[Federal Register: September 5, 2007 (Volume 72, Number 171)]
[Rules and Regulations]
[Page 51011-51099]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05se07-10]
[[Page 51011]]
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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
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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
[[Page 51015]]
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 th