hospital must
be comprised of contiguous zip codes. We are clarifying that
``contiguous zip codes'' does not mean only zip codes that are
contiguous to the zip code in which the hospital is located. It is our
intention that ``contiguous zip codes'' means zip codes that are next
to (or contiguous to) each other. A hospital should look at its
inpatient data to determine where patients live and then calculate the
lowest number of zip codes that touch at least one other zip code in
which the inpatients reside. Our specific responses are as follows.
(1) We do not expect that many hospitals would be in the situation
described by the commenter. However, to the extent that this situation
exists, the hospital would be prohibited from relying on the
recruitment exception because, under the Phase II definition of
``geographic area served by the hospital,'' the contiguous zip codes
from which the hospital draws inpatients would not meet either the ``at
least 75 percent of inpatients'' test (applicable to all hospitals) or,
under this Phase III final rule, the ``at least 90 percent of
inpatients'' test (the optional test for hospitals located in rural
areas). In order to avoid this result, we are modifying Sec.
411.357(e) to deem a hospital's geographic service area as comprising
all of the contiguous zip codes from which the hospital's inpatients
are drawn when the hospital draws fewer than 75 percent of its
inpatients from those contiguous zip codes (or 90 percent in the case
of the new optional test for hospitals located in rural areas). Using
the commenter's example, the hospital would be permitted to recruit
into the zip codes from which it draws the 69 percent of its
inpatients.
(2) Provided that the ``hole'' zip code is surrounded by contiguous
zip codes as described by the commenter, if no people reside in the
``hole'' zip code, the hospital may recruit a physician to establish a
practice into the ``hole'' zip code. For example, a ``hole'' zip code
might be one assigned to a large office building or commercial
district. We have modified the regulation accordingly.
(3) If multiple configurations containing the same number of zip
codes permit the hospital to meet the applicable percent of inpatients
threshold (that is, 75 percent for all hospitals or 90 percent for
hospitals located in rural areas), the hospital is free to use any of
the configurations.
(4) A hospital may use any configuration that satisfies the lowest
number of zip codes/applicable percent of inpatients test on the date
it enters into the recruitment arrangement (that is, the date on which
all parties have signed the written recruitment agreement). In some
cases, this may result in the use of a different
[[Page 51051]]
geographic service area for different recruitment arrangements.
(5) The determination of the geographic area served by a hospital
is applied at the hospital level rather than at the hospital system
level. Therefore, the service area is hospital-specific, not system-
specific.
Comment: One commenter asked whether, for purposes of Sec.
411.357(e)(3), a ``residency'' includes all training, including post-
residency fellowships.
Response: For purposes of Sec. 411.357(e)(3), a residency includes
all training, including post-residency fellowships.
Comment: Section 411.357(e)(3) specifies that the relocation
requirement does not apply to residents and physicians who have been in
practice 1 year or less, provided that the resident or physician
establishes his practice in the geographic area served by the hospital.
One commenter requested that we expand this provision to include other
physicians who do not have a private medical practice, such as
physicians on active military duty who are ending their military
careers; physicians who live in, but have never practiced medicine in,
the geographic area served by the hospital; and physicians who are
employed by the Department of Veterans Affairs, Native American
Hospital System, or a staff model HMO. According to the commenter, such
physicians do not have an established medical practice that is capable
of being relocated because virtually none of their patients could be
treated by the recruited physician (or another physician) in the
recruited physician's new medical practice and virtually none of the
patients could become patients of the recruiting hospital.
Response: The recruitment exception in Sec. 411.357(e) excepts
certain remuneration that is intended to induce a physician ``to
relocate his or her medical practice'' to the geographic area served by
the hospital. In Phase II, we stated that residents and physicians who
have been in practice 1 year or less would not be considered to have an
established medical practice to relocate and that recruitment
arrangements involving such physicians could qualify for the
recruitment exception regardless of whether or not the physician
actually moves his or her practice location, provided that all other
conditions of the exception are satisfied (69 FR 16094-16095). We agree
that some of the physicians identified by the commenter have practices
that are incapable of being relocated due to unique restrictions that
effectively prevent the recruited physician's patients from receiving
medical care furnished by either the recruiting hospital or the
recruited physician's new medical practice. Thus, we are expanding
Sec. 411.357(e)(3) to provide that, as long as the recruited physician
establishes his or her medical practice in the geographic area served
by the hospital, the relocation requirement will not apply if, for at
least 2 years immediately prior to the recruitment arrangement, the
recruited physician was employed on a full-time basis by one of the
following--
A Federal or State bureau of prisons or similar entity
(operating correctional facilities) to serve exclusively a prison
population;
The Department of Defense or Department of Veterans
Affairs to serve active or veteran military personnel and their
families; or
Facilities of the Indian Health Service to serve patients
who receive medical care exclusively through the Indian Health Service.
Also, the physician must not have maintained an independent private
practice in addition to his or her full-time employment with one of the
above entities. We believe that the 2-year employment restriction is
necessary to prevent program abuse. Because physicians often see
patients less than once a year, we believe that an experienced
physician may have an established medical practice that is capable of
being relocated even when the physician has not practiced in that
location for a period of time. Thus, for example, we believe that the
exception's relocation requirement should apply in the case of a
physician who left private practice in the hospital's geographic
service area to become a full-time employee of the Indian Health
Service for 1 year only.
In addition, to accommodate those rare instances in which a
hospital should be permitted to provide recruitment assistance to a
physician whose practice cannot be relocated for reasons other than
those stated above, we are modifying the exception to provide that the
relocation requirement will not apply if the Secretary has deemed in an
advisory opinion issued under section 1877(g)(6) of the Act that the
physician does not have an established medical practice that serves or
could serve a significant number of patients who are or could become
patients of the recruiting hospital.
Comment: One commenter asked for clarification with respect to the
signatories to the recruitment contract. The commenter was concerned
that Sec. 411.357(e)(4)(i), which requires that the recruitment
agreement be signed also by the party to whom the payments are directly
made, could be interpreted to require that the hospital, the physician
practice, and the recruited physician all had to sign one document. The
commenter asserted that this would be unnecessary and would add
unnecessarily to the transaction costs. The commenter suggested that we
require a written agreement between the hospital and either: (1) The
recruit; or (2) the physician practice to which the payments will be
made. The commenter suggested, alternatively, that it should be
acceptable to limit the contracting parties to the hospital and the
physician practice receiving the recruitment assistance and require the
recruited physician to sign a one-page acknowledgement agreeing to be
bound by the terms and conditions set forth in the recruitment
agreement signed by the hospital and the physician practice.
Response: The exception requires a written agreement signed by all
parties, including the recruiting hospital, the recruited physician,
and the physician practice that the physician will be joining, if any.
Nothing in the regulations precludes execution of the agreement in
counterparts. This requirement is necessary to safeguard against
program and patient abuse, and we are not persuaded that it creates any
undue burden.
Comment: Two commenters asked whether a hospital could require a
group practice that was receiving recruitment assistance to guarantee
repayment of any monies advanced to the group on behalf of the
recruited physician if the physician did not fulfill his or her
community service requirement.
Response: Nothing in this rule precludes a hospital from requiring
a physician practice to repay any monies advanced to the group on
behalf of the recruited physician if the physician does not fulfill his
or her community service requirement. However, if requiring the
physician practice to guarantee repayment on behalf of the recruited
physician is used to shield the recruited physician from any real
liability for failure to fulfill his or her community service
obligation under a recruitment agreement, the parties would be at
significant risk of noncompliance with the fraud and abuse laws,
particularly if the recruiting hospital failed to collect amounts owed
by the physician practice making the guarantee. Any such arrangement
should be carefully scrutinized under the fraud and abuse laws
(including the physician self-referral law and the anti-kickback
statute) for other implications, such as problematic relationships
[[Page 51052]]
between the group practice and the recruited physician or additional,
unexcepted remuneration from the hospital to the group practice or the
recruited physician.
Section 411.357(e)(4) excepts remuneration provided by a hospital
to a physician: (1) Indirectly through payments to a physician
practice; or (2) directly to a physician who joins a physician
practice. To the extent that a physician practice guarantees the
obligations of the recruited physician, and indemnifies the recruited
physician against repayment of those obligations, the indemnification
would create a remunerative relationship between the physician practice
and the recruited physician (and potentially between the physician
practice and the hospital) that could implicate the fraud and abuse
laws, including the physician self-referral law and the anti-kickback
statute.
Comment: A number of commenters requested clarification regarding
the applicability of Sec. 411.357(e)(4)(ii) to situations in which a
group practice, through which a hospital makes indirect recruitment
payments to a recruited physician, employs the recruited physician. The
commenters requested clarification that the group practice could deduct
from the amount passed through to the physician in salary, the group
practice's actual costs attributable to recruiting the physician.
Examples of such costs include headhunter fees, travel expenses and
moving expenses associated with the recruitment, and employee benefits,
taxes and professional fees attributable to hiring the recruited
physician. The commenters pointed out that Sec. 411.357(e)(4)(iii)
specifically permitted such adjustments in the case of an income
guarantee.
Response: Under Sec. 411.357(e)(4)(iii), the costs allocated by a
group practice that employs the recruited physician under an income
guarantee may include the group's actual additional incremental costs
attributable to the recruited physician. Depending on the
circumstances, these costs may include those noted by the commenters.
This provision was included in Sec. 411.357(e)(4)(iii) in Phase II (69
FR 16096-16097).
Comment: A commenter requested clarification regarding the types of
expenses that qualify as recruiting expenses. The commenter suggested
that the following should qualify as covered expenses: Headhunter fees;
air fare, hotel, meals, and other costs associated with visits by the
recruited physician and his or her family to the relevant geographic
area; moving expenses; telephone calls; and the cost of tail
malpractice insurance covering the physician's prior practice. Another
commenter asked whether a hospital could pay a physician or a group
practice for time spent recruiting a physician into the hospital's
service area, and whether our answer depends on if the recruited
physician joined the recruiting physician's or group's practice or an
unrelated medical practice.
Response: We understand the first commenter to be asking about the
language in Sec. 411.357(e)(4)(ii) that refers to ``actual costs
incurred by the * * * physician practice in recruiting the new
physician * * *.'' This language describes only costs incurred in the
recruiting of the physician and does not include costs incurred after
the physician is recruited and has joined the group. Depending on the
circumstances, these costs incurred in recruiting could include the
actual costs of headhunter fees; air fare, hotel, meals, and other
costs associated with visits by the recruited physician and his or her
family to the relevant geographic area; moving expenses; telephone
calls; and tail malpractice insurance covering the physician's prior
practice.
With respect to the second commenter's questions, if a hospital
pays a physician or group for time spent recruiting a physician, as
opposed to the expenses discussed above, such compensation would have
to meet all of the requirements of a compensation exception (other than
the recruitment exception). It would not matter whether the recruited
physician actually joined the compensated physician's practice.
Comment: Several commenters requested clarification regarding what
types of income guarantees trigger the application of Sec.
411.357(e)(4)(iii). Several commenters claimed that revenue guarantees
are not considered income guarantees.
Response: Any income guarantee, whether gross income, net income,
revenues, or some variation, involves a potential cost to the guarantor
hospital and a benefit to the recipient physician. Any such guarantee
triggers the application of Sec. 411.357(e)(4)(iii). We have modified
the provision to clarify that Sec. 411.357(e)(4)(iii) applies to any
type of income guarantee.
Comment: Many commenters objected to the condition in Sec.
411.357(e)(4)(iii) that a group practice cannot allocate more than its
actual, additional incremental costs attributable to the recruited
physician under an income guarantee. According to the commenters, the
limitation will prevent groups from recruiting new physicians using
hospital funding, and is unreasonable. The commenters requested that we
revise the regulation to permit other reasonable methods of allocating
overhead costs, such as pro rata or per capita. The commenters noted
that Sec. 411.352 permits group practices to use such allocation
methods for distributing certain group practice revenues. A number of
commenters stated that the rule was particularly unfair when the new
physician was merely replacing a deceased, retiring, or relocating
group physician, because there was no real benefit to the remaining
physicians from a replacement physician who merely ``takes over'' the
overhead costs of the deceased, retired, or relocated physician.
Response: We agree that, in the limited situation in which the
recruited physician is replacing a deceased, retiring, or relocating
physician in an underserved area, a physician practice may, for
purposes of an income guarantee, allocate to the recruited physician a
per capita allocation of the practice's aggregate overhead and other
expenses, not to exceed 20 percent of the practice's aggregate costs.
In the alternative, the practice may allocate the actual additional
incremental costs attributable to the recruited physician as provided
for in Phase II (69 FR 16096-16097). This additional flexibility should
assist hospitals that seek to replace needed physicians in their
communities. In all other cases, the group may allocate to the
recruited physician only the actual additional incremental expenses
attributable to the recruited physician.
Contrary to the commenter, we perceive no unfairness. Physician
practices that use their own funds to recruit physicians to join them
are free to use any cost allocation method when compensating the
recruited physicians (subject to any conditions necessary to satisfy
the requirements of an applicable physician self-referral exception,
such as the exception for bona fide employment relationships or the in-
office ancillary services exception). In the case of a hospital-
subsidized income guarantee, a restriction on the allocation of costs
becomes necessary to prevent physician practices from inappropriately
shifting overhead costs to the hospital to which the physician practice
refers. If a hospital were to subsidize costs that are not genuinely
attributable to the recruited physician, the hospital would confer
remuneration on the physician practice for which no exception would
apply and which could reflect referrals. This would pose a substantial
risk of program abuse under
[[Page 51053]]
the physician self-referral law, as well as under the anti-kickback
statute. We believe that permitting broader overhead allocation in the
limited way described above will provide appropriate assistance in
underserved areas, where a deceased, retired, or relocated physician
might create a deficit in available care for patients, without the risk
of increased program or patient abuse. We are modifying the regulation
in Sec. 411.357(e)(4)(iii) accordingly.
Comment: One commenter asked whether the income guarantee
requirements in Sec. 411.357(e)(4)(iii) with respect to ``actual
additional incremental costs'' apply to a recruited physician who
leases space and equipment from and is co-located with (rather than a
member of or a physician in) a group practice.
Response: The requirements of Sec. 411.357(e)(4)(iii) apply only
in the case of income guarantees provided by a hospital when a
physician joins a physician practice. For purposes of the recruitment
exception, a physician has not ``joined'' a physician practice unless
he or she has become a ``physician in the group practice'' or a
``member of the group'' (or the equivalent, in the case of a physician
who joins a practice that is not a ``group practice'' as defined at
Sec. 411.352). In the case of a physician who joins a physician
practice, except as provided in new Sec. 411.357(e)(4)(iii), the
physician practice may not allocate costs under the income guarantee
that exceed the actual additional incremental costs attributable to the
recruited physician. In the case of a physician who merely co-locates
with a physician practice (for example, by leasing office space from a
group practice), none of the provisions of Sec. 411.357(e)(4) would
apply. Rather, the arrangement must satisfy the requirements of the
recruitment exception without reference to Sec. 411.357(e)(4), or
satisfy the requirements of another exception. The recruitment
exception would not protect any remuneration provided by the hospital
to the physician practice indirectly through payments made to the
recruited physician. For example, the exception would not protect an
arrangement in which a recruited physician uses funds from a hospital
(including amounts pursuant to an income guarantee) to pay inflated
rental payments to a group practice. Nor, for example, would it protect
any arrangement in which a hospital uses a recruitment arrangement with
a recruited physician who co-locates with a physician practice to
provide remuneration indirectly to the physician practice (for example,
by arranging for the recruited physician to co-locate with, but not
join, the existing physician practice and to pay that practice inflated
amounts for rent or services). We are aware of no circumstances in
which it would be appropriate for a physician practice to be a party to
an income guarantee made by a hospital to a recruited physician who is
not joining the practice.
We caution that the physician practice and the physician may not
improperly shift costs to the hospital making the income guarantee. We
note that any lease or contract between the recruited physician and the
physician practice would create a financial relationship that would
require an exception, such as the exception for the rental of office
space in Sec. 411.357(a), if the recruited physician refers DHS to the
physician practice. Moreover, such lease would potentially create an
indirect compensation arrangement between the hospital and the
physician practice's physicians who refer DHS to the hospital (the
chain links the hospital to the recruited physician (via the income
guarantee) to the physician practice (via the lease) to the referring
physicians (via ownership or employment)). Such arrangement would need
to satisfy the requirements of the indirect compensation arrangements
exception in Sec. 411.357(p), and should also be closely scrutinized
under the anti-kickback statute.
Comment: One commenter asked for confirmation that Sec.
411.357(e)(4)(iv) requires that the physician practice keep records of
its actual costs and the amount passed through to the recruited
physician, and that a physician practice's failure to keep the records
would not, by itself, subject the hospital to sanction.
Response: Section 411.357(e)(4)(iv) requires that records of costs
be maintained for at least 5 years and made available to the Secretary
upon request. Because the recruiting hospital is the DHS entity seeking
payment from Medicare in the scenario presented, it is the hospital's
responsibility to maintain the necessary records. The commenter is
correct that the physician practice's failure to keep records would not
subject the hospital to sanction under the physician self-referral
provisions. However, the hospital's failure to keep full, complete and
accurate records of the actual costs it has subsidized and the amounts
passed through to the physician it has recruited would preclude
protection under the physician recruitment exception. Hospitals should
take appropriate steps to ensure that their funds, intended for the
benefit of recruited physicians, are appropriately handled by the
physician practices that receive them.
Comment: We received many comments concerning the requirement in
Sec. 411.357(e)(4)(vi) that a physician practice may not impose
additional practice restrictions on the recruited physician other than
conditions related to quality of care. Commenters (including hospital
associations) that addressed the issue of the allowability of non-
compete agreements were uniformly opposed to prohibitions on them. They
also stated that the restriction limited the utility of the exception
and was contrary to State laws permitting such restrictions. Several
commenters suggested that Sec. 411.357(e)(4)(vi) be revised to
prohibit only restrictions that prohibit the physician from practicing
in the hospital's geographic service area. The commenters asserted that
non-compete agreements are a standard business practice between
physician groups and physicians. They stated that, without the ability
to enter into non-compete agreements, physician practices would be less
likely to take on new physicians and, as a result, hospitals may be
unable to attract new physicians, and certain health care needs of the
surrounding communities could go unmet. Other commenters questioned
whether the following were permitted--
Restrictions on moonlighting;
Prohibitions on soliciting patients and/or employees of
the physician practice;
Requiring that the recruited physician treat Medicaid and
indigent patients;
Requiring that a recruited physician not use confidential
or proprietary information of the physician practice;
Requiring the recruited physician to repay losses of his
or her practice that are absorbed by the physician practice in excess
of any hospital recruitment payments; and
Requiring the recruited physician to pay a predetermined
amount of reasonable damages (that is, liquidated damages) if the
physician leaves the physician practice and remains in the community.
Response: We indicated in Phase II that we considered a non-compete
clause to be a practice restriction and not a condition related to
quality of care (69 FR 16096-16097). Although we did not list other
examples of such practice restrictions, we intended to include only
such restrictions placed on the recruited physician by a physician
practice that would have a substantial effect on the recruited
physician's ability to remain and practice medicine
[[Page 51054]]
in the hospital's geographic service area after leaving the physician
practice or group practice. We do not consider the restrictions,
prohibitions, and requirements that are specifically mentioned in the
bulleted points above as falling into the category of having a
substantial effect on the recruited physician's ability to remain in
the hospital's geographic service area. (We note that we may consider a
liquidated damages clause requiring a significant or unreasonable
payment by the physician leaving the physician practice to have a
substantial effect on the recruited physician's ability to remain in
the recruiting hospital's geographic service area.) Our purpose in
prohibiting practice restrictions such as non-compete clauses was to
avoid frustrating the purpose of the exception. That is, we intended to
discourage physician practices that recruit physicians using hospital
funding from making it difficult for a recruited physician to remain in
the community and fulfill his or her commitments under the recruitment
agreement with the hospital. Allowing a physician to remain in the
community not only furthers the health care needs of the community, but
also obviates the need for the hospital to enter into a new recruitment
agreement to replace the physician.
Upon review of the comments, however, we are persuaded that
categorically prohibiting physician practices from imposing non-compete
provisions may have the unintended effect of making it more difficult
for hospitals to recruit physicians. We are concerned that physician
practices and individual physicians may be unable or reluctant to hire
additional physicians, regardless of the receipt of financial
assistance from hospitals, unless they are able to impose a limited,
reasonable non-compete clause. Therefore, we are amending Sec.
411.357(e)(4)(vi) to state that physicians and physician practices, may
not impose on the recruited physician any practice restrictions that
unreasonably restrict the recruited physician's ability to practice
medicine in the geographic area served by the hospital. Although we are
not per se conditioning payment for DHS on compliance with State and
local laws regarding non-compete agreements, we believe that any
practice restrictions or conditions that do not comply with applicable
State and local law run a significant risk of being considered
unreasonable. (Nothing in Sec. 411.357(e)(4)(vi) should be construed,
however, as prohibiting a hospital that provides financial assistance
to the hiring physician practice from entering into an agreement with
the practice that prohibits the hiring physician practice from imposing
a non-compete agreement or other practice restriction.)
Comment: Several commenters asked whether money paid to a group
practice under a physician recruitment arrangement constitutes indirect
compensation within the meaning of Sec. 411.354(c)(2). Other
commenters asked why physician recruitment arrangements could not
qualify for the fair market value exception in Sec. 411.357(l).
Response: With respect to the first comment, as discussed in Phase
II (69 FR 16097), the provisions of Sec. 411.357(e)(4) related to
pass-through hospital recruitment payments establish an exception
applicable to the compensation arrangement created between the hospital
and the recruited physician (and to the compensation arrangement
between the hospital and the existing physician practice) (69 FR
16097). With respect to the second comment, physician recruitment
arrangements cannot qualify for the fair market value compensation
exception for the reasons explained in Phase II (69 FR 16096). Our
position with respect to the application of the fair market value
compensation exception to recruitment arrangements has not changed.
Comment: A commenter requested that we amend the physician
recruitment exception to provide that the requirements in Sec.
411.357(e)(4) do not apply in the case of remuneration involving the
recruitment of a faculty physician to a nonprofit faculty practice plan
affiliated with the hospital. The commenter stated that the Phase II
preamble was clear that physician recruitment activities conducted in
compliance with the academic medical centers exception do not need to
comply with the physician recruitment exception. The commenter also
stated, however, that an academic medical center may choose not to
structure its compensation arrangements to fit within the academic
medical centers exception, either because the indirect compensation
rules apply or because another exception or exceptions are available
for the compensation arrangements. The commenter theorized that our
concerns with hospital payments for the recruitment of a physician who
joins an existing physician practice arise from the potential
incidental benefit that such arrangements may confer on the existing
physician practice and its owner-physicians (who may have existing
referral relationships with the hospital). However, the commenter
asserted that, where a nonprofit hospital provides remuneration to
recruit a needed faculty physician to an affiliated nonprofit faculty
practice plan, it is unlikely that any improper incidental benefit
would be conferred on any physician group.
Response: To the extent that a hospital, including one affiliated
with an academic medical center, wishes to provide remuneration to a
physician for recruitment purposes, the arrangement, depending on the
facts and circumstances, may be structured to satisfy one or more
exceptions, such as the exception for bona fide employment
relationships in Sec. 411.357(c), the academic medical centers
exception in Sec. 411.355(e), or the physician recruitment exception
in Sec. 411.357(e). Where the only exception potentially applicable is
the physician recruitment exception (because some remuneration would be
paid to another physician or to a physician practice), the arrangement
must satisfy all of the requirements of Sec. 411.357(e)(4). We are not
persuaded that any additional protection under the physician self-
referral statute for a nonprofit hospital's recruitment of faculty
physicians is necessary or appropriate. We believe that the potential
for program and patient abuse in the form of anti-competitive behavior
or over-utilization exists whether the DHS entity is a for-profit or
nonprofit entity.
F. Isolated Transactions
Section 1877(e)(6) of the Act provides that an isolated
transaction, such as a one-time sale of property or a medical practice,
is not considered to be a compensation arrangement for purposes of the
prohibition on physician referrals if the following conditions are
met--
The amount of remuneration for the transaction is
consistent with fair market value and is not determined, directly or
indirectly, in a manner that takes into account the volume or value of
referrals;
The remuneration is provided in accordance with an
agreement that would be commercially reasonable even if no referrals
were made to the entity; and
The transaction meets any other requirements that the
Secretary may impose by regulation as needed to protect against program
or patient abuse.
Phase II incorporated the provisions of section 1877(e)(6) of the
Act into our regulations in Sec. 411.357(f), with a requirement that
there be no additional transactions between the parties for 6 months
after the isolated transaction, except for transactions that are
specifically permitted under another
[[Page 51055]]
exception (69 FR 16098). Phase II set forth definitions of
``transaction'' and ``isolated transaction'' at Sec. 411.351. Phase II
provided that installment payments could qualify as isolated
transactions, as long as the total aggregate payment is: (1) set before
the first payment is made; and (2) does not take into account, directly
or indirectly, referrals or other business generated by the referring
physician (69 FR 16098). Additionally, the payments must be immediately
negotiable or guaranteed by a third party, secured by a negotiable
promissory note, or subject to a similar mechanism to ensure payment
even in the event of default by the purchaser or obligated party. Phase
II also clarified that post-closing adjustments that are commercially
reasonable and not dependent on referrals or other business generated
by the referring physician will be permitted if made within 6-months of
the date of a purchase or sale transaction (69 FR 16098). We are making
no changes to the isolated transactions exception in this Phase III
final rule.
Comment: Two commenters raised questions regarding the requirement
in the definition of isolated transaction at Sec. 411.351 that the
payments be immediately negotiable or secured by a negotiable
promissory note, among other options. According to one commenter, a
promissory note is immediately negotiable if the note so states,
although as a practical matter, there may not be a market for the note.
The other commenter claimed that promissory notes are typically
immediately negotiable only in the event of default, and that requiring
immediate negotiability is inconsistent with installment payments. One
of the commenters also pointed out that a promissory note does not
necessarily secure the underlying debt; rather, it can serve as
security for a different obligation. Both commenters sought
clarification of the ``immediately negotiable'' note requirement.
Response: We have carefully considered the commenters' questions
and assertions. The critical element with respect to installment
payments is that a mechanism is in place to ensure payment (even in the
event of default by the purchaser or obligated party). The regulation
provides for several options to accomplish this: (1) Immediately
negotiable payments or payments that are guaranteed by a third party;
(2) payments that are secured by a negotiable promissory note; or (3)
payments that are subject to a mechanism similar to (1) and (2) that
ensures payment in the event of default. The regulation at Sec.
411.351 does not require that a promissory note be immediately
negotiable. Installment payments need only be secured by a negotiable
promissory note if that is the mechanism chosen by the parties to
ensure payment in the event of default. The parties are free to choose
one of the other options to satisfy the requirements for installment
loans in isolated transactions. Whether a promissory note is negotiable
is governed by the State's version of the Uniform Commercial Code or
other applicable State law.
Comment: One commenter asked for clarification concerning separate
transactions involving related parties, such as a hospital's purchase
of a group practice and the purchase of an office building that is
owned by some of the group practice physicians through a separate
limited liability company. The commenter believed that such
transactions are not unusual but would not appear to qualify for the
exception.
Response: The commenter's example appears to describe two isolated
transactions between different parties that would each need to satisfy
the requirements of the isolated transactions exception: a transaction
between the hospital and the group practice, and a transaction between
the hospital and the limited liability company. These arrangements
could qualify for the exception, provided that they are structured with
separate payments for each transaction and all other conditions of the
exception are satisfied.
Comment: Two commenters asked for clarification regarding post-
closing adjustments. One commenter stated that the 6-month limit on
post-closing adjustments is too brief. The commenter asserted that, as
a practical matter, it would encourage recalcitrant parties to ``hold
out'' to increase their bargaining leverage. The commenter interpreted
the exception as not precluding post-closing adjustments after 6
months, but precluding only other isolated transactions. The commenter
suggested that the commercial reasonableness test provided sufficient
protections. The commenter also requested clarification that an
adjustment based on a breach of a warranty will not be considered a
post-closing adjustment. The second commenter asked that post-closing
adjustments be permitted for 24 months. According to the commenter,
many purchase and sale agreements provide for warranties,
representations, and indemnities to continue in effect for at least one
complete audit cycle (that is, 1 fiscal year plus additional months, as
needed, to complete the audit) to enable the buyer's auditors to fully
examine financial statements.
Response: The exception for isolated transactions permits
commercially reasonable post-closing adjustments within the first 6
months following an isolated transaction, provided that the adjustments
do not take into account (directly or indirectly) the volume or value
of referrals or other business generated by the referring physician(s).
After 6 months, any post-closing adjustment would be treated as a
separate, additional transaction that would need to satisfy the
requirements of an exception. Claims based on breach of warranty are
not considered post-closing adjustments or new transactions; rather,
they are considered part of the original transaction and, therefore,
may occur at any time without jeopardizing compliance with the
exception in Sec. 411.357(f).
Comment: Several commenters were concerned with the interplay
between the definition of ``ownership,'' which includes, for example, a
security interest in property sold to an entity furnishing DHS, and the
definition of the term ``isolated transaction'' at Sec. 411.351, which
permits installment payments only if the instruments are secured or
guaranteed by a third party. According to the commenter, as a practical
matter, the result is that a hospital has few options if it wants to
purchase a physician's equipment or practice using installment
payments. Another commenter asked whether a guarantee from an entity
furnishing DHS made to a physician would create an ownership interest
in the entity. The commenters sought clarification as to how the
exception would apply to these transactions.
Response: Hospitals and physicians can use other arrangements and
methods (that is, other than installment payments made from the
hospital to the physician) to secure legal obligations arising from
transactions between them. However, we note that, as discussed in
section VI.A, we do not consider a security interest in equipment sold
by a physician to a hospital and financed through a loan from the
physician to the hospital to be an ownership interest in the hospital
or a portion of the hospital. Where a physician extends a loan to an
entity and is granted a security interest by the entity in the
equipment sold by the physician to the entity, the arrangement creates
a compensation arrangement (subject to a contrary provision in the
security instrument or agreement of the parties). In response to the
second comment, a guarantee does not create an ownership interest in
the entity providing the guarantee.
[[Page 51056]]
G. Remuneration Unrelated to Designated Health Services
Under section 1877(e)(4) of the Act, remuneration provided by a
hospital to a physician that does not relate to the furnishing of DHS
does not constitute a prohibited compensation arrangement. The
exception does not apply to remuneration from a hospital to a member of
a physician's immediate family, nor does it apply to remuneration from
entities other than hospitals.
Under Phase II, the exception is available only if the remuneration
is wholly unrelated to the provision of DHS (69 FR 16093). Phase II
provided that, for purposes of the exception, any item, service, or
cost that could be allocated in whole or in part to Medicare or
Medicaid under applicable cost reporting principles is considered to be
related directly or indirectly to the provision of DHS. In addition,
remuneration is considered related to DHS for purposes of this
exception if it is furnished, directly or indirectly, explicitly or
implicitly, in a selective, targeted, preferential, or conditional
manner to medical staff or other physicians in a position to make or
influence referrals. The exception does not apply to any other
remuneration that is related in any manner to the provision of DHS.
This Phase III final rule makes no changes to Phase II.
Comment: Numerous commenters, including several hospital trade
associations, strongly objected to Sec. 411.357(g) as set forth in
Phase II. According to the commenters, the regulation is inconsistent
with the statutory language and congressional intent. Some of the
commenters argued that the Congress intended that hospitals could
provide any amount of remuneration to physicians provided that it was
not directly related to the provision of DHS services. The commenters
uniformly urged us to reconsider the position we took in Phase II in
this regard.
Response: As we discussed in Phase II, Sec. 411.357(g) is
consistent with the statutory scheme and congressional intent (69 FR
16093-16094). We do not believe that the Congress intended that a
hospital could provide any remuneration it chooses to physicians
provided that the amount of remuneration is not directly related to the
provision of DHS services. Bona fide compensation relationships related
in any way to the furnishing of DHS should be structured to fit in
another exception.
Comment: Two commenters asked us to provide additional examples of
arrangements that would qualify under the exception in Sec.
411.357(g). Another commenter asked for clarification regarding what
would constitute an improper targeted, preferential, or selective
process for distributing a benefit. The commenter asked, for example,
if a hospital could waive the entry fee for its charity golf tournament
for the entire medical staff and still qualify for the exception.
Response: The determination of whether an arrangement is unrelated
to the furnishing of DHS will require a detailed review of the facts
and circumstances surrounding the arrangement. The examples provided in
Phase II are suitably illustrative (69 FR 16093-16094). Parties seeking
guidance on particular transactions may submit a request for an
advisory opinion. Waiving an entry fee would be a targeted benefit if
applied to the medical staff and not to all other participants.
However, the arrangement between the hospital and a particular
physician could fit into the exception in Sec. 411.357(k) if the value
of the total nonmonetary compensation to the physician during a
calendar year is not greater than $300 (as adjusted by the CPI-U).
Comment: One commenter requested confirmation that, where there are
no explicit cost reporting guidelines or requirements with respect to
the allowability of an item, it is sufficient to apply a good faith
reading of general Medicare cost principles.
Response: We understand the commenter's concern to be situations in
which a hospital does not know and could not reasonably be expected to
know whether a particular item, service, or cost could be allocated in
whole or part to Medicare or Medicaid under cost reporting principles,
as required by Sec. 411.357(g)(1). In such a situation, we would not
consider the item, service, or cost to relate to the furnishing of DHS
under Sec. 411.357(g)(1). However, it is not sufficient to satisfy
Sec. 411.357(g)(1) alone in order to qualify for protection under the
exception. Sections 411.357(g)(2) and (g)(3) set forth additional
grounds for determining that remuneration relates to the furnishing of
DHS. Specifically, remuneration also relates to the furnishing of DHS
if either: (1) It is furnished directly or indirectly, explicitly or
implicitly, in a selective, targeted, preferential, or conditional
manner to medical staff or other persons in a position to make or
influence referrals; or (2) otherwise takes into account the volume or
value of referrals or other business generated by the referring
physician.
Comment: One commenter expressed concern that the exception in
Sec. 411.357(g) was narrowed so much under Phase II that it does not
allow hospitals to provide assistance with malpractice insurance
premiums.
Response: As discussed below in section IX.R, assistance with
malpractice insurance premiums may be structured to satisfy the
requirements of other exceptions, such as the fair market value
compensation exception (Sec. 411.357(l)), the exception for bona fide
employment relationships (Sec. 411.357(c)), the exception for personal
service arrangements (Sec. 411.357(d)), or the exception for
obstetrical malpractice insurance subsidies (Sec. 411.357(r)). We note
that the January 1998 proposed rule clearly stated that this exception
would not protect malpractice insurance premium subsidies (63 FR 1702).
H. Group Practice Arrangements With a Hospital
Section 1877(e)(7) of the Act provides that an arrangement between
a hospital and a group practice under which DHS are furnished by the
group practice but are billed by the hospital does not constitute a
compensation arrangement for purposes of the prohibition on referrals
if certain conditions are met. The August 1995 final rule incorporated
the provisions of section 1877(e)(7) of the Act into our regulations in
Sec. 411.357(h) (60 FR 41920, 41975). In the January 1998 proposed
rule, we proposed revising Sec. 411.357(h) to make several minor
changes and to apply the provision to all DHS, not just clinical
laboratory services (63 FR 1669-1670, 1702-1703). The changes included
clarifying that the exception protects only arrangements that have
continued in effect, without interruption, since December 19, 1989;
interpreting the regulatory language to allow changes to the
arrangement over time with respect to the services covered by the
arrangement or the physicians providing those services; and clarifying
that at least 75 percent of the DHS covered under the arrangement must
be furnished to patients of the hospital by the group practice under
the arrangement (63 FR 1702-1703).
Phase II adopted Sec. 411.357(h) as proposed (69 FR 16099). We
received no comments on this exception and are making no changes in
this Phase III final rule.
I. Payments by a Physician
Section 1877(e)(8) of the Act creates an exception for certain
payments that a physician makes to a laboratory in exchange for
clinical laboratory services
[[Page 51057]]
or to an entity as compensation for other items or services that are
furnished at a price that is consistent with fair market value.
Phase II implemented section 1877(e)(8) of the Act in Sec.
411.357(i) by making two clarifications (69 FR 16099). The first made
the exception applicable to payments by a physician's immediate family
members, as well as to payments by a physician. The second clarified
that the exception does not apply to items or services for which there
is another potentially applicable exception in Sec. 411.355 through
Sec. 411.357. This Phase III final rule makes no change to this
exception. However, we are amending the exception for fair market value
compensation in Sec. 411.357(l) to provide that that exception covers
compensation from a physician, provided that all other conditions of
the exception are satisfied. We note that the fair market value
compensation exception does not protect office space lease
arrangements; arrangements for the rental of office space must satisfy
the requirements of the exception in Sec. 411.357(a).
Comment: Two commenters objected to the provision in Sec.
411.357(i)(2) that the exception applies only to items and services
that are not specifically excepted by another exception in Sec.
411.355 through Sec. 411.357. According to the commenters, the
restriction leaves many legitimate purchases of items or services by a
physician from a DHS entity without an available exception. The first
commenter gave the example of the lease of space on a non-exclusive
basis to a physician. The commenters also noted that the statement in
Phase II that the fair market value compensation exception was
available is incorrect because that exception only protects payments to
a physician from a DHS entity (69 FR 16099). The second commenter
suggested that we either delete language in Sec. 411.357(i) that
indicates that the fair market value compensation exception is
available, or that we allow the payments by a physician exception in
Sec. 411.357(i) to be generally available (rather than available only
when another potential exception does not apply), except with respect
to space rental arrangements.
Response: We continue to believe, as we stated in Phase II, that
our policy of not allowing items and services addressed by another
exception to be covered in this exception is consistent with the
overall statutory scheme and purpose, and is necessary to prevent the
exception from negating the statute (69 FR 16099). To that end, we are
amending the text of the exception for fair market value compensation
in Sec. 411.357(l) to permit application of that exception to
arrangements involving fair market value compensation to physicians
from DHS entities, as well as to arrangements involving fair market
value compensation to DHS entities from physicians. We believe that
this approach is consistent with the statutory scheme and intent.
The expansion of the applicability of the fair market value
compensation exception to compensation paid to DHS entities by
physicians will require parties to use the exception in Sec.
411.357(l), rather than the exception in Sec. 411.357(i), when
payments by a physician to a hospital are, for example, for equipment
leases of less than 1 year. Upon further consideration, we believe that
the required application of the fair market value compensation
exception, which contains conditions not found in the less transparent
exception for payments by a physician to a hospital, further reduces
the risk of program abuse. As discussed below in section IX.L, we have
amended the text of the exception for fair market value compensation in
Sec. 411.357(l) to exclude arrangements for the rental of office
space. The only exception applicable to arrangements for the rental of
office space is Sec. 411.357(a).
J. Charitable Donations by a Physician
Using our authority under section 1877(b)(4) of the Act, in Phase
II, we established an exception in Sec. 411.357(j) for bona fide
charitable donations made by a physician (or his or her immediate
family member) to an entity furnishing DHS. To qualify for the
exception, donations must be made to an organization exempt from
taxation under the Internal Revenue Code (or to an exempt supporting
organization, such as a hospital foundation). The exception provided
that the donation may not be solicited or made in any manner that
reflects the volume or value of referrals or other business generated
between the parties. As with all regulatory exceptions promulgated
under section 1877(b)(4) of the Act, a protected arrangement must not
violate the anti-kickback statute or billing or claims submission
rules. This Phase III final rule clarifies that the donation may not be
solicited or offered in any manner that reflects the volume or value of
referrals.
Comment: A hospital association objected to the requirement in
Sec. 411.357(j)(2) that the donation cannot be made in a manner that
takes into account referrals or other business generated between the
physician and the entity furnishing DHS. According to the commenter, a
hospital cannot control how the donor makes the payment. The commenter
asked that the exception be conditioned only upon the manner in which
the charitable donations are solicited, rather than the manner in which
they are both solicited and made.
Response: We disagree that only the manner of the solicitation
should be relevant for this exception. We agree, however, that the
phrase ``nor made, in any manner'' might be interpreted as implying
that, irrespective of whether the entity had knowledge of an improper
purpose of the donation, the donation is outside the protection of the
exception simply if the physician intended that the donation was in
exchange for future or past referrals or other business generated
between the parties. Accordingly, we have amended Sec. 411.357(j) to
provide that the entity may not solicit the donation, nor may the
physician offer the donation, in any manner that takes into account the
volume or value of referrals or other business generated between the
physician and the entity.
Comment: Two commenters asked for further guidance regarding
acceptable fundraising efforts directed at medical staff. One of the
commenters emphasized that such efforts are very important to
hospitals.
Response: We recognize the importance of fundraising to nonprofit
health care entities and the crucial role often played by medical staff
in fundraising. The regulation is sufficiently clear that it permits
solicitations of the medical staff provided that neither the
solicitation nor the offer of a contribution from the physician takes
into account the volume or value of referrals or other business
generated between the physician and the hospital.
Comment: Two commenters asserted that the purpose of the law is to
regulate payments to physicians from entities furnishing DHS, not
contributions from the physicians to the entities. One of the
commenters suggested that we define remuneration to exclude charitable
donations from physicians.
Response: We disagree with the commenters. All financial
relationships between a DHS entity and a physician who refers Medicare
patients to the entity for DHS must comply with the physician self-
referral provisions. Contributions from a physician to a hospital are
remuneration and must comply with an exception. Moreover, some
ostensible charitable donations have been abusive. The current
regulation adequately protects legitimate fundraising while imposing
minimal restrictions.
[[Page 51058]]
K. Nonmonetary Compensation
In Phase I, using our authority under section 1877(b)(4) of the
Act, we established a new regulatory exception to protect nonmonetary
compensation provided to physicians up to $300 per year. Phase II
provided that nonmonetary compensation that does not exceed $300 per
year does not create a compensation arrangement if--
The compensation is not determined in any manner that
takes into account the volume or value of referrals or other business
generated by the referring physician;
The compensation is not solicited by the physician or the
physician's practice; and
The compensation arrangement does not violate the anti-
kickback statute or other Federal or State law.
In addition, Phase II provided that the limit on the nonmonetary
compensation would be adjusted for inflation to the nearest whole
dollar effective January 1 of each calendar year using the increase in
the Consumer Price Index-Urban All Items (CPI-U) for the 12-month
period that ends the previous September 30. The nonmonetary
compensation limit increased to $308 for CY-2005, $322 for CY-2006, and
$329 for CY-2007. We display the increase in the CPI-U and these new
limits on the physician self-referral Web site at http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
This Phase III final rule makes two substantive changes to Sec.
411.357(k): (1) The revised exception allows physicians to repay
certain excess nonmonetary compensation within the same calendar year
to preserve compliance with the exception; and (2) the revised
exception allows entities, without regard to the dollar limitation in
Sec. 411.357(k)(1), to provide one medical staff appreciation function
(such as a holiday party) for the entire medical staff per year. We are
also clarifying that the aggregate limit in Sec. 411.357(k)(1) is to
be calculated on a calendar year basis.
Comment: Several commenters asked for clarification regarding the
treatment under Sec. 411.357(k) of specific activities. Two commenters
believed that meals and reimbursement to physicians on a DHS entity's
board should not count against the monetary limit, provided that the
compensation is consistent with that provided to other non-physician
board members. Other commenters asked that meals or other remuneration
given to staff members for activities in connection with hospital
business should not be subject to the limit. Examples provided by
commenters included off-site meetings of the medical staff due to space
constraints, assistance in recruiting, hospital leadership meetings,
and other business meetings.
Response: We previously addressed the issues raised by these
commenters in Phase II (69 FR 16113-16114). There, we said that,
``[w]hether a remunerative arrangement between specific parties would
fit in an exception would depend on the particular facts and
circumstances. For example, some dinners and meetings might fit in the
exception for nonmonetary compensation [in] Sec. 411.357(k) or the
exception for fair market value compensation [in] Sec. 411.357(l);
others would not. Nothing in the statute precludes modest meals in
connection with services provided by or to Boards of Trustees, Boards
of Directors, or hospital administrators, and many of these activities
can easily fit in an exception'' (69 FR 16114). We also noted that our
regulations do not address every possible relationship between
physicians and DHS entities of the type addressed by the commenter, nor
could they. In some cases, relationships clearly will not involve a
transfer of remuneration and thus will not trigger section 1877 of the
Act. In others, an activity might involve the transfer of remuneration,
and there may be no readily apparent exception. We expect that
questions of the kind posed by the commenter will arise with some
frequency. Parties may submit advisory opinion requests about specific
arrangements according to Sec. 411.370 (69 FR 16114).
Comment: One commenter sought clarification as to whether the
dollar limit on nonmonetary compensation applied to the legal entity
providing the compensation (such as a parent health system) or to the
DHS entity. The commenter noted that some large systems could be hurt
if the agency imposed aggregate limits, and suggested that the limit
should be on each DHS provider.
Response: The limit applies to each DHS entity, and not to a parent
health system. Remuneration provided by a parent health system to a
referring physician could create an indirect compensation arrangement
between the referring physician and the entity furnishing the DHS (for
example, if the referring physician has a compensation relationship
with the parent health system, which has an ownership interest in the
DHS entity).
Comment: Two commenters asked that the cap be raised. One suggested
$500 and the other $600.
Response: We believe that the limit ($329 in CY-2007) is
appropriate. As explained above and in Phase II, we have indexed the
amount so that it will increase to account for inflation (69 FR 16112).
Comment: One commenter stated that inadvertently exceeding the
yearly dollar limit on nonmonetary compensation could lead to
disastrous and uncertain results. The commenter asserted that the harsh
result should be mitigated by permitting the excessive payment to be
cured by the physician's repayment of the excess. The commenter stated
that errors can occur through, among other things, erroneously valuing
a benefit, not properly accounting for a benefit, or not being aware of
a family relationship between a physician and another person (including
another physician). Another commenter asserted that, by their nature,
gifts of nonmonetary compensation are very difficult to account for in
traditional accounting systems. Tracking of such benefits is usually a
manual process, based on the submission of reports from department
heads and other members of hospital management. In addition, once the
hospital becomes aware of a benefit provided to physicians, it is
sometimes faced with difficult questions of how to value the benefit
and allocate it among the physicians.
Response: Hospitals and other DHS entities that wish to use the
exception for nonmonetary compensation should take steps to ensure the
implementation of effective compliance systems, including appropriate
tracking and valuation mechanisms. DHS entities should not provide
benefits to physicians about which the entities are unaware or for
which they are unable to account. However, we are persuaded to mitigate
the potentially serious consequences of exceeding the nonmonetary
compensation limits where the violation is inadvertent and the value of
the overage is limited. Therefore, we are adding new subparagraph (3)
to Sec. 411.357(k) to provide some protection against inadvertent
violations. Under this new provision, nonmonetary compensation will be
deemed to be within the limit set forth in Sec. 411.357(k)(1) if the
entity has inadvertently exceeded the limit by no more than 50 percent
during a calendar year and the physician repays the excess compensation
within the earlier of: (1) The end of the calendar year in which the
excess nonmonetary compensation was received; or (2) 180 days from the
date the excess nonmonetary compensation was received. For example, if
an entity gave nonmonetary
[[Page 51059]]
compensation with a value of $250 to a physician on April 15 and then
inadvertently made another gift, this time valued at $200, to the
physician on August 15, the total nonmonetary compensation to the
physician is $450, which is less than 150 percent of the amount allowed
($329 x 150 percent = $493.50). If the physician repays the excess of
$121 ($450 - $329 = $121) by December 31, the entity continues to
satisfy the requirements of the exception. An entity will not be
allowed to use this new provision more than once every 3 calendar years
with respect to the same physician. With respect to DHS referrals made
by a physician after his or her receipt of excess nonmonetary
compensation, any billing or claims submission by the entity for such
referrals will not violate the prohibition in section 1877(a)(1)(B) of
the Act, provided that the deeming provision set forth in Sec.
411.357(k)(3) and the remaining conditions of the nonmonetary
compensation exception are satisfied. Once a DHS entity becomes aware
that it has provided to a physician excess nonmonetary compensation
that could qualify for the deeming provision, it would be prudent for
the DHS entity to delay any billing and claims submission for the
physician's DHS referrals until after the physician has returned the
nonmonetary compensation in accordance with Sec. 411.357(k)(3).
Comment: One commenter stated that its physician relations
department had routinely arranged occasional small services for
physicians as tokens of appreciation. Events included free haircuts,
manicures, massages, golf tournaments, and tickets to plays and
sporting events. The commenter requested clarification concerning
whether the cap on nonmonetary compensation applied to the hospital's
cost of the item or the fair market value of the item to the physician.
The commenter suggested that the exception exclude one-time annual
events provided that the event is open to the entire medical staff or a
specialty, the fair market value of the event is less than $200 per
attendee, and that there are no more than three such events per year.
In addition, the commenter believed that hospitals should be permitted
to give any staff member a token of appreciation annually if the fair
market value does not exceed $100 and the provision of the gift is not
tied to referrals or other business generated between the parties.
Response: We believe that the limit on nonmonetary compensation per
calendar year period is sufficient to provide for tokens of
appreciation. We note that we do not agree that all of the items listed
by the commenter are ``small.'' The cap under the nonmonetary
compensation exception applies to the fair market value of the item,
which is the amount the physician would have paid if he or she had
purchased the item or service in a fair market value transaction.
However, we believe that allowing one annual, local social event for
the entire medical staff would not create a risk of program or patient
abuse. (This is in addition to the nonmonetary compensation permitted
under Sec. 411.357(k).) Accordingly, we are modifying the exception in
Sec. 411.357(k) to permit hospitals and other entities with formal
medical staffs to provide one local medical staff appreciation event
per year open generally to all medical staff (that is, all physicians
and other medical practitioners who order hospital services for
patients). The entity's cost per medical staff member for such event
will not be counted against the limit set forth in Sec. 411.357(k)(1)
(as adjusted under Sec. 411.357(k)(2)). However, any gifts or
gratuities provided in connection with the medical staff appreciation
event (such as door prizes) would be subject to the limit in Sec.
411.357(k)(1) (as adjusted under Sec. 411.357(k)(2)).
L. Fair Market Value Compensation
In Phase I, we finalized an exception for fair market value
compensation arrangements that was originally proposed in the January
1998 proposed rule (66 FR 917-919). The exception, which was
promulgated using our authority under section 1877(b)(4) of the Act,
protects compensation from a DHS entity to a physician, an immediate
family member of a physician, or a group of physicians for the
provision of items or services by the physician or group to the DHS
entity, provided that, generally--
The arrangement is set out in a writing that is signed by
the parties and describes the items or services;
The writing sets out the timeframe for the arrangement,
subject to some restrictions;
The writing specifies the compensation, which must be set
in advance, consistent with fair market value, and not determined in a
manner that takes into account the volume or value of any referrals or
other business generated by the referring physician;
The arrangement is commercially reasonable and furthers
the legitimate business purposes of the parties; and
The arrangement does not violate the anti-kickback statute
or involve the counseling or promotion of any business arrangement that
violates Federal or State law. Phase II made no substantive changes to
Sec. 411.357(l). This Phase III final rule makes one substantive and
one clarifying change to Sec. 411.357(l). Specifically, and as
discussed at section IX.I, we are amending the exception to provide
that it may apply to compensation provided to a physician from an
entity and to compensation provided to an entity from a physician. We
are also clarifying that the exception is not applicable to leases for
office space; rather, such lease arrangements must comply with Sec.
411.357(a).
Comment: One commenter objected to our position that physician
recruitment is not a service to the hospital and, therefore, cannot
qualify under Sec. 411.357(l), the fair market value compensation
exception.
Response: We disagree with the commenter for the reasons stated in
Phase II (69 FR 16096). There, we said that ``the physician's
relocation is not properly viewed as a benefit to the hospital, except
as a potential source of DHS referrals--a consideration that is
antithetical to the premise of the statute.'' Money spent on
recruitment of physicians who will not be employed by the hospital
offering the recruitment incentives is essentially a contribution made
for the benefit of the community and not a payment for services
provided to the hospital. Therefore, recruitment incentives offered by
hospitals must be structured to satisfy the requirements of the
recruitment exception or another exception, such as the exception for
bona fide employment relationships or obstetrical malpractice insurance
subsidies.
Comment: One commenter objected to our position that a lease of
office space cannot qualify for the fair market value compensation
exception in Sec. 411.357(l) because it is not an ``item.'' The
commenter noted that elsewhere in Phase II, we stated that a space
lease is an item or service when a physician is the lessee (69 FR
16111).
Response: In Phase II, we explained that we could not expand the
exception to be as comprehensive as the commenters advocated without
posing a risk of fraud or abuse (69 FR 16111-16112). We do not believe
that the lease of office space is an ``item or service.'' Moreover,
because space leases have been subject to abuse, we believe that the
use of the fair market value compensation exception for space leases
may pose a risk of program or patient abuse. Therefore, a space lease
must qualify under the exception for the rental of office space in
Sec. 411.357(a), which contains more restrictive conditions. We have
modified the
[[Page 51060]]
regulatory text in Sec. 411.357(l) accordingly.
Comment: The same commenter asked us to provide bright-line
guidance as to what is fair market value. The commenter recommended
that there be a rebuttable presumption that a transaction is fair
market value.
Response: The statute and regulations provide a definition of fair
market value for purposes of section 1877 of the Act. The parties to a
transaction or an arrangement are in the best position to ensure that
the remuneration is at fair market value and to document it
contemporaneously. If questioned by the government, the burden would be
on the parties to explain how the transaction meets the fair market
value compensation exception requirements. We are not adopting the
suggestion that a transaction be presumed to be fair market value.
M. Medical Staff Incidental Benefits
In Phase I, we established a new exception in Sec. 411.357(m) for
medical staff incidental benefits (66 FR 920-922). This exception is
limited to benefits, such as parking, cafeteria meals, and lab coats,
that are customarily provided by a hospital to members of its medical
staff and that are incidental to services being provided by the medical
staff at the hospital.
In Phase II, we clarified that the exception is not intended to
cover the provision of tangential, off-site benefits, such as
restaurant dinners or theater tickets, which must comply with the
exception for nonmonetary compensation in Sec. 411.357(k) (69 FR
16112-16113). We also made other clarifications in Sec. 411.357(m)(1)
and (m)(2), and stated in Sec. 411.357(m)(8) that certain
institutional entities (such as long-term care facilities), federally
qualified health centers, and other health care clinics, that have bona
fide medical staffs are permitted to provide incidental benefits to
those staffs on the same terms and conditions that apply to hospitals
under the exception (69 FR 16112-16114). Phase II also provided that
the $25 limit on the value of each medical staff incidental benefit
would be adjusted in the same manner as the limit on nonmonetary
compensation in Sec. 411.357(k). The limit for each medical staff
incidental benefit for purposes of Sec. 411.357(m) increased to $26
for CY 2005, $27 for CY 2006, and $28 for CY 2007.
We are making no substantive changes to this exception in this
Phase III final rule.
Comment: One commenter requested the elimination of the ``on
campus'' requirement in Sec. 411.357(m). According to the commenter,
the limitation is not necessary because the exception already requires
the physician to be on rounds or otherwise engaged in services or
activities that benefit the hospital or its patients. Alternatively,
the commenter suggested that we define campus as a hospital and all
facilities owned or operated by the hospital.
Response: We disagree with the commenter. The ``on campus''
limitation is integral to the exception and an important safeguard
against program and patient abuse. A hospital's campus includes all
facilities operated by a hospital except for facilities that have been
leased for non-hospital purposes and are not used exclusively by the
hospital.
Comment: One commenter requested clarification as to whether a
hospital may provide a physician with a device that is used to access
patients who are at home or at work or personnel who are in locations
other than the hospital campus.
Response: A hospital may not provide a device used to access
patients who are at home or at work or personnel who are in locations
other than the hospital campus under this exception. A hospital can
provide a physician with a device that is used to access patients and
personnel on the hospital's campus, even if the physician is not on the
campus. In Phase II, we indicated that the exception (as revised in
that rulemaking) covers dedicated pagers or two-way radios used to
facilitate instant communication with physicians in emergency or other
urgent patient care situations when they are away from the hospital
campus (69 FR 16113). A physician may use the dedicated pager or two-
way radio: (1) to contact the physician's patients (who are hospital
patients) only when the patients are on the hospital's campus; or (2)
to contact personnel only when the personnel are on the hospital
campus. We note that some arrangements involving health information
technology used for patients or personnel who are not on the hospital
campus may qualify under the exception in Sec. 411.357(u) for
community-wide health information systems or the exceptions in Sec.
411.357(v) and (w) for arrangements involving the provision of
electronic prescribing technology and electronic health records
technology, respectively.
Comment: One commenter noted that, whereas Sec. 411.357(m)
specifically provides that mere identification of medical staff on a
hospital website or in hospital advertising is covered by the
exception, the preamble to Phase II states that advertising or
promoting a physician's private practice would not satisfy the
requirements of the exception (69 FR 16113). The commenter asserted
that it is unclear whether hospital physician referral services would
be considered advertising or promotion of the physician. The commenter
requested clarification that a hospital's physician referral service
could qualify for the exception in Sec. 411.357(m).
Response: A hospital's physician referral service may be considered
a medical staff incidental benefit and qualify for the exception if all
of the requirements of Sec. 411.357(m) are satisfied. Whether a
hospital's physician referral service would constitute advertising or
promotion of a physician or his or her private practice would depend on
the nature of the particular referral service; however, many typical
referral services constitute advertising or promotional activity. We
note that hospital referral services sometimes involve payments by
physicians to the hospital that operates the referral service. These
payments, which are often assessed based on the costs of operating the
referral service, would need to satisfy the requirements of an
exception. Moreover, these payments also potentially implicate the
anti-kickback statute. The payments could be structured to satisfy the
exception in Sec. 411.357(q) for referral services, which protects
remuneration that satisfies all of the conditions of the safe harbor
for referral services in Sec. 1001.952(f).
N. Risk-Sharing Arrangements
In Phase I, we created a new exception for remuneration made
pursuant to a bona fide ``risk-sharing arrangement,'' out of concern
about the impact of the January 1998 proposed rule on commercial and
employer-provided managed care arrangements (66 FR 912). The risk-
sharing arrangements exception in Sec. 411.357(n) applies to
compensation (including, but not limited to, withholds, bonuses, and
risk pools) between a managed care organization or an independent
physician association and a physician (either directly or indirectly
through a subcontractor) for services provided to enrollees of a health
plan, provided that the arrangement does not violate the anti-kickback
statute or any laws or regulations governing billing or claims
submission. In Phase II, we responded to several comments on the new
risk-sharing arrangements exception in Sec. 411.357(n) but made no
changes to the exception (69 FR 16114). We received no comments on this
exception and are making no changes to Sec. 411.357(n) in this Phase
III final rule.
[[Page 51061]]
O. Compliance Training
In the Phase I rulemaking, we exercised our authority under section
1877(b)(4) of the Act to create an exception for compliance training
provided by a hospital to physicians who practice in the hospital's
local community or service area (66 FR 915, 921). In Phase II, we
modified the exception to include compliance training provided to a
physician or a physician's office staff by any DHS entity and
explicitly included training addressing the requirements of any
Federal, State or local law governing the activities of the party
receiving the training (69 FR 16114-16115). The Phase II exception
excludes any programs for which continuing medical education (CME)
credit is available.
This Phase III final rule amends Sec. 411.357(o) to permit
compliance training programs that involve CME credit, provided that
compliance training predominates.
Comment: Several commenters objected that, under Phase II, Sec.
411.357(o) does not protect any compliance training that also qualifies
for CME credit. According to the commenters, provided that the
compliance training program qualifies under the exception, it should
not matter whether a physician receives CME credit.
Response: We agree that, if a program offers CME credit for
compliance training, such compliance training should nonetheless be
able to satisfy the requirements of Sec. 411.357(o). However, we are
concerned that the exception not be used to protect CME programs that
are only incidentally about or related to compliance training. For the
reasons set forth in Phase I and Phase II, we are not prepared to
except generally from the physician self-referral law CME programs
funded by DHS entities. Programs offering CME credit, when provided to
a referring physician, have substantial value to the physician, who is
required to obtain such CME credit for State licensure purposes. We are
also not prepared to except CME programs merely because they contain a
compliance training component. Instead, we are revising the exception
in Sec. 411.357(o) to cover all training programs of which compliance
training is the primary purpose, including any genuine compliance
training program that happens to qualify for CME credit. The revised
exception does not protect traditional CME content under the guise of
``compliance training.'' The exception may not be used for other
programs that are not compliance training programs, regardless of
whether such programs may also provide CME.
Comment: A commenter requested clarification that internet-based
compliance training can qualify as local training. The commenter also
noted that many small- and medium-sized communities lack the resources
to provide specialized compliance training and should be permitted to
provide reimbursement for a physician's reasonable out-of-pocket
expenses to obtain training outside of the local community.
Response: Section 411.357(o) protects compliance training provided
by an entity to a physician (or to the physician's immediate family
member or office staff) who practices in the entity's local community
or service area, provided that the training is held in the local
community or service area. With respect to on-line compliance training,
if the physician (or the physician's immediate family member or office
staff) accesses the on-line training while in a location that is in the
entity's local community or service area, the compliance training would
qualify for the exception in Sec. 411.357(o), provided that all other
requirements of the exception are satisfied. We disagree that an entity
should be permitted to reimburse out-of-pocket expenses (such as travel
expenses) for physicians to obtain training outside of the entity's
local community or service area. We are not persuaded that permitting
payment of such expenses does not create a risk of program or patient
abuse.
P. Indirect Compensation Arrangements
In Phase I, we established a new exception for indirect
compensation arrangements using our authority under section 1877(b)(4)
of the Act (66 FR 865). Indirect compensation arrangements qualify for
the exception if the following conditions are satisfied:
The compensation received by the referring physician (or
immediate family member) from the person or entity in the chain of
financial relationships with which the referring physician (or
immediate family member) has the direct financial relationship is fair
market value for the items or services provided under the arrangement
and does not take into account the volume or value of referrals or
other business generated by the referring physician for the entity
furnishing the DHS;
The compensation arrangement between the person or entity
in the chain with which the referring physician (or immediate family
member) has the direct financial relationship is set out in writing,
signed by the parties, and specifies the items or services covered by
the arrangement (in the case of a bona fide employment relationship,
the arrangement need not be set out in a written contract, but it must
be for identifiable services and be commercially reasonable even if no
referrals are made to the employer); and
The compensation arrangement does not violate the anti-
kickback statute or any laws or regulations governing billing or claims
submission. (66 FR 867.)
Phase II made no substantive changes to the indirect compensation
arrangements exception. This Phase III final rule similarly makes no
changes to the exception.
We received a number of comments regarding Sec. 411.357(p), the
indirect compensation arrangements exception. Some commenters
questioned how the indirect compensation arrangements exception applies
in circumstances involving a compensation arrangement between a DHS
entity and a group practice that employs or contracts with referring
physicians. As discussed in section VI.B, we have revised Sec.
411.354(c), which specifically addresses direct and indirect
compensation arrangements between DHS entities and physicians. Under
the revised rule, the relationship between the physician and his or her
physician organization (as defined in this Phase III final rule at
Sec. 411.351) is disregarded and the physician ``stands in the shoes''
of his or her physician organization. The effect of this new provision
is that many arrangements that would have constituted indirect
compensation arrangements if analyzed under Phase I and Phase II are
now deemed to be direct compensation arrangements, and the indirect
compensation arrangements exception cannot be used. Moreover, under
this Phase III final rule, many arrangements that may not have met the
definition of an ``indirect compensation arrangement'' under the Phase
I and Phase II analysis will constitute direct compensation
arrangements that must satisfy the requirements of an exception in
order for the physician to make DHS referrals to the entity furnishing
DHS. As discussed above in section VI, the ``stand in the shoes''
provisions in Sec. 411.354(c) are applicable as of the effective date
of this Phase III final rule. However, arrangements that satisfied the
Phase II definition of ``indirect compensation arrangement'' and the
requirements of Sec. 411.357(p) as of the publication date of this
final rule need not be amended during the original or current renewal
term of the arrangement to comply with the Phase III final regulations.
[[Page 51062]]
Comment: One commenter stated that the indirect compensation
arrangements exception was difficult to apply because the DHS entity
had no ready ability to monitor or assess the basis of payment being
made by the intervening entity to the physician. The commenter
suggested that we expand the exception by adding an alternative whereby
the arrangement would be protected if: (1) The direct payment made by
the DHS entity to the intervening entity complies with an exception;
(2) the physician provides a written representation that his or her
compensation from the intervening entity is not based on referrals; and
(3) the DHS entity has no actual knowledge of the falsity of the
representation. Another commenter stated that the exception was unfair
to hospitals and other DHS entities because compliance turns on the
physician's compensation arrangement with the intervening entity, and
hospitals have no control over those compensation arrangements.
Response: We believe that the new ``stand in the shoes'' provision
will substantially address the commenters' concerns. Under that
provision, many arrangements will use direct compensation arrangements
exceptions (for example, personal service arrangements, fair market
value compensation, office space rental, or equipment rental) rather
than the indirect compensation arrangements exception in Sec.
411.357(p). We perceive no unfairness to DHS entities, because the
definition of an ``indirect compensation arrangement'' includes a
knowledge element.
Comment: Several commenters requested confirmation that, if there
exists an indirect compensation arrangement involving a hospital and a
physician in the group practice and the arrangement qualifies for the
indirect compensation arrangements exception, the direct compensation
arrangement between the hospital and the group practice would not also
have to satisfy the requirements of a direct compensation arrangements
exception, such as those for the rental of office space or personal
service arrangements. The commenters noted that the indirect
compensation arrangements exception was considerably more flexible
because, for example, the arrangement could be amended at any time.
Other commenters wanted clarification that, in an identical
situation (that is, a chain of financial relationships involving a
hospital and a group practice and the group practice's physicians),
referrals by the physicians to the hospital would be protected,
provided that the financial relationship between the hospital and the
group practice complied with one of the direct compensation
arrangements exceptions. One commenter requested confirmation that,
whenever a direct or indirect compensation arrangements exception is
applicable, the parties would be protected from the referral
prohibition provided that they complied with any one of the potentially
applicable exceptions.
Response: As noted above, the new ``stand in the shoes'' provision
should address many of these commenters' concerns. Under this final
rule, physicians ``stand in the shoes'' of physician organizations,
including group practices. This means that, in the case of a chain of
financial relationships involving a hospital, a group practice, and the
group practice's physicians, the physicians ``stand in the shoes'' of
their group and the financial relationship at issue is the direct
relationship between the hospital and the group practice. The direct
relationship could satisfy the requirements of any applicable direct
compensation arrangements exception. The indirect compensation
arrangements exception would not apply.
Where, after applying the ``stand in the shoes'' provision, an
arrangement still meets the definition of an indirect compensation
arrangement in Sec. 411.354(c)(2) (for example, a chain of financial
relationships involving a hospital, a leasing company, and a
physician), the only available exception is the indirect compensation
arrangements exception. As we explained in Phase I and Phase II,
indirect compensation arrangements cannot fit in any of the direct
compensation arrangements exceptions; the only available exception for
an arrangement that meets the definition of an ``indirect compensation
arrangement'' is the indirect compensation arrangements exception (66
FR 866-867, 69 FR 16060-16061). To satisfy the requirements of the
indirect compensation arrangements exception, it is not necessary for
each link in the chain of financial relationships to also satisfy the
requirements of a separate exception. Consistent with the statutory
scheme, the only financial relationship that triggers liability under
section 1877 of the Act is the financial relationship between the DHS
entity and the referring physician. (66 FR 864.)
Comment: Two commenters asked for confirmation that a contract
based on a percentage of collections can satisfy the requirement in the
indirect compensation arrangements exception that the compensation be
fair market value and not determined in any manner that takes into
account the volume or value of referrals or other business generated by
the referring physician for the DHS entity. The commenter gave the
example of a hospital contracting for outpatient radiology with a joint
venture owned by the hospital and physicians, and basing payment on a
percentage of collections. This commenter stated that, because the
hospital is billing and collecting payment for the services, it is the
entity furnishing DHS for purposes of the physician self-referral law.
This commenter noted that, in Phase II, we acknowledged that the
position we took in Phase I on percentage compensation arrangements was
overly restrictive and that we amended Sec. 411.354(d)(1) to permit
percentage compensation arrangements under certain conditions (69 FR
16068). The commenter stated that, if the percentage compensation
arrangement is at fair market value and is not inflated to compensate
for the generation of business, the parties should be entitled to rely
on the indirect compensation arrangements exception for the transaction
described.
Response: The discussion in Phase II regarding percentage
compensation arrangements and the modification to Sec. 411.354(d)(1)
pertained to the ``set in advance'' requirement that is contained in
certain exceptions, but not in the indirect compensation arrangements
exception. The joint venture relationship between the hospital and the
physicians creates an indirect compensation arrangement between the
hospital and the physicians that must satisfy the requirements of an
exception. A percentage contract as described by the commenter will
cause the arrangement to fall outside the indirect compensation
arrangements exception if the return to the physician from the
radiology joint venture takes into account in any manner the
physician's referrals to the hospital (whether or not these referrals
involve services provided by the joint venture). Moreover, a second
indirect compensation arrangement exists between the hospital and the
physicians, created by virtue of the ownership interest that does not
meet an ownership exception (which, thus, creates a compensation
arrangement), in the chain of relationships that runs: hospital--
radiology venture--physicians. This arrangement would also need to
satisfy the requirements of the indirect compensation arrangements
exception. With respect to the second indirect compensation
arrangement, the inquiry would be whether the compensation
[[Page 51063]]
under the percentage contract between the hospital and the radiology
venture (the compensation arrangement nearest the referring physician)
is fair market value not taking into account in any manner the volume
or value of referrals or other business generated by the referring
physician. We note that the indirect compensation arrangements
exception requires that the compensation ``received'' by the referring
physician (or immediate family member) is fair market value for
services and items provided. A compensation arrangement based on a
percentage of collections may not, depending on how the actual
collections progress, result in fair market value received by the
referring physician (or immediate family member).
Comment: Two commenters requested clarification regarding the
potential application of the indirect compensation arrangements
exception to medical foundations. One of the commenters noted that,
whereas the agency had suggested that the personal service arrangements
exception was available, most medical foundations contract with a
physician group, thereby creating an indirect financial relationship
between the foundation and the physicians. The commenter asked whether
a group: (1) That received a percentage of collections from the
foundation; (2) in which the physicians were both employees and
shareholders; and (3) that compensated physicians based on RVUs and
quality measures, would qualify under the indirect compensation
arrangements exception.
Response: The new stand in the shoes provision should address the
commenters' concerns. Physicians will stand in the shoes of their group
practices. Thus, in the example given by the commenter, the arrangement
between the medical foundation (as DHS entity) and the referring
physicians would be treated as a direct compensation arrangement
(rather than an indirect compensation arrangement) and the personal
service arrangements exception would apply, provided that all
conditions of the exception are satisfied. In section VI.C, we
addressed the treatment of percentage compensation in exceptions, such
as the personal service arrangements exception, that include the ``set
in advance'' requirement. (If, by way of example, the hospital were to
contract with a medical foundation for services provided to the
hospital by the physician group with which the foundation contracts,
the arrangement created between the hospital and the group physicians
would be an indirect compensation arrangement that would need to
satisfy the requirements of the indirect compensation arrangements
exception. The physicians would stand in the shoes of their group
practice, but not in the shoes of the foundation.)
Comment: One commenter asked whether a DHS entity that
intentionally restructures an unprotected direct compensation
arrangement to form a protected indirect compensation arrangement is
engaging in a prohibited circumvention scheme under section 1877(g)(4)
of the Act. The commenter described a situation in which a hospital
elects to contract with an intervening entity for the medical director
services of a physician rather than contract with the physician
directly.
Response: Under the physician self-referral law, all financial
relationships between DHS entities and referring physicians must be
structured to satisfy the requirements of an exception. Restructuring
an arrangement that does not meet a direct compensation arrangements
exception so that it complies with the indirect compensation
arrangements exception is not per se prohibited. Whether the
restructuring of an arrangement constitutes a prohibited circumvention
scheme under section 1877(g)(4) of the Act would depend on the specific
facts and circumstances. The commenter has not clearly identified a set
of specific circumstances sufficient for us to judge whether a
circumvention scheme exists.
Q. Referral Services
In the Phase I rulemaking, we solicited comments on creating
exceptions to the physician self-referral prohibition for arrangements
that fit squarely in an anti-kickback statute ``safe harbor'' in Sec.
1001.952 (66 FR 863). In Phase II, we created two new compensation
exceptions for arrangements that fit in the anti-kickback safe harbors
for referral services (Sec. 411.357(q)) and obstetrical malpractice
insurance subsidies (Sec. 411.357(r)) (69 FR 16115). We received no
comments on Sec. 411.357(q) and this Phase III final rule makes no
changes to the exception in Sec. 411.355(q) for referral services.
R. Obstetrical Malpractice Insurance Subsidies
As discussed above in section IX.Q, we created a new exception in
Phase II for compensation arrangements that fit in the anti-kickback
safe harbor for obstetrical malpractice insurance subsidies (Sec.
411.357(r)) (69 FR 16115). This Phase III final rule makes no changes
to the exception in Sec. 411.357(r).
Comment: One commenter suggested that we permit the fair market
value compensation exception in Sec. 411.357(l) to be used for
additional malpractice insurance assistance for medical staff.
Response: We see no reason why the fair market value compensation
exception in Sec. 411.357(l) cannot be used to offer medical staff
assistance with malpractice insurance, provided that the value of the
assistance is fair market value for services actually provided by the
staff and the other requirements of the exception are satisfied.
Comment: Several commenters complained that the exception for
malpractice insurance subsidies is too narrow and the limitation to
health professional shortage areas (HPSAs) should be expanded to
include all specialties and hospitals. One commenter urged us to revise
the exception to include non-HPSA areas where at least 50 percent of
the deliveries come from patients who reside in a HPSA. The commenters
urged us to consult with the OIG and to develop a broader exception.
Another commenter suggested that hospitals should be permitted to
provide assistance if there is a community need.
Response: The exception in Sec. 411.357(r) is one of several
exceptions that allow DHS entities to provide assistance with
malpractice insurance. Other exceptions that permit DHS entities to
provide such assistance are the fair market value compensation
exception (as discussed above in response to the previous comment) in
Sec. 411.357(l), the exception for bona fide employment relationships
in Sec. 411.357(c), and the exception for personal service
arrangements in Sec. 411.357(d) (provided that the value of the
assistance is commensurate with the value of actual services furnished
to the hospital by the physician). These exceptions allow any DHS
entity to provide assistance with malpractice insurance, without regard
to the specialty of the physician or the area in which the physician
practices. The exception in Sec. 411.357(r), on the other hand, is
intended to mirror the anti-kickback safe harbor for malpractice
insurance in Sec. 1001.952(o). The OIG has not issued any guidance of
general application that is broader than this exception and safe
harbor. Finally, apart from the availability of other exceptions, we do
not believe that it is advisable to relax the criteria of Sec.
411.357(r) where a ``community need'' is present, because ``community
need'' is too ambiguous a standard and does not, by itself, eliminate
the potential for program or patient abuse. We note that, in the CY
2008 Physician Fee Schedule notice of
[[Page 51064]]
proposed rulemaking, we proposed to amend the exception in Sec.
411.357(r) to remove the incorporation of the safe harbor for
malpractice insurance in Sec. 1001.952(o) and to include more flexible
criteria.
Comment: One commenter asserted that we did not have the authority
to create exceptions that were limited to specific geographic areas,
for example, limiting the malpractice insurance subsidies exception to
physician practices in HPSAs.
Response: Section 1877(b)(4) of the Act allows us to create
additional exceptions to the general prohibition on physician self-
referral where doing so would not result in a risk of program or
patient abuse. It does not require us, where we exercise such
authority, to make the additional exceptions available to all types of
entities and physicians, or make them applicable in all areas. The
Congress and CMS have long recognized the special needs and character
of rural, urban, and underserved areas. Malpractice insurance
availability in HPSAs poses specific concerns not present in other
areas and supports a targeted exception.
S. Professional Courtesy
In Phase II, we established a new compensation arrangements
exception (Sec. 411.357(s)) for professional courtesy provided to a
physician or his or her immediate family members (69 FR 16116). We
defined ``professional courtesy'' at Sec. 411.351 as the provision of
free or discounted health care items or services to a physician or his
or her immediate family members or office staff. To qualify for the new
exception, the arrangement must meet the following conditions (69 FR
16116)--
The professional courtesy is offered to all physicians on
the entitys bona fide medical staff or in the entitys local community
without regard to the volume or value of referrals or other business
generated between the parties;
The health care items and services provided are of a type
routinely provided by the entity;
The entity's professional courtesy policy is set out in
writing and approved in advance by the governing body of the health
care entity;
The professional courtesy is not offered to any physician
(or immediate family member) who is a Federal health care program
beneficiary, unless there has been a good faith showing of financial
need;
If the professional courtesy involves any complete or
partial waiver of any coinsurance obligation, the insurer is informed
in writing of the reduction so that the insurer is aware of the
arrangement; and
The professional courtesy arrangement does not violate the
anti-kickback statute or any billing or claims submission laws or
regulations.
This Phase III final rule makes one substantive change to Sec.
411.357(s), deleting the requirement that an entity notify an insurer
when the professional courtesy involves the whole or partial reduction
of any coinsurance obligation. We have also modified the exception to
make clear our intent that Sec. 411.357(s) applies only to hospitals
and other providers with formal medical staffs.
Comment: A commenter noted that one of the conditions of the
exception is that the arrangement does not violate the anti-kickback
statute. The commenter questioned whether, given the 1994 OIG Special
Fraud Alert, clinical laboratories would be prohibited from offering
professional courtesy, notwithstanding that the actual language of
Sec. 411.357(s) does not exclude any specific type of entity or
services and, therefore, appears applicable to clinical laboratory
services. The commenter stated that, unlike the situation in which one
physician extends professional courtesy to another physician, when a
laboratory offers professional courtesy to a physician, it does not
expect the same in return, a fact that makes kickback issues more
significant. The commenter suggested that we clarify that the 1994 OIG
Special Fraud Alert continues to be applicable to the provision of
professional courtesy by all laboratories, including hospital outreach
laboratories. The commenter also stated that, to the extent that the
exception permits a hospital to offer professional courtesy only to
physicians on its medical staff, instead of to all physicians in its
local community or service area, the exception creates an inducement
for referrals to the hospital.
Response: Nothing in these regulations affects in any respect the
application of the OIG's guidance regarding the anti-kickback statute.
We conclude from the comment that some clarification may be helpful
with respect to the scope of the exception. The exception was
promulgated in response to comments requesting an exception for
providers that offer certain professional courtesy to physicians and
their family members. We are clarifying the regulatory language to
state specifically that the professional courtesy exception applies
only to DHS entities with formal medical staffs. The exception does not
apply to suppliers, such as laboratories or DME companies. The
traditional reasons for professional courtesy provided by entities with
medical staffs do not pertain to suppliers and such ``courtesy''
offered by suppliers would pose a risk of program abuse.
We believe that the exception contains sufficient safeguards to
protect against abuse. In particular, we note that:
Professional courtesy must be extended to all members of
the bona fide medical staff (or in such entity's local community or
service area) without regard to the volume or value of referrals (thus
prohibiting expensive courtesy for high-referring physicians and only
less costly courtesy for low-referring physicians);
The entity's professional courtesy policy must be set out
in writing and approved in advance by the entity's governing body; and
The arrangement must not violate the anti-kickback
statute.
Based on a comment received in response to Phase II, we are
concerned that the current Sec. 411.357(s)(3) may be misinterpreted as
meaning that the requirements of the exception apply only if an entity,
in fact, has a written policy regarding professional courtesy (that is,
if an entity's policy is not reduced to writing, the entity need not
comply with the requirements of the exception at all). Therefore, we
are amending Sec. 411.357(s)(3) to clarify that, as a prerequisite to
extending professional courtesy, the entity must have a written policy
that is approved by the entity's governing body.
Comment: Two commenters objected to limits placed on physicians
extending professional courtesy. One commenter requested that we revise
the regulation so as not to prohibit the longstanding practice of
professional courtesy, including physician-to-physician professional
courtesy. Another commenter approved of the exception generally, but
objected to the restriction requiring the courtesy to be extended
either to the entire medical staff or to all physicians in the
community. This commenter requested that a hospital be able to extend
the courtesy on the same terms as medical staff incidental benefits;
that is, for example, to members of the medical staff practicing in the
same specialty rather than to the entire medical staff.
Response: With respect to the first comment, physician-to-physician
professional courtesy is unlikely to need a separate exception, unless
the recipient physician is a source of DHS referrals to the physician
(or physician practice) extending the courtesy. We believe the more
typical situation would involve a group practice offering professional
courtesy to its physicians
[[Page 51065]]
and their families. The in-office ancillary services exception would be
available in such situations. Moreover, for purposes of the
professional courtesy exception, we consider a group or other physician
practice to be an entity with a formal medical staff that could use the
exception, if all of the requirements of the exception were satisfied.
Second, we do not agree that a hospital, or other entity with a
formal medical staff, should be allowed under the exception to extend
professional courtesy only to certain members of its medical staff. The
selective provision of professional courtesy to a physician gives rise
to an inference that the recipient of the courtesy may have been chosen
in a manner that took into account the volume or value of referrals
from the recipient (or his or her family member or employer-physician)
to the physician providing the professional courtesy or other business
generated between the parties.
Comment: One commenter sought clarification as to the applicability
of the exception to DHS entities that did not have medical staffs.
Response: The exception would not apply to such entities, for the
reasons noted above. We are clarifying the regulatory text in Sec.
411.357(s).
Comment: One commenter asked for clarification as to which Federal
health care programs are referred to in Sec. 411.357(s)(4) and how to
document financial need.
Response: For purposes of the exception, the Federal health care
programs are all Federal health care programs as defined at section
1128B(e) of the Act (69 FR 16115-16116). The determination and
documentation of financial need should be reasonable, consistent, and
contemporaneous.
Comment: Two commenters objected to the requirement that a hospital
notify the insurer if any coinsurance obligation is waived in whole or
in part. According to the commenters, the requirement is unreasonable
and serves no purpose. The commenters requested that the condition be
deleted.
Response: We agree that, in order to eliminate the risk of program
or patient abuse, our standard under section 1877(b)(4) of the Act, we
do not have to require a hospital or other DHS entity to notify a
private insurer if it intends to waive in whole, or in part, any
coinsurance obligation of the insurer's beneficiary. We are deleting
the notification provision. Nonetheless, we believe that it would be a
prudent practice for DHS entities to provide such notification; in
fact, insurers may require such notification.
T. Retention Payments in Underserved Areas
In Phase II, in accordance with our authority under section
1877(b)(4) of the Act, we created a new exception for retention
payments made to a physician by a hospital or federally qualified
health center located in a HPSA (regardless of whether the HPSA is
specifically designated for the physician's particular specialty) (69
FR 16097). In order to qualify for the exception under Phase II, the
following conditions must be met--
The physician must have a bona fide firm, written
recruitment offer from a hospital or federally qualified health center
that is not related to the hospital or the federally qualified health
center making the payment, and the offer specifies the remuneration
being offered;
The offer must require the physician to move the location
of his or her practice at least 25 miles and outside of the geographic
area served by the hospital or federally qualified health center making
the retention payment;
The retention payment must be limited to the lower of: (1)
The amount obtained by subtracting the physician's current income from
physician and related services from the income the physician would
receive from comparable physician and related services in the bona fide
recruitment offer (provided that the respective incomes are determined
using a reasonable and consistent methodology and that they are
calculated uniformly over no more than a 24-month period); or (2) the
reasonable costs the hospital or federally qualified health center
would otherwise have to expend to recruit a new physician to the
geographic area served by the hospital or federally qualified health
center in order to join the medical staff of the hospital or federally
qualified health center to replace the retained physician;
Any retention payment must be subject to the same
obligations and restrictions, if any, on repayment or forgiveness of
indebtedness as the bona fide recruitment offer;
The amount and terms of the retention payment may not be
altered during the term of the arrangement in any manner that takes
into account the volume or value of referrals or other business
generated by the physician;
The requirements of Sec. 411.357(e)(1)(i)-(iv), relating
to physician recruitment arrangements, must be satisfied; and
The arrangement must not violate the anti-kickback statute
or any Federal or State law or regulation governing billing or claims
submission.
The exception in Sec. 411.357(t) requires that retention payments
be made directly from the hospital or federally qualified health center
to the retained physician. A hospital or federally qualified health
center may not enter into a retention payment arrangement with a
physician more frequently than once every 5 years. Also, Phase II
provided for approval of retention payments to physicians practicing in
other underserved areas (or to physicians serving underserved patient
populations), as determined on a case by case basis through an advisory
opinion.
As discussed below, we are modifying Sec. 411.357(t) in several
respects, including expanding the exception by permitting (under
certain circumstances) retention payments in the absence of a written
recruitment offer, by adding flexibility for retention payments to
physicians who serve underserved areas and populations, and by allowing
rural health clinics to make retention payments. In addition, retention
payments may be made on the basis of a written offer of employment as
well as a bona fide firm, written recruitment offer.
Comment: A commenter that is the only hospital providing labor and
delivery services for its county and the 100,000 people who reside in
its service area requested modifications to the exception. The
commenter believed that the exception should not be limited to
retention payments in HPSAs or other underserved areas. According to
the commenter, in 2003, the five obstetricians who were delivering
babies at the hospital received an offer from an academic medical
center located 30 miles away. Under the terms of the offer, the
academic medical center would have provided through its captive
insurance company malpractice insurance that was much less expensive
than the insurance the obstetricians then carried. The commenter stated
that the academic medical center required that the obstetricians
perform their deliveries in a community hospital in a neighboring
county with which the academic medical center was affiliated. The
commenter wrote that its attorneys advised the hospital that the
physician self-referral regulations prohibited it from countering the
academic medical center's offer because the commenter's hospital is not
located in a HPSA. The commenter proposed two alternative modifications
to the retention exception: (1) Permit tax-exempt organizations to make
retention payments if the payments would not constitute an improper
private benefit or an excess benefit transaction under
[[Page 51066]]
applicable IRS principles; or (2) replace the HPSA requirement in both
the retention exception and the obstetrical malpractice insurance
subsidies exception with a super-majority board approval requirement.
Response: We intend for the retention payments exception to be
limited to those areas in which there is a demonstrated shortage of
physicians, and where special efforts are often necessary to attract
and maintain physicians. As noted below, we are expanding the exception
to permit retention payments where the physician's current medical
practice is in a rural area or HPSA, or where at least 75 percent of
the physician's patients either reside in a medically underserved area
or are members of a medically underserved population.
With respect to the suggested modifications to the exception, we
believe that they are too broad and subject to abuse. Compliance with
the IRS excess benefit and private benefit rules, or securing a super-
majority vote of the governing board, does not ensure that the
physician is needed or cannot easily be replaced. Neither proposed
modification necessarily would prevent retention payments from being
abused to reward high referring physicians.
Comment: A number of commenters requested that we eliminate the
requirement in Sec. 411.357(t)(1)(iii) of a written offer. According
to the commenters, many offers are not in writing until agreement is
imminent, at which point it is too late for the hospital to retain the
physician. Other commenters believed that the requirement for a written
offer encourages physicians both to solicit offers, and to engage in
insincere negotiations with others. One commenter believed that an
entity should be able to offer retention payments provided it has a
good faith belief that a physician may be recruited by another entity.
Response: We are revising Sec. 411.357(t) to permit a hospital,
rural health clinic, or federally qualified health center to offer
assistance to a physician who does not have a bona fide written offer
of recruitment or employment if the physician certifies in writing to
the hospital, rural health clinic, or federally qualified health center
that, among other things, he or she has a bona fide opportunity for
future employment by a hospital, academic medical center, or physician
organization that would require relocation of his or her medical
practice at least 25 miles to a location outside of the geographic area
served by the hospital, rural health clinic, or federally qualified
health center. Revised Sec. 411.357(t) also requires the physician to
certify in writing: details regarding the steps taken by the physician
to effectuate the employment opportunity; details of the physician's
employment opportunity, including the identity and location of the
physician's future employer and/or employment location, and the
physician's anticipated income and benefits (or a range for income and
benefits); that the future employer is not related to the hospital,
rural health clinic, or federally qualified health center making the
payment; the date on which the physician anticipates relocating his or
her medical practice; and information sufficient for the hospital,
rural health clinic, or federally qualified health center to verify the
information included in the written certification. The hospital, rural
health clinic, or federally qualified health center must take
reasonable steps to verify the information in the certification.
In circumstances in which the retained physician provides a written
certification to the hospital (or rural health clinic or federally
qualified health center) rather than a bona fide written offer of
recruitment or employment, the retention payment may not exceed the
lower of the following: (1) an amount equal to 25 percent of the
physician's current annual income (averaged over the previous 24
months) using a reasonable and consistent methodology that is
calculated uniformly; or (2) the reasonable costs the hospital would
otherwise have to expend to recruit a new physician to the geographic
area served by the hospital in order to join the medical staff of the
hospital to replace the retained physician. Where the physician has a
written offer, the hospital may match the written offer, as provided in
Sec. 411.357(t)(1). (We note that the exception for retention payments
applies to federally qualified health centers and rural health clinics
in the same manner as it applies to hospitals.)
Comment: Several commenters asked that we broaden the exception to
allow facilities in any medically underserved area to offer retention
payments. Two commenters asked for clarification regarding whether the
entity paying the retention payment must be located in an area of
demonstrated need or whether the physician's patients must live in the
area of demonstrated need. The commenters stated that the latter should
be the test. For example, a hospital should be permitted to offer
retention payments to keep a physician in an outreach area that is
underserved. Another commenter urged that the exception be made
available to rural health clinics.
Response: We agree generally with the comments and are expanding
the exception in Sec. 411.357(t) to permit retention payments that
otherwise satisfy all of the conditions of the exception when: (1) the
physician's current medical practice is located in a rural area, a
HPSA, or an area of demonstrated need as determined by the Secretary in
an advisory opinion issued under section 1877(g)(6) of the Act; or (2)
at least 75 percent of the physician's patients either reside in a
medically underserved area or are members of a medically underserved
population. The location of the hospital in a HPSA is no longer a
requirement of the exception. A retention payment may be made to a
physician whose current medical practice is located in a HPSA,
regardless of whether the HPSA has been designated for physicians in
the retained physician's specialty. Further, we are also permitting
retention payments to be made by rural health clinics under the same
terms and conditions that apply to hospitals and federally qualified
health centers. The purpose of this exception is to retain the
physician's practice in a rural or underserved area.
Comment: Two commenters questioned why the exception requires a
retention payment to be contingent on an offer from a hospital.
According to the commenters, any offer of employment, including an
offer from a group practice, should be sufficient.
Response: We agree and have modified the regulatory text in Sec.
411.357(t)(1) to allow retention payments if a physician has a written
offer from a hospital, academic medical center, or physician
organization (as defined in this Phase III final rule at Sec. 411.351)
that is not related to the hospital, rural health clinic, or federally
qualified health center making the retention payment. We have included
a similar provision in new Sec. 411.357(t)(2) related to the
certification of an employment opportunity for which no written offer
has been received.
Comment: In light of the prohibition against entering into a
retention payment arrangement with the same physician more frequently
than once every 5 years, several commenters objected to the provision
requiring that retention payments be limited to the difference between
the compensation set forth in the recruitment offer and the physician's
current annual income averaged over a 24-month period. According to the
commenters, the net effect is to make the retention payment offer non-
competitive. Another
[[Page 51067]]
commenter asked whether an offer that is for a smaller amount than the
difference over a 24-month period would qualify for the exception.
Response: We are not persuaded to revise the regulation to permit
the hospital, rural health clinic, or federally qualified health center
to make a retention payment that would match the physician's
compensation specified in the recruitment offer (or offer of
employment), irrespective of the period of the recruitment offer. Under
our present rule, we allow entities to make a retention payment that
takes into account the difference between what the physician earns in
his or her current position and what the physician would earn if he or
she accepted the recruitment offer, for a period of up to 24 months.
For example, if a physician's monthly total compensation package in his
or her current position is $13,000, and he or she has a bona fide
written recruitment offer that would, over the next 36 months, provide
the physician with total monthly compensation of $15,000, we would
allow an entity to make a retention payment of up to $48,000 (24 months
(the maximum number of months permitted) x $2000). We believe that
allowing a retention payment that takes into account the difference
between what the physician earns in his or her current position and
what the physician would earn if he or she accepted the recruitment
offer (or offer of employment) may create a potential for abuse if that
payment is calculated over a period greater than 24 months. An entity
is always free to offer a lesser amount. For clarity, we have amended
the language in Sec. 411.357(t)(1)(iv) that stated the retention
payment ``is limited to the lower of'' to ``does not exceed the lower
of.''
Comment: A hospital trade association objected to the provisions
limiting the total retention payment to an existing physician to the
costs of recruiting a new physician. The commenter believed that the
restriction would require hospitals to limit their retention offers to
the costs of a newly practicing physician. The commenter contended that
hospitals should be permitted to take into account the physician's
experience, training, and length of service in the area. Other
commenters asked for confirmation that, in determining the costs of a
replacement, a hospital could include all costs, both direct and
indirect.
Response: We did not intend to limit the amount of a retention
payment to the amount that it would cost to recruit a newly practicing
physician in the same specialty to the same geographic area. Hospitals,
rural health clinics, and federally qualified health centers may take
into account experience, training, and length of service in the area.
Both direct and indirect costs of a replacement can be included,
provided that they are actual costs.
Comment: Two commenters asked whether a hospital could make
retention payments to a group practice, rather than to the physician
directly. One of these commenters noted that the physician recruitment
exception in Sec. 411.357(e) permits remuneration to be paid to the
group on behalf of the physician.
Response: We do not believe that it is appropriate for the payment
to be made to the group practice because the hospital, rural health
clinic, or federally qualified health center should not be subsidizing
expenses of the group practice through the retention payment. The
purpose of the retention payment exception is to allow hospitals, rural
health clinics, and federally qualified health centers to retain the
physician receiving the retention payment in the facility's service
area. We note that a written or other offer of employment by a local
group practice with whom the physician is affiliated would not qualify
for this exception. We note further that the commenter misunderstands
the recruitment exception, which does not protect remuneration provided
to a group practice. It protects remuneration provided directly or
indirectly to a recruited physician, some part of which may pass
through a group practice subject to specific conditions.
Comment: Several commenters complained that the exception did not
permit hospitals to provide malpractice insurance assistance to
physicians on their medical staffs facing exorbitant increases in their
premiums.
Response: As noted in section IX.R of this preamble (in response to
a comment on the exception for obstetrical malpractice insurance
subsidies), there are several exceptions available to entities that
wish to provide assistance with malpractice insurance. Moreover, we do
not believe it is accurate to say that the retention payment exception
does not permit assistance for malpractice insurance premiums.
Remuneration in the form of a retention payment paid by an entity to a
physician may be applied by the physician to malpractice insurance
premiums.
Comment: One commenter questioned whether an arrangement that fully
complies with the retention payments exception in Sec. 411.357(t) at
the time that it is entered into will be considered out of compliance
if the HPSA designation is lost before the arrangement expires.
Specifically, the commenter wanted to know whether a retention payment
arrangement would be out of compliance after all payments have been
made, but the physician remains under a community service obligation at
the time of the HPSA redesignation.
Response: We have amended Sec. 411.357(t)(3) to permit the payment
of a retention payment to a physician whose current medical practice is
in a rural area or a HPSA, or to a physician when 75 percent of his or
her patients reside in a medically underserved area or are members of a
medically underserved population. It is likely that a retention payment
made by a hospital to a physician whose practice location was within an
area that formerly was designated as a HPSA would satisfy one of the
new, more flexible requirements in Sec. 411.357(t)(3). Retention
payments may be made only if the arrangement meets the conditions of
the amended exception; however, a retention agreement may remain in
compliance despite a continuing community service obligation (provided
no additional retention payments are made) even if the HPSA designation
was changed. We note that, under Phase II, the entire geographic area
served by the hospital need not be located in a HPSA.
Comment: One commenter asked for clarification of the term
``relocation requirement'' in the Phase II regulation text in Sec.
411.357(t)(2). According to the commenter, it is unclear from this
provision as to whether the Secretary has the authority to waive the
requirement that the physician receive a bona fide written offer from a
facility to which the physician intends to relocate, or whether the
Secretary has the authority to waive the requirement that the bona fide
written offer would require the physician to relocate his practice at
least 25 miles from its present location and outside the geographic
area served by the entity that would make the retention payment, or
both.
Response: The term ``relocation requirement'' refers to the
requirement that the bona fide written offer requires the physician to
relocate his or her practice at least 25 miles from its present
location to a location outside the geographic area served by the
hospital that would make the retention payment.
Comment: One commenter stated that the advisory opinion alternative
in the exception in Sec. 411.357(t)(2) is unworkable because the
process takes too long and has an uncertain result. The commenter
asserted that a physician would not delay his or her
[[Page 51068]]
decision to relocate his or her practice pending the receipt of a
favorable advisory opinion. Moreover, according to the commenter, the
availability of an advisory opinion has limited utility because only
the relocation requirement in Sec. 411.357(t)(1) may be waived by the
Secretary. The commenter suggested that CMS should be given more
latitude through the advisory opinion process to approve retention
payment agreements.
Response: The advisory opinion process is the vehicle for CMS to
use in determining whether the relocation requirement in this exception
will be waived for a particular retention payment arrangement. We
believe that the modifications to Sec. 411.357(t) may alleviate many
of the commenter's concerns regarding a hospital's ability to offer a
retention payment to a physician in a manner timely enough to affect
the physician's decision to relocate out of the hospital's geographic
service area. With respect to the commenter's suggestion that CMS be
given more latitude to approve retention payment agreements, we are not
convinced that additional changes to this exception would pose no risk
of program abuse.
U. Community-Wide Health Information System
In Phase II, using our authority under section 1877(b)(4) of the
Act, we created a new exception for community-wide health information
systems (69 FR 16113). If certain conditions are met, Sec. 411.357(u)
permits compensation in the form of items or services of information
technology provided by an entity to a physician that allow access to,
and sharing of, electronic health care records and any complementary
drug information systems, general health information, medical alerts,
and related information for patients served by community providers and
practitioners, in order to enhance the community's overall health. We
are making no changes to this exception.
Comment: We received 13 comments regarding the community-wide
health information system exception, all of which supported the new
exception in Sec. 411.357(u). Several commenters recommended further
clarification of the definition of a ``community'' and of ``community-
wide health information system.'' Several commenters recommended that
hospitals be allowed to provide to physicians items and services needed
for non-clinical functions. Commenters also raised questions about
patient access and whether physicians may be charged to use a system.
Several commenters suggested that hospitals be able to provide access
to health information to physicians only, rather than all residents of
the community. Two commenters urged that ``maximum flexibility'' be
allowed. A few commenters recommended that interoperability should be
encouraged.
Response: Subsequent to the receipt of the public comments, on
October 11, 2005, we published a notice of proposed rulemaking creating
an exception for electronic prescribing technology as required by
section 101 of the MMA (70 FR 59182). In addition, in that same notice,
using our authority under section 1877(b)(4) of the Act, we proposed an
exception for electronic health records software and information
technology and training services. After taking into account public
comments, on August 8, 2006, we published a final rule promulgating
these two exceptions (71 FR 45140). The exception for electronic
prescribing items and services appears in Sec. 411.357(v) and the
exception for electronic health records software and information
technology and training services appears in Sec. 411.357(w). We are
republishing both exceptions with nonsubstantive technical changes in
this Phase III final rule. In addition to requiring compliance with
criteria designed to safeguard against program and patient abuse, both
exceptions provide that neither the donor nor any person on the donor's
behalf may take any action to limit or restrict the use, compatibility
or interoperability of the items or services. The electronic health
records exception in Sec. 411.357(w) requires interoperability at the
time the remuneration is provided to the physician. Neither exception
requires community-wide application.
At this time, we are not making any changes to, or issuing any
further guidance concerning, the community-wide health information
systems exception while we observe how the new exceptions for
electronic prescribing and electronic health records technology in
Sec. 411.357 (v) and (w), respectively, are received. We are
continuing to consider the issues that commenters raised and, if
appropriate, we will issue clarifications and changes in a future
rulemaking.
X. Reporting Requirements--Sec. 411.361
Section 1877(f) of the Act sets forth certain reporting
requirements for all entities providing covered items or services for
which payment may be made under Medicare. The required information must
be provided in a form, manner, and at such times that the Secretary
specifies. Section 1877(g)(5) of the Act provides that any person who
is required, but fails, to meet one of these reporting requirements is
subject to a civil money penalty of not more than $10,000 for each day
for which reporting is required to have been made.
Section 411.361 of our regulations, as modified in Phase II, states
that the information that we may require to be furnished can include
the following--
(1) The name and Unique Physician Identification Number (UPIN) of
each physician who has a financial relationship with the entity;
(2) The name and UPIN of each physician with an immediate family
member (as defined at Sec. 411.351) who has a financial relationship
with the entity;
(3) The covered items and services provided by the entity; and
(4) With respect to each physician identified under (1) and (2),
the nature of the financial relationship (including the extent and/or
value of the ownership or investment interest or the compensation
arrangement).
In Phase II, we--
Specifically excluded from the definition of ``reportable
financial relationships'' ownership or investment interests in
publicly-traded securities and mutual funds if such interests satisfy
the requirements of the exceptions in Sec. 411.356(a) or (b),
respectively. This exclusion from the definition of reportable
financial relationships for publicly-traded securities and mutual funds
is limited to shareholder information; contractual arrangements
concerning these ownership or investment interests are reportable
financial relationships.
Modified Sec. 411.361(c)(4) to specify that the
information required to be reported is only that information that the
entity knows or should know in the course of prudently conducting
business, including, but not limited to, records that the entity is
already required to retain to comply with IRS and Securities and
Exchange Commission rules and other rules under the Medicare and
Medicaid programs.
We are making no substantive changes to Sec. 411.361 in this Phase
III final rule. However, we are revising Sec. 411.361(c) to account
for the transition from the UPIN to the National Provider Identifier
(NPI).
Comment: One commenter sought clarification of our statement in
Phase II that, to the extent we are obligated under the Freedom of
Information Act (FOIA), 5 U.S.C. 552, to disclose records we have
received pursuant to the physician self-referral reporting
requirements, we cannot maintain the records as confidential (69 FR
17934). The commenter believes that most such records will be exempt
from disclosure under Exemption 4 of the FOIA, 5
[[Page 51069]]
U.S.C. 552(b)(4), as they will involve confidential business
information.
Response: The commenter is correct that Exemption 4 of the FOIA
protects confidential business information from required disclosure.
Moreover, the Trade Secrets Act, 18 U.S.C. 1905, prohibits Federal
agencies from disclosing confidential business information, absent a
law or regulation permitting such disclosure. We agree that much of the
information that we may receive pursuant to our reporting requirements
under the physician self-referral regulations will be exempt from
disclosure under the FOIA and prohibited from disclosure by the Trade
Secrets Act. However, when we receive a FOIA request for information
reported to us, we must evaluate whether the particular information is
exempt or prohibited from disclosure. (Generally, information that is
exempt from disclosure under the FOIA is also prohibited from
disclosure by the Trade Secrets Act.) We cannot state categorically,
however, that all information that we receive will be confidential
business information within the meaning of the FOIA and the Trade
Secrets Act.
Comment: A commenter suggested that we exclude from the definition
of ``reportable financial relationship'' compensation arrangements that
qualify under any of the following exceptions: Medical staff incidental
benefits (Sec. 411.357(m)); nonmonetary compensation (Sec.
411.357(k)); professional courtesy (Sec. 411.357(s)); or referral
services (Sec. 411.357(q)). According to the commenter, treating these
compensation arrangements as ``reportable financial relationships''
would require a hospital to furnish the required information for
virtually all physicians on its medical staff (and perhaps for others
as well), which would create an unnecessary burden for the hospital.
Another commenter asserted that an entity's obligation under our
reporting requirements is staggering because of the breadth of the
physician self-referral statute. According to this commenter, the most
acute burdens relate to the requirement in Sec. 411.361(c)(2) to
maintain records of financial relationships with family members of
physicians. The commenter further asserted that most DHS entities do
not have a means to catalog all such financial relationships, as they
have no reason to create records of transactions that are at fair
market value. The commenter suggested that various types of financial
relationships involving immediate family members of physicians (such as
charitable donations by family members or fair market value lease
arrangements) be excepted from the reporting requirements. A third
commenter also expressed concern that the inclusion of financial
relationships with immediate family members of physicians imposed a
substantial burden on DHS entities. This commenter suggested that if
basic information, such as the UPIN of each physician who has a
reportable financial arrangement with the entity, the covered items or
services provided by the entity, and the nature of the financial
arrangement for each such physician is provided, CMS could verify that
exceptions are met and it would not be necessary in many cases for the
entity to report information pertaining to immediate family members who
have financial relationships with the DHS entities. Where such
information is needed from the immediate family members of physicians,
the commenter asserted that 30 days is an unreasonable amount of time
in which to provide the information, and suggested that extensions of
at least 90 days should be available.
Response: We decline to adopt the commenters' suggestions for the
reasons stated in Phase II (69 FR 17934). There, we stated that we are
concerned that an entity could decide that one or more of its financial
relationships falls within an exception, fail to retain data concerning
those financial relationships, and thereby prevent the government from
reviewing the arrangements to determine if they qualify for an
exception. In particular, we disagree that, where the financial
relationship that triggers the physician self-referral statute is
between an immediate family member of a physician and the DHS entity,
it is not necessary for the entity to maintain information concerning
the financial relationship and to report it upon our direction to do
so. We fail to see how reporting information pertaining only to
physicians who have financial relationships provides us with assurance
that financial relationships concerning immediate family members meet
one or more of the exceptions.
Section 411.361(e) provides that entities must be given at least 30
days to provide the required information. Where we agree that the
nature or scope of the request for information is such that the
information cannot reasonably be furnished within 30 days, we will
extend the time for supplying the information.
Comment: A commenter requested that we create an exception to the
reporting requirements for the situation in which a DHS entity seeks to
obtain the required information but was denied access to it, such as
where a physician has a reportable financial relationship solely by
virtue of the hospital's financial arrangement with an immediate family
member.
Response: We fail to see the basis for the commenter's concern. An
entity that has a financial relationship with a physician or an
immediate family member of the physician should have its own records of
the details of such relationship.
XI. Miscellaneous (Other)
A. Specialty Hospital Moratorium
Section 507(a) of the MMA amended the hospital and rural provider
ownership exceptions to the physician self-referral prohibition.
Section 507 of the MMA specified that, for the 18-month period
beginning on December 8, 2003 and ending on June 7, 2005, physician
ownership and investment interests in ``specialty hospitals'' would not
qualify for the whole hospital exception. Section 507 of the MMA
further specified that, for the same 18-month period, the exception for
physician ownership or investment interests in rural providers would
not apply in the case of specialty hospitals located in rural areas.
For purposes of section 507 of the MMA only, a ``specialty hospital''
was defined as a hospital in one of the 50 States or the District of
Columbia that is primarily or exclusively engaged in the care and
treatment of one of the following: (1) Patients with a cardiac
condition; (2) patients with an orthopedic condition; (3) patients
receiving a surgical procedure; or (4) patients receiving any other
specialized category of services that the Secretary designates as being
inconsistent with the purpose of permitting physician ownership and
investment interests in a hospital. The term ``specialty hospital'' did
not include any hospital determined by the Secretary to be in operation
or ``under development'' as of November 18, 2003, and ``for which the
number of physician investors at any time on or after such date is no
greater than the number of such investors as of such date.''
Phase II modified the hospital ownership exception to reflect the
MMA moratorium provisions. We received several comments on Phase II
regarding the implementation of the 18-month moratorium on referrals of
Medicare patients to specialty hospitals by physician investors.
Comment: One commenter suggested that, during the 18-month
moratorium, any entity applying to receive a Medicare provider
agreement as a hospital should be required to submit, as part of the
application process, the
[[Page 51070]]
information required under Sec. 411.361(c)(1) through (c)(4).
Response: The commenter's suggestion is moot as the moratorium
ended on June 7, 2005. However, as we noted in the Secretary's August
8, 2006 final Report to Congress on specialty hospitals, which was
required by section 5006 of the DRA, we are exploring changes to the
enrollment form for hospitals (the CMS-855A) to capture information
regarding whether an applicant hospital is, or is projected to be, a
specialty hospital.
Comment: A commenter noted that Phase II defined a specialty
hospital as a hospital that is primarily or exclusively engaged in the
care and treatment of patients with a cardiac condition, patients with
an orthopedic condition, or patients receiving a surgical procedure,
but that no clear guidance exists as to what ``primarily engaged in''
means.
Response: For purposes of implementing the 18-month moratorium
imposed by section 507 of the MMA, we considered a hospital to be
``primarily engaged'' in the care and treatment of cardiac, orthopedic,
or surgical patients if 45 percent of the hospital's Medicare cases
were (or were projected to be) in Major Diagnostic Category (MDC) 5,
Diseases and Disorders of the Circulatory System (cardiac), MDC 8,
Diseases and Disorders of the Musculoskeletal System and Connective
Tissue (orthopedic), or were surgical in nature (surgical). As noted in
response to the previous comment, we are exploring changes to the CMS-
855A to enable us better to determine whether an applicant hospital is
a specialty hospital. We may define ``primarily engaged'' for that
purpose.
Comment: A commenter noted that, in Phase II, we defined specialty
hospital for purposes of the 18-month moratorium to exclude a hospital
for which the number of physician investors at any time on or after
November 18, 2003 is no greater than the number of investors as of such
date. The commenter stated that this requirement unfairly restricted
any group practice that had invested in a specialty hospital prior to
November 18, 2003 from increasing the number of its physician owners.
It suggested that we interpret section 507 of the MMA to mean that
there is no increase in physician investors, notwithstanding an
increase in the number of physician equity owners in a group practice,
if the group practice owned its interest in the specialty hospital
prior to November 18, 2003 and the group was not formed for the purpose
of investing in the hospital.
Response: For purposes of implementing the 18-month moratorium, we
considered there to be an increase in the number of physician investors
in a specialty hospital if a group practice that had an investment
interest in a specialty hospital increased the number of physician
equity owners in the group at any time on or after November 18, 2003
(and there was no corresponding decrease in the specialty hospital's
investors). The suggested interpretation by the commenter does not
comport with the plain language of section 507 of the MMA.
B. Physician Certification Requirements for Home Health Services--Sec.
424.22
Section 903 of the Omnibus Reconciliation Act of 1980 amended
sections 1814(a) and 1835(a) of the Act to require the Secretary to
issue regulations prohibiting a physician from certifying the need for
home health services, or establishing and reviewing home health plans
of treatment if the physician had a ``significant ownership interest
in, or a significant financial or contractual relationship with, a home
health agency.'' In October 1982, we published a rule (47 FR 47388)
interpreting the prohibition to apply to physicians having, among other
things: (1) a direct or indirect ownership interest of 5 percent or
more in a home health agency; or (2) direct or indirect business
transactions with the home health agency that totaled more than $25,000
or 5 percent of the agency's operating expenses, whichever was less.
The 1982 regulatory provision, which was ultimately codified in Sec.
424.22(d), was superseded by the physician self-referral prohibition
when the prohibition became applicable in 1995 to physician referrals
for home health services.
In Phase I, we amended the home health certification requirement in
Sec. 424.22(d) to provide that a physician may not certify the need
for home health services or establish or review a plan of treatment if
his or her ``financial relationship'' (as defined in the physician
self-referral regulations) with the home health agency did not satisfy
the requirements of an exception under the physician self-referral law.
In Phase II, we republished Sec. 424.22(d) without change, and we
received no comments on this provision. This Phase III final rule makes
no substantive change to Sec. 424.22(d), although we are revising the
provision to reference more explicitly the regulatory exceptions.
XII. Provisions of the Final Rule
A summary of the major changes to the regulations in this Phase III
final rule are discussed below. No major regulatory changes were made
to Sec. 411.352 (Group Practices), Sec. 411.353 (Prohibition on
Certain Referrals by Physicians and Limitations on Billing), or Sec.
411.356 (Exceptions to the Referral Prohibition Related to Ownership or
Investment Interests). However, certain provisions of these sections
were clarified in this preamble.
Three definitions are added at Sec. 411.351 (``downstream
contractor,'' ``physician organization,'' and ``rural area''). Also, in
the definition of ``fair market value,'' we are not retaining the safe
harbor regarding hourly payments for a physician's personal services.
Section 411.354 defines ``financial relationships'' for purposes of
the physician self-referral law. A new provision was added in Sec.
411.354(b)(3)(v) which specifies that an ownership interest in an
entity [the whole hospital or a subdivision (that is, portion) of the
hospital] does not include a security interest taken by a physician in
equipment sold to the entity and financed with a loan by the physician
to the entity. However, the security interest is a compensation
arrangement.
A new ``stand in the shoes'' provision was added to Sec.
411.354(c)(2) under which a physician is deemed to ``stand in the
shoes'' of his or her physician organization (defined at Sec. 411.351
as a ``physician (including a professional corporation of which the
physician is the sole owner), a physician practice, or a group practice
that complies with the requirements of Sec. 411.352.'' A physician who
stands in the shoes of his or her physician organization is deemed to
have the same compensation arrangements with the DHS entity that the
physician organization has with the DHS entity. As a result, many
compensation arrangements that were analyzed under Phase II as indirect
compensation arrangements are now analyzed as direct compensation
arrangements that must comply with an applicable exception for direct
compensation arrangements.
The Phase III changes to the general exceptions in Sec. 411.355
for both ownership/investment interests and compensation arrangements
are concentrated in the exceptions for academic medical centers and
intra-family rural referrals in Sec. 411.355(e) and (j), respectively.
With respect to the academic medical centers exception, we clarified
that the total compensation from each academic medical center component
to a faculty physician must be set in advance and not determined in a
manner that takes into account the volume or value of the physician's
[[Page 51071]]
referrals or other business generated by the referring physician within
the academic medical center. In addition, when determining whether the
majority of physicians on the medical staff of a hospital affiliated
with an academic medical center consists of faculty members, the
affiliated hospital must include or exclude all individual physicians
holding the same class of privileges at the affiliated hospital.
We amended the exception for intra-family rural referrals to
include an alternative test to determine whether a physician may refer
a patient to an immediate family member for DHS. Specifically, if, in
light of the patient's condition, no other person or entity is
available to furnish the DHS in a timely manner within 45 minutes
transportation time from the patient's home, a physician is not
prohibited from making a referral for the DHS to an immediate family
member or to an entity with which the immediate family member has a
financial relationship, provided that all other conditions of the
exception are satisfied. The Phase II 25-mile test remains an option
for complying with the exception.
Section 411.357 sets out the exceptions for various compensation
arrangements. The revisions to the exceptions for physician recruitment
in Sec. 411.357(e) and retention payments in underserved areas in
Sec. 411.357(t) are significant.
The physician recruitment exception protects certain remuneration
that is provided by a hospital to a physician as an inducement for the
physician to relocate his or her medical practice into the ``geographic
area served by the hospital,'' which we defined in Phase II as the
lowest number of contiguous zip codes from which the hospital draws at
least 75 percent of its inpatients. Under the revised definition of
``geographic area served by the hospital,'' a hospital that draws fewer
than 75 percent of its inpatients from all of the contiguous zip codes
from which it draws inpatients may recruit a physician into the
geographic area composed of all of the contiguous zip codes from which
it draws its inpatients, provided that all other requirements of the
exception are satisfied. In addition, the revised definition sets forth
a special optional rule for rural hospitals under which a rural
hospital may determine its geographic service area using the lowest
number of contiguous zip codes from which the hospital draws at least
90 percent of its inpatients or, if the hospital draws fewer than 90
percent of its inpatients from all of the contiguous zip codes from
which it draws inpatients, its service area may include certain
noncontiguous zip codes. A rural hospital may also recruit physicians
to an area outside the geographic area served by the hospital if the
Secretary has determined in an advisory opinion that the area into
which the physician is to be recruited has a demonstrated need for the
recruited physician, provided that all other requirements of the
exception are satisfied.
In the case of an income guarantee provided by a hospital to a
physician who relocates his or her practice into a rural area or HPSA
and joins a physician practice to replace a physician who retired,
died, or relocated (from the service area) during the previous 12-month
period, the costs allocated by the physician practice to the recruited
physician may be either: (1) the actual additional incremental costs
attributable to the recruited physician; or (2) the lower of a per
capita allocation or 20 percent of the practice's aggregate costs.
This Phase III final rule also clarifies that a physician must move
his or her medical practice from a location outside of the geographic
area served by the hospital to a location within the geographic area
served by the hospital. In addition, we have revised the exception to
provide that the relocation requirement will not apply to a physician
who: (1) for at least 2 years immediately preceding the recruitment
arrangement, was employed on a full-time basis by a Federal or State
bureau of prisons (or similar entity operating correctional
facilities), the Department of Defense or Veterans Affairs, or
facilities of the Indian Health Service, provided that he or she had no
private medical practice during the same time period; or (2) the
Secretary has determined in an advisory opinion not to have an
established medical practice that serves a significant number of
patients who are or could become patients of the recruiting hospital.
In the case of recruitment assistance provided by a hospital to a
physician who joins a physician practice, we have revised the exception
to prohibit the physician practice from imposing on the recruited
physician any practice restrictions that unreasonably restrict the
recruited physician's ability to practice medicine in the geographic
area served by the hospital. Finally, the exception in Sec. 411.357(e)
is now applicable to a rural health clinic in the same manner as it
applies to a hospital (or federally qualified health center).
We have expanded the exception in Sec. 411.357(t) for retention
payments in underserved areas to permit a hospital to make a payment to
retain a physician on its medical staff even if the physician does not
have a bona fide firm, written recruitment offer, provided that the
physician certifies in writing that, among other things, he or she has
a bona fide opportunity for future employment that would require the
physician to move his or her medical practice at least 25 miles to a
location outside the geographic area served by the hospital, and
certain other conditions are satisfied. We have also expanded the
retention payments exception to permit retention payments in the case
of a physician with a bona fide firm, written offer of employment from,
or a bona fide opportunity for future employment with, an academic
medical center or physician organization. Also, we have expanded the
exception to permit a hospital to make a retention payment to a
physician whose current medical practice is not located in a HPSA.
Under the revised exception, a retention payment may be made to a
physician whose current medical practice is located in a rural area or
an area with demonstrated need for the physician, as determined by the
Secretary in an advisory opinion.
Changes to the remaining exceptions found in Sec. 411.357
include--
Under the personal service arrangements exception in Sec.
411.357(d), allowing a ``holdover'' personal service arrangement on
terms similar to those in the exceptions for the rental of office space
and equipment;
Under the nonmonetary compensation exception in Sec.
411.357(k), in certain circumstances, upon repayment of nonmonetary
compensation in excess of the applicable limit, deeming the nonmonetary
compensation to be within the limit, and allowing an entity with a
formal medical staff to hold one local medical staff appreciation event
per year;
Under the exception for charitable donations by a
physician in Sec. 411.357(j), clarifying that the donation may neither
be solicited nor offered in any manner that takes into account the
volume or value of referrals or other business generated between the
physician and the entity;
Under the professional courtesy exception in Sec.
411.357(s), eliminating the requirement that the entity offering the
professional courtesy inform the insurer in writing of the reduction of
any coinsurance obligation on the part of the recipient of the
professional courtesy, and clarifying that the exception is applicable
only to entities that have formal medical staffs;
Under the fair market value compensation exception in
Sec. 411.357(l),
[[Page 51072]]
clarifying that the exception is applicable to both compensation
provided to a physician from an entity and compensation provided to an
entity from a physician; and,
Under the compliance training exception in Sec.
411.357(o), permitting the provision of training programs for which CME
is available, provided that the primary purpose of the program is
compliance training.
XIII. Technical Corrections
1. Web site Change
Because the address of the physician self-referral Web site has
changed, we are correcting the references to our Web site in the
definition of ``List of CPT/HCPCS Codes'' at Sec. 411.351, the
``nonmonetary compensation'' exception in Sec. 411.357(k), and the
``medical staff incidental benefits'' exception in Sec. 411.357(m).
[REG TEXT--Change]
2. Typographical Error
We are correcting typographical and other errors that appeared in
Phase II. For example, we are removing a typographical error
(``sbull'') in Sec. 411.355(a)(2). In addition, we are correcting
Sec. 411.357(m)(1) to state that medical staff incidental benefits
must be ``offered'' to all members of the medical staff. In Phase II,
we intended to change ``offered'' to ``provided'' only in Sec.
411.357(m)(2), but the change was inadvertently made to paragraph
(m)(1) as well.
3. CMS Manuals
Because CMS has begun re-numbering and posting its manuals on the
Internet, we are correcting the citations to the manuals in Sec.
411.351 (the definitions of entity, locum tenens physician, parenteral
and enteral nutrients, equipments and supplies, and physician in the
group practice).
4. Nonmonetary Compensation
We are revising the section heading of Sec. 411.357(k) to remove
the reference to ``up to $300.'' This change will make the section
heading consistent with the provisions of Sec. 411.357(k).
5. Simplification of Regulatory Text
We made several non-substantive grammatical and editorial revisions
to the regulatory text. For example, we revised the introductory
language in Sec. 411.355(g) concerning EPO and other dialysis related
drugs to make it easier to read. We also substituted ``nonmonetary''
for ``non-monetary'' throughout the regulations. A similar change is
being made to Sec. 424.22 to simplify language concerning home health
services. We have simplified references in the recruitment exception to
a recruited physician joining a ``physician or physician practice.''
Because ``joining a physician'' is necessarily synonymous with
``joining a physician practice,'' we have simplified the regulation
text so that it now refers only to ``joining a physician practice.''
6. Statutory References
Under the definition of ``Does not violate the anti-kickback
statute'' at Sec. 411.351, the statutory references to the anti-
kickback statute have been corrected from sections 1128(a)(7) and
1128a(b)(7) of the Act to sections 1128A(a)(7) and 1128(b)(7) of the
Act, respectively.
7. References to the Reassignment Rules
In the definition of ``physician in the group practice,'' we
updated the reference to the reassignment rules from Sec. 424.80(b)(3)
to Sec. 424.80(b)(2). We also updated the reference to the
reassignment rules in the in-office ancillary services exception in
Sec. 411.355(b)(3)(v) from Sec. 424.80(b)(6) to Sec. 424.80(b)(5).
8. National Provider Identifier
We revised the Reporting Requirements provision in Sec. 411.361(c)
to account for the transition from the Unique Physician Identification
Number (UPIN) to the National Provider Identifier (NPI) by inserting
the following phrase: ``and/or the national provider identifier
(NPI).'' Specific references to the NPI are found in Sec.
411.361(c)(1) and (c)(2).
9. Advisory Opinions
We are revising Sec. 411.370(a) to remove the sunset provision
that had formerly applied to our authority to issue advisory opinions
because section 543 of the Medicare, Medicaid, and SCHIP Benefits and
Improvement Protection Act of 2000, Pub. L. 106-554, extended the time
period indefinitely for our authority to issue advisory opinions.
XIV. Collection of Information Requirements
Under the Paperwork Reduction Act of 1995, we are required to
provide 30-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act
of 1995 requires that we solicit comment on the following issues--
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
Therefore, we previously solicited public comment on each of these
issues for the following sections of the regulation that contain
information collection requirements.
Group Practice (Sec. 411.352)
The burden associated with Sec. 411.352 was discussed in detail in
both Phase I and Phase II (66 FR 949 and 69 FR 16118-16119,
respectively). Section 411.352 sets out the requirements that must be
met in order to qualify as a group practice. Section 411.352(d)
provides that substantially all of the patient care services of the
physicians who are members of the group must be furnished and billed
through the group practice. The burden associated with this requirement
is the time and effort necessary to collect, document, and maintain the
information outlined in Sec. 411.352(d). We believe that the
documentation requirements in this section are usual and customary
business practices. The burden associated with this requirement,
therefore, is not subject to the PRA as stated in 5 CFR 1320.3(b)(2)
because the time, effort, and financial resources necessary to comply
with a collection of information that would be incurred by persons in
the normal course of their activities are considered to be usual and
customary business practices and are not subject to the PRA. In
addition, the burden is not subject to the PRA under 5 CFR 1320.4(a) to
the extent that the information is collected during the conduct of a
criminal or civil action, or during the conduct of an administrative
action, investigation or audit.
Section 411.352(i) addresses the special rule for productivity
bonuses and profit shares. The burden associated with the requirements
in this section is the time and effort associated with collecting and
maintaining the information listed under Sec. 411.352(i)(2) and
(i)(3). The burden associated with the recordkeeping requirements in
Sec. 411.352(i) is not subject to the PRA, as stated in 5 CFR
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5
CFR 1320.4(a) to the extent
[[Page 51073]]
that the information is collected during the conduct of a criminal or
civil action, or during the conduct of an administrative action,
investigation or audit.
Financial Relationship, Compensation, and Ownership or Investment
Interest (Sec. 411.354)
Both Phase I (66 FR 949) and Phase II (69 FR 16119) contain
detailed discussions of the information collection requirements in
Sec. 411.354. Section 411.354(d)(4) permits a physician's compensation
from a bona fide employer or under a managed care or other contract to
be conditioned on the physician's referrals to a particular provider,
practitioner, or supplier if, among other things, the requirement to
make referrals is set forth in a written agreement signed by the
parties. Specifically, the burden associated with this requirement in
Sec. 411.354(d)(4)(iv)(A) is the time and effort necessary to set
forth the required referrals provision in a written agreement signed by
both parties. The burden associated with this requirement is not
subject to the PRA as stated in 5 CFR 1320.3(b)(2). In addition, the
burden is not subject to the PRA under 5 CFR 1320.4(a) to the extent
that the information is collected during the conduct of a criminal or
civil action, or during the conduct of an administrative action,
investigation or audit.
General Exceptions to the Referral Prohibition Related to Both
Ownership/Investment and Compensation (Sec. 411.355)
The burden associated with Sec. 411.355 was discussed in detail in
both Phase I (66 FR 949) and Phase II (69 FR 16119). Section 411.355(e)
addresses the exception for services provided by an academic medical
center. Essentially, Sec. 411.355(e)(1)(iii)(B) states that the
relationship of the components of the academic medical center must be
set forth in written agreement(s) or other written document(s) that
have been adopted by the governing body of each component. If the
academic medical center is one legal entity, this requirement will be
satisfied if transfers of funds between components of the academic
medical center are reflected in the routine financial reports covering
the components. The burden associated with these requirements is not
subject to the PRA, as stated in 5 CFR 1320.3(b)(2). In addition, the
burden is not subject to the PRA under 5 CFR 1320.4(a) to the extent
that the information is collected during the conduct of a criminal or
civil action, or during the conduct of an administrative action,
investigation or audit.
Exceptions to the Referral Prohibition Related to Compensation
Arrangements (Sec. 411.357)
Section 411.357(a) addresses the rental of office space. Under
Sec. 411.357(a)(1), the rental or lease agreement associated with
payments for the use of office space made by a lessee to a lessor must
be set out in writing, signed by the parties, and specify the premises
covered. The burden associated with these requirements is the time and
effort necessary to draft, sign, and maintain the written agreement.
The burden associated with this requirement is not subject to the PRA
as stated in 5 CFR 1320.3(b)(2). In addition, the burden is not subject
to the PRA under 5 CFR 1320.4(a) to the extent that the information is
collected during the conduct of a criminal or civil action, or during
the conduct of an administrative action, investigation or audit.
Section 411.357(b) requires that the payments made by a lessee to a
lessor for the use of equipment meet certain conditions. Specifically,
Sec. 411.357(b)(1) requires that a rental or lease agreement be set
out in writing, signed by the parties, and specify the equipment
covered by the agreement. The burden associated with this requirement
is the time and effort associated with drafting, signing, and
maintaining the written agreement. The burden associated with this
requirement is not subject to the PRA as stated in 5 CFR 1320.3(b)(2).
In addition, the burden is not subject to the PRA under 5 CFR 1320.4(a)
to the extent that the information is collected during the conduct of a
criminal or civil action, or during the conduct of an administrative
action, investigation or audit.
Section 411.357(d) addresses personal service arrangements. Section
411.357(d)(1)(i) requires that each personal service arrangement be set
out in writing, signed by the parties, and specify the services covered
by the arrangement. In addition, Sec. 411.357(d)(1)(ii) requires that
the written agreement cover all of the services to be furnished by the
physician or his or her immediate family member, or both. This
requirement is satisfied if all separate arrangements with the
physician and his or her immediate family member incorporate each other
by reference or cross-reference a master list of contracts. The burden
associated with both Sec. 411.357(d)(1)(i) and (ii) is not subject to
the PRA as stated under 5 CFR 1320.3(b)(2). In addition, the burden is
not subject to the PRA under 5 CFR 1320.4(a) to the extent that the
information is collected during the conduct of a criminal or civil
action, or during the conduct of an administrative action,
investigation or audit.
Section 411.357(e) addresses physician recruitment. Specifically,
Sec. 411.357(e)(1)(i) requires that all arrangements for remuneration
provided by a hospital to recruit a physician that is intended to
induce the physician to relocate his or her medical practice to the
geographic area served by the hospital in order to become a member of
the hospital's medical staff must be set out in writing and signed by
both parties. In addition, Sec. 411.357(e)(4)(i) provides that, in the
case of certain recruitment arrangements in which the recruited
physician joins a physician practice, the written agreement must be
signed by the hospital, the recruited physician, and the physician
practice. The burden associated with these requirements is the time and
effort associated with drafting, signing, and maintaining the written
agreement. The burden associated with this requirement is not subject
to the PRA as stated under 5 CFR 1320.3(b)(2). In addition, the burden
is not subject to the PRA under 5 CFR 1320.4(a) to the extent that the
information is collected during the conduct of a criminal or civil
action, or during the conduct of an administrative action,
investigation or audit.
Section 411.357(e)(4)(iv) imposes a recordkeeping requirement.
Records of the actual costs and the passed through amounts must be
maintained for a period of at least 5 years and made available to the
Secretary upon request. The burden associated with this requirement is
the time and effort associated with maintaining the required
documentation. The burden associated with this collection is not
subject to the PRA as it meets the requirements set forth in 5 CFR
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5
CFR 1320.4(a) to the extent that the information is collected during
the conduct of a criminal or civil action, or during the conduct of an
administrative action, investigation or audit.
Section 411.357(l)(1) requires that all arrangements pertaining to
fair market value compensation be set forth in writing. In addition,
the written agreement must be signed by the parties and must cover
identifiable items or services that are the subject of the arrangement.
The burden associated with this requirement is the time and effort
necessary to draft, sign, and maintain the written agreement. The
burden associated with these
[[Page 51074]]
requirements is not subject to the PRA as it meets the requirements set
forth in 5 CFR 1320.3(b)(2). In addition, the burden is not subject to
the PRA under 5 CFR 1320.4(a) to the extent that the information is
collected during the conduct of a criminal or civil action, or during
the conduct of an administrative action, investigation or audit.
Section 411.357(p) sets forth an exception for indirect
compensation arrangements. The exception requires the arrangement to be
set out in a writing that is signed by the parties and specifies the
services covered by the arrangement. The burden associated with this
requirement is the time and effort necessary to draft, sign, and
maintain the written agreement. The burden associated with these
requirements is not subject to the PRA as it meets the requirements set
forth in 5 CFR 1320.3(b)(2). In addition, the burden is not subject to
the PRA under 5 CFR 1320.4(a) to the extent that the information is
collected during the conduct of a criminal or civil action, or during
the conduct of an administrative action, investigation or audit.
Section 411.357(q) sets forth an exception for remuneration that
meets all of the conditions set forth in the voluntary anti-kickback
safe harbor at Sec. 1001.952(f). Under Sec. 1001.952(f), the referral
service must make certain standard disclosures to each person seeking a
referral and must maintain a written record certifying each disclosure.
The burden associated with this requirement is the time and effort
necessary to draft, sign, and maintain the disclosures. The burden
associated with these requirements is not subject to the PRA as it
meets the requirements set forth in 5 CFR 1320.3(b)(2). In addition,
the burden is not subject to the PRA under 5 CFR 1320.4(a) to the
extent that the information is collected during the conduct of a
criminal or civil action, or during the conduct of an administrative
action, investigation or audit.
Section 411.357(r) sets forth an exception for obstetrical
malpractice insurance subsidies that satisfy all of the conditions set
forth in the voluntary anti-kickback safe harbor at Sec. 1001.952(o).
Under Sec. 1001.952(o)(1), such subsidies must be made in accordance
with a written agreement. The burden associated with this requirement
is the time and effort necessary to draft, sign, and maintain the
agreement. Under Sec. 1001.952(o)(2), the physician receiving the
subsidy must certify that for the initial coverage period, he or she
has a reasonable basis for believing that at least 75 percent of his or
her obstetrical patients will either reside in a HPSA or medically
underserved area, or be part of a medically underserved population, and
the physician must make a similar certification for subsequent coverage
periods. The burden associated with the requirement for a written
agreement is not subject to the PRA as it meets the requirements set
forth in 5 CFR 1320.3(b)(2). In addition, the burden is not subject to
the PRA under 5 CFR 1320.4(a) to the extent that the information is
collected during the conduct of a criminal or civil action, or during
the conduct of an administrative action, investigation or audit. The
burden associated with the physician certification requirement is
considered to be a usual and customary business practice and, as set
forth in 5 CFR 1320.3(b)(2), is not subject to the PRA. In addition,
the burden is not subject to the PRA under 5 CFR 1320.4(a) to the
extent that information is collected during conduct of a criminal or
civil action, or during the conduct of an administrative action,
investigation or audit.
Section 411.357(s) addresses professional courtesy. Specifically,
Sec. 411.357(s)(3) requires that an entity have a written policy
approved by the entity's governing body in order to extend professional
courtesy. The burden associated with this requirement is the time and
effort associated with drafting and maintaining the written policy. The
burden associated with this requirement is not subject to the PRA as
stated under 5 CFR 1320.3(b)(2). In addition, the burden is not subject
to the PRA under 5 CFR 1320.4(a) to the extent that the information is
collected during the conduct of a criminal or civil action, or during
the conduct of an administrative action, investigation or audit.
Section 411.357(t), under this Phase III final rule, protects
payments made by a hospital to a physician on its medical staff to
retain the physician's medical practice in an underserved area if
certain conditions are satisfied. The exception requires, among other
things, that the physician: (1) have a bona fide firm written
recruitment offer (or offer of employment) from an unrelated hospital
(which includes a rural health clinic or federally qualified health
center), academic medical center, or physician organization that
specifies, among other things, the remuneration being offered; or (2)
provide a written certification of a verifiable employment opportunity.
Both options require documentation that the new employment would
require the physician to move the location of his or her medical
practice at least 25 miles and outside of the geographic area served by
the hospital, rural health clinic, or federally qualified health center
making the retention payment. The burden associated with this
requirement is considered to be a usual and customary business practice
and, as set forth in 5 CFR 1320.3(b)(2), is not subject to the PRA. In
addition, the burden is not subject to the PRA under 5 CFR 1320.4(a) to
the extent that the information is collected during the conduct of a
criminal or civil action, or during the conduct of an administrative
action, investigation or audit.
Section 411.357(v) sets forth an exception for certain arrangements
involving the donation of nonmonetary remuneration consisting of
electronic prescribing items and services necessary and used solely to
receive and transmit electronic prescription information. Section
411.357(v)(7) requires that such arrangements be set forth in a written
agreement that is signed by all parties, specifies the items or
services being provided and the donor's cost of the items and services,
and covers all of the electronic prescribing items and services to be
provided by the donor. This requirement is met if all separate
agreements between the donor and the physician incorporate each other
by reference or if they cross-reference a master list of agreements
that is maintained and updated centrally and is available for review by
the Secretary upon request. The burden associated with these
requirements is the time and effort associated with drafting, signing,
and maintaining the necessary documentation. The burden associated with
these requirements is not subject to the PRA as stated under 5 CFR
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5
CFR 1320.4(a) to the extent that the information is collected during
the conduct of a criminal or civil action, or during the conduct of an
administrative action, investigation or audit.
Section 411.357(w) addresses certain arrangements involving the
donation of nonmonetary remuneration consisting of electronic health
records software and information technology and training services
necessary and used predominantly to create, maintain, transmit, or
receive electronic health records. Specifically, Sec. 411.357(w)(7)
requires that the arrangement be set forth in a written agreement that
is signed by the parties and that specifies the items and services
being provided, the donor's cost of the items, and the amount of the
physician's contribution. The agreement must cover all of the
electronic health records items and services to be provided by the
donor. The burden associated with these
[[Page 51075]]
requirements is the time and effort associated with drafting, signing,
and maintaining the necessary documentation. The burden associated with
these requirements is not subject to the PRA as stated under 5 CFR
1320.3(b)(2). In addition, the burden is not subject to the PRA under 5
CFR 1320.4(a) to the extent that the information is collected during
the conduct of a criminal or civil action, or during the conduct of an
administrative action, investigation or audit.
Reporting Requirements (Sec. 411.361)
The burden associated with this section was discussed in detail in
Phase II (69 FR 16054). The burden associated with the requirements in
this section is not subject to the PRA as stated under both 5 CFR
1320.3(b)(2) and 5 CFR 1320.4(a). However, this section does contain
requirements that are not exempt from the PRA. As stated in Phase II,
we quantified the burden associated with the reporting requirements in
Sec. 411.361(c) through (e) (69 FR 16119-16121). While these
requirements are subject to the PRA, they are currently approved under
OMB control number 0938-0846, with an expiration date of November 30,
2007.
We have submitted a copy of this final rule to OMB for its review
of the aforementioned information collection requirements.
XV. Regulatory Impact Statement
A. Overall Impact
We have examined the impact of Phase III of this rulemaking as
required by Executive Order 12866 (September 1993, Regulatory Planning
and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980,
Pub. L. 96-354), section 1102(b) of the Social Security Act, the
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive
Order 13132.
Executive Order 12866 (as amended by Executive Order 13258, which
merely reassigns responsibility of duties) directs agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). A
regulatory impact analysis (RIA) must be prepared for major rules with
economically significant effects ($100 million or more in any 1 year).
While we cannot specify in advance the aggregate economic impact of
this rule, we do not believe that the impact will approach $100 million
or more annually. This Phase III final rule does not unsettle existing
financial relationships or create further restrictions on financial
relationships between physicians and health care facilities. Indeed,
physicians and DHS entities have been complying with the requirements
set forth in the physician self-referral prohibition for many years,
specifically in regard to clinical laboratory services since 1992 and
to referrals for all other DHS since 1995.
Under Phase I, the physician self-referral prohibition was
interpreted narrowly while the exceptions were interpreted broadly.
Phase I also established additional regulatory exceptions for
legitimate arrangements that would otherwise violate the prohibition.
Phase I covered the following--
Sections 1877(a) and 1877(b) of the Act (the general
prohibition and the exceptions applicable to both ownership and
compensation arrangements);
The statutory definitions at section 1877(h) of the Act;
Certain additional regulatory definitions; and
New regulatory exceptions promulgated using the
Secretary's authority under section 1877(b)(4) of the Act for certain
arrangements involving the following--
Academic medical centers;
Implants furnished by an ambulatory surgery center;
EPO and certain dialysis-related outpatient prescription
drugs;
Preventive screening tests, immunizations, and vaccines;
Eyeglasses and contact lenses after cataract surgery;
Nonmonetary compensation up to $300;
Fair market value compensation;
Medical staff incidental benefits;
Risk-sharing arrangements;
Compliance training; and
Indirect compensation arrangements.
Phase II was issued as an interim final rule with comment period on
March 26, 2004. Under Phase II, we clarified certain regulatory
definitions, broadened certain established exceptions, and created
additional regulatory exceptions. Phase II also addressed the public
comments provided on the Phase I regulations. Phase II covered the
following--
All provisions of section 1877 of the Act (namely, the
exceptions for ownership and investment interests and the exceptions
for various compensation arrangements);
Additional regulatory definitions; and
Additional new regulatory exceptions promulgated using the
Secretary's authority under section 1877(b)(4) of the Act for certain
arrangements involving the following--
Temporary noncompliance with an applicable exception;
Intra-family rural referrals;
Charitable donations by a physician;
Referral services;
Obstetrical malpractice insurance subsidies;
Professional courtesy;
Retention payments in underserved areas; and
Community-wide health information systems.
This Phase III final rule primarily clarifies aspects of Phase I
and Phase II based on public comments and, again, like Phase I and
Phase II, increases the flexibility of the rule's application by
expanding the breadth of the exceptions while continuing to protect
against program and patient abuse. Phase III covers all of the
provisions in section 1877 of the Act except those related to advisory
opinions and civil monetary penalties. Among other things, this Phase
III final rule--
Eliminates the proposed safe harbor within the fair market
value definition for physician compensation;
Adds three new regulatory definitions;
Considers a physician to ``stand in the shoes'' of a
physician organization of which he or she is a member;
Adds an alternative 45-minute transportation time test to
the intra-family rural referrals exception;
Adds a holdover provision in the exception for personal
service arrangements on terms similar to those in the space and
equipment lease contexts;
Expands the geographic area into which a rural hospital
may recruit a physician;
With respect to a physician who is recruited to join
another physician or practice in a rural area or HPSA to replace
another physician who retired, died, or relocated within the previous
12-month period, permits the allocation of costs by the physician or
practice to the recruited physician not to exceed either (A) the actual
additional incremental costs attributable to the recruited physician,
or (B) the lower of a per capita allocation or 20 percent of the
practice's aggregate costs;
Allows practice restrictions that do not unreasonably
restrict the recruited physician from practicing in the geographic area
served by the hospital;
Expands the nonmonetary compensation exception to allow
entities to avoid what would otherwise be noncompliance with the
exception in
[[Page 51076]]
certain circumstances, and to allow an entity with a formal medical
staff to provide one local medical staff appreciation event per year;
and
Adds a written certification option as an alternative to
the requirement for a bona fide written offer under the exception for
retention payments in underserved areas.
This Phase III final rule generally does not require existing
financial relationships to be restructured; it merely further clarifies
the language of Phase I and Phase II, and provides additional
flexibility under the regulatory exceptions to enable parties to adjust
noncompliant arrangements. Wherever possible, this Phase III final rule
attempts to accommodate legitimate financial relationships while
reducing the regulatory burden and continuing to protect against
program and patient abuse. For these reasons, we conclude that this is
not a major rule with an economically significant effect of $100
million in any 1 year.
The RFA requires agencies to analyze options for regulatory relief
of small businesses. For purposes of the RFA, small entities include
small businesses, nonprofit organizations, and small governmental
jurisdictions. Most hospitals and most other providers and suppliers
are small entities, either by nonprofit status or by having revenues of
$6 million to $29 million in any 1 year. Currently, there are
approximately 1.1 million physicians, other health care practitioners,
and medical suppliers that receive Medicare payment (http://www.cms.hhs.gov/CapMarketUpdates/Downloads/2006CMSstat.pdf).
For purposes of the RFA, according to the latest numbers from the
Small Business Administration's North American Industrial
Classification System, approximately 100 percent of offices of
physicians in the United States are considered small businesses
according to the Small Business Administration's size standards with
total revenues of $9 million or less and are considered small entities.
Individuals and States are not included in the definition of a small
entity. We determined that this Phase III final rule does not have a
significant impact on small businesses because it does not increase
regulatory burden, but rather reduces it. As noted above, this Phase
III final rule generally does not require existing financial
relationships to be restructured; it provides clarifications of the
provisions found in Phase I and Phase II and provides additional
flexibility under the regulatory exceptions to enable parties to adjust
noncompliant arrangements. Overall, this Phase III final rule is very
accommodating to legitimate financial relationships while reducing the
regulatory burden and continuing to protect against program and patient
abuse.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a Metropolitan
Statistical Area and has fewer than 100 beds. The impact of this rule
on small rural hospitals is minimal. In fact, several provisions of the
rule benefit small rural hospitals by giving them more flexibility to
maintain operations and remain competitive in an increasingly global
health care market.
Several provisions of this Phase III final rule benefit rural
hospitals and rural health clinics. For example, the rule modifies the
physician recruitment exception with respect to a hospital located in a
rural area by expanding the geographic area into which a rural hospital
may recruit a physician. Under the revised exception, a rural hospital
may recruit a physician into an area composed of the lowest number of
contiguous zip codes (and in some circumstances, noncontiguous zip
codes) from which the hospital draws at least 90 percent of its
inpatients. In addition, we have modified the recruitment exception to
permit a hospital to offer a more generous income guarantee to a
physician who is recruited into a rural area or HPSA to replace a
physician who retired, relocated, or died within the previous 12
months. The exception for physician recruitment is also expanded to
include rural health clinics. Small rural hospitals also benefit under
this rule from the significant expansion of their ability to offer
retention payments to physicians. In summary, this Phase III final rule
does not have a substantial negative impact on the operations of a
substantial number of small rural hospitals.
Section 202 of the Unfunded Mandates Reform Act of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. That threshold
level is currently approximately $120 million. As discussed above, the
revisions made to the Phase I and Phase II rules by this Phase III
final rule will have an insignificant financial impact. As such, there
are no anticipated expenditures under this rule that would result in
expenditures to State, local or tribal governments, in the aggregate,
or to the private sector, that would rise above the $120 million
threshold.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. We do not anticipate that this Phase III final rule will
have a substantial effect on State or local governments, nor do we
believe that this final rule preempts State law or draws Federalism
issues into question.
We are not preparing analyses for either the RFA or section 1102(b)
of the Act because, for the reasons identified above, we have
determined, and we certify, that this Phase III final rule will not
have a significant economic impact on a substantial number of small
entities or a significant impact on the operations of a substantial
number of small rural hospitals. For the benefit of the public, we
discuss below the anticipated effects of the rule and the alternative
regulatory options we considered.
B. Anticipated Effects
This Phase III final rule primarily affects physicians and health
care entities that furnish certain items and services (``designated
health services'') to Medicare beneficiaries. We believe that this
Phase III final rule addresses many of the industry's primary concerns
with the existing regulatory scheme, is consistent with the statute's
goals and directives, and protects beneficiaries of Federal health care
programs. In particular, we have attempted to preserve the core
statutory prohibition while providing sufficient flexibility to
minimize the impact of the rule on many common business arrangements.
For the reasons stated above, we do not anticipate that this rule will
have a significant economic impact on a substantial number of small
entities. Nevertheless, we wish to inform the public of what we regard
as the major effects of this rulemaking. We discuss below some of the
possible economic effects upon physicians and DHS entities. We also
briefly discuss the effects of the rules on the Medicare and Medicaid
programs as well as Medicare beneficiaries.
1. Effects on Physicians
A physician can have a financial relationship with an entity either
through an ownership or investment
[[Page 51077]]
interest in the entity, or through a compensation arrangement with the
entity. Financial relationships include both direct and indirect
ownership and investment interests and direct and indirect compensation
arrangements. A physician who has (or whose immediate family member
has) a financial relationship with an entity that does not qualify for
an exception is prohibited under section 1877 of the Act from referring
Medicare patients to that entity for the provision of DHS. The primary
statutory sanctions for violating the physician self-referral
prohibition are nonpayment of claims for DHS furnished as the result of
a prohibited referral and the corresponding obligation to refund any
amounts collected on those claims. These sanctions target the entities
that furnish DHS, including physician group practices. Referring
physicians may be sanctioned with the imposition of civil monetary
penalties (CMPs) only for knowing violations of the statutory
prohibition. Nevertheless, although referring physicians are not the
primary targets of the sanctions for violating the statute, their
financial relationships with DHS entities must comply with the statute
and implementing regulations. Accordingly, this Phase III final rule
may affect a physician's or group practice's decision to enter into a
particular financial relationship and the manner in which the
arrangement is structured.
We have made every effort in Phase I, Phase II, and Phase III of
this rulemaking to address the concerns of physicians and physician
group practices while remaining faithful to the statute. We discuss
below the major provisions of this rule that affect physicians.
Two major changes under this Phase III final rule directly affect
physicians. In Phase II, we clarified that a referring physician may be
treated as ``standing in the shoes'' of his or her wholly-owned PC and
we solicited comments on whether to permit a physician to ``stand in
the shoes'' of a group practice of which he or she is a member. In this
final rule, we are adopting a broader ``stand in the shoes'' provision
than the provision proposed in Phase II. Essentially, a physician is
deemed to stand in the shoes of his or her ``physician organization,''
which is defined to include a physician practice or group practice as
well as a professional corporation of which the physician is the sole
owner. A physician who stands in the shoes of a physician organization
is deemed to have the same compensation arrangements (with the same
parties and on the same terms) as the physician organization. For
physicians, this will require some compensation arrangements to comply
with an exception for direct compensation arrangements, rather than the
indirect compensation arrangements exception. In general, the new stand
in the shoes provision will ease compliance by simplifying the analysis
of arrangements in which a physician organization is interposed between
the referring physician and the entity furnishing DHS.
The second major change relates to revisions to the physician
recruitment exception. For hospitals located in rural areas, we have
expanded the geographic area into which they may recruit a physician.
Under the revised exception, a rural hospital may recruit a physician
into an area composed of the lowest number of contiguous zip codes (and
in some circumstances, noncontiguous zip codes) from which the hospital
draws at least 90 percent of its inpatients. In addition, we have
modified the recruitment exception to permit a hospital to offer a more
generous income guarantee to a physician who is recruited into a rural
area or HPSA to replace a physician who retired, relocated, or died
within the previous 12 months. This change will make it easier for such
physicians and physician practices to recruit new physicians.
This Phase III final rule also allows a physician practice to
impose on a recruited physician practice restrictions that do not
unreasonably restrict the ability of the recruited physician to
practice in the geographic area served by the recruiting hospital.
Allowing certain kinds of practice restrictions makes it more likely
that physician practices will take on new physicians and, as a result,
hospitals will be able to attract new physicians and satisfy what would
otherwise be unmet health care needs of their communities.
Beyond the adoption of the more expansive ``stand in the shoes''
provision, and the revisions to the physician recruitment exception,
the effect of the remaining changes on physicians under the Phase III
final rule are relatively minor. Some of these changes include--
Not retaining the safe harbor within the fair market value
definition for hourly payments to physicians;
Clarifying that group practices can compensate members,
employed physicians, and other physicians in the group by directly
taking into account the volume and value of items and services that are
provided ``incident to'' the physicians' professional services, in
certain circumstances; and
Expanding the exception for retention payments in
underserved areas to permit retention payments to be made in the case
of a physician who does not have a bona fide written offer of
recruitment or employment, provided that the physician certifies that
he or she has a bona fide opportunity for future employment and the
arrangement satisfies all other conditions of the exception.
All of these changes ease the burden and cost of complying with the
statutory prohibition by creating or implementing clear rules in such a
way that the parties can determine more easily and with greater
certainty whether their financial relationships comply with an
exception. In addition, by expanding some definitions and exceptions, a
greater number of legitimate arrangements can comply with the statute.
2. Effects on Other Health Care Providers and Suppliers
As we stated above, the physician self-referral rules affect
entities that furnish DHS by preventing them from receiving payment for
services that they furnish as a result of a physician's prohibited
referral. Entities may also be subject to other sanctions, including
fines and exclusion from Federal health care programs, if they
knowingly submit a claim in violation of the prohibition. While all
physicians and DHS entities are subject to this rule, we lack the data
to determine the number of entities whose financial relationships with
physicians must be terminated or revised to comply with this Phase III
final rule. However, we believe that the number will be fewer than we
had anticipated in the prior physician self-referral rules for two
reasons--
First, hospitals and other DHS entities were required to
restructure any non-compliant financial arrangements after Phase I and
Phase II became effective (January 4, 2002 and July 26, 2004,
respectively); and
Second, this Phase III final rule does not adopt any
changes that significantly narrow existing exceptions, or which would
require termination or substantial modification of existing
arrangements. As with Phase I and Phase II, we have interpreted the
prohibition narrowly and the exceptions broadly under Phase III.
We have made every effort in Phase I, Phase II, and in Phase III of
this rulemaking to address the concerns of health care providers and
suppliers while remaining faithful to the statute. We discuss below the
major provisions of this rule that affect health care providers and
suppliers.
[[Page 51078]]
This Phase III final rule makes two substantive changes to the
nonmonetary compensation exception that affect health care providers
and suppliers: (1) The revised exception allows physicians to repay
certain excess nonmonetary compensation within the same calendar year
in which the excess compensation was received, thereby preserving
compliance with the exception; and (2) entities are allowed, without
regard to the nonmonetary compensation limit, to provide one local
medical staff appreciation event per year for the entire medical staff
(such as a holiday party).
The Phase III final rule also--
Revises the exception for charitable donations by a
physician to clarify that the donation may neither be solicited nor
offered in any manner that takes into account the volume or value of
referrals;
Revises the exception for compliance training programs to
permit entities to provide compliance training programs for which CME
is available, provided that compliance training is the primary purpose
of the program; and
Allows a hospital, rural health clinic, or federally
qualified health center to make a retention payment to a physician if
the hospital receives a written certification from the physician, in
lieu of documentation of a written offer, that he or she has a bona
fide opportunity for future employment that would require the physician
to relocate his or her medical practice at least 25 miles and outside
of the geographic area served by the entity.
Again, to the extent that expanded exceptions permit additional
legitimate arrangements to comply with the law, Phase III reduces the
potential costs of restructuring such arrangements, and the
consequences of noncompliance may be avoided entirely.
3. Effects on the Medicare and Medicaid Programs
Section 1877 of the Act was enacted to address over-utilization,
anti-competitive behavior, and other program abuses that occur when
physicians have financial relationships with certain entities to which
they refer Medicare or Medicaid patients. Physician financial
arrangements may have some anti-competitive effects to the extent that
those relationships discourage other providers from entering a market
in which patients are primarily referred to physician-owned entities or
DHS entities that maintain generous compensation arrangements with
physicians. Anti-competitive behavior can increase program costs if the
DHS entities with which physicians have financial relationships are
favored over other, more cost-efficient providers or providers that
furnish higher quality care. Over-utilization increases program costs
because it causes Medicare (or Medicaid) to pay for more items or
services than are medically necessary.
We expect this Phase III final rule to generate savings to the
program by minimizing anti-competitive business arrangements as well as
over-utilization or other program abuse, similar to the effects of
Phase I and Phase II. For example, we declined to eliminate the
requirement in many exceptions that the arrangement at issue comply
with the anti-kickback statute. We believe this requirement is
necessary to protect the Medicare and Medicaid programs by preventing
individuals or entities with fraudulent intent from paying for
referrals.
Phase III continues to balance the risk of program and patient
abuse with the need to support legitimate business arrangements. For
example, we are not excluding DHS ordered by anesthesiologists pursuant
to a consultation from the definition of a referral under Phase III,
because we are not satisfied that this modification poses no risk of
program or patient abuse. While we cannot gauge with certainty the
extent of these savings to the programs at this time, this Phase III
final rule reflects our continued efforts to prohibit arrangements that
have the potential to increase utilization improperly or promote anti-
competitive behavior.
4. Effects on Beneficiaries
We have sought to ensure that this rule will not adversely impact
the medical care of Federal health care program beneficiaries. In most
cases, this Phase III final rule should not require substantial changes
in delivery arrangements. This Phase III final rule makes no
significant changes that have the potential to impede patient access to
health care facilities and services. In fact, as noted above under the
``Effects on the Medicare and Medicaid Programs,'' we believe that this
final rule will help minimize anti-competitive behavior that can affect
where a beneficiary receives health care services and possibly the
quality of the services furnished. We believe the protections included
under this Phase III final rule will minimize the number of medically
unnecessary tests performed on, and items or services ordered for,
Federal health care program beneficiaries.
C. Alternatives Considered
After reviewing the voluminous number of comments we received, we
considered in Phase I and Phase II many alternatives to accommodate the
practical problems that commenters raised. As noted throughout the
Phase III preamble, we have considered alternatives raised in comments
received on Phase II. We have modified the regulations to accommodate
those alternatives that comport with the statutory language and intent.
For example, we received many comments suggesting that we revise
our restrictions on retention payments to physicians in underserved
areas in Sec. 411.357(t). Under Phase II, this exception protected
retention payments made only: (1) By a hospital whose geographic
service area was located in a HPSA; and (2) to a physician with a firm,
written recruitment offer from an unrelated hospital or federally
qualified health center (provided that certain other conditions were
satisfied). Some commenters requested that we broaden the exception to
permit retention payments when the recruitment offer is made by any
entity, including a group practice. In addition, a number of commenters
requested that we eliminate the requirement for a written offer; they
suggested that the exception be revised to permit a retention payment
made on the basis of a ``good faith belief'' that the physician may be
recruited by another entity.
After reviewing the comments, we decided to permit retention
payments made in the case of a bona fide written recruitment offer from
or written offer of employment with a hospital, academic medical
center, or physician organization (which is defined to include a
physician or group practice). We considered broadening the exception to
permit retention payments made in the case of a recruitment or
employment offer from any DHS entity, but rejected that alternative as
unnecessarily broad and potentially subject to abuse.
In addition, after reviewing the comments, we recognized that it is
commonplace for hospitals to become cognizant of a verbal offer
received by a physician and that, in order to ensure that hospitals can
compete fairly, we should permit hospitals to act based upon a written
certification provided by the physician. We considered the ``good faith
belief'' standard suggested by the commenters, but rejected it because
it would be too difficult to enforce and would be subject to abuse.
Instead, we added a new option in Sec. 411.357(t)(2) to permit
retention payments in the
[[Page 51079]]
absence of a written offer where a physician provides a written
certification stating that the physician has a bona fide opportunity
for future employment with a hospital, academic medical center, or
physician organization that would require relocation of his or her
medical practice at least 25 miles and outside the geographic area
served by the hospital. The physician's certification must detail the
opportunity presented (such as income and benefits), the steps taken by
the physician to effectuate the employment opportunity, and other
information sufficient for the hospital to verify the offer. We believe
that our changes to the retention payments exception strike an
appropriate balance between the industry's need for greater flexibility
in making retention payments and our need to protect the Medicare and
Medicaid programs from abuse while ensuring access to care in
underserved areas.
Many commenters to both the Phase I and Phase II rules requested
clarification of the definition of ``indirect compensation
arrangement.'' In Phase II, we clarified that a referring physician may
be treated as ``standing in the shoes'' of his or her wholly-owned PC
when the only intervening entity between the referring physician and
the DHS entity is his or her PC. Phase II did not make any changes with
respect to the issue of indirect compensation arrangements that are
created when a group practice is the only intervening entity between a
DHS entity and the referring physician. However, we did solicit
comments in Phase II on whether to permit a physician to ``stand in the
shoes'' of a group practice of which he or she is a member. Since the
publication of the Phase II interim final rule and in light of the
comments we have received, we have concluded that it is in the best
program integrity interests of the Medicare and Medicaid programs to
adopt a broader ``stand in the shoes'' provision. In this Phase III
final rule, we have modified the regulations to deem a direct
compensation arrangement to exist when the only intervening entity
between a referring physician and a DHS entity is a group practice or
other physician organization. This will require some compensation
arrangements to be analyzed for compliance with an exception for direct
compensation arrangements, rather than the exception for indirect
compensation arrangements exception.
We considered defining a ``physician organization'' to include
entities other than a physician, physician practice, or group practice,
but we have rejected that alternative because we are concerned about
the potential for abuse and believe that such an expansion of the
``stand in the shoes'' doctrine would benefit from additional public
comment.
We considered a number of alternatives suggested by commenters
regarding the recruitment exception. The Phase II rule modified the
physician recruitment exception to allow hospitals to recruit
physicians into the geographic area served by the hospital, provided
that certain conditions are satisfied. We defined ``geographic area
served by the hospital'' to be the area composed of the lowest number
of contiguous zip codes from which the hospital draws at least 75
percent of its inpatients. Several commenters objected to the
restriction on recruiting only into the ``geographic area served by the
hospital,'' stating that the definition of that term prevents hospitals
from recruiting physicians into outlying parts of their service area,
where there is likely to be greater need. Additionally, some commenters
pointed out that the restriction hurt rural hospitals and was very
difficult for federally qualified health centers to satisfy.
Based on the comments we received, we revised the exception to
permit a rural hospital to recruit a physician into an area composed of
the lowest number of contiguous zip codes (and in some circumstances,
noncontiguous zip codes) from which the hospital draws at least 90
percent of its inpatients. We considered expanding the definition of
``geographic area served by the hospital'' to permit all hospitals to
recruit physicians into a broader geographic area, but we rejected that
alternative on the grounds that, in many cases, such recruitment
arrangements would not be necessary to ensure access to care and may be
abusive.
As these examples demonstrate, our approach in this Phase III final
rule is to address as many of the industry's concerns as possible. As
noted throughout this preamble, we considered a variety of suggestions
and alternatives, selecting only those that are consistent with the
statute's goals and directives and that will protect Federal health
care program beneficiaries' access to services.
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
List of Subjects
42 CFR Part 411
Kidney diseases, Medicare, Physician referral, Reporting and
recordkeeping requirements.
42 CFR Part 424
Emergency medical services, Health facilities, Health professions,
Medicare, Reporting and recordkeeping requirements.
0
For the reasons set forth in the preamble, the Centers for Medicare &
Medicaid Services amends 42 CFR Chapter IV as follows:
PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE
PAYMENT
0
1. The authority citation for part 411 continues to read as follows:
Authority: Secs. 1102, 1860 D-1 through 1860D-42, 1871, and 1877
of the Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-
152, 1395hh, and 1395nn).
Subpart J--Financial Relationships Between Physicians and Entities
Furnishing Designated Health Services
0
2. Section 411.350 is revised to read as follows:
Sec. 411.350 Scope of subpart.
(a) This subpart implements section 1877 of the Act, which
generally prohibits a physician from making a referral under Medicare
for designated health services to an entity with which the physician or
a member of the physician's immediate family has a financial
relationship.
(b) This subpart does not provide for exceptions or immunity from
civil or criminal prosecution or other sanctions applicable under any
State laws or under Federal law other than section 1877 of the Act. For
example, although a particular arrangement involving a physician's
financial relationship with an entity may not prohibit the physician
from making referrals to the entity under this subpart, the arrangement
may nevertheless violate another provision of the Act or other laws
administered by HHS, the Federal Trade Commission, the Securities and
Exchange Commission, the Internal Revenue Service, or any other Federal
or State agency.
(c) This subpart requires, with some exceptions, that certain
entities furnishing covered services under Medicare report information
concerning ownership, investment, or compensation arrangements in the
form, in the manner, and at the times specified by CMS.
[[Page 51080]]
(d) This subpart does not alter an individual's or entity's
obligations under--
(1) The rules regarding reassignment of claims (Sec. 424.80);
(2) The rules regarding purchased diagnostic tests (Sec. 414.50);
(3) The rules regarding payment for services and supplies incident
to a physician's professional services (Sec. 410.26); or
(4) Any other applicable Medicare laws, rules, or regulations.
0
3. Section 411.351 is revised to read as follows--
Sec. 411.351 Definitions.
As used in this subpart, unless the context indicates otherwise:
Centralized building means all or part of a building, including,
for purposes of this subpart only, a mobile vehicle, van, or trailer
that is owned or leased on a full-time basis (that is, 24 hours per
day, 7 days per week, for a term of not less than 6 months) by a group
practice and that is used exclusively by the group practice. Space in a
building or a mobile vehicle, van, or trailer that is shared by more
than one group practice, by a group practice and one or more solo
practitioners, or by a group practice and another provider or supplier
(for example, a diagnostic imaging facility) is not a centralized
building for purposes of this subpart. This provision does not preclude
a group practice from providing services to other providers or
suppliers (for example, purchased diagnostic tests) in the group
practice's centralized building. A group practice may have more than
one centralized building.
Clinical laboratory services means the biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings, including procedures to
determine, measure, or otherwise describe the presence or absence of
various substances or organisms in the body, as specifically identified
by the List of CPT/HCPCS Codes. All services so identified on the List
of CPT/HCPCS Codes are clinical laboratory services for purposes of
this subpart. Any service not specifically identified as a clinical
laboratory service on the List of CPT/HCPCS Codes is not a clinical
laboratory service for purposes of this subpart.
Consultation means a professional service furnished to a patient by
a physician if the following conditions are satisfied:
(1) The physician's opinion or advice regarding evaluation or
management or both of a specific medical problem is requested by
another physician.
(2) The request and need for the consultation are documented in the
patient's medical record.
(3) After the consultation is provided, the physician prepares a
written report of his or her findings, which is provided to the
physician who requested the consultation.
(4) With respect to radiation therapy services provided by a
radiation oncologist, a course of radiation treatments over a period of
time will be considered to be pursuant to a consultation, provided that
the radiation oncologist communicates with the referring physician on a
regular basis about the patient's course of treatment and progress.
Designated health services (DHS) means any of the following
services (other than those provided as emergency physician services
furnished outside of the U.S.), as they are defined in this section:
(1)(i) Clinical laboratory services.
(ii) Physical therapy, occupational therapy, and speech-language
pathology services.
(iii) Radiology and certain other imaging services.
(iv) Radiation therapy services and supplies.
(v) Durable medical equipment and supplies.
(vi) Parenteral and enteral nutrients, equipment, and supplies.
(vii) Prosthetics, orthotics, and prosthetic devices and supplies.
(viii) Home health services.
(ix) Outpatient prescription drugs.
(x) Inpatient and outpatient hospital services.
(2) Except as otherwise noted in this subpart, the term
``designated health services'' or DHS means only DHS payable, in whole
or in part, by Medicare. DHS do not include services that are
reimbursed by Medicare as part of a composite rate (for example,
ambulatory surgical center services or SNF Part A payments), except to
the extent the services listed in paragraphs (1)(i) through (1)(x) of
this definition are themselves payable through a composite rate (for
example, all services provided as home health services or inpatient and
outpatient hospital services are DHS).
Does not violate the anti-kickback statute, as used in this subpart
only, means that the particular arrangement--
(1)(i) Meets a safe harbor under the anti-kickback statute, as set
forth at Sec. 1001.952 of this title, ``Exceptions'';
(ii) Has been specifically approved by the OIG in a favorable
advisory opinion issued to a party to the particular arrangement (for
example, the entity furnishing DHS) with respect to the particular
arrangement (and not a similar arrangement), provided that the
arrangement is conducted in accordance with the facts certified by the
requesting party and the opinion is otherwise issued in accordance with
part 1008 of this title, ``Advisory Opinions by the OIG''; or
(iii) Does not violate the anti-kickback provisions in section
1128B(b) of the Act.
(2) For purposes of this definition, a favorable advisory opinion
means an opinion in which the OIG opines that--
(i) The party's specific arrangement does not implicate the anti-
kickback statute, does not constitute prohibited remuneration, or fits
in a safe harbor under Sec. 1001.952 of this title; or
(ii) The party will not be subject to any OIG sanctions arising
under the anti-kickback statute (for example, under sections
1128A(a)(7) and 1128(b)(7) of the Act) in connection with the party's
specific arrangement.
Downstream contractor means a ``first tier contractor'' as defined
at Sec. 1001.952(t)(2)(iii) or a ``downstream contractor'' as defined
at Sec. 1001.952(t)(2)(i).
Durable medical equipment (DME) and supplies has the meaning given
in section 1861(n) of the Act and Sec. 414.202 of this chapter.
Electronic health record means a repository of consumer health
status information in computer processable form used for clinical
diagnosis and treatment for a broad array of clinical conditions.
Employee means any individual who, under the common law rules that
apply in determining the employer-employee relationship (as applied for
purposes of section 3121(d)(2) of the Internal Revenue Code of 1986),
is considered to be employed by, or an employee of, an entity.
(Application of these common law rules is discussed in 20 CFR 404.1007
and 26 CFR 31.3121(d)-1(c).)
Entity means--
(1) A physician's sole practice or a practice of multiple
physicians or any other person, sole proprietorship, public or private
agency or trust, corporation, partnership, limited liability company,
foundation, nonprofit corporation, or unincorporated association that
furnishes DHS. An entity does not include the referring physician
himself or herself, but does include his or her medical practice. A
person or entity is considered to be furnishing DHS if it--
[[Page 51081]]
(i) Is the person or entity to which CMS makes payment for the DHS,
directly or upon assignment on the patient's behalf; or
(ii) Is the person or entity to which the right to payment for the
DHS has been reassigned in accordance with Sec. 424.80(b)(1)
(employer) or (b)(2) (payment under a contractual arrangement) of this
chapter (other than a health care delivery system that is a health plan
(as defined at Sec. 1001.952(l) of this title), and other than any
managed care organization (MCO), provider-sponsored organization (PSO),
or independent practice association (IPA) with which a health plan
contracts for services provided to plan enrollees).
(2) A health plan, MCO, PSO, or IPA that employs a supplier or
operates a facility that could accept reassignment from a supplier
under Sec. 424.80(b)(1) and (b)(2) of this chapter, with respect to
any DHS provided by that supplier.
(3) For purposes of this subpart, ``entity'' does not include a
physician's practice when it bills Medicare for a diagnostic test in
accordance with Sec. 414.50 of this chapter (Physician billing for
purchased diagnostic tests) and section 30.2.9 of the CMS Internet-only
Manual, publication 100-04, Claims Processing Manual, Chapter 1
(general billing requirements), as amended or replaced from time to
time.
Fair market value means the value in arm's-length transactions,
consistent with the general market value. ``General market value''
means the price that an asset would bring as the result of bona fide
bargaining between well-informed buyers and sellers who are not
otherwise in a position to generate business for the other party, or
the compensation that would be included in a service agreement as the
result of bona fide bargaining between well-informed parties to the
agreement who are not otherwise in a position to generate business for
the other party, on the date of acquisition of the asset or at the time
of the service agreement. Usually, the fair market price is the price
at which bona fide sales have been consummated for assets of like type,
quality, and quantity in a particular market at the time of
acquisition, or the compensation that has been included in bona fide
service agreements with comparable terms at the time of the agreement,
where the price or compensation has not been determined in any manner
that takes into account the volume or value of anticipated or actual
referrals. With respect to rentals and leases described in Sec.
411.357(a), (b), and (l) (as to equipment leases only), ``fair market
value'' means the value of rental property for general commercial
purposes (not taking into account its intended use). In the case of a
lease of space, this value may not be adjusted to reflect the
additional value the prospective lessee or lessor would attribute to
the proximity or convenience to the lessor when the lessor is a
potential source of patient referrals to the lessee. For purposes of
this definition, a rental payment does not take into account intended
use if it takes into account costs incurred by the lessor in developing
or upgrading the property or maintaining the property or its
improvements.
Home health services means the services described in section
1861(m) of the Act and part 409, subpart E of this chapter.
Hospital means any entity that qualifies as a ``hospital'' under
section 1861(e) of the Act, as a ``psychiatric hospital'' under section
1861(f) of the Act, or as a ``critical access hospital'' under section
1861(mm)(1) of the Act, and refers to any separate legally organized
operating entity plus any subsidiary, related entity, or other entities
that perform services for the hospital's patients and for which the
hospital bills. However, a ``hospital'' does not include entities that
perform services for hospital patients ``under arrangements'' with the
hospital.
HPSA means, for purposes of this subpart, an area designated as a
health professional shortage area under section 332(a)(1)(A) of the
Public Health Service Act for primary medical care professionals (in
accordance with the criteria specified in part 5 of this title).
Immediate family member or member of a physician's immediate family
means husband or wife; birth or adoptive parent, child, or sibling;
stepparent, stepchild, stepbrother, or stepsister; father-in-law,
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law; grandparent or grandchild; and spouse of a grandparent or
grandchild.
``Incident to'' services or services ``incident to'' means those
services and supplies that meet the requirements of section
1861(s)(2)(A) of the Act, Sec. 410.26 of this chapter, and sections
60, 60.1, 60.2, and 60.3 of the CMS Internet-only Manual, publication
100-02, Medicare Benefit Policy Manual, Chapter 15 (covered medical and
other health services), as amended or replaced from time to time.
Inpatient hospital services means those services defined in section
1861(b) of the Act and Sec. 409.10(a) and (b) of this chapter and
include inpatient psychiatric hospital services listed in section
1861(c) of the Act and inpatient critical access hospital services, as
defined in section 1861(mm)(2) of the Act. ``Inpatient hospital
services'' do not include emergency inpatient services provided by a
hospital located outside of the U.S. and covered under the authority in
section 1814(f)(2) of the Act and part 424, subpart H of this chapter,
or emergency inpatient services provided by a nonparticipating hospital
within the U.S., as authorized by section 1814(d) of the Act and
described in part 424, subpart G of this chapter. ``Inpatient hospital
services'' also do not include dialysis furnished by a hospital that is
not certified to provide end-stage renal dialysis (ESRD) services under
subpart U of part 405 of this chapter. ``Inpatient hospital services''
include services that are furnished either by the hospital directly or
under arrangements made by the hospital with others. ``Inpatient
hospital services'' do not include professional services performed by
physicians, physician assistants, nurse practitioners, clinical nurse
specialists, certified nurse midwives, and certified registered nurse
anesthetists and qualified psychologists if Medicare reimburses the
services independently and not as part of the inpatient hospital
service (even if they are billed by a hospital under an assignment or
reassignment).
Interoperable means able to communicate and exchange data
accurately, effectively, securely, and consistently with different
information technology systems, software applications, and networks, in
various settings; and exchange data such that the clinical or
operational purpose and meaning of the data are preserved and
unaltered.
Laboratory means an entity furnishing biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings. These examinations also
include procedures to determine, measure, or otherwise describe the
presence or absence of various substances or organisms in the body.
Entities only collecting or preparing specimens (or both) or only
serving as a mailing service and not performing testing are not
considered laboratories.
List of CPT/HCPCS Codes means the list of CPT and HCPCS codes that
identifies those items and services that are DHS under section 1877 of
the Act or that may qualify for certain exceptions under section 1877
of the Act. It is updated annually, as published
[[Page 51082]]
in the Federal Register, and is posted on the CMS Web site at http://www.cms.hhs.gov/PhysicianSelfReferral/11_List_of_Codes.asp#TopOfPage.
Locum tenens physician means a physician who substitutes (that is,
``stands in the shoes'') in exigent circumstances for a physician, in
accordance with applicable reassignment rules and regulations,
including section 30.2.11 of the CMS Internet-only Manual, publication
100-04, Claims Processing Manual, Chapter 1 (general billing
requirements), as amended or replaced from time to time.
Member of the group or member of a group practice means, for
purposes of this subpart, a direct or indirect physician owner of a
group practice (including a physician whose interest is held by his or
her individual professional corporation or by another entity), a
physician employee of the group practice (including a physician
employed by his or her individual professional corporation that has an
equity interest in the group practice), a locum tenens physician (as
defined in this section), or an on-call physician while the physician
is providing on-call services for members of the group practice. A
physician is a member of the group during the time he or she furnishes
``patient care services'' to the group as defined in this section. An
independent contractor or a leased employee is not a member of the
group (unless the leased employee meets the definition of an
``employee'' under this Sec. 411.351).
Outpatient hospital services means the therapeutic, diagnostic, and
partial hospitalization services listed under sections 1861(s)(2)(B)
and (s)(2)(C) of the Act; outpatient services furnished by a
psychiatric hospital, as defined in section 1861(f) of the Act; and
outpatient critical access hospital services, as defined in section
1861(mm)(3) of the Act. ``Outpatient hospital services'' do not include
emergency services furnished by nonparticipating hospitals and covered
under the conditions described in section 1835(b) of the Act and
subpart G of part 424 of this chapter. ``Outpatient hospital services''
include services that are furnished either by the hospital directly or
under arrangements made by the hospital with others. ``Outpatient
hospital services'' do not include professional services performed by
physicians, physician assistants, nurse practitioners, clinical nurse
specialists, certified nurse midwives, certified registered nurse
anesthetists, and qualified psychologists if Medicare reimburses the
services independently and not as part of the outpatient hospital
service (even if they are billed by a hospital under an assignment or
reassignment).
Outpatient prescription drugs means all drugs covered by Medicare
Part B or Part D.
Parenteral and enteral nutrients, equipment, and supplies means the
following services (including all HCPCS level 2 codes for these
services):
(1) Parenteral nutrients, equipment, and supplies, meaning those
items and supplies needed to provide nutriment to a patient with
permanent, severe pathology of the alimentary tract that does not allow
absorption of sufficient nutrients to maintain strength commensurate
with the patient's general condition, as described in section 108.2 of
the National Coverage Determinations Manual, as amended or replaced
from time to time; and
(2) Enteral nutrients, equipment, and supplies, meaning items and
supplies needed to provide enteral nutrition to a patient with a
functioning gastrointestinal tract who, due to pathology to or
nonfunction of the structures that normally permit food to reach the
digestive tract, cannot maintain weight and strength commensurate with
his or her general condition, as described in section 108.2 of the
National Coverage Determinations Manual, as amended or replaced from
time to time.
Patient care services means any task(s) performed by a physician in
the group practice that address the medical needs of specific patients
or patients in general, regardless of whether they involve direct
patient encounters or generally benefit a particular practice. Patient
care services can include, for example, the services of physicians who
do not directly treat patients, such as time spent by a physician
consulting with other physicians or reviewing laboratory tests, or time
spent training staff members, arranging for equipment, or performing
administrative or management tasks.
Physical therapy, occupational therapy, and speech-language
pathology services means those particular services so identified on the
List of CPT/HCPCS Codes. All services so identified on the List of CPT/
HCPCS Codes are physical therapy, occupational therapy, and speech-
language pathology services for purposes of this subpart. Any service
not specifically identified as physical therapy, occupational therapy
or speech-language pathology on the List of CPT/HCPCS Codes is not a
physical therapy, occupational therapy, or speech-language pathology
service for purposes of this subpart. The list of codes identifying
physical therapy, occupational therapy, and speech-language pathology
services for purposes of this regulation includes the following:
(1) Physical therapy services, meaning those outpatient physical
therapy services (including speech-language pathology services)
described in section 1861(p) of the Act that are covered under Medicare
Part A or Part B, regardless of who provides them, if the services
include--
(i) Assessments, function tests, and measurements of strength,
balance, endurance, range of motion, and activities of daily living;
(ii) Therapeutic exercises, massage, and use of physical medicine
modalities, assistive devices, and adaptive equipment;
(iii) Establishment of a maintenance therapy program for an
individual whose restoration potential has been reached; however,
maintenance therapy itself is not covered as part of these services; or
(iv) Speech-language pathology services that are for the diagnosis
and treatment of speech, language, and cognitive disorders that include
swallowing and other oral-motor dysfunctions.
(2) Occupational therapy services, meaning those services described
in section 1861(g) of the Act that are covered under Medicare Part A or
Part B, regardless of who provides them, if the services include--
(i) Teaching of compensatory techniques to permit an individual
with a physical or cognitive impairment or limitation to engage in
daily activities;
(ii) Evaluation of an individual's level of independent
functioning;
(iii) Selection and teaching of task-oriented therapeutic
activities to restore sensory-integrative function; or
(iv) Assessment of an individual's vocational potential, except
when the assessment is related solely to vocational rehabilitation.
Physician means a doctor of medicine or osteopathy, a doctor of
dental surgery or dental medicine, a doctor of podiatric medicine, a
doctor of optometry, or a chiropractor, as defined in section 1861(r)
of the Act.
Physician in the group practice means a member of the group
practice, as well as an independent contractor physician during the
time the independent contractor is furnishing patient care services (as
defined in this section) for the group practice under a contractual
arrangement directly with the group practice to provide services to the
group practice's patients in the group practice's facilities. The
contract must
[[Page 51083]]
contain the same restrictions on compensation that apply to members of
the group practice under Sec. 411.352(g) (or the contract must satisfy
the requirements of the personal service arrangements exception in
Sec. 411.357(d)), and the independent contractor's arrangement with
the group practice must comply with the reassignment rules in Sec.
424.80(b)(2) of this chapter (see also section 30.2.11 of the CMS
Internet-only Manual, publication 100-04, Claims Processing Manual,
Chapter 1 (general billing requirements), as amended or replaced from
time to time). Referrals from an independent contractor who is a
physician in the group practice are subject to the prohibition on
referrals in Sec. 411.353(a), and the group practice is subject to the
limitation on billing for those referrals in Sec. 411.353(b).
Physician incentive plan means any compensation arrangement between
an entity (or downstream contractor) and a physician or physician group
that may directly or indirectly have the effect of reducing or limiting
services furnished with respect to individuals enrolled with the
entity.
Physician organization means a physician (including a professional
corporation of which the physician is the sole owner), a physician
practice, or a group practice that complies with the requirements of
Sec. 411.352.
Plan of care means the establishment by a physician of a course of
diagnosis or treatment (or both) for a particular patient, including
the ordering of services.
Professional courtesy means the provision of free or discounted
health care items or services to a physician or his or her immediate
family members or office staff.
Prosthetics, Orthotics, and Prosthetic Devices and Supplies means
the following services (including all HCPCS level 2 codes for these
items and services that are covered by Medicare):
(1) Orthotics, meaning leg, arm, back, and neck braces, as listed
in section 1861(s)(9) of the Act.
(2) Prosthetics, meaning artificial legs, arms, and eyes, as
described in section 1861(s)(9) of the Act.
(3) Prosthetic devices, meaning devices (other than a dental
device) listed in section 1861(s)(8) of the Act that replace all or
part of an internal body organ, including colostomy bags, and one pair
of conventional eyeglasses or contact lenses furnished subsequent to
each cataract surgery with insertion of an intraocular lens.
(4) Prosthetic supplies, meaning supplies that are necessary for
the effective use of a prosthetic device (including supplies directly
related to colostomy care).
Radiation therapy services and supplies means those particular
services and supplies, including (effective January 1, 2007)
therapeutic nuclear medicine services and supplies, so identified on
the List of CPT/HCPCS Codes. All services and supplies so identified on
the List of CPT/HCPCS Codes are radiation therapy services and supplies
for purposes of this subpart. Any service or supply not specifically
identified as radiation therapy services or supplies on the List of
CPT/HCPCS Codes is not a radiation therapy service or supply for
purposes of this subpart. The list of codes identifying radiation
therapy services and supplies is based on section 1861(s)(4) of the Act
and Sec. 410.35 of this chapter.
Radiology and certain other imaging services means those particular
services so identified on the List of CPT/HCPCS Codes. All services so
identified on the List of CPT/HCPCS Codes are radiology and certain
other imaging services for purposes of this subpart. Any service not
specifically identified as radiology and certain other imaging services
on the List of CPT/HCPCS Codes is not a radiology or certain other
imaging service for purposes of this subpart. The list of codes
identifying radiology and certain other imaging services includes the
professional and technical components of any diagnostic test or
procedure using x-rays, ultrasound, computerized axial tomography,
magnetic resonance imaging, nuclear medicine (effective January 1,
2007), or other imaging services. All codes identified as radiology and
certain other imaging services are covered under section 1861(s)(3) of
the Act and Sec. 410.32 and Sec. 410.34 of this chapter, but do not
include--
(1) X-ray, fluoroscopy, or ultrasound procedures that require the
insertion of a needle, catheter, tube, or probe through the skin or
into a body orifice; and
(2) Radiology procedures that are integral to the performance of a
nonradiological medical procedure and performed)--
(i) During the nonradiological medical procedure; or
(ii) Immediately following the nonradiological medical procedure
when necessary to confirm placement of an item placed during the
nonradiological medical procedure.
Referral--
(1) Means either of the following:
(i) Except as provided in paragraph (2) of this definition, the
request by a physician for, or ordering of, or the certifying or
recertifying of the need for, any designated health service for which
payment may be made under Medicare Part B, including a request for a
consultation with another physician and any test or procedure ordered
by or to be performed by (or under the supervision of) that other
physician, but not including any designated health service personally
performed or provided by the referring physician. A designated health
service is not personally performed or provided by the referring
physician if it is performed or provided by any other person,
including, but not limited to, the referring physician's employees,
independent contractors, or group practice members.
(ii) Except as provided in paragraph (2) of this definition, a
request by a physician that includes the provision of any designated
health service for which payment may be made under Medicare, the
establishment of a plan of care by a physician that includes the
provision of such a designated health service, or the certifying or
recertifying of the need for such a designated health service, but not
including any designated health service personally performed or
provided by the referring physician. A designated health service is not
personally performed or provided by the referring physician if it is
performed or provided by any other person including, but not limited
to, the referring physician's employees, independent contractors, or
group practice members.
(2) Does not include a request by a pathologist for clinical
diagnostic laboratory tests and pathological examination services, by a
radiologist for diagnostic radiology services, and by a radiation
oncologist for radiation therapy or ancillary services necessary for,
and integral to, the provision of radiation therapy, if--
(i) The request results from a consultation initiated by another
physician (whether the request for a consultation was made to a
particular physician or to an entity with which the physician is
affiliated); and
(ii) The tests or services are furnished by or under the
supervision of the pathologist, radiologist, or radiation oncologist,
or under the supervision of a pathologist, radiologist, or radiation
oncologist, respectively, in the same group practice as the
pathologist, radiologist, or radiation oncologist.
(3) Can be in any form, including, but not limited to, written,
oral, or electronic.
Referring physician means a physician who makes a referral as
defined in this section or who directs another person or entity to make
a referral or who controls referrals made
[[Page 51084]]
by another person or entity. A referring physician and the professional
corporation of which he or she is a sole owner are the same for
purposes of this subpart.
Remuneration means any payment or other benefit made directly or
indirectly, overtly or covertly, in cash or in kind, except that the
following are not considered remuneration for purposes of this section:
(1) The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
(2) The furnishing of items, devices, or supplies (not including
surgical items, devices, or supplies) that are used solely to collect,
transport, process, or store specimens for the entity furnishing the
items, devices, or supplies or are used solely to order or communicate
the results of tests or procedures for the entity.
(3) A payment made by an insurer or a self-insured plan (or a
subcontractor of the insurer or self-insured plan) to a physician to
satisfy a claim, submitted on a fee-for-service basis, for the
furnishing of health services by that physician to an individual who is
covered by a policy with the insurer or by the self-insured plan, if--
(i) The health services are not furnished, and the payment is not
made, under a contract or other arrangement between the insurer or the
self-insured plan (or a subcontractor of the insurer or self-insured
plan) and the physician;
(ii) The payment is made to the physician on behalf of the covered
individual and would otherwise be made directly to the individual; and
(iii) The amount of the payment is set in advance, does not exceed
fair market value, and is not determined in a manner that takes into
account directly or indirectly the volume or value of any referrals.
Rural area means an area that is not an urban area as defined at
Sec. 412.62(f)(1)(ii) of this chapter.
Same building means a structure with, or combination of structures
that share, a single street address as assigned by the U.S. Postal
Service, excluding all exterior spaces (for example, lawns, courtyards,
driveways, parking lots) and interior loading docks or parking garages.
For purposes of this section, the ``same building'' does not include a
mobile vehicle, van, or trailer.
Specialty hospital means a subsection (d) hospital (as defined in
section 1886(d)(1)(B) of the Act) that is primarily or exclusively
engaged in the care and treatment of one of the following:
(1) Patients with a cardiac condition;
(2) Patients with an orthopedic condition;
(3) Patients receiving a surgical procedure; or
(4) Any other specialized category of services that the Secretary
designates as inconsistent with the purpose of permitting physician
ownership and investment interests in a hospital. A ``specialty
hospital'' does not include any hospital--
(1) Determined by the Secretary to be in operation before or under
development as of November 18, 2003;
(2) For which the number of physician investors at any time on or
after such date is no greater than the number of such investors as of
such date;
(3) For which the type of categories described above is no
different at any time on or after such date than the type of such
categories as of such date;
(4) For which any increase in the number of beds occurs only in the
facilities on the main campus of the hospital and does not exceed 50
percent of the number of beds in the hospital as of November 18, 2003,
or 5 beds, whichever is greater; and
(5) That meets such other requirements as the Secretary may
specify.
Transaction means an instance or process of two or more persons or
entities doing business. An isolated financial transaction means one
involving a single payment between two or more persons or entities or a
transaction that involves integrally related installment payments
provided that--
(1) The total aggregate payment is fixed before the first payment
is made and does not take into account, directly or indirectly, the
volume or value of referrals or other business generated by the
referring physician; and
(2) The payments are immediately negotiable or are guaranteed by a
third party, or secured by a negotiable promissory note, or subject to
a similar mechanism to ensure payment even in the event of default by
the purchaser or obligated party.
0
3a. Section 411.352 is revised to read as follows:
Sec. 411.352 Group practice.
For purposes of this subpart, a group practice is a physician
practice that meets the following conditions:
(a) Single legal entity. The group practice must consist of a
single legal entity operating primarily for the purpose of being a
physician group practice in any organizational form recognized by the
State in which the group practice achieves its legal status, including,
but not limited to, a partnership, professional corporation, limited
liability company, foundation, nonprofit corporation, faculty practice
plan, or similar association. The single legal entity may be organized
by any party or parties, including, but not limited to, physicians,
health care facilities, or other persons or entities (including, but
not limited to, physicians individually incorporated as professional
corporations). The single legal entity may be organized or owned (in
whole or in part) by another medical practice, provided that the other
medical practice is not an operating physician practice (and regardless
of whether the medical practice meets the conditions for a group
practice under this section). For purposes of this subpart, a single
legal entity does not include informal affiliations of physicians
formed substantially to share profits from referrals, or separate group
practices under common ownership or control through a physician
practice management company, hospital, health system, or other entity
or organization. A group practice that is otherwise a single legal
entity may itself own subsidiary entities. A group practice operating
in more than one State will be considered to be a single legal entity
notwithstanding that it is composed of multiple legal entities,
provided that--
(1) The States in which the group practice is operating are
contiguous (although each State need not be contiguous to every other
State);
(2) The legal entities are absolutely identical as to ownership,
governance, and operation; and
(3) Organization of the group practice into multiple entities is
necessary to comply with jurisdictional licensing laws of the States in
which the group practice operates.
(b) Physicians. The group practice must have at least two
physicians who are members of the group (whether employees or direct or
indirect owners), as defined at Sec. 411.351.
(c) Range of care. Each physician who is a member of the group, as
defined at Sec. 411.351, must furnish substantially the full range of
patient care services that the physician routinely furnishes, including
medical care, consultation, diagnosis, and treatment, through the joint
use of shared office space, facilities, equipment, and personnel.
(d) Services furnished by group practice members. (1) Except as
otherwise provided in paragraphs (d)(3), (d)(4), (d)(5), and (d)(6) of
this section, substantially all of the patient care services of the
physicians who are members of the group (that is, at least
[[Page 51085]]
75 percent of the total patient care services of the group practice
members) must be furnished through the group and billed under a billing
number assigned to the group, and the amounts received must be treated
as receipts of the group. Patient care services must be measured by one
of the following:
(i) The total time each member spends on patient care services
documented by any reasonable means (including, but not limited to, time
cards, appointment schedules, or personal diaries). (For example, if a
physician practices 40 hours a week and spends 30 hours a week on
patient care services for a group practice, the physician has spent 75
percent of his or her time providing patient care services for the
group.)
(ii) Any alternative measure that is reasonable, fixed in advance
of the performance of the services being measured, uniformly applied
over time, verifiable, and documented.
(2) The data used to calculate compliance with this substantially
all test and related supportive documentation must be made available to
the Secretary upon request.
(3) The substantially all test set forth in paragraph (d)(1) of
this section does not apply to any group practice that is located
solely in a HPSA, as defined at Sec. 411.351.
(4) For a group practice located outside of a HPSA (as defined at
Sec. 411.351), any time spent by a group practice member providing
services in a HPSA should not be used to calculate whether the group
practice has met the substantially all test, regardless of whether the
member's time in the HPSA is spent in a group practice, clinic, or
office setting.
(5) During the start up period (not to exceed 12 months) that
begins on the date of the initial formation of a new group practice, a
group practice must make a reasonable, good faith effort to ensure that
the group practice complies with the substantially all test requirement
set forth in paragraph (d)(1) of this section as soon as practicable,
but no later than 12 months from the date of the initial formation of
the group practice. This paragraph (d)(5) does not apply when an
existing group practice admits a new member or reorganizes.
(6)(i) If the addition to an existing group practice of a new
member who would be considered to have relocated his or her medical
practice under Sec. 411.357(e)(2) would result in the existing group
practice not meeting the substantially all test set forth in paragraph
(d)(1) of this section, the group practice will have 12 months
following the addition of the new member to come back into full
compliance, provided that--
(A) For the 12-month period the group practice is fully compliant
with the substantially all test if the new member is not counted as a
member of the group for purposes of Sec. 411.352; and
(B) The new member's employment with, or ownership interest in, the
group practice is documented in writing no later than the beginning of
his or her new employment, ownership, or investment.
(ii) This paragraph (d)(6) does not apply when an existing group
practice reorganizes or admits a new member who is not relocating his
or her medical practice.
(e) Distribution of expenses and income. The overhead expenses of,
and income from, the practice must be distributed according to methods
that are determined before the receipt of payment for the services
giving rise to the overhead expense or producing the income. Nothing in
this section prevents a group practice from adjusting its compensation
methodology prospectively, subject to restrictions on the distribution
of revenue from DHS under Sec. 411.352(i).
(f) Unified business. (1) The group practice must be a unified
business having at least the following features:
(i) Centralized decision-making by a body representative of the
group practice that maintains effective control over the group's assets
and liabilities (including, but not limited to, budgets, compensation,
and salaries); and
(ii) Consolidated billing, accounting, and financial reporting.
(2) Location and specialty-based compensation practices are
permitted with respect to revenues derived from services that are not
DHS and may be permitted with respect to revenues derived from DHS
under Sec. 411.352(i).
(g) Volume or value of referrals. No physician who is a member of
the group practice directly or indirectly receives compensation based
on the volume or value of his or her referrals, except as provided in
Sec. 411.352(i).
(h) Physician-patient encounters. Members of the group must
personally conduct no less than 75 percent of the physician-patient
encounters of the group practice.
(i) Special rule for productivity bonuses and profit shares. (1) A
physician in the group practice may be paid a share of overall profits
of the group, provided that the share is not determined in any manner
that is directly related to the volume or value of referrals of DHS by
the physician. A physician in the group practice may be paid a
productivity bonus based on services that he or she has personally
performed, or services ``incident to'' such personally performed
services, or both, provided that the bonus is not determined in any
manner that is directly related to the volume or value of referrals of
DHS by the physician (except that the bonus may directly relate to the
volume or value of DHS referrals by the physician if the referrals are
for services ``incident to'' the physician's personally performed
services).
(2) Overall profits means the group's entire profits derived from
DHS payable by Medicare or Medicaid or the profits derived from DHS
payable by Medicare or Medicaid of any component of the group practice
that consists of at least five physicians. Overall profits should be
divided in a reasonable and verifiable manner that is not directly
related to the volume or value of the physician's referrals of DHS. The
share of overall profits will be deemed not to relate directly to the
volume or value of referrals if one of the following conditions is met:
(i) The group's profits are divided per capita (for example, per
member of the group or per physician in the group).
(ii) Revenues derived from DHS are distributed based on the
distribution of the group practice's revenues attributed to services
that are not DHS payable by any Federal health care program or private
payer.
(iii) Revenues derived from DHS constitute less than 5 percent of
the group practice's total revenues, and the allocated portion of those
revenues to each physician in the group practice constitutes 5 percent
or less of his or her total compensation from the group.
(3) A productivity bonus must be calculated in a reasonable and
verifiable manner that is not directly related to the volume or value
of the physician's referrals of DHS. A productivity bonus will be
deemed not to relate directly to the volume or value of referrals of
DHS if one of the following conditions is met:
(i) The bonus is based on the physician's total patient encounters
or relative value units (RVUs). (The methodology for establishing RVUs
is set forth in Sec. 414.22 of this chapter.)
(ii) The bonus is based on the allocation of the physician's
compensation attributable to services that are not DHS payable by any
Federal health care program or private payer.
(iii) Revenues derived from DHS are less than 5 percent of the
group practice's total revenues, and the allocated portion of those
revenues to each physician in the group practice constitutes 5 percent
or less of his or her
[[Page 51086]]
total compensation from the group practice.
(4) Supporting documentation verifying the method used to calculate
the profit share or productivity bonus under paragraphs (i)(2) and
(i)(3) of this section, and the resulting amount of compensation, must
be made available to the Secretary upon request.
0
4. Section 411.353 is revised to read as follows:
Sec. 411.353 Prohibition on certain referrals by physicians and
limitations on billing.
(a) Prohibition on referrals. Except as provided in this subpart, a
physician who has a direct or indirect financial relationship with an
entity, or who has an immediate family member who has a direct or
indirect financial relationship with the entity, may not make a
referral to that entity for the furnishing of DHS for which payment
otherwise may be made under Medicare. A physician's prohibited
financial relationship with an entity that furnishes DHS is not imputed
to his or her group practice or its members or its staff. However, a
referral made by a physician's group practice, its members, or its
staff may be imputed to the physician if the physician directs the
group practice, its members, or its staff to make the referral or if
the physician controls referrals made by his or her group practice, its
members, or its staff.
(b) Limitations on billing. An entity that furnishes DHS pursuant
to a referral that is prohibited by paragraph (a) of this section may
not present or cause to be presented a claim or bill to the Medicare
program or to any individual, third party payer, or other entity for
the DHS performed pursuant to the prohibited referral.
(c) Denial of payment. Except as provided in paragraph (e) of this
section, no Medicare payment may be made for a designated health
service that is furnished pursuant to a prohibited referral.
(d) Refunds. An entity that collects payment for a designated
health service that was performed pursuant to a prohibited referral
must refund all collected amounts on a timely basis, as defined at
Sec. 1003.101 of this title.
(e) Exception for certain entities. Payment may be made to an
entity that submits a claim for a designated health service if--
(1) The entity did not have actual knowledge of, and did not act in
reckless disregard or deliberate ignorance of, the identity of the
physician who made the referral of the designated health service to the
entity; and
(2) The claim otherwise complies with all applicable Federal and
State laws, rules, and regulations.
(f) Exception for certain arrangements involving temporary
noncompliance. (1) Except as provided in paragraphs (f)(2), (f)(3), and
(f)(4) of this section, an entity may submit a claim or bill and
payment may be made to an entity that submits a claim or bill for a
designated health service if--
(i) The financial relationship between the entity and the referring
physician fully complied with an applicable exception under Sec.
411.355, Sec. 411.356, or Sec. 411.357 for at least 180 consecutive
calendar days immediately preceding the date on which the financial
relationship became noncompliant with the exception;
(ii) The financial relationship has fallen out of compliance with
the exception for reasons beyond the control of the entity, and the
entity promptly takes steps to rectify the noncompliance; and
(iii) The financial relationship does not violate the anti-kickback
statute (section 1128B(b) of the Act), and the claim or bill otherwise
complies with all applicable Federal and State laws, rules, and
regulations.
(2) Paragraph (f)(1) of this section applies only to DHS furnished
during the period of time it takes the entity to rectify the
noncompliance, which must not exceed 90 consecutive calendar days
following the date on which the financial relationship became
noncompliant with an exception.
(3) Paragraph (f)(1) may be used by an entity only once every 3
years with respect to the same referring physician.
(4) Paragraph (f)(1) does not apply if the exception with which the
financial relationship previously complied was Sec. 411.357(k) or (m).
0
4a. Section 411.354 is revised to read as follows:
Sec. 411.354 Financial relationship, compensation, and ownership or
investment interest.
(a) Financial relationships. (1) Financial relationship means--
(i) A direct or indirect ownership or investment interest (as
defined in paragraph (b) of this section) in any entity that furnishes
DHS; or
(ii) A direct or indirect compensation arrangement (as defined in
paragraph (c) of this section) with an entity that furnishes DHS.
(2) Types of financial relationships. (i) A direct financial
relationship exists if remuneration passes between the referring
physician (or a member of his or her immediate family) and the entity
furnishing DHS without any intervening persons or entities between the
entity furnishing DHS and the referring physician (or a member of his
or her immediate family).
(ii) An indirect financial relationship exists under the conditions
described in paragraphs (b)(5) and (c)(2) of this section.
(b) Ownership or investment interest. An ownership or investment
interest in the entity may be through equity, debt, or other means, and
includes an interest in an entity that holds an ownership or investment
interest in any entity that furnishes DHS.
(1) An ownership or investment interest includes, but is not
limited to, stock, stock options other than those described in Sec.
411.354(b)(3)(ii), partnership shares, limited liability company
memberships, as well as loans, bonds, or other financial instruments
that are secured with an entity's property or revenue or a portion of
that property or revenue.
(2) An ownership or investment interest in a subsidiary company is
neither an ownership or investment interest in the parent company, nor
in any other subsidiary of the parent, unless the subsidiary company
itself has an ownership or investment interest in the parent or such
other subsidiaries. It may, however, be part of an indirect financial
relationship.
(3) Ownership and investment interests do not include, among other
things--
(i) An interest in a retirement plan;
(ii) Stock options and convertible securities received as
compensation until the stock options are exercised or the convertible
securities are converted to equity (before this time the stock options
or convertible securities are compensation arrangements as defined in
paragraph (c) of this section);
(iii) An unsecured loan subordinated to a credit facility (which is
a compensation arrangement as defined in paragraph (c) of this
section);
(iv) An ``under arrangements'' contract between a hospital and an
entity owned by one or more physicians (or a group of physicians)
providing DHS ``under arrangements'' with the hospital (such a contract
is a compensation arrangement as defined in paragraph (c) of this
section); or
(v) A security interest held by a physician in equipment sold by
the physician to a hospital and financed through a loan from the
physician to the hospital (such an interest is a compensation
arrangement as defined in paragraph (c) of this section).
(4) An ownership or investment interest that meets an exception set
forth in Sec. 411.355 or Sec. 411.356 need not also
[[Page 51087]]
meet an exception for compensation arrangements set forth in Sec.
411.357 with respect to profit distributions, dividends, or interest
payments on secured obligations.
(5)(i) An indirect ownership or investment interest exists if--
(A) Between the referring physician (or immediate family member)
and the entity furnishing DHS there exists an unbroken chain of any
number (but no fewer than one) of persons or entities having ownership
or investment interests; and
(B) The entity furnishing DHS has actual knowledge of, or acts in
reckless disregard or deliberate ignorance of, the fact that the
referring physician (or immediate family member) has some ownership or
investment interest (through any number of intermediary ownership or
investment interests) in the entity furnishing the DHS.
(ii) An indirect ownership or investment interest exists even
though the entity furnishing DHS does not know, or acts in reckless
disregard or deliberate ignorance of, the precise composition of the
unbroken chain or the specific terms of the ownership or investment
interests that form the links in the chain.
(iii) Notwithstanding anything in this paragraph (b)(5), common
ownership or investment in an entity does not, in and of itself,
establish an indirect ownership or investment interest by one common
owner or investor in another common owner or investor.
(iv) An indirect ownership or investment interest requires an
unbroken chain of ownership interests between the referring physician
and the entity furnishing DHS such that the referring physician has an
indirect ownership or investment interest in the entity furnishing DHS.
(c) Compensation arrangement. A compensation arrangement is any
arrangement involving remuneration, direct or indirect, between a
physician (or a member of a physician's immediate family) and an
entity. An ``under arrangements'' contract between a hospital and an
entity providing DHS ``under arrangements'' to the hospital creates a
compensation arrangement for purposes of these regulations. A
compensation arrangement does not include the portion of any business
arrangement that consists solely of the remuneration described in
section 1877(h)(1)(C) of the Act and in paragraphs (1) through (3) of
the definition of the term ``remuneration'' at Sec. 411.351. (However,
any other portion of the arrangement may still constitute a
compensation arrangement.)
(1)(i) A direct compensation arrangement exists if remuneration
passes between the referring physician (or a member of his or her
immediate family) and the entity furnishing DHS without any intervening
persons or entities.
(ii) A physician is deemed to have a direct compensation
arrangement with an entity furnishing DHS if the only intervening
entity between the physician and the entity furnishing DHS is his or
her physician organization. In such situations, for purposes of this
section, the physician is deemed to stand in the shoes of the physician
organization.
(2) An indirect compensation arrangement exists if--
(i) Between the referring physician (or a member of his or her
immediate family) and the entity furnishing DHS there exists an
unbroken chain of any number (but not fewer than one) of persons or
entities that have financial relationships (as defined in paragraph (a)
of this section) between them (that is, each link in the chain has
either an ownership or investment interest or a compensation
arrangement with the preceding link);
(ii) The referring physician (or immediate family member) receives
aggregate compensation from the person or entity in the chain with
which the physician (or immediate family member) has a direct financial
relationship that varies with, or takes into account, the volume or
value of referrals or other business generated by the referring
physician for the entity furnishing the DHS, regardless of whether the
individual unit of compensation satisfies the special rules on unit-
based compensation under paragraphs (d)(2) or (d)(3) of this section.
If the financial relationship between the physician (or immediate
family member) and the person or entity in the chain with which the
referring physician (or immediate family member) has a direct financial
relationship is an ownership or investment interest, the determination
whether the aggregate compensation varies with, or takes into account,
the volume or value of referrals or other business generated by the
referring physician for the entity furnishing the DHS will be measured
by the nonownership or noninvestment interest closest to the referring
physician (or immediate family member). (For example, if a referring
physician has an ownership interest in company A, which owns company B,
which has a compensation arrangement with company C, which has a
compensation arrangement with entity D that furnishes DHS, we would
look to the aggregate compensation between company B and company C for
purposes of this paragraph (c)(2)(ii)); and
(iii) The entity furnishing DHS has actual knowledge of, or acts in
reckless disregard or deliberate ignorance of, the fact that the
referring physician (or immediate family member) receives aggregate
compensation that varies with, or takes into account, the volume or
value of referrals or other business generated by the referring
physician for the entity furnishing the DHS.
(iv) For purposes of paragraph (c)(2)(i), a physician is deemed to
``stand in the shoes'' of his or her physician organization.
(3)(i) For purposes of paragraphs (c)(1)(ii) and (c)(2)(iv), a
physician who ``stands in the shoes'' of his or her physician
organization is deemed to have the same compensation arrangements (with
the same parties and on the same terms) as the physician organization.
For purposes of applying the exceptions in Sec. 411.355 and Sec.
411.357 to arrangements described in paragraphs (c)(1)(i) and
(c)(2)(i), the ``parties'' to the arrangements are considered to be the
entity furnishing DHS and the physician organization (including all
members, employees, or independent contractor physicians).
(ii) The provisions of paragraphs (c)(1)(ii) and (c)(2)(iv) need
not apply during the original term or current renewal term of an
arrangement that satisfied the requirements of Sec. 411.357(p) as of
September 5, 2007.
(d) Special rules on compensation. The following special rules
apply only to compensation under section 1877 of the Act and subpart J
of this part:
(1) Compensation is considered ``set in advance'' if the aggregate
compensation, a time-based or per-unit of service-based (whether per-
use or per-service) amount, or a specific formula for calculating the
compensation is set in an agreement between the parties before the
furnishing of the items or services for which the compensation is to be
paid. The formula for determining the compensation must be set forth in
sufficient detail so that it can be objectively verified, and the
formula may not be changed or modified during the course of the
agreement in any manner that takes into account the volume or value of
referrals or other business generated by the referring physician.
(2) Unit-based compensation (including time-based or per-unit of
service-based compensation) is deemed not to take into account ``the
volume or value of referrals'' if the compensation
[[Page 51088]]
is fair market value for services or items actually provided and does
not vary during the course of the compensation arrangement in any
manner that takes into account referrals of DHS.
(3) Unit-based compensation (including time-based or per-unit of
service-based compensation) is deemed not to take into account ``other
business generated between the parties,'' provided that the
compensation is fair market value for items and services actually
provided and does not vary during the course of the compensation
arrangement in any manner that takes into account referrals or other
business generated by the referring physician, including private pay
health care business (except for services personally performed by the
referring physician, which are not considered ``other business
generated'' by the referring physician).
(4) A physician's compensation from a bona fide employer or under a
managed care contract or other contract for personal services may be
conditioned on the physician's referrals to a particular provider,
practitioner, or supplier, provided that the compensation arrangement
meets all of the following conditions. The compensation arrangement:
(i) Is set in advance for the term of the agreement.
(ii) Is consistent with fair market value for services performed
(that is, the payment does not take into account the volume or value of
anticipated or required referrals).
(iii) Otherwise complies with an applicable exception under Sec.
411.355 or Sec. 411.357.
(iv) Complies with both of the following conditions:
(A) The requirement to make referrals to a particular provider,
practitioner, or supplier is set forth in a written agreement signed by
the parties.
(B) The requirement to make referrals to a particular provider,
practitioner, or supplier does not apply if the patient expresses a
preference for a different provider, practitioner, or supplier; the
patient's insurer determines the provider, practitioner, or supplier;
or the referral is not in the patient's best medical interests in the
physician's judgment.
(v) The required referrals relate solely to the physician's
services covered by the scope of the employment or the contract, and
the referral requirement is reasonably necessary to effectuate the
legitimate business purposes of the compensation arrangement. In no
event may the physician be required to make referrals that relate to
services that are not provided by the physician under the scope of his
or her employment or contract.
0
5. Section 411.355 is revised to read as follows:
Sec. 411.355 General exceptions to the referral prohibition related
to both ownership/investment and compensation.
The prohibition on referrals set forth in Sec. 411.353 does not
apply to the following types of services:
(a) Physician services. (1) Physician services as defined in Sec.
410.20(a) of this chapter that are furnished--
(i) Personally by another physician who is a member of the
referring physician's group practice or is a physician in the same
group practice (as defined at Sec. 411.351) as the referring
physician; or
(ii) Under the supervision of another physician who is a member of
the referring physician's group practice or is a physician in the same
group practice (as defined at Sec. 411.351) as the referring
physician, provided that the supervision complies with all other
applicable Medicare payment and coverage rules for the physician
services.
(2) For purposes of paragraph (a) of this section, ``physician
services'' include only those ``incident to'' services (as defined at
Sec. 411.351) that are physician services under Sec. 410.20(a) of
this chapter.
(b) In-office ancillary services. Services (including certain items
of durable medical equipment (DME), as defined in paragraph (b)(4) of
this section, and infusion pumps that are DME (including external
ambulatory infusion pumps), but excluding all other DME and parenteral
and enteral nutrients, equipment, and supplies (such as infusion pumps
used for PEN)), that meet the following conditions:
(1) They are furnished personally by one of the following
individuals:
(i) The referring physician.
(ii) A physician who is a member of the same group practice as the
referring physician.
(iii) An individual who is supervised by the referring physician
or, if the referring physician is in a group practice, by another
physician in the group practice, provided that the supervision complies
with all other applicable Medicare payment and coverage rules for the
services.
(2) They are furnished in one of the following locations:
(i) The same building (as defined at Sec. 411.351), but not
necessarily in the same space or part of the building, in which all of
the conditions of paragraph (b)(2)(i)(A), (b)(2)(i)(B), or (b)(2)(i)(C)
of this section are satisfied:
(A)(1) The referring physician or his or her group practice (if
any) has an office that is normally open to the physician's or group's
patients for medical services at least 35 hours per week; and
(2) The referring physician or one or more members of the referring
physician's group practice regularly practices medicine and furnishes
physician services to patients at least 30 hours per week. The 30 hours
must include some physician services that are unrelated to the
furnishing of DHS payable by Medicare, any other Federal health care
payer, or a private payer, even though the physician services may lead
to the ordering of DHS; or
(B)(1) The patient receiving the DHS usually receives physician
services from the referring physician or members of the referring
physician's group practice (if any);
(2) The referring physician or the referring physician's group
practice owns or rents an office that is normally open to the
physician's or group's patients for medical services at least 8 hours
per week; and
(3) The referring physician regularly practices medicine and
furnishes physician services to patients at least 6 hours per week. The
6 hours must include some physician services that are unrelated to the
furnishing of DHS payable by Medicare, any other Federal health care
payer, or a private payer, even though the physician services may lead
to the ordering of DHS; or
(C)(1) The referring physician is present and orders the DHS during
a patient visit on the premises as set forth in paragraph
(b)(2)(i)(C)(2) of this section or the referring physician or a member
of the referring physician's group practice (if any) is present while
the DHS is furnished during occupancy of the premises as set forth in
paragraph (b)(2)(i)(C)(2) of this section;
(2) The referring physician or the referring physician's group
practice owns or rents an office that is normally open to the
physician's or group's patients for medical services at least 8 hours
per week; and
(3) The referring physician or one or more members of the referring
physician's group practice regularly practices medicine and furnishes
physician services to patients at least 6 hours per week. The 6 hours
must include some physician services that are unrelated to the
furnishing of DHS payable by Medicare, any other Federal health care
payer, or a private payer, even though the physician services may lead
to the ordering of DHS.
(ii) A centralized building (as defined at Sec. 411.351) that is
used by the group practice for the provision of some or all
[[Page 51089]]
of the group practice's clinical laboratory services.
(iii) A centralized building (as defined at Sec. 411.351) that is
used by the group practice for the provision of some or all of the
group practice's DHS (other than clinical laboratory services).
(3) They are billed by one of the following:
(i) The physician performing or supervising the service.
(ii) The group practice of which the performing or supervising
physician is a member under a billing number assigned to the group
practice.
(iii) The group practice if the supervising physician is a
``physician in the group practice'' (as defined at Sec. 411.351) under
a billing number assigned to the group practice.
(iv) An entity that is wholly owned by the performing or
supervising physician or by that physician's group practice under the
entity's own billing number or under a billing number assigned to the
physician or group practice.
(v) An independent third party billing company acting as an agent
of the physician, group practice, or entity specified in paragraphs
(b)(3)(i) through (b)(3)(iv) of this section under a billing number
assigned to the physician, group practice, or entity, provided that the
billing arrangement meets the requirements of Sec. 424.80(b)(5) of
this chapter. For purposes of this paragraph (b)(3), a group practice
may have, and bill under, more than one Medicare billing number,
subject to any applicable Medicare program restrictions.
(4) For purposes of paragraph (b) of this section, DME covered by
the in-office ancillary services exception means canes, crutches,
walkers and folding manual wheelchairs, and blood glucose monitors,
that meet the following conditions:
(i) The item is one that a patient requires for the purpose of
ambulating, a patient uses in order to depart from the physician's
office, or is a blood glucose monitor (including one starter set of
test strips and lancets, consisting of no more than 100 of each). A
blood glucose monitor may be furnished only by a physician or employee
of a physician or group practice that also furnishes outpatient
diabetes self-management training to the patient.
(ii) The item is furnished in a building that meets the ``same
building'' requirements in the in-office ancillary services exception
as part of the treatment for the specific condition for which the
patient-physician encounter occurred.
(iii) The item is furnished personally by the physician who ordered
the DME, by another physician in the group practice, or by an employee
of the physician or the group practice.
(iv) A physician or group practice that furnishes the DME meets all
DME supplier standards set forth in Sec. 424.57(c) of this chapter.
(v) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(vi) All other requirements of the in-office ancillary services
exception in paragraph (b) of this section are met.
(5) A designated health service is ``furnished'' for purposes of
paragraph (b) of this section in the location where the service is
actually performed upon a patient or where an item is dispensed to a
patient in a manner that is sufficient to meet the applicable Medicare
payment and coverage rules.
(6) Special rule for home care physicians. In the case of a
referring physician whose principal medical practice consists of
treating patients in their private homes, the ``same building''
requirements of paragraph (b)(2)(i) of this section are met if the
referring physician (or a qualified person accompanying the physician,
such as a nurse or technician) provides the DHS contemporaneously with
a physician service that is not a designated health service provided by
the referring physician to the patient in the patient's private home.
For purposes of paragraph (b)(5) of this section only, a private home
does not include a nursing, long-term care, or other facility or
institution, except that a patient may have a private home in an
assisted living or independent living facility.
(c) Services furnished by an organization (or its contractors or
subcontractors) to enrollees. Services furnished by an organization (or
its contractors or subcontractors) to enrollees of one of the following
prepaid health plans (not including services provided to enrollees in
any other plan or line of business offered or administered by the same
organization):
(1) An HMO or a CMP in accordance with a contract with CMS under
section 1876 of the Act and part 417, subparts J through M of this
chapter.
(2) A health care prepayment plan in accordance with an agreement
with CMS under section 1833(a)(1)(A) of the Act and part 417, subpart U
of this chapter.
(3) An organization that is receiving payments on a prepaid basis
for Medicare enrollees through a demonstration project under section
402(a) of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or
under section 222(a) of the Social Security Amendments of 1972 (42
U.S.C. 1395b-1 note).
(4) A qualified HMO (within the meaning of section 1310(d) of the
Public Health Service Act).
(5) A coordinated care plan (within the meaning of section
1851(a)(2)(A) of the Act) offered by an organization in accordance with
a contract with CMS under section 1857 of the Act and part 422 of this
chapter.
(6) A MCO contracting with a State under section 1903(m) of the
Act.
(7) A prepaid inpatient health plan (PIHP) or prepaid ambulance
health plan (PAHP) contracting with a State under part 438 of this
chapter.
(8) A health insuring organization (HIO) contracting with a State
under part 438, subpart D of this chapter.
(9) An entity operating under a demonstration project under
sections 1115(a), 1915(a), 1915(b), or 1932(a) of the Act.
(d) [Reserved]
(e) Academic medical centers. (1) Services provided by an academic
medical center if all of the following conditions are met:
(i) The referring physician--
(A) Is a bona fide employee of a component of the academic medical
center on a full-time or substantial part-time basis. (A ``component''
of an academic medical center means an affiliated medical school,
faculty practice plan, hospital, teaching facility, institution of
higher education, departmental professional corporation, or nonprofit
support organization whose primary purpose is supporting the teaching
mission of the academic medical center.) The components need not be
separate legal entities;
(B) Is licensed to practice medicine in the State(s) in which he or
she practices medicine;
(C) Has a bona fide faculty appointment at the affiliated medical
school or at one or more of the educational programs at the accredited
academic hospital (as defined at Sec. 411.355(e)(3)); and
(D) Provides either substantial academic services or substantial
clinical teaching services (or a combination of academic services and
clinical teaching services) for which the faculty member receives
compensation as part of his or her employment relationship with the
academic medical center. Parties should use a reasonable and consistent
method for calculating a physician's academic services and clinical
teaching services. A physician will be deemed to meet this requirement
if he or she spends at least 20 percent of his or her professional time
or 8 hours per week providing
[[Page 51090]]
academic services or clinical teaching services (or a combination of
academic services or clinical teaching services). A physician who does
not spend at least 20 percent of his or her professional time or 8
hours per week providing academic services or clinical teaching
services (or a combination of academic services or clinical teaching
services) is not precluded from qualifying under this paragraph
(e)(1)(i)(D).
(ii) The compensation paid to the referring physician must meet all
of the following conditions:
(A) The total compensation paid by each academic medical center
component to the referring physician is set in advance.
(B) In the aggregate, the compensation paid by all academic medical
center components to the referring physician does not exceed fair
market value for the services provided.
(C) The total compensation paid by each academic medical center
component is not determined in a manner that takes into account the
volume or value of any referrals or other business generated by the
referring physician within the academic medical center.
(iii) The academic medical center must meet all of the following
conditions:
(A) All transfers of money between components of the academic
medical center must directly or indirectly support the missions of
teaching, indigent care, research, or community service.
(B) The relationship of the components of the academic medical
center must be set forth in one or more written agreements or other
written documents that have been adopted by the governing body of each
component. If the academic medical center is one legal entity, this
requirement will be satisfied if transfers of funds between components
of the academic medical center are reflected in the routine financial
reports covering the components.
(C) All money paid to a referring physician for research must be
used solely to support bona fide research or teaching and must be
consistent with the terms and conditions of the grant.
(iv) The referring physician's compensation arrangement does not
violate the anti-kickback statute (section 1128B(b) of the Act), or any
Federal or State law or regulation governing billing or claims
submission.
(2) The ``academic medical center'' for purposes of this section
consists of--
(i) An accredited medical school (including a university, when
appropriate) or an accredited academic hospital (as defined at Sec.
411.355(e)(3));
(ii) One or more faculty practice plans affiliated with the medical
school, the affiliated hospital(s), or the accredited academic
hospital; and
(iii) One or more affiliated hospitals in which a majority of the
physicians on the medical staff consists of physicians who are faculty
members and a majority of all hospital admissions is made by physicians
who are faculty members. The hospital for purposes of this paragraph
(e)(2)(iii) may be the same hospital that satisfies the requirement of
paragraph (e)(2)(i) of this section. For purposes of this paragraph, a
faculty member is a physician who is either on the faculty of the
affiliated medical school or on the faculty of one or more of the
educational programs at the accredited academic hospital. In meeting
this paragraph (e)(2)(iii), faculty from any affiliated medical school
or accredited academic hospital education program may be aggregated,
and residents and non-physician professionals need not be counted. Any
faculty member may be counted, including courtesy and volunteer
faculty. For purposes of determining whether the majority of physicians
on the medical staff consists of faculty members, the affiliated
hospital must include or exclude all individual physicians with the
same class of privileges at the affiliated hospital (for example,
physicians holding courtesy privileges).
(3) An accredited academic hospital for purposes of this section
means a hospital or a health system that sponsors four or more approved
medical education programs.
(f) Implants furnished by an ASC. Implants furnished by an ASC,
including, but not limited to, cochlear implants, intraocular lenses,
and other implanted prosthetics, implanted prosthetic devices, and
implanted DME that meet the following conditions:
(1) The implant is implanted by the referring physician or a member
of the referring physician's group practice in an ASC that is certified
by Medicare under part 416 of this chapter and with which the referring
physician has a financial relationship.
(2) The implant is implanted in the patient during a surgical
procedure paid by Medicare to the ASC as an ASC procedure under Sec.
416.65 of this chapter.
(3) The arrangement for the furnishing of the implant does not
violate the anti-kickback statute (section 1128B(b) of the Act).
(4) All billing and claims submission for the implants does not
violate any Federal or State law or regulation governing billing or
claims submission.
(5) The exception set forth in this paragraph (f) does not apply to
any financial relationships between the referring physician and any
entity other than the ASC in which the implant is furnished to, and
implanted in, the patient.
(g) EPO and other dialysis-related drugs. EPO and other dialysis-
related drugs that meet the following conditions:
(1) The EPO and other dialysis-related drugs are furnished in or by
an ESRD facility. For purposes of this paragraph, ``EPO and other
dialysis-related drugs'' means certain outpatient prescription drugs
that are required for the efficacy of dialysis and identified as
eligible for this exception on the List of CPT/HCPCS Codes; and
``furnished'' means that the EPO or dialysis-related drugs are
administered to a patient in the ESRD facility or, in the case of EPO
or Aranesp (or equivalent drug identified on the List of CPT/HCPCS
Codes) only, are dispensed by the ESRD facility for use at home.
(2) The arrangement for the furnishing of the EPO and other
dialysis-related drugs does not violate the anti-kickback statute
(section 1128B(b) of the Act).
(3) All billing and claims submission for the EPO and other
dialysis-related drugs does not violate any Federal or State law or
regulation governing billing or claims submission.
(4) The exception set forth in this paragraph does not apply to any
financial relationship between the referring physician and any entity
other than the ESRD facility that furnishes the EPO and other dialysis-
related drugs to the patient.
(h) Preventive screening tests, immunizations, and vaccines.
Preventive screening tests, immunizations, and vaccines that meet the
following conditions:
(1) The preventive screening tests, immunizations, and vaccines are
subject to CMS-mandated frequency limits.
(2) The arrangement for the provision of the preventive screening
tests, immunizations, and vaccines does not violate the anti-kickback
statute (section 1128B(b) of the Act).
(3) All billing and claims submission for the preventive screening
tests, immunizations, and vaccines does not violate any Federal or
State law or regulation governing billing or claims submission.
(4) The preventive screening tests, immunizations, and vaccines
must be covered by Medicare and must be listed as eligible for this
exception on the List of CPT/HCPCS Codes.
[[Page 51091]]
(i) Eyeglasses and contact lenses following cataract surgery.
Eyeglasses and contact lenses that are covered by Medicare when
furnished to patients following cataract surgery that meet the
following conditions:
(1) The eyeglasses or contact lenses are provided in accordance
with the coverage and payment provisions set forth in Sec.
410.36(a)(2)(ii) and Sec. 414.228 of this chapter, respectively.
(2) The arrangement for the furnishing of the eyeglasses or contact
lenses does not violate the anti-kickback statute (section 1128B(b) of
the Act).
(3) All billing and claims submission for the eyeglasses or contact
lenses does not violate any Federal or State law or regulation
governing billing or claims submission.
(j) Intra-family rural referrals. (1) Services provided pursuant to
a referral from a referring physician to his or her immediate family
member or to an entity furnishing DHS with which the immediate family
member has a financial relationship, if all of the following conditions
are met:
(i) The patient who is referred resides in a rural area as defined
at Sec. 411.351 of this subpart;
(ii) Except as provided in paragraph (j)(1)(iii) of this section,
in light of the patient's condition, no other person or entity is
available to furnish the services in a timely manner within 25 miles of
or 45 minutes transportation time from the patient's residence;
(iii) In the case of services furnished to patients where they
reside (for example, home health services or DME), no other person or
entity is available to furnish the services in a timely manner in light
of the patient's condition; and
(iv) The financial relationship does not violate the anti-kickback
statute (section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission;
(2) The referring physician or the immediate family member must
make reasonable inquiries as to the availability of other persons or
entities to furnish the DHS. However, neither the referring physician
nor the immediate family member has any obligation to inquire as to the
availability of persons or entities located farther than 25 miles of or
45 minutes transportation time from (whichever test the referring
physician utilized for purposes of paragraph (j)(1)(ii)) the patient's
residence.
0
6. Section 411.356 is revised to read as follows:
Sec. 411.356 Exceptions to the referral prohibition related to
ownership or investment interests.
For purposes of Sec. 411.353, the following ownership or
investment interests do not constitute a financial relationship:
(a) Publicly-traded securities. Ownership of investment securities
(including shares or bonds, debentures, notes, or other debt
instruments) that at the time the DHS referral was made could be
purchased on the open market and that meet the requirements of
paragraphs (a)(1) and (a)(2) of this section.
(1) They are either--
(i) Listed for trading on the New York Stock Exchange, the American
Stock Exchange, or any regional exchange in which quotations are
published on a daily basis, or foreign securities listed on a
recognized foreign, national, or regional exchange in which quotations
are published on a daily basis; or
(ii) Traded under an automated interdealer quotation system
operated by the National Association of Securities Dealers.
(2) They are in a corporation that had stockholder equity exceeding
$75 million at the end of the corporation's most recent fiscal year or
on average during the previous 3 fiscal years. ``Stockholder equity''
is the difference in value between a corporation's total assets and
total liabilities.
(b) Mutual funds. Ownership of shares in a regulated investment
company as defined in section 851(a) of the Internal Revenue Code of
1986, if the company had, at the end of its most recent fiscal year, or
on average during the previous 3 fiscal years, total assets exceeding
$75 million.
(c) Specific providers. Ownership or investment interest in the
following entities, for purposes of the services specified:
(1) A rural provider, in the case of DHS furnished in a rural area
(as defined at Sec. 411.351 of this subpart) by the provider. A
``rural provider'' is an entity that furnishes substantially all (not
less than 75 percent) of the DHS that it furnishes to residents of a
rural area and, for the 18-month period beginning on December 8, 2003
(or such other period as Congress may specify), is not a specialty
hospital.
(2) A hospital that is located in Puerto Rico, in the case of DHS
furnished by such a hospital.
(3) A hospital that is located outside of Puerto Rico, in the case
of DHS furnished by such a hospital, if--
(i) The referring physician is authorized to perform services at
the hospital;
(ii) Effective for the 18-month period beginning on December 8,
2003 (or such other period as Congress may specify), the hospital is
not a specialty hospital; and
(iii) The ownership or investment interest is in the entire
hospital and not merely in a distinct part or department of the
hospital.
0
7. Section 411.357 is revised to read as follows:
Sec. 411.357 Exceptions to the referral prohibition related to
compensation arrangements.
For purposes of Sec. 411.353, the following compensation
arrangements do not constitute a financial relationship:
(a) Rental of office space. Payments for the use of office space
made by a lessee to a lessor if there is a rental or lease agreement
that meets the following requirements:
(1) The agreement is set out in writing, is signed by the parties,
and specifies the premises it covers.
(2) The term of the agreement is at least 1 year. To meet this
requirement, if the agreement is terminated during the term with or
without cause, the parties may not enter into a new agreement during
the first year of the original term of the agreement.
(3) The space rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee (and is not shared with or used by the lessor or any
person or entity related to the lessor), except that the lessee may
make payments for the use of space consisting of common areas if the
payments do not exceed the lessee's pro rata share of expenses for the
space based upon the ratio of the space used exclusively by the lessee
to the total amount of space (other than common areas) occupied by all
persons using the common areas.
(4) The rental charges over the term of the agreement are set in
advance and are consistent with fair market value.
(5) The rental charges over the term of the agreement are not
determined in a manner that takes into account the volume or value of
any referrals or other business generated between the parties.
(6) The agreement would be commercially reasonable even if no
referrals were made between the lessee and the lessor.
(7) A holdover month-to-month rental for up to 6 months immediately
following the expiration of an agreement of at least 1 year that met
the conditions of this paragraph (a) satisfies the requirements of this
paragraph (a),
[[Page 51092]]
provided that the holdover rental is on the same terms and conditions
as the immediately preceding agreement.
(b) Rental of equipment. Payments made by a lessee to a lessor for
the use of equipment under the following conditions:
(1) A rental or lease agreement is set out in writing, is signed by
the parties, and specifies the equipment it covers.
(2) The equipment rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee and is not shared with or used by the lessor or any
person or entity related to the lessor.
(3) The agreement provides for a term of rental or lease of at
least 1 year. To meet this requirement, if the agreement is terminated
during the term with or without cause, the parties may not enter into a
new agreement during the first year of the original term of the
agreement.
(4) The rental charges over the term of the agreement are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
(5) The agreement would be commercially reasonable even if no
referrals were made between the parties.
(6) A holdover month-to-month rental for up to 6 months immediately
following the expiration of an agreement of at least 1 year that met
the conditions of this paragraph (b) satisfies the requirements of this
paragraph (b), provided that the holdover rental is on the same terms
and conditions as the immediately preceding agreement.
(c) Bona fide employment relationships. Any amount paid by an
employer to a physician (or immediate family member) who has a bona
fide employment relationship with the employer for the provision of
services if the following conditions are met:
(1) The employment is for identifiable services.
(2) The amount of the remuneration under the employment is--
(i) Consistent with the fair market value of the services; and
(ii) Except as provided in paragraph (c)(4) of this section, is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any referrals by the referring physician.
(3) The remuneration is provided under an agreement that would be
commercially reasonable even if no referrals were made to the employer.
(4) Paragraph (c)(2)(ii) of this section does not prohibit payment
of remuneration in the form of a productivity bonus based on services
performed personally by the physician (or immediate family member of
the physician).
(d) Personal service arrangements. (1) General--Remuneration from
an entity under an arrangement or multiple arrangements to a physician
or his or her immediate family member, or to a group practice,
including remuneration for specific physician services furnished to a
nonprofit blood center, if the following conditions are met:
(i) Each arrangement is set out in writing, is signed by the
parties, and specifies the services covered by the arrangement.
(ii) The arrangement(s) covers all of the services to be furnished
by the physician (or an immediate family member of the physician) to
the entity. This requirement is met if all separate arrangements
between the entity and the physician and the entity and any family
members incorporate each other by reference or if they cross-reference
a master list of contracts that is maintained and updated centrally and
is available for review by the Secretary upon request. The master list
must be maintained in a manner that preserves the historical record of
contracts. A physician or family member can ``furnish'' services
through employees whom they have hired for the purpose of performing
the services; through a wholly-owned entity; or through locum tenens
physicians (as defined at Sec. 411.351, except that the regular
physician need not be a member of a group practice).
(iii) The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement(s).
(iv) The term of each arrangement is for at least 1 year. To meet
this requirement, if an arrangement is terminated during the term with
or without cause, the parties may not enter into the same or
substantially the same arrangement during the first year of the
original term of the arrangement.
(v) The compensation to be paid over the term of each arrangement
is set in advance, does not exceed fair market value, and, except in
the case of a physician incentive plan (as defined at Sec. 411.351 of
this subpart), is not determined in a manner that takes into account
the volume or value of any referrals or other business generated
between the parties.
(vi) The services to be furnished under each arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates any Federal or State law.
(vii) A holdover personal service arrangement for up to 6 months
following the expiration of an agreement of at least 1 year that met
the conditions of paragraph (d) of this section satisfies the
requirements of paragraph (d) of this section, provided that the
holdover personal service arrangement is on the same terms and
conditions as the immediately preceding agreement.
(2) Physician incentive plan exception. In the case of a physician
incentive plan (as defined at Sec. 411.351) between a physician and an
entity (or downstream contractor), the compensation may be determined
in a manner (through a withhold, capitation, bonus, or otherwise) that
takes into account directly or indirectly the volume or value of any
referrals or other business generated between the parties, if the plan
meets the following requirements:
(i) No specific payment is made directly or indirectly under the
plan to a physician or a physician group as an inducement to reduce or
limit medically necessary services furnished with respect to a specific
individual enrolled with the entity.
(ii) Upon request of the Secretary, the entity provides the
Secretary with access to information regarding the plan (including any
downstream contractor plans), in order to permit the Secretary to
determine whether the plan is in compliance with paragraph (d)(2) of
this section.
(iii) In the case of a plan that places a physician or a physician
group at substantial financial risk as defined at Sec. 422.208, the
entity or any downstream contractor (or both) complies with the
requirements concerning physician incentive plans set forth in Sec.
422.208 and Sec. 422.210 of this chapter.
(e) Physician recruitment. (1) Remuneration provided by a hospital
to recruit a physician that is paid directly to the physician and that
is intended to induce the physician to relocate his or her medical
practice to the geographic area served by the hospital in order to
become a member of the hospital's medical staff, if all of the
following conditions are met:
(i) The arrangement is set out in writing and signed by both
parties;
(ii) The arrangement is not conditioned on the physician's referral
of patients to the hospital;
(iii) The hospital does not determine (directly or indirectly) the
amount of the remuneration to the physician based on the volume or
value of any actual or anticipated referrals by the physician or
[[Page 51093]]
other business generated between the parties; and
(iv) The physician is allowed to establish staff privileges at any
other hospital(s) and to refer business to any other entities (except
as referrals may be restricted under an employment or services contract
that complies with Sec. 411.354(d)(4)).
(2)(i) The ``geographic area served by the hospital'' is the area
composed of the lowest number of contiguous zip codes from which the
hospital draws at least 75 percent of its inpatients. The geographic
area served by the hospital may include one or more zip codes from
which the hospital draws no inpatients, provided that such zip codes
are entirely surrounded by zip codes in the geographic area described
above from which the hospital draws at least 75 percent of its
inpatients.
(ii) With respect to a hospital that draws fewer than 75 percent of
its inpatients from all of the contiguous zip codes from which it draws
inpatients, the ``geographic area served by the hospital'' will be
deemed to be the area composed of all of the contiguous zip codes from
which the hospital draws its inpatients.
(iii) Special optional rule for rural hospitals. In the case of a
hospital located in a rural area (as defined at Sec. 411.351), the
``geographic area served by the hospital'' may also be the area
composed of the lowest number of contiguous zip codes from which the
hospital draws at least 90 percent of its inpatients. If the hospital
draws fewer than 90 percent of its inpatients from all of the
contiguous zip codes from which it draws inpatients, the ``geographic
area served by the hospital'' may include noncontiguous zip codes,
beginning with the noncontiguous zip code in which the highest
percentage of the hospital's inpatients resides, and continuing to add
noncontiguous zip codes in decreasing order of percentage of
inpatients.
(iv) A physician will be considered to have relocated his or her
medical practice if the medical practice was located outside the
geographic area served by the hospital and--
(A) The physician moves his or her medical practice at least 25
miles and into the geographic area served by the hospital; or
(B) The physician moves his medical practice into the geographic
area served by the hospital, and the physician's new medical practice
derives at least 75 percent of its revenues from professional services
furnished to patients (including hospital inpatients) not seen or
treated by the physician at his or her prior medical practice site
during the preceding 3 years, measured on an annual basis (fiscal or
calendar year). For the initial ``start up'' year of the recruited
physician's practice, the 75 percent test in the preceding sentence
will be satisfied if there is a reasonable expectation that the
recruited physician's medical practice for the year will derive at
least 75 percent of its revenues from professional services furnished
to patients not seen or treated by the physician at his or her prior
medical practice site during the preceding 3 years.
(3) The recruited physician will not be subject to the relocation
requirement of this paragraph, provided that he or she establishes his
or her medical practice in the geographic area served by the recruiting
hospital, if--
(i) He or she is a resident or physician who has been in practice 1
year or less;
(ii) He or she was employed on a full-time basis for at least 2
years immediately prior to the recruitment arrangement by one of the
following (and did not maintain a private practice in addition to such
full-time employment):
(A) A Federal or State bureau of prisons (or similar entity
operating one or more correctional facilities) to serve a prison
population;
(B) The Department of Defense or Department of Veterans Affairs to
serve active or veteran military personnel and their families; or
(C) A facility of the Indian Health Service to serve patients who
receive medical care exclusively through the Indian Health Service; or
(iii) The Secretary has deemed in an advisory opinion issued under
section 1877(g) of the Act that the physician does not have an
established medical practice that serves or could serve a significant
number of patients who are or could become patients of the recruiting
hospital.
(4) In the case of remuneration provided by a hospital to a
physician either indirectly through payments made to another physician
practice, or directly to a physician who joins a physician practice,
the following additional conditions must be met:
(i) The written agreement in paragraph (e)(1) is also signed by the
party to whom the payments are directly made.
(ii) Except for actual costs incurred by the physician practice in
recruiting the new physician, the remuneration is passed directly
through to or remains with the recruited physician.
(iii) In the case of an income guarantee of any type made by the
hospital to a recruited physician who joins a physician practice, the
costs allocated by the physician practice to the recruited physician do
not exceed the actual additional incremental costs attributable to the
recruited physician. With respect to a physician recruited to join a
physician practice located in a rural area or HPSA, if the physician is
recruited to replace a physician who, within the previous 12-month
period, retired, relocated outside of the geographic area served by the
hospital, or died, the costs allocated by the physician practice to the
recruited physician do not exceed either--
(A) The actual additional incremental costs attributable to the
recruited physician; or
(B) The lower of a per capita allocation or 20 percent of the
practice's aggregate costs.
(iv) Records of the actual costs and the passed-through amounts are
maintained for a period of at least 5 years and made available to the
Secretary upon request.
(v) The remuneration from the hospital under the arrangement is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any actual or anticipated referrals by the
recruited physician or the physician practice (or any physician
affiliated with the physician practice) receiving the direct payments
from the hospital.
(vi) The physician practice may not impose on the recruited
physician practice restrictions that unreasonably restrict the
recruited physician's ability to practice medicine in the geographic
area served by the hospital.
(vii) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(5) Recruitment of a physician by a hospital located in a rural
area (as defined at Sec. 411.351) to an area outside the geographic
area served by the hospital is permitted under this exception if the
Secretary determines in an advisory opinion issued under section
1877(g) of the Act that the area has a demonstrated need for the
recruited physician and all other requirements of this paragraph (e)
are met.
(6) This paragraph (e) applies to remuneration provided by a
federally qualified health center or a rural health clinic in the same
manner as it applies to remuneration provided by a hospital, provided
that the arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
[[Page 51094]]
(f) Isolated transactions. Isolated financial transactions, such as
a one-time sale of property or a practice, if all of the following
conditions are met:
(1) The amount of remuneration under the isolated transaction is--
(i) Consistent with the fair market value of the transaction; and
(ii) Not determined in a manner that takes into account (directly
or indirectly) the volume or value of any referrals by the referring
physician or other business generated between the parties.
(2) The remuneration is provided under an agreement that would be
commercially reasonable even if the physician made no referrals to the
entity.
(3) There are no additional transactions between the parties for 6
months after the isolated transaction, except for transactions that are
specifically excepted under the other provisions in Sec. 411.355
through Sec. 411.357 and except for commercially reasonable post-
closing adjustments that do not take into account (directly or
indirectly) the volume or value of referrals or other business
generated by the referring physician.
(g) Certain arrangements with hospitals. Remuneration provided by a
hospital to a physician if the remuneration does not relate, directly
or indirectly, to the furnishing of DHS. To qualify as ``unrelated,''
remuneration must be wholly unrelated to the furnishing of DHS and must
not in any way take into account the volume or value of a physician's
referrals. Remuneration relates to the furnishing of DHS if it--
(1) Is an item, service, or cost that could be allocated in whole
or in part to Medicare or Medicaid under cost reporting principles;
(2) Is furnished, directly or indirectly, explicitly or implicitly,
in a selective, targeted, preferential, or conditioned manner to
medical staff or other persons in a position to make or influence
referrals; or
(3) Otherwise takes into account the volume or value of referrals
or other business generated by the referring physician.
(h) Group practice arrangements with a hospital. An arrangement
between a hospital and a group practice under which DHS are furnished
by the group but are billed by the hospital if the following conditions
are met:
(1) With respect to services furnished to an inpatient of the
hospital, the arrangement is pursuant to the provision of inpatient
hospital services under section 1861(b)(3) of the Act.
(2) The arrangement began before, and has continued in effect
without interruption since, December 19, 1989.
(3) With respect to the DHS covered under the arrangement, at least
75 percent of these services furnished to patients of the hospital are
furnished by the group under the arrangement.
(4) The arrangement is in accordance with a written agreement that
specifies the services to be furnished by the parties and the
compensation for services furnished under the agreement.
(5) The compensation paid over the term of the agreement is
consistent with fair market value, and the compensation per unit of
service is fixed in advance and is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
(6) The compensation is provided in accordance with an agreement
that would be commercially reasonable even if no referrals were made to
the entity.
(i) Payments by a physician. Payments made by a physician (or his
or her immediate family member)--
(1) To a laboratory in exchange for the provision of clinical
laboratory services; or
(2) To an entity as compensation for any other items or services
that are furnished at a price that is consistent with fair market
value, and that are not specifically addressed by another provision in
Sec. 411.355 through Sec. 411.357 (including, but not limited to,
Sec. 411.357(l)). ``Services'' in this context means services of any
kind (not merely those defined as ``services'' for purposes of the
Medicare program in Sec. 400.202 of this chapter).
(j) Charitable donations by a physician. Bona fide charitable
donations made by a physician (or immediate family member) to an entity
if all of the following conditions are satisfied:
(1) The charitable donation is made to an organization exempt from
taxation under the Internal Revenue Code (or to a supporting
organization);
(2) The donation is neither solicited, nor offered, in any manner
that takes into account the volume or value of referrals or other
business generated between the physician and the entity; and
(3) The donation arrangement does not violate the anti-kickback
statute (section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(k) Nonmonetary compensation. (1) Compensation from an entity in
the form of items or services (not including cash or cash equivalents)
that does not exceed an aggregate of $300 per calendar year, as
adjusted for inflation in accordance with paragraph (k)(2) of this
section, if all of the following conditions are satisfied:
(i) The compensation is not determined in any manner that takes
into account the volume or value of referrals or other business
generated by the referring physician.
(ii) The compensation may not be solicited by the physician or the
physician's practice (including employees and staff members).
(iii) The compensation arrangement does not violate the anti-
kickback statute (section 1128B(b) of the Act) or any Federal or State
law or regulation governing billing or claims submission.
(2) The annual aggregate nonmonetary compensation limit in this
paragraph (k) is adjusted each calendar year to the nearest whole
dollar by the increase in the Consumer Price Index--Urban All Items
(CPI-U) for the 12-month period ending the preceding September 30. CMS
displays after September 30 each year both the increase in the CPI-U
for the 12-month period and the new nonmonetary compensation limit on
the physician self-referral Web site: http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
(3) Where an entity has inadvertently provided nonmonetary
compensation to a physician in excess of the limit (as set forth in
paragraph (k)(1) of this section), such compensation is deemed to be
within the limit if--
(i) The value of the excess nonmonetary compensation is no more
than 50 percent of the limit; and
(ii) The physician returns to the entity the excess nonmonetary
compensation (or an amount equal to the value of the excess nonmonetary
compensation) by the end of the calendar year in which the excess
nonmonetary compensation was received or within 180 consecutive
calendar days following the date the excess nonmonetary compensation
was received by the physician, whichever is earlier.
(iii) Paragraph (k)(3) may be used by an entity only once every 3
years with respect to the same referring physician.
(4) In addition to nonmonetary compensation up to the limit
described in paragraph (k)(1) of this section, an entity that has a
formal medical staff may provide one local medical staff appreciation
event per year for the entire medical staff. Any gifts or gratuities
provided in connection with the medical staff appreciation event are
subject to the limit in paragraph (k)(1).
(l) Fair market value compensation. Compensation resulting from an
arrangement between an entity and a
[[Page 51095]]
physician (or an immediate family member) or any group of physicians
(regardless of whether the group meets the definition of a group
practice set forth in Sec. 411.352) for the provision of items or
services (other than the rental of office space) by the physician (or
an immediate family member) or group of physicians to the entity, or by
the entity to the physician (or an immediate family member) or a group
of physicians, if the arrangement is set forth in an agreement that
meets the following conditions:
(1) The arrangement is in writing, signed by the parties, and
covers only identifiable items or services, all of which are specified
in the agreement.
(2) The writing specifies the timeframe for the arrangement, which
can be for any period of time and contain a termination clause,
provided that the parties enter into only one arrangement for the same
items or services during the course of a year. An arrangement made for
less than 1 year may be renewed any number of times if the terms of the
arrangement and the compensation for the same items or services do not
change.
(3) The writing specifies the compensation that will be provided
under the arrangement. The compensation must be set in advance,
consistent with fair market value, and not determined in a manner that
takes into account the volume or value of referrals or other business
generated by the referring physician.
(4) The arrangement is commercially reasonable (taking into account
the nature and scope of the transaction) and furthers the legitimate
business purposes of the parties.
(5) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(6) The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates a Federal or State law.
(m) Medical staff incidental benefits. Compensation in the form of
items or services (not including cash or cash equivalents) from a
hospital to a member of its medical staff when the item or service is
used on the hospital's campus, if all of the following conditions are
met:
(1) The compensation is offered to all members of the medical staff
practicing in the same specialty (but not necessarily accepted by every
member to whom it is offered) without regard to the volume or value of
referrals or other business generated between the parties.
(2) Except with respect to identification of medical staff on a
hospital web site or in hospital advertising, the compensation is
provided only during periods when the medical staff members are making
rounds or are engaged in other services or activities that benefit the
hospital or its patients.
(3) The compensation is provided by the hospital and used by the
medical staff members only on the hospital's campus. Compensation,
including, but not limited to, internet access, pagers, or two-way
radios, used away from the campus only to access hospital medical
records or information or to access patients or personnel who are on
the hospital campus, as well as the identification of the medical staff
on a hospital web site or in hospital advertising, meets the ``on
campus'' requirement of this paragraph (m) of this section.
(4) The compensation is reasonably related to the provision of, or
designed to facilitate directly or indirectly the delivery of, medical
services at the hospital.
(5) The compensation is of low value (that is, less than $25) with
respect to each occurrence of the benefit (for example, each meal given
to a physician while he or she is serving patients who are hospitalized
must be of low value). The $25 limit in this paragraph (m)(5) is
adjusted each calendar year to the nearest whole dollar by the increase
in the Consumer Price Index--Urban All Items (CPI-I) for the 12 month
period ending the preceding September 30. CMS displays after September
30 each year both the increase in the CPI-I for the 12 month period and
the new limits on the physician self-referral web site: http://www.cms.hhs.gov/PhysicianSelfReferral/10_CPI-U_Updates.asp.
(6) The compensation is not determined in any manner that takes
into account the volume or value of referrals or other business
generated between the parties.
(7) The compensation arrangement does not violate the anti-kickback
statute (section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(8) Other facilities and health care clinics (including, but not
limited to, federally qualified health centers) that have bona fide
medical staffs may provide compensation under this paragraph (m) on the
same terms and conditions applied to hospitals under this paragraph
(m).
(n) Risk-sharing arrangements. Compensation pursuant to a risk-
sharing arrangement (including, but not limited to, withholds, bonuses,
and risk pools) between a MCO or an IPA and a physician (either
directly or indirectly through a subcontractor) for services provided
to enrollees of a health plan, provided that the arrangement does not
violate the anti-kickback statute (section 1128B(b) of the Act), or any
Federal or State law or regulation governing billing or claims
submission. For purposes of this paragraph (n), ``health plan'' and
``enrollees'' have the meanings set forth in Sec. 1001.952(l) of this
title.
(o) Compliance training. Compliance training provided by an entity
to a physician (or to the physician's immediate family member or office
staff) who practices in the entity's local community or service area,
provided that the training is held in the local community or service
area. For purposes of this paragraph (o), ``compliance training'' means
training regarding the basic elements of a compliance program (for
example, establishing policies and procedures, training of staff,
internal monitoring, or reporting); specific training regarding the
requirements of Federal and State health care programs (for example,
billing, coding, reasonable and necessary services, documentation, or
unlawful referral arrangements); or training regarding other Federal,
State, or local laws, regulations, or rules governing the conduct of
the party for whom the training is provided. For purposes of this
paragraph, ``compliance training'' includes programs that offer
continuing medical education credit, provided that compliance training
is the primary purpose of the program.
(p) Indirect compensation arrangements. Indirect compensation
arrangements, as defined at Sec. 411.354(c)(2), if all of the
following conditions are satisfied:
(1) The compensation received by the referring physician (or
immediate family member) described in Sec. 411.354(c)(2)(ii) is fair
market value for services and items actually provided and not
determined in any manner that takes into account the volume or value of
referrals or other business generated by the referring physician for
the entity furnishing DHS.
(2) The compensation arrangement described in Sec.
411.354(c)(2)(ii) is set out in writing, signed by the parties, and
specifies the services covered by the arrangement, except in the case
of a bona fide employment relationship between an employer and an
employee, in which case the arrangement need not be set out in a
written contract, but must be for identifiable services and be
commercially reasonable even if no referrals are made to the employer.
[[Page 51096]]
(3) The compensation arrangement does not violate the anti-kickback
statute (section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(q) Referral services. Remuneration that meets all of the
conditions set forth in Sec. 1001.952(f) of this title.
(r) Obstetrical malpractice insurance subsidies. Remuneration to
the referring physician that meets all of the conditions set forth in
Sec. 1001.952(o) of this title.
(s) Professional courtesy. Professional courtesy (as defined at
Sec. 411.351) offered by an entity with a formal medical staff to a
physician or a physician's immediate family member or office staff if
all of the following conditions are met:
(1) The professional courtesy is offered to all physicians on the
entity's bona fide medical staff or in such entity's local community or
service area without regard to the volume or value of referrals or
other business generated between the parties;
(2) The health care items and services provided are of a type
routinely provided by the entity;
(3) The entity has a professional courtesy policy that is set out
in writing and approved in advance by the entity's governing body;
(4) The professional courtesy is not offered to a physician (or
immediate family member) who is a Federal health care program
beneficiary, unless there has been a good faith showing of financial
need; and
(5) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(t) Retention payments in underserved areas.
(1) Bona fide written offer. Remuneration provided by a hospital
directly to a physician on the hospital's medical staff to retain the
physician's medical practice in the geographic area served by the
hospital (as defined in paragraph (e)(2) of this section), if all of
the following conditions are met:
(i) The physician has a bona fide firm, written recruitment offer
or offer of employment from a hospital, academic medical center (as
defined at Sec. 411.355(e)), or physician organization (as defined at
Sec. 411.351) that is not related to the hospital making the payment,
and the offer specifies the remuneration being offered and requires the
physician to move the location of his or her medical practice at least
25 miles and outside of the geographic area served by the hospital
making the retention payment.
(ii) The requirements of Sec. 411.357(e)(1)(i) through Sec.
411.357(e)(1)(iv) are satisfied.
(iii) Any retention payment is subject to the same obligations and
restrictions, if any, on repayment or forgiveness of indebtedness as
the written recruitment offer or offer of employment.
(iv) The retention payment does not exceed the lower of--
(A) The amount obtained by subtracting the physician's current
income from physician and related services from the income the
physician would receive from comparable physician and related services
in the written recruitment or employment offer, provided that the
respective incomes are determined using a reasonable and consistent
methodology, and that they are calculated uniformly over no more than a
24-month period; or
(B) The reasonable costs the hospital would otherwise have to
expend to recruit a new physician to the geographic area served by the
hospital to join the medical staff of the hospital to replace the
retained physician.
(v) The requirements of paragraph (t)(3) are satisfied.
(2) Written certification from physician. Remuneration provided by
a hospital directly to a physician on the hospital's medical staff to
retain the physician's medical practice in the geographic area served
by the hospital (as defined in paragraph (e)(2) of this section), if
all of the following conditions are met:
(i) The physician furnishes to the hospital before the retention
payment is made a written certification that the physician has a bona
fide opportunity for future employment by a hospital, academic medical
center (as defined at Sec. 411.355(e)), or physician organization (as
defined at Sec. 411.351) that requires the physician to move the
location of his or her medical practice at least 25 miles and outside
the geographic area served by the hospital. The certification contains
at least the following--
(A) Details regarding the steps taken by the physician to
effectuate the employment opportunity;
(B) Details of the physician's employment opportunity, including
the identity and location of the physician's future employer or
employment location or both, and the anticipated income and benefits
(or a range for income and benefits);
(C) A certification that the future employer is not related to the
hospital making the payment;
(D) The date on which the physician anticipates relocating his or
medical practice outside of the geographic area served by the hospital;
and
(E) Information sufficient for the hospital to verify the
information included in the written certification.
(ii) The hospital takes reasonable steps to verify that the
physician has a bona fide opportunity for future employment that
requires the physician to relocate outside the geographic area served
by the hospital.
(iii) The requirements of Sec. 411.357(e)(1)(i) through Sec.
411.357(e)(1)(iv) are satisfied.
(iv) The retention payment does not exceed the lower of--
(A) An amount equal to 25 percent of the physician's current income
(measured over no more than a 24-month period), using a reasonable and
consistent methodology that is calculated uniformly; or
(B) The reasonable costs the hospital would otherwise have to
expend to recruit a new physician to the geographic area served by the
hospital to join the medical staff of the hospital to replace the
retained physician.
(v) The requirements of paragraph (t)(3) are satisfied.
(3) Remuneration provided under paragraph (t)(1) or (t)(2) must
meet the following additional requirements:
(i)(A) The physician's current medical practice is located in a
rural area or HPSA (regardless of the physician's specialty) or is
located in an area with demonstrated need for the physician as
determined by the Secretary in an advisory opinion issued in accordance
with section 1877(g)(6) of the Act; or
(B) At least 75 percent of the physician's patients reside in a
medically underserved area or are members of a medically underserved
population.
(ii) The hospital does not enter into a retention arrangement with
a particular referring physician more frequently than once every 5
years.
(iii) The amount and terms of the retention payment are not altered
during the term of the arrangement in any manner that takes into
account the volume or value of referrals or other business generated by
the physician.
(iv) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(4) The Secretary may waive the relocation requirement of
paragraphs (t)(1) and (t)(2) of this section for payments made to
physicians practicing in a HPSA or an area with demonstrated need for
the physician through an advisory opinion issued in accordance with
section 1877(g)(6) of the Act, if the
[[Page 51097]]
retention payment arrangement otherwise complies with all of the
conditions of this paragraph.
(5) This paragraph (t) applies to remuneration provided by a
federally qualified health center or a rural health clinic in the same
manner as it applies to remuneration provided by a hospital.
(u) Community-wide health information systems. Items or services of
information technology provided by an entity to a physician that allow
access to, and sharing of, electronic health care records and any
complementary drug information systems, general health information,
medical alerts, and related information for patients served by
community providers and practitioners, in order to enhance the
community's overall health, provided that--
(1) The items or services are available as necessary to enable the
physician to participate in a community-wide health information system,
are principally used by the physician as part of the community-wide
health information system, and are not provided to the physician in any
manner that takes into account the volume or value of referrals or
other business generated by the physician;
(2) The community-wide health information systems are available to
all providers, practitioners, and residents of the community who desire
to participate; and
(3) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(v) Electronic prescribing items and services. Nonmonetary
remuneration (consisting of items and services in the form of hardware,
software, or information technology and training services) necessary
and used solely to receive and transmit electronic prescription
information, if all of the following conditions are met:
(1) The items and services are provided by a--
(i) Hospital to a physician who is a member of its medical staff;
(ii) Group practice (as defined at Sec. 411.352) to a physician
who is a member of the group (as defined at Sec. 411.351); or
(iii) PDP sponsor or MA organization to a prescribing physician.
(2) The items and services are provided as part of, or are used to
access, an electronic prescription drug program that meets the
applicable standards under Medicare Part D at the time the items and
services are provided.
(3) The donor (or any person on the donor's behalf) does not take
any action to limit or restrict the use or compatibility of the items
or services with other electronic prescribing or electronic health
records systems.
(4) For items or services that are of the type that can be used for
any patient without regard to payer status, the donor does not
restrict, or take any action to limit, the physician's right or ability
to use the items or services for any patient.
(5) Neither the physician nor the physician's practice (including
employees and staff members) makes the receipt of items or services, or
the amount or nature of the items or services, a condition of doing
business with the donor.
(6) Neither the eligibility of a physician for the items or
services, nor the amount or nature of the items or services, is
determined in a manner that takes into account the volume or value of
referrals or other business generated between the parties.
(7) The arrangement is set forth in a written agreement that--
(i) Is signed by the parties;
(ii) Specifies the items and services being provided and the
donor's cost of the items and services; and
(iii) Covers all of the electronic prescribing items and services
to be provided by the donor. This requirement is met if all separate
agreements between the donor and the physician (and the donor and any
family members of the physician) incorporate each other by reference or
if they cross-reference a master list of agreements that is maintained
and updated centrally and is available for review by the Secretary upon
request. The master list must be maintained in a manner that preserves
the historical record of agreements.
(8) The donor does not have actual knowledge of, and does not act
in reckless disregard or deliberate ignorance of, the fact that the
physician possesses or has obtained items or services equivalent to
those provided by the donor.
(w) Electronic health records items and services. Nonmonetary
remuneration (consisting of items and services in the form of software
or information technology and training services) necessary and used
predominantly to create, maintain, transmit, or receive electronic
health records, if all of the following conditions are met:
(1) The items and services are provided by an entity (as defined at
Sec. 411.351) to a physician.
(2) The software is interoperable (as defined at Sec. 411.351) at
the time it is provided to the physician. For purposes of this
paragraph, software is deemed to be interoperable if a certifying body
recognized by the Secretary has certified the software no more than 12
months prior to the date it is provided to the physician.
(3) The donor (or any person on the donor's behalf) does not take
any action to limit or restrict the use, compatibility, or
interoperability of the items or services with other electronic
prescribing or electronic health records systems.
(4) Before receipt of the items and services, the physician pays 15
percent of the donor's cost for the items and services. The donor (or
any party related to the donor) does not finance the physician's
payment or loan funds to be used by the physician to pay for the items
and services.
(5) Neither the physician nor the physician's practice (including
employees and staff members) makes the receipt of items or services, or
the amount or nature of the items or services, a condition of doing
business with the donor.
(6) Neither the eligibility of a physician for the items or
services, nor the amount or nature of the items or services, is
determined in a manner that directly takes into account the volume or
value of referrals or other business generated between the parties. For
purposes of this paragraph, the determination is deemed not to directly
take into account the volume or value of referrals or other business
generated between the parties if any one of the following conditions is
met:
(i) The determination is based on the total number of prescriptions
written by the physician (but not the volume or value of prescriptions
dispensed or paid by the donor or billed to the program);
(ii) The determination is based on the size of the physician's
medical practice (for example, total patients, total patient
encounters, or total relative value units);
(iii) The determination is based on the total number of hours that
the physician practices medicine;
(iv) The determination is based on the physician's overall use of
automated technology in his or her medical practice (without specific
reference to the use of technology in connection with referrals made to
the donor);
(v) The determination is based on whether the physician is a member
of the donor's medical staff, if the donor has a formal medical staff;
(vi) The determination is based on the level of uncompensated care
provided by the physician; or
[[Page 51098]]
(vii) The determination is made in any reasonable and verifiable
manner that does not directly take into account the volume or value of
referrals or other business generated between the parties.
(7) The arrangement is set forth in a written agreement that--
(i) Is signed by the parties;
(ii) Specifies the items and services being provided, the donor's
cost of the items and services, and the amount of the physician's
contribution; and
(iii) Covers all of the electronic health records items and
services to be provided by the donor. This requirement is met if all
separate agreements between the donor and the physician (and the donor
and any family members of the physician) incorporate each other by
reference or if they cross-reference a master list of agreements that
is maintained and updated centrally and is available for review by the
Secretary upon request. The master list must be maintained in a manner
that preserves the historical record of agreements.
(8) The donor does not have actual knowledge of, and does not act
in reckless disregard or deliberate ignorance of, the fact that the
physician possesses or has obtained items or services equivalent to
those provided by the donor.
(9) For items or services that are of the type that can be used for
any patient without regard to payer status, the donor does not
restrict, or take any action to limit, the physician's right or ability
to use the items or services for any patient.
(10) The items and services do not include staffing of physician
offices and are not used primarily to conduct personal business or
business unrelated to the physician's medical practice.
(11) The electronic health records software contains electronic
prescribing capability, either through an electronic prescribing
component or the ability to interface with the physician's existing
electronic prescribing system that meets the applicable standards under
Medicare Part D at the time the items and services are provided.
(12) The arrangement does not violate the anti-kickback statute
(section 1128B(b) of the Act), or any Federal or State law or
regulation governing billing or claims submission.
(13) The transfer of the items or services occurs and all
conditions in this paragraph (w) are satisfied on or before December
31, 2013.
0
8. Section 411.361 is revised to read as follows:
Sec. 411.361 Reporting requirements.
(a) Basic rule. Except as provided in paragraph (b) of this
section, all entities furnishing services for which payment may be made
under Medicare must submit information to CMS or to the Office of
Inspector General (OIG) concerning their reportable financial
relationships (as defined in paragraph (d) of this section), in the
form, manner, and at the times that CMS or OIG specifies.
(b) Exception. The requirements of paragraph (a) of this section do
not apply to entities that furnish 20 or fewer Part A and Part B
services during a calendar year, or to any Medicare covered services
furnished outside the United States.
(c) Required information. The information requested by CMS or OIG
can include the following:
(1) The name and unique physician identification number (UPIN) or
the national provider identifier (NPI) of each physician who has a
reportable financial relationship with the entity.
(2) The name and UPIN or NPI of each physician who has an immediate
family member (as defined at Sec. 411.351) who has a reportable
financial relationship with the entity.
(3) The covered services furnished by the entity.
(4) With respect to each physician identified under paragraphs
(c)(1) and (c)(2) of this section, the nature of the financial
relationship (including the extent or value of the ownership or
investment interest or the compensation arrangement) as evidenced in
records that the entity knows or should know about in the course of
prudently conducting business, including, but not limited to, records
that the entity is already required to retain to comply with the rules
of the Internal Revenue Service and the Securities and Exchange
Commission and other rules of the Medicare and Medicaid programs.
(d) Reportable financial relationships. For purposes of this
section, a reportable financial relationship is any ownership or
investment interest, as defined at Sec. 411.354(b) or any compensation
arrangement, as defined at Sec. 411.354(c), except for ownership or
investment interests that satisfy the exceptions set forth in Sec.
411.356(a) or Sec. 411.356(b) regarding publicly-traded securities and
mutual funds.
(e) Form and timing of reports. Entities that are subject to the
requirements of this section must submit the required information, upon
request, within the time period specified by the request. Entities are
given at least 30 days from the date of the request to provide the
information. Entities must retain the information, and documentation
sufficient to verify the information, for the length of time specified
by the applicable regulatory requirements for the information, and,
upon request, must make that information and documentation available to
CMS or OIG.
(f) Consequences of failure to report. Any person who is required,
but fails, to submit information concerning his or her financial
relationships in accordance with this section is subject to a civil
money penalty of up to $10,000 for each day following the deadline
established under paragraph (e) of this section until the information
is submitted. Assessment of these penalties will comply with the
applicable provisions of part 1003 of this title.
(g) Public disclosure. Information furnished to CMS or OIG under
this section is subject to public disclosure in accordance with the
provisions of part 401 of this chapter.
0
9. Section 411.370 is amended by revising paragraph (a) to read as
follows:
Sec. 411.370 Advisory opinions relating to physician referrals.
(a) Period during which CMS accepts requests. The provisions of
Sec. 411.370 through Sec. 411.389 apply to requests for advisory
opinions that are submitted to CMS during any time period in which CMS
is required by law to issue the advisory opinions described in this
subpart.
* * * * *
PART 424--CONDITIONS FOR MEDICARE PAYMENT
0
10. The authority citation for part 424 continues to read as follows:
Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).
Subpart B--Certification and Plan of Treatment Requirements
0
11. In Sec. 424.22, paragraph (d) is revised to read as follows:
Sec. 424.22 Requirements for home health services.
* * * * *
(d) Limitation on the performance of certification and plan of
treatment functions. A physician who has a financial relationship, as
defined at Sec. 411.354 of this chapter, with a HHA may not certify or
recertify the need for home health services or establish or review a
plan of treatment for the HHA unless the financial relationship
satisfies the requirements of one of the
[[Page 51099]]
exceptions set forth in Sec. 411.355 through Sec. 411.357 of this
chapter.
(Program No. 93.774, Medicare--Supplementary Medical Insurance
Program)
Dated: January 4, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.
Approved: June 11, 2007.
Michael O. Leavitt,
Secretary.
[FR Doc. 07-4252 Filed 8-27-07; 3:45 pm]
BILLING CODE 4120-01-P