63 fr 1659

1659Federal Register / Vol. 63, No. 6 / Friday, January 9, 1998 / Proposed Rules

DEPARTMENT OF HEALTH ANDHUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 411, 424, 435, and 455

[HCFA–1809–P]

RIN 0938–AG80

Medicare and Medicaid Programs;Physicians’ Referrals to Health CareEntities With Which They HaveFinancial Relationships

AGENCY: Health Care FinancingAdministration (HCFA), HHS.ACTION: Proposed rule.

SUMMARY: This proposed rule wouldincorporate into regulations theprovisions of sections 1877 and 1903(s)of the Social Security Act. Undersection 1877, if a physician or a memberof a physician’s immediate family has afinancial relationship with a health careentity, the physician may not makereferrals to that entity for the furnishingof designated health services under theMedicare program, unless certainexceptions apply. The followingservices are designated health services:

• Clinical laboratory services.• Physical therapy services.• Occupational therapy services.• Radiology services, including

magnetic resonance imaging,computerized axial tomography scans,and ultrasound services.

• Radiation therapy services andsupplies.

• Durable medical equipment andsupplies.

• Parenteral and enteral nutrients,equipment, and supplies.

• Prosthetics, orthotics, andprosthetic devices and supplies.

• Home health services.• Outpatient prescription drugs.• Inpatient and outpatient hospital

services.In addition, section 1877 provides

that an entity may not present or causeto be presented a Medicare claim or billto any individual, third party payer, orother entity for designated healthservices furnished under a prohibitedreferral, nor may the Secretary makepayment for a designated health servicefurnished under a prohibited referral.

Section 1903(s) of the Social SecurityAct extended aspects of the referralprohibition to the Medicaid program. Itdenies payment under the Medicaidprogram to a State for certainexpenditures for designated healthservices. Payment would be denied ifthe services are furnished to anindividual on the basis of a physician

referral that would result in the denialof payment for the services underMedicare if Medicare covered theservices to the same extent and underthe same terms and conditions as underthe State plan.

This proposed rule incorporates thesestatutory provisions into the Medicareand Medicaid regulations and interpretscertain aspects of the law. The proposedrule is based on the provisions ofsection 1903(s) and section 1877 of theSocial Security Act, as amended bysection 13562 of the Omnibus BudgetReconciliation Act of 1993, and bysection 152 of the Social Security ActAmendments of 1994.DATES: Comments will be considered ifwe receive them at the appropriateaddress, as provided below, no laterthan 5 p.m. on March 10, 1998. We willalso consider comments that wereceived in response to the final rulewith comment period, ‘‘PhysicianFinancial Relationships With, andReferrals to, Health Care Entities ThatFurnish Clinical Laboratory Servicesand Financial Relationship ReportingRequirements,’’ which we published inthe Federal Register on August 14, 1995(60 FR 41914).ADDRESSES: Mail written comments (1original and 3 copies) to the followingaddress: Health Care FinancingAdministration, Department of Healthand Human Services, Attention: HCFA–1809–P, P.O. Box 26688, Baltimore, MD21207.

If you prefer, you may deliver yourwritten comments (1 original and 3copies) to one of the followingaddresses:Room 309–G, Hubert H. Humphrey

Building, 200 Independence Avenue,SW., Washington, DC 20201, or

Room C5–09–26, 7500 SecurityBoulevard, Baltimore, MD 21244–1850.Comments may also be submitted

electronically to the following e-mailaddress: hcfa1809p.hcfa.gov. E-mailcomments must include the full nameand address of the sender and must besubmitted to the referenced address inorder to be considered. All commentsmust be incorporated in the e-mailmessage because we may not be able toaccess attachments. Because of staffingand resource limitations, we cannotaccept comments by facsimile (FAX)transmission. In commenting, pleaserefer to file code HCFA–1809–P.Comments received timely will beavailable for public inspection as theyare received, generally beginningapproximately 3 weeks after publicationof a document, in Room 309–G of theDepartment’s offices at 200

Independence Avenue, SW.,Washington, DC, on Monday throughFriday of each week from 8:30 a.m. to5 p.m. (phone: (202) 690–7890).

Copies: To order copies of the FederalRegister containing this document, sendyour request to: New Orders,Superintendent of Documents, P.O. Box371954, Pittsburgh, PA 15250–7954.Specify the date of the issue requestedand enclose a check or money orderpayable to the Superintendent ofDocuments, or enclose your Visa orMaster Card number and expirationdate. Credit card orders can also beplaced by calling the order desk at (202)783–3238 or by faxing to (202) 275–6802. The cost for each copy is $8. Asan alternative, you can view andphotocopy the Federal Registerdocument at most libraries designatedas Federal Depository Libraries and atmany other public and academiclibraries throughout the country thatreceive the Federal Register.

This Federal Register document isalso available from the Federal Registeronline database through GPO Access, aservice of the U.S. Government PrintingOffice. Free public access is available ona Wide Area Information Server (WAIS)through the Internet and viaasynchronous dial-in. Internet users canaccess the database by using the WorldWide Web; the Superintendent ofDocuments home page address is http://www.access.gpo.gov/su—docs/, byusing local WAIS client software, or bytelnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communicationssoftware and modem to call (202) 512–1661; type swais, then log in as guest(no password required).FOR FURTHER INFORMATION CONTACT:Joanne Sinsheimer (410) 786–4620.SUPPLEMENTARY INFORMATION: To assistreaders in referencing sectionscontained in this proposed rule, we areproviding the following table ofcontents:

Table of Contents

I. BackgroundA. Problems Associated with Physician

Self-referralsB. Legislation Designed to Address Self-

referrals and Similar Practices1. Legislative history of section 18772. Recent provisions and how they relate

to each otherC. HCFA and OIG Regulations Relating to

Section 1877II. Sections 1877 and 1903(s) of the Act and

the Provisions of This Proposed RuleA. Reflecting the Statutory Changes in

Section 18771. General prohibition2. Definitionsa. Referral, referring physician

1660 Federal Register / Vol. 63, No. 6 / Friday, January 9, 1998 / Proposed Rules

b. Designated health servicesc. Financial relationshipd. Compensation arrangement,

remuneration3. General Exceptions to the Prohibition on

Physician Referralsa. Exception—physician servicesb. Exception—in-office ancillary servicesc. Exception—certain prepaid health plansd. Other exceptions4. Exceptions That Apply Only to Certain

Ownership or Investment Interestsa. Exception—certain investment securities

and sharesb. Exception—ownership or investment

interest in certain health care facilities5. Exceptions That Apply Only to Certain

Compensation Arrangementsa. Exception—rental of office spaceb. Exception—rental of equipmentc. Exception—bona fide employment

relationshipd. Exception—personal service

arrangementse. Exception—remuneration unrelated to

the provision of designated healthservices

f. Exception—physician recruitmentg. Exception—isolated transactionh. Exception—certain group practice

arrangements with a hospitali. Exception—payments by a physician for

items and services6. Requirements Related to the

‘‘Substantially All’’ Test7. Reporting Requirements8. Sanctions9. Additional Definitionsa. ‘‘Clinical laboratory services’’b. ‘‘Entity’’c. ‘‘Hospital’’d. ‘‘HPSA’’e. ‘‘Immediate family member’’ or

‘‘member of a physician’s immediatefamily’’

f. ‘‘Laboratory’’g. ‘‘Plan of care’’10. Conforming Changes11. Editorial ChangesB. Applying The Referral Prohibition to the

Medicaid Program: Section 1903(s) of theAct and the Provisions of this ProposedRule

III. Interpretations of Sections 1877 and1903(s) of the Act

A. Definitions1. Designated health servicesa. Clinical laboratory servicesb. Physical therapy services (including

speech-language pathology services)c. Occupational therapy servicesd. Radiology services, including magnetic

resonance imaging, computerized axialtomography scans, ultrasound services,and radiation therapy services andsupplies

e. Durable medical equipment and suppliesf. Parenteral and enteral nutrients,

equipment, and suppliesg. Prosthetics, orthotics, and prosthetic

devicesh. Home health servicesi. Outpatient prescription drugsj. Inpatient hospital servicesk. Outpatient hospital services2. Direct supervision

3. Entity4. Fair market value5. Financial relationship6. Group practice7. Referral8. Remuneration

B. General Prohibition on ReferralsC. General Exceptions That Apply to

Ownership or Investment Interests andto Compensation Arrangements

1. Exception for physician services2. Exception for in-office ancillary servicesa. The site requirementb. The billing requirementc. Designated health services that do not

trigger the in-office exception3. Exception for services provided under

prepaid health plansa. Physicians, suppliers, and providers that

contract with prepaid organizationsb. Managed care organizations under the

Medicaid programc. Evolving structures of integrated

delivery and other health care deliverysystems

d. Designated health services furnishedunder a demonstration project or waiver

D. Exceptions That Apply Only toOwnership or Investment Interests

1. Exception for ownership in publiclytraded securities

2. Exception for hospital ownershipE. Exceptions That Apply Only to

Compensation Arrangements1. A new exception for all compensation

arrangements that meet certain standards2. A new exception for certain forms of ‘‘de

minimis’’ compensation3. The ‘‘volume or value of referrals’’

standard4. The commercial reasonableness standard5. The Secretary’s authority to create

additional requirements6. Exception for bona fide employment

relationships7. Exception for personal services

arrangements8. Exception for remuneration unrelated to

the provision of designated healthservices

9. Exception for a hospital’s payments forphysician recruitment

10. Exception for certain group practicearrangements with a hospital

11. Exception for payments by a physicianfor items and services

F. The Reporting Requirements1. Which financial relationships must be

reported2. What entities outside the United States

must reportG. How the Referral Prohibition Applies to

the Medicaid Program1. Who qualifies as a ‘‘physician’’ for

purposes of section 1903(s)2. How the referral prohibition and

sanctions affect Medicaid providers3. How the referral rules apply when

Medicaid-covered designated healthservices differ from the services coveredunder Medicare

4. How the reporting requirements applyunder the Medicaid program

IV. Our Responses to Questions About theLaw

A. Definitions

1. Compensation arrangementWhat is an ‘‘indirect’’ compensation

arrangement?Which exceptions apply in indirect

situations?2. EntityWhat are the characteristics of an ‘‘entity’’

that provides for the furnishing ofdesignated health services?

When is an entity furnishing, or providingfor the furnishing of, designated healthservices?

3. Financial relationshipHow do equity and debt qualify as

ownership?Is membership in a nonprofit corporation

an ownership or investment interest?Do stock options and nonvested interests

constitute ownership?4. Group practiceWhat is the ‘‘full range of services’’ test?5. Immediate family member or member of

a physician’s immediate familyHow does the prohibition affect a

physician’s referrals to immediate familymembers?

If one member of a group practice cannotmake a referral to an entity, are all othergroup practice physicians alsoprecluded?

6. RemunerationDo payments qualify as remuneration only

if they result in a net benefit?B. General prohibition—What constitutes a

prohibited referralDoes the prohibition apply only if a

physician refers directly to a particularrelated entity?

When is the owner of a designated healthservices provider considered asequivalent to that provider?

Has a physician made a referral to aparticular entity if another individualdirects the patient there?

How will HCFA interpret situations inwhich it is not clear whether a physicianhas referred to a particular entity?

C. General Exceptions That Apply toOwnership or Investment Interests andto Compensation Arrangements

1. The in-office ancillary exceptionCan a physician supply crutches as in-

office ancillary services?2. Exception for services furnished by

organizations operating under prepaidplans.

Can a physician refer non-enrollees to arelated prepaid organization or to itsphysicians and providers?

3. Other permissible exceptions forfinancial relationships that do not posea risk of program or patient abuse.

Should situations that meet a safe harborunder the anti-kickback statute beautomatically excepted?


1. Exception for ownership in publiclytraded securities or mutual funds

Does the exception for publicly tradedsecurities apply to stock options?

2. Exception for services provided by ahospital in which a physician or familymember has an interest

Can a physician or family member own aninterest in a chain of hospitals?


E. Exceptions That Apply Only toCompensation Arrangements

1. Compensation arrangements in generalCan a lease or arrangement for items or

services have a termination clause?Will a physician’s referrals be prohibited if

an entity pays for certain incidentalbenefits?

2. Exception for agreements involving therental of office space or equipment

Can a lessee sublet office space orequipment?

Does the lease exception apply to any kindof lease covering space or equipment?

Can a lease provide for payment based onhow often the equipment is used?

3. Exception for personal servicesarrangements

How does the physician incentive planexception apply when an enrolling entitycontracts with a group practice?

V. Regulatory Impact StatementA. BackgroundB. Anticipated Effects and Alternatives

Considered1. Physicians2. Entities, including hospitalsC. Conclusion

VI. Collection of Information RequirementsVII. Response to Comments

I. Background

A. Problems Associated With PhysicianSelf-referrals

When a patient seeks medical care,his or her physician has a major role indetermining the kind and amount ofhealth care services the patient willreceive. Having a financial interest in anentity that furnishes these services canaffect a physician’s decision about whatmedical care to furnish a patient andwho should furnish the care. In fact,numerous studies have raised seriousconcerns about the referral patterns ofphysicians who make self-referrals(referrals to entities with which they ortheir family members have financialrelationships).

In June 1988, Congress mandated thatthe Office of Inspector General (OIG) ofthe Department of Health and HumanServices conduct a study on physicianownership of and compensation fromhealth care entities to which thephysicians make referrals. The OIGreported that patients of referringphysicians who owned or invested inindependent clinical laboratoriesreceived 45 percent more laboratoryservices than all Medicare patients ingeneral. The OIG found similar effectson utilization associated with theexistence of compensation arrangementsbetween laboratories and physicians.Patients of these physicians used 32percent more laboratory services thanall Medicare patients in general.(‘‘Financial Arrangements BetweenPhysicians and Health Care Businesses:Report to Congress,’’ Office of Inspector

General, DHHS, pages 18 and 21 (May1989)). Based in part on the results ofthis study, Congress enacted, inNovember of 1989, section 1877 of theSocial Security Act (the Act). (Unlessotherwise indicated, references tosections of the law below are to sectionsof the Act.) We discuss section 1877 indetail below.

Subsequent studies have supportedthe OIG findings on self-referrals. Thestudies indicate that other types ofservices are also associated with higherutilization and increased costs. Forexample, in 1991 the Florida CostContainment Board (the Board)analyzed the effect of joint venturearrangements on the following aspectsof health care: access, costs, charges,utilization, and quality. A joint venturewas defined as any ownership orinvestment interest or compensationarrangement involving physicians (orany health care professionals who makereferrals) and an entity providing healthcare goods or services.

The Board found that doctor-ownedclinical laboratories, diagnostic imagingcenters, and physical therapy andrehabilitation centers performed moreprocedures on a per-patient basis andcharged higher prices than nondoctor-affiliated facilities. The Boardconcluded that there might be referralproblems or the results did not allowclear conclusions for ambulatorysurgical centers, durable medicalequipment suppliers, home healthagencies, and radiation therapy centers.The study revealed that little or noimpact existed for acute care hospitalsand nursing homes. (‘‘Joint VenturesAmong Health Care Providers inFlorida,’’ State of Florida Health CareCost Containment Board (Sept. 1991)).

Additionally, in 1994, the GeneralAccounting Office (GAO) released ananalysis of 2.4 million diagnosticimaging services ordered by 17,900physicians in the State of Florida. TheGAO found that Florida physicians witha financial interest in joint ventureimaging centers had higher referral ratesfor almost all types of imaging servicesthan other Florida physicians. Thedifferences in the referral rates weregreatest for costly high-technologyimaging services. For example, ownersof joint ventures ordered 54 percentmore magnetic resonance imaging scansfor patients than did non-owners.

The GAO study also found thatFlorida physicians, group practices, orother practice affiliations with imagingfacilities in their own offices orderedimaging tests more frequently thanphysicians who referred their patients toimaging facilities outside their practices.The in-practice imaging rates were

about 3 times higher for magneticresonance imaging scans; about 2 timeshigher for computed tomograph scans;4.5 to 5.1 times higher for ultrasound,echocardiography, and diagnosticnuclear medicine imaging; and about 2times higher for complex and simple X-rays. (GAO Report, ‘‘Medicare: Referralsto Physician-owned Imaging FacilitiesWarrant HCFA’s Scrutiny,’’ No. B–253835; pages 2, 3, and 10, October1994.)

Several other studies, appearing in theNew England Journal of Medicine andthe Journal of the American MedicalAssociation, have found increasedutilization for a variety of services whenthe physicians have a financialrelationship with the entity to whichthey refer their patients. (See, forexample, Bruce J. Hillman, M.D., andothers, ‘‘Physicians’ Utilization andCharges for Outpatient DiagnosticImaging in a Medicare Population,’’Journal of the American MedicalAssociation, Vol. 268, No. 15 (Oct. 21,1992), pp. 2050–2054; Hemenway D.,Killen A., and others, ‘‘Physicians’Responses to Financial Incentives—Evidence From a For-profit AmbulatoryCare Center,’’ New England Journal ofMedicine, Vol. 322, No. 15 (April 12,1990), pp. 1059–1063; Alex Swedlowand others, ‘‘Increased Costs and Ratesof Use in the California Workers’Compensation System as a Result of SelfReferral by Physicians,’’ New EnglandJournal of Medicine, Vol. 327, No. 21(Nov. 19, 1992), pp. 1502–1506.)

B. Legislation Designed to Address Self-referrals and Similar Practices

1. Legislative History of Section 1877Section 6204 of the Omnibus Budget

Reconciliation Act of 1989 (OBRA ’89),Public Law 101–239, enacted onDecember 19, 1989, added section 1877to the Social Security Act. In general,section 1877 as it read under OBRA ’89provided that, if a physician (or animmediate family member of aphysician) had a financial relationshipwith a clinical laboratory, that physiciancould not make a referral to thelaboratory entity for the furnishing ofclinical laboratory services for whichMedicare might otherwise pay. (For thesake of brevity, whenever we refer to‘‘immediate family member’’ or ‘‘familymember,’’ this means ‘‘a member of thephysician’s immediate family.’’) It alsoprovided that the laboratory could notpresent or cause to be presented aMedicare claim or bill to any individual,third party payer, or other entity forclinical laboratory services furnishedunder the prohibited referral.Additionally, it required a refund of any


amount collected from an individual asa result of a billing for an item or servicefurnished under a prohibited referral.

The statute defined ‘‘financialrelationship’’ as an ownership orinvestment interest in the entity or acompensation arrangement between thephysician (or immediate familymember) and the entity. The statuteprovided a number of exceptions to theprohibition. Some of these exceptionsapplied to both ownership/investmentinterests and compensationarrangements, while other exceptionsapplied to only one or the other of these.Additionally, the statute imposedreporting requirements and provided forsanctions.

Section 4207(e) of the OmnibusBudget Reconciliation Act of 1990(OBRA ’90), Public Law 101–508,enacted on November 5, 1990, amendedcertain provisions of section 1877 toclarify definitions and reportingrequirements relating to physicianownership and referral and to providean additional exception to theprohibition.

Section 13562 of the Omnibus BudgetReconciliation Act of 1993 (OBRA ’93),Public Law 103–66, enacted on August10, 1993, extensively revised section1877. It modified the prior law to applyto referrals for ten ‘‘designated healthservices’’ in addition to clinicallaboratory services, modified someexceptions, and added new ones.Section 152 of the Social Security ActAmendments of 1994 (SSA ’94), PublicLaw 103–432, enacted on October 31,1994, amended the list of designatedservices, effective January 1, 1995.(Section II of this preamble contains alisting of the designated healthservices.) It also changed the reportingrequirements in section 1877(f) andamended some of the effective dates ofthe OBRA ’93 provisions.

Section 13624 of OBRA ’93 extendedaspects of the referral prohibition to theMedicaid program. It amended section1903 of the Act by adding a newparagraph (s). This provision deniesFederal financial participation (FFP)payment under the Medicaid program toa State for certain expenditures fordesignated health services. A Statecannot receive FFP for designatedhealth services furnished to anindividual on the basis of a physicianreferral that would result in a denial ofpayment under the Medicare program ifMedicare covered the services to thesame extent and under the same termsand conditions as under the StateMedicaid plan. Section 13624 alsospecified that the reportingrequirements of section 1877(f) and thecivil money penalty provision of section

1877(g)(5) (which relates to reporting)apply to a provider of a designatedhealth service for which payment maybe made under Medicaid in the samemanner as they apply to a provider ofa designated health service for whichpayment may be made under Medicare.

We describe the provisions of section1877, as amended, in detail in part A ofsection II of this preamble. We discusssection 1903(s) in part B of section II.

2. Recent Provisions and How TheyRelate to Each Other

Congress has enacted into law severalprovisions governing financialrelationships between entitiesfurnishing health care services andthose health care professionals whorefer patients to them. For example, the‘‘anti-kickback statute’’ providescriminal penalties for individuals orentities that knowingly and willfullyoffer, pay, solicit, or receiveremuneration to induce the furnishingof items or services covered by Medicareor State health care programs (includingMedicaid, and any State programreceiving funds under titles V or XX ofthe Act). (This provision was originallyenacted in 1972 as part of the SocialSecurity Amendments of 1972, PublicLaw 92–603. It was revised in 1977 (inPublic Law 95–142) to read as it doestoday. It was subsequently recodified bythe Medicare and Medicaid ProgramPatient Protection Act of 1987 (PublicLaw 100–93). It currently appears at 42U.S.C. 1320a–7b(b)(2) and section1128B(b) of the Social Security Act.)

Both the anti-kickback statute andsection 1877 address Congress’ concernthat health care decisionmaking can beunduly influenced by a profit motive.When physicians have a financialincentive to refer, this incentive canaffect utilization, patient choice, andcompetition. Physicians can overutilizeby ordering items and services forpatients that, absent a profit motive,they would not have ordered. Apatient’s choice can be affected whenphysicians steer patients to lessconvenient, lower quality, or moreexpensive providers of health care, justbecause the physicians are sharingprofits with, or receiving remunerationfrom, the providers. And lastly, wherereferrals are controlled by those sharingprofits or receiving remuneration, themedical marketplace suffers since newcompetitors can no longer win businesswith superior quality, service, or price.Although the purposes behind the anti-kickback statute and section 1877 aresimilar, it is important to analyze themseparately. In other words, to operatelawfully under Medicare and Medicaid,one must comply with both statutes.

Anti-kickback statute: The anti-kickback statute is a criminal statutethat applies to those who knowingly andwillfully offer, pay, solicit, or receiveremuneration to induce the furnishingof items or services under Medicare orState health care programs (includingMedicaid). The offense is classified as afelony and is punishable by fines of upto $25,000 and imprisonment for up to5 years. Violation of the statute is alsoa basis for exclusion from Medicare andMedicaid.

Since the statute on its face is verybroad, a number of health care entitiesexpressed concern after its enactmentthat many relatively innocuous, or evenbeneficial, commercial arrangements aretechnically covered by the statute andcan therefore lead to criminalprosecution. Congress addressed thisfact by enacting section 14 of theMedicare and Medicaid Patient andProgram Protection Act of 1987. Thisprovision requires the Department ofHealth and Human Services to issue‘‘safe harbors,’’ specifying thosepayment practices that will not besubject to criminal prosecution underthe anti-kickback statute and will notprovide a basis for an exclusion. Thesafe harbors are not mandatory in thesense that one is required to fit into asafe harbor. The safe harbors exist toprovide absolute immunity to thosearrangements.

Section 1877: Section 1877 prohibitsphysicians from referring Medicarepatients to certain entities fordesignated health services if thephysician (or an immediate familymember) has a financial relationshipwith the entity, unless the relationshipfits into an exception. Certain aspects ofsection 1877 also affect Medicaidreferrals. While there are otherremedies, section 1877 is primarily apayment ban that is effective regardlessof intent. Many of the exceptions insection 1877 are similar to the safeharbors under the anti-kickback statute,such as exceptions for certainemployees, personal servicearrangements, and space and equipmentrentals. The exceptions are different inthe sense that, under section 1877, aphysician is required to meet anexception if the physician wants tomake an otherwise prohibited referral,while under the anti-kickback statute, ahealth care provider is not required tomeet a safe harbor. That is, if a providermeets a safe harbor, it is automaticallyprotected from prosecution. If aprovider does not meet a safe harbor, itmay still be in compliance with the anti-kickback statute and therefore be safefrom prosecution, but that


determination would be based on acase-by-case assessment of the facts.

C. HCFA and OIG Regulations Relatingto Section 1877

On December 3, 1991, we issued aninterim final rule with comment period(56 FR 61374) setting forth the reportingrequirements under section 1877(f). OnMarch 11, 1992, we published aproposed rule (57 FR 8588) setting forththe self-referral prohibition andexceptions to the prohibition in section1877, as these provisions were amendedby OBRA ’90, and as they relate toreferrals for clinical laboratory services.

On October 20, 1993, the OIGpublished a proposed rule (58 FR54096) that would set forth inregulations the penalty provisionsspecified in sections 1877(g)(3) and(g)(4). The final rule with commentperiod implementing the civil moneypenalty provisions was published onMarch 31, 1995 (60 FR 16580).

On August 14, 1995, we published afinal rule with comment period in theFederal Register (60 FR 41914) thatincorporated into regulations theprovisions of section 1877 that relate tothe prohibition on physician referralsfor clinical laboratory services. TheAugust 1995 final rule containsrevisions to the March 11, 1992proposal based on comments submittedby the public. Further, it incorporatesthe amendments and exceptions createdby OBRA ’93 and the amendments inSSA ’94 that relate to referrals forclinical laboratory services.

The final rule addresses only thosechanges that had a retroactive effectivedate of January 1, 1992; it does notincorporate those modifications made tosection 1877 that became effective forreferrals made after December 31, 1994.(Even though the August 1995 final ruleincorporates OBRA ’93 and SSA ’94provisions, it generally only reiteratesthem without interpreting them. Weinterpreted the new provisions only ina few instances in which it wasnecessary to do so in order toimplement the statute at all.) The finalrule also responds to commentsreceived on the December 1991 interimfinal rule covering the reportingrequirements. In addition, it revises theregulations established by that rule toincorporate the amendments to section1877(f) made by SSA ’94, to apply toany future reporting that we require.

II. Sections 1877 and 1903(s) of the Actand the Provisions of This ProposedRule

Many of the provisions covered beloware discussed in detail in the preambleof either the March 1992 proposed rule

or the August 1995 final rule in thecontext of referrals for clinicallaboratory services. We are proposing,as discussed below, to leave a numberof these provisions unchanged except toapply them to the additional designatedhealth services. Readers who desiremore background information on theseprovisions are referred to the earlierdocuments.

We are also proposing to amend theprovisions of the August 1995 finalregulation to reflect other changes insection 1877 that were enacted in OBRA’93 or in SSA ’94 and became effectiveon January 1, 1995. In part A of thissection, we discuss how we have alteredthe final regulation to apply it to theadditional designated health services,and to reflect the statutory changes insection 1877 that took effect on January1, 1995. Part B of this section covers thechanges made by section 13624 ofOBRA ’93 to the Medicaid program insection 1903(s) of the Act. Section13624 applies aspects of the referralprohibition to the Medicaid program forreferrals made on or after December 31,1994. We discuss in part B how wepropose to amend the Medicaidregulations to reflect the statutorychanges.

In section III of this preamble wediscuss in detail how we propose tointerpret any provisions in sections1877 and 1903(s) that we believe areambiguous, incomplete, or that providethe Secretary with discretion. We alsodiscuss policy changes or clarificationswe propose to make to the August 1995rule. In section IV, we present some ofthe most common questions concerningphysician referrals that we receivedfrom the health care community. Weinclude in section IV our interpretationsof how the law applies in the situationsdescribed to us.

A. Reflecting the Statutory Changes inSection 1877

1. General Prohibition

With certain exceptions, section1877(a)(1)(A) prohibits a physician frommaking a referral to an entity for thefurnishing of designated health services,for which Medicare may otherwise pay,if the physician (or an immediate familymember) has a financial relationshipwith that entity. This provision as itrelated to clinical laboratory serviceswas incorporated into our regulations at§ 411.353(a) by the August 1995 finalrule. We would revise § 411.353(a) toapply the prohibition to referrals fordesignated health services.

Section 1877(a)(1)(B) prohibits anentity from presenting, or causing to bepresented, either a Medicare claim or a

bill to any individual, third party payor,or other entity for designated healthservices furnished under a prohibitedreferral. This provision, with regard toclinical laboratory services, wasincorporated into our regulations at§ 411.353(b) by the August 1995 finalrule. We would revise § 411.353(b) toapply it to claims or bills for any of thedesignated health services.

2. DefinitionsFor purposes of section 1877, the

statute provides definitions of a numberof terms. Because they are important tounderstanding the general prohibitionset forth above, we discuss certain ofthese definitions immediately below.The statutory definitions of other termsare presented elsewhere in thispreamble when relevant.

a. Referral, referring physicianAs defined by section 1877(h)(5), a

‘‘referral’’ means the following:• The request by a physician for an

item or service for which payment maybe made under Medicare Part B,including the request by a physician fora consultation with another physician(and any test or procedure ordered by,or to be performed by (or under thesupervision of) that other physician).

• The request or establishment of aplan of care by a physician that includesthe furnishing of designated healthservices.

Section 1877(h)(5)(C), however,provides an exception to this definitionin the case of a request by a pathologistfor clinical diagnostic laboratory testsand pathological examination services,(and as added by OBRA ’93) a requestby a radiologist for diagnostic radiologyservices, and a request by a radiationoncologist for radiation therapy if theservices are furnished by (or under thesupervision of) the pathologist,radiologist, or radiation oncologist,respectively, as a result of a consultationrequested by another physician.

The August 1995 final ruleincorporated section 1877(h)(5), withregard to clinical laboratory services,into our regulations by defining‘‘referral’’ at § 411.351. We interpreted areferral as the request by a physician for,or the ordering of, any item or servicecovered under Medicare Part B. Weinterpreted the referral for other items orservices as a request by a physician thatincludes the provision of laboratoryservices or the establishment of a planof care by a physician that includes theprovision of laboratory services. We alsoincluded the statutory exception forcertain clinical diagnostic laboratorytests and pathological examinationservices requested by a pathologist.


This proposed rule would revise thedefinition of ‘‘referral’’ to apply it toreferrals for designated health services.In accordance with section1877(h)(5)(C), we would also add theexception to the definition describedabove relating to a request by aradiologist for diagnostic radiologyservices and a request by a radiationoncologist for radiation therapy. Inaddition, we would make a technicalchange in this section. We wouldremove the phrase ‘‘any item or service’’and replace it with the phrase ‘‘anyservice.’’ Because the term ‘‘services’’ isdefined in our regulations (at § 400.202)to include ‘‘items,’’ the phrase ‘‘anyitem or service’’ contains a redundancy.Hereinafter, unless we specifically stateotherwise, we use the term ‘‘service(s)’’as including ‘‘item(s).’’ We have alsomade several other changes to thedefinition that are discussed in sectionIII of this preamble.

Also, in accordance with section1877(h)(5), the August 1995 final rule at§ 411.351 defined ‘‘referring physician’’as a physician (or group practice) whomakes a referral as defined in § 411.351.This proposed rule would retain thisdefinition, but with one amendmentthat is described in section IV.A.5 ofthis preamble.

b. Designated health services

Section 1877(h)(6) defines‘‘designated health services’’ as any ofthe following services:

• Clinical laboratory services.• Physical therapy services.• Occupational therapy services.• Radiology services, including

magnetic resonance imaging,computerized axial tomography scans,and ultrasound services.

• Radiation therapy services andsupplies.

• Durable medical equipment andsupplies.

• Parenteral and enteral nutrients,equipment, and supplies.

• Prosthetics, orthotics, andprosthetic devices and supplies.

• Home health services.• Outpatient prescription drugs.• Inpatient and outpatient hospital

services.This proposed rule would incorporate

this definition of ‘‘designated healthservices’’ into our regulations at§ 411.351, except that, for purposes ofdefinition, we would combine radiologyservices and radiation therapy servicesand supplies. Also, we propose todefine each of these designated healthservices in § 411.351. We explain ourdefinitions and interpretations insection III of this preamble.

c. Financial relationshipSection 1877(a)(2) describes a

financial relationship between aphysician (or an immediate familymember) and an entity as being anownership or investment interest in theentity or a compensation arrangementbetween a physician (or immediatefamily member) and the entity. (Wediscuss compensation arrangements inthe next section). The statute providesthat an ownership or investment interestmay be established through equity, debt,or other means. The statute furtherspecifies that an ownership orinvestment interest includes an interestin an entity that holds an ownership orinvestment interest in any entityfurnishing designated health services.

The August 1995 final ruleincorporated this definition into ourregulations, with regard to clinicallaboratory services, at § 411.351. Thatsection specifies that a financialrelationship includes an interest in anentity that holds an ownership orinvestment interest in any entityproviding laboratory services. Thisproposed rule would revise thedefinition to specify that a financialrelationship includes an interest in anentity that holds an ownership orinvestment interest in any entityproviding designated health services.We have also made certain otherchanges described in section III of thispreamble.

d. Compensation arrangement,remuneration

Section 1877(h)(1)(A) defines a‘‘compensation arrangement’’ as anyarrangement involving anyremuneration between a physician (orimmediate family member) and anentity, other than an arrangementinvolving only remuneration describedin section 1877(h)(1)(C). Section1877(h)(1)(B) defines ‘‘remuneration’’ toinclude ‘‘any remuneration, directly orindirectly, overtly or covertly, in cash orin kind.’’ Section 1877(h)(1)(C) providesthat a compensation arrangement doesnot include the following types ofremuneration:

• The forgiveness of amounts owedfor inaccurate tests or procedures,mistakenly performed tests orprocedures, or the correction of minorbilling errors.

• The provision of items, devices, orsupplies that are used solely to—

+ Collect, transport, process, or storespecimens for the entity providing theitem, device, or supply; or

+ Order or communicate the resultsof tests or procedures for the entity.

• A payment made by an insurer ora self-insured plan to a physician to

satisfy a claim, submitted on a fee-for-service basis, for the furnishing ofhealth services by that physician to anindividual who is covered by a policywith the insurer or by the self-insuredplan, if—

+ The health services are notfurnished, and the payment is not made,under a contract or other arrangementbetween the insurer or the plan and thephysician;

+ The payment is made to thephysician on behalf of the coveredindividual and would otherwise bemade directly to the individual;

+ The amount of the payment is setin advance, does not exceed fair marketvalue, and is not determined in amanner that takes into account directlyor indirectly the volume or value of anyreferrals; and

+ The payment meets any otherrequirements the Secretary may imposeby regulation as needed to protectagainst Medicare program or patientabuse.

The above definitions of a‘‘compensation arrangement’’ and‘‘remuneration’’ were incorporated intoour regulations at § 411.351 by theAugust 1995 final rule. In the definitionof ‘‘compensation arrangement,’’ weclarified that such an arrangement couldbe either direct or indirect. Thisproposed rule would retain thatdefinition. Also, because the statutedefines ‘‘remuneration’’ only byreferring to how the remuneration mightbe made (for example, in cash or inkind), we interpreted remuneration tomean any payment, discount,forgiveness of debt, or other benefit.This proposed rule would retain thedefinition of ‘‘remuneration,’’ with onechange. We will consider that paymentsmade by an insurer to a physician arenot ‘‘remuneration’’ if they meet therequirements in the statute, and if theamount of the payment does not takeinto account directly or indirectly otherbusiness generated between the parties.We explain this change in section III.E.3of this preamble.

3. General Exceptions to the Prohibitionon Physician Referrals

Section 1877(b) provides for generalexceptions to the prohibition onreferrals. (General exceptions areexceptions that apply to bothownership/investment interests andcompensation arrangements.)

Because the first two of theseexceptions apply to a ‘‘group practice,’’we begin with a discussion of ‘‘grouppractice’’ as defined in section 1877. A‘‘group practice,’’ as defined in section1877(h)(4), is a group of two or morephysicians legally organized as a


partnership, professional corporation,foundation, not-for-profit corporation,faculty practice plan, or similarassociation, that meets the followingconditions:

• Each physician member of thegroup furnishes substantially the fullrange of services that the physicianroutinely furnishes, including medicalcare, consultation, diagnosis, ortreatment, through the joint use ofshared office space, facilities,equipment, and personnel.

• Substantially all of the services ofthe physician members of the group arefurnished through the group, are billedunder a billing number assigned to thegroup, and amounts so received aretreated as receipts of the group (the‘‘substantially all’’ test, which wediscuss below). (The predecessorprovision, that is, the provision as itread before January 1, 1995, requiredthat the services be billed in the nameof the group (not that they be billedunder a billing number assigned to thegroup).)

• The overhead expenses of and theincome from the practice are distributedin accordance with methods previouslydetermined.

• Except for profits and productivitybonuses that meet the conditionsdescribed below, no physician memberof the group directly or indirectlyreceives compensation based on thevolume or value of referrals by thephysician. (Added by OBRA ’93 to beeffective January 1, 1995.)

• Members of the group personallyconduct at least 75 percent of thephysician-patient encounters of thegroup practice. (Added by OBRA ’93 tobe effective January 1, 1995.)

• The group practice complies withall other standards established by theSecretary in regulations.

With regard to the above definition,section 1877(h)(4)(B) establishes thefollowing ‘‘Special Rules’’:

• A physician in a group practice maybe paid a share of the overall profits ofthe group, or a productivity bonus basedon services personally performed orservices incident to the personallyperformed services, so long as the shareor bonus is not determined in anymanner that is directly related to thevolume or value of referrals by thephysician. (Added by OBRA ’93 to beeffective for referrals made on or afterJanuary 1, 1995.)

• In the case of a faculty practice planassociated with a hospital, institution ofhigher education, or medical schoolwith an approved medical residencytraining program in which physicianmembers may furnish a variety ofdifferent specialty services and furnish

professional services both within andoutside the group, as well as performother tasks such as research, theconditions contained in the definition of‘‘group practice’’ apply only withrespect to the services furnished withinthe faculty practice plan.

Our August 1995 final ruleestablished a definition of ‘‘grouppractice’’ at § 411.351 based on thestatute as it read effective January 1,1992. In implementing the statute, weinterpreted the provision requiring that‘‘substantially all’’ of the services of thephysician members be furnishedthrough the group as meaning 75percent of the patient care services ofthe group practice. (We discussadditional requirements and definitionsrelated to the ‘‘substantially all’’ test insection II.A.6. of this preamble.) Asstated above, OBRA ’93 made certainrevisions to the definition of a grouppractice, effective January 1, 1995. Thisproposed rule would revise thedefinition of ‘‘group practice’’ at§ 411.351 to conform with the changesmade by OBRA ’93. Therefore we woulddo the following:

• Remove the requirement thatsubstantially all of the services must bebilled in the name of the group. Wewould specify, instead, thatsubstantially all of the services must bebilled under a billing number assignedto the group.

• Add the above provisionsrestricting payments made to physiciansbased on volume or value of referrals,with the exception for profits andproductivity bonuses.

• Add that members of the groupmust personally conduct at least 75percent of the physician-patientencounters of the group practice.

In addition, for reasons explained inthe August 1995 final rule, thedefinition would continue to providethat the ‘‘substantially all’’ test does notapply to any group practice that islocated solely in a health professionalshortage area (HPSA). Also, for grouppractices located outside of a HPSA, anytime spent by group practice membersproviding services in a HPSA shouldnot be used to calculate whether thegroup practice located outside the HPSAhas met the ‘‘substantially all’’ test. Wehave also made several other changes tothe definition of a group practice, whichare discussed later in this preamble.

a. Exception—physician servicesSection 1877(b)(1) specifies that the

prohibition does not apply to servicesfurnished on a referral basis if theservices are physician services, asdefined in section 1861(q), furnishedpersonally by (or under the personal

supervision of) another physician in thesame group practice as the referringphysician. Our August 1995 final ruleincorporated this provision at§ 411.355(a), covering physicianservices as we have defined them at§ 410.20(a). This proposed rule retains§ 411.355(a).

b. Exception—in-office ancillaryservices

Section 1877(b)(2) specifies that theprohibition does not apply to referralsfor certain in-office ancillary services.We consider in-office ancillary servicesto be all designated health services thatcan be provided in an in-office setting,except durable medical equipment(excluding infusion pumps) andparenteral and enteral nutrients,equipment, and supplies. (In otherwords, referrals for infusion pumps canqualify for the exception. However, theexception does not apply to referrals forthe in-office provision of other durablemedical equipment and parenteral andenteral nutrients, equipment, andsupplies.) To qualify for the exception,an ownership or investment interest inthe services must meet anyrequirements the Secretary sets forth inregulations to protect against Medicareprogram or patient abuse. Additionally,the ancillary services must meet thefollowing requirements:

• The services must be furnishedpersonally by the referring physician, aphysician who is a member of the samegroup practice as the referringphysician, or an individual who isdirectly supervised by the physician orby another physician in the grouppractice. Also, the services must befurnished in either of the following:

+ A building in which the referringphysician (or another physician who isa member of the same group practice)furnishes physician services unrelatedto the furnishing of designated healthservices. (The predecessor provisionread ‘‘* * * unrelated to the furnishingof clinical laboratory services.’’)

+ In the case of a referring physicianwho is a member of a group practice, inanother building that is used by thegroup practice for either of thefollowing:

++ Furnishing some or all of thegroup’s clinical laboratory services.

++ The centralized provision of thegroup’s designated health services(other than clinical laboratory services).(This provision, which was added byOBRA ’93, became effective January 1,1995.) Note that OBRA ’93 also containsan undesignated paragraph followingthis provision that reads as follows:‘‘unless the Secretary determines otherterms and conditions under which the


provision of such services does notpresent a risk of program or patientabuse, * * *.’’ As discussed in theAugust 1995 final rule, it is ourinterpretation that this paragraph isintended to provide for the possibility ofour liberalizing the conditions describedin section 1877(b)(2)(A)(ii)(II); that is,the conditions concerning the provisionof services in ‘‘another building’’ that isused by a group practice.

• The ancillary services must bebilled by one of the following:

+ The physician performing orsupervising the services.

+ A group practice of which thephysician is a member under a billingnumber assigned to the group practice.(Prior to January 1, 1995, this provisiondid not require that the services bebilled under a group practice’s billingnumber.)

+ An entity that is wholly owned bythe physician or group practice.

The August 1995 final ruleincorporated into our regulations an in-office ancillary services exception thatwas based on the statutory provision, asit was in effect on January 1, 1992, at§ 411.355(b). This proposed rule wouldrevise § 411.355(b) to conform it to thecurrent statutory provision. That is, itwould—

• Specify that the exception does notapply to durable medical equipment(other than infusion pumps) or toparenteral and enteral nutrients,equipment, and supplies; and

• Revise paragraph (b)(2) of § 411.355to require that the services be furnishedin one of the following locations:

+ A building in which the referringphysician (or another physician who isa member of the same group practice)furnishes physician services unrelatedto the furnishing of designated healthservices.

+ A building that is used by thegroup practice for the provision of someor all of the group’s clinical laboratoryservices.

+ A building that is used by thegroup practice for the centralizedprovision of the group’s designatedhealth services (other than clinicallaboratory services).

• Indicate that when a group practicebills for ancillary services, the servicesmust be billed under a billing numberassigned to the group practice.

We have also made several otherchanges to the in-office ancillaryservices exception that we discuss insection III of this preamble.

For purposes of the in-office ancillaryservices exception, the August 1995final rule also defined ‘‘directsupervision’’ at § 411.351. The ruledefines this term as supervision by a

physician who is present in the officesuite and immediately available toprovide assistance and directionthroughout the time services are beingperformed. This proposed rule wouldretain that definition, with severalchanges that are meant to clarify themeaning of the term ‘‘present in theoffice suite.’’ We discuss these changesin section III of this preamble.

c. Exception—certain prepaid healthplans

Section 1877(b)(3) specifies that theprohibition on referrals does not applyto services furnished by certain prepaidhealth plans. To qualify for theexception, the services must befurnished by a Federally-qualifiedhealth maintenance organization(within the meaning of section 1310(d)of the Public Health Services Act) to itsenrollees or by a prepaid health careorganization to its enrollees under acontract or agreement with Medicareunder one of the following statutoryauthorities:

• Section 1876, which authorizes usto enter into contracts with healthmaintenance organizations andcompetitive medical plans to furnishcovered items and services on a risk-sharing or reasonable cost basis.

• Section 1833(a)(1)(A), whichauthorizes payment for Medicare Part Bservices to prepaid health plans on areasonable cost basis.

• Section 402(a) of the Social SecurityAmendments of 1967 or section 222(a)of the Social Security Amendments of1972, both of which authorize us toconduct demonstration projectsinvolving payments on a prepaid basis.

The August 1995 final ruleincorporated section 1877(b)(3) into ourregulations at § 411.355(c). We areproposing to set forth at § 435.1012(b)an exception for services provided byorganizations analogous to those citedabove to enrollees under the Medicaidprogram. We discuss this proposal insection III of this preamble.

d. Other exceptionsEffective January 1, 1995, section

1877(b)(4) authorizes the Secretary toprovide in regulations for additionalexceptions for financial relationships,beyond those specified in the statute, ifshe determines that they do not pose arisk of Medicare program or patientabuse. The Secretary determined, basedon the rationale explained in the August1995 final rule, that referrals for certainclinical laboratory services furnished inan ambulatory surgical center or endstage renal disease facility, or by ahospice do not pose a risk of Medicareprogram or patient abuse. The Secretary

found no risk of abuse when paymentsfor these services are included in theambulatory surgical center paymentrate, the end stage renal diseasecomposite payment rate, or as part ofthe hospice payment rate, respectively.Therefore, the August 1995 final ruleincorporated an exception for thoseservices into our regulations at§ 411.355(d). This proposed rule wouldretain that provision, with a changediscussed below. Because this proposedrule covers 10 additional designatedhealth services, this exception wouldnow apply to any of the designatedhealth services provided in the samemanner.

As we noted in the August 1995 finalrule, we excepted the listed servicesbecause they are furnished as part of acomposite rate that cannot vary inresponse to utilization. We areamending § 411.355(d) to allow theSecretary to except services furnishedunder other payment rates that theSecretary determines provide nofinancial incentive for eitherunderutilization or overutilization, orany other risk of program or patientabuse. We are specifically solicitingcomments on whether there areanalogous composite rates under theMedicaid program that are similarlyguaranteed not to result in program orpatient abuse. Commenters who areinterested in this issue shoulddemonstrate why they believe aparticular kind of service should qualifyfor the exception.

4. Exceptions That Apply Only toCertain Ownership or InvestmentInterests

The statute also provides that certainownership or investment interests donot constitute a ‘‘financial relationship’’for purposes of the section 1877prohibition on referrals.

a. Exception—certain investmentsecurities and shares

Under section 1877(c), the prohibitionon referrals does not apply in the caseof ownership by a physician (orimmediate family member) of thefollowing:

• Investment securities (includingshares or bonds, debentures, notes, orother debt instruments) that may bepurchased on terms generally availableto the public and that are—

• Securities listed on the New YorkStock Exchange, the American StockExchange, or any regional exchange inwhich quotations are published on adaily basis, or foreign securities listedon a recognized foreign, national, orregional exchange in which quotationsare published on a daily basis, or


• Securities traded under anautomated interdealer quotation systemoperated by the National Association ofSecurities Dealers, and

• In a corporation that had, at the endof the corporation’s most recent fiscalyear or on average during the previous3 fiscal years, stockholder equityexceeding $75 million. (OBRA ’93 alsoincluded, until January 1, 1995,securities in a corporation that, at theend of the corporation’s most recentfiscal year, had total assets exceeding$100 million.)

• Ownership of shares in a regulatedinvestment company as defined insection 851(a) of the Internal RevenueCode of 1986 if the company had, at theend of the company’s most recent fiscalyear or on average during the previous3 fiscal years, total assets exceeding $75million.

The August 1995 final ruleincorporated the above provision intoour regulations at §§ 411.356 (a) and (b).This proposed rule would remove from§ 411.356(a) that portion of theprovision that expired on January 1,1995, and would make certain otherchanges described in section III of thispreamble.

b. Exception—ownership or investmentinterest in certain health care facilities

Section 1877(d) provides additionalexceptions to the prohibition onphysician referrals for certaindesignated health services furnished bythree types of facilities if the physician(or immediate family member) has anownership or investment interest in thefacilities:

• Designated health servicesfurnished by a hospital located inPuerto Rico.

• Designated health servicesfurnished in a rural area by an entity ifsubstantially all of the designated healthservices furnished by the entity arefurnished to individuals residing in arural area. A ‘‘rural area’’ is defined insection 1886(d)(2)(D) as meaning an areaoutside of a Metropolitan StatisticalArea. (Until January 1, 1995, thisprovision read as follows: ‘‘In the caseof clinical laboratory services if thelaboratory furnishing the services is ina rural area (as defined in section1886(d)(2)(D)).’’)

• Designated health servicesfurnished by a hospital outside ofPuerto Rico if the referring physician isauthorized to perform services at thehospital and the ownership orinvestment interest is in the hospitalitself (and not merely in a subdivisionof the hospital).

The August 1995 final ruleincorporated section 1877(d), as it

related to clinical laboratory services,into our regulations at § 411.356(c). Inestablishing the rural providerexception in the regulations, werequired that referred laboratory testingbe performed on the premises of therural laboratory (if not performed on thepremises, the laboratory performing thetesting was required to bill the Medicareprogram directly). As described in thepreamble to the proposed rule coveringreferrals for clinical laboratory services(57 FR 8598 (March 11, 1992)), webelieve that Congress included thisexception in order to benefit Medicarebeneficiaries who live in rural areaswhere laboratories may not be availablewithout the financial support of localphysicians. We included the additionalrequirement to prevent situations inwhich physicians who own an urbanlaboratory set up a storefront or ‘‘shell’’laboratory with a rural address in orderto use the rural exception. In thisscenario, the urban owner could makereferrals to the rural laboratory, whichwould in turn refer the tests to thephysician’s urban laboratory.Alternatively, urban laboratories withphysician owners could set up rurallaboratories for the purpose ofperforming tests referred by thephysician owners for their urbanpatients.

Because section 1877(d)(2) has beenamended to apply only to designatedhealth services that are actuallyfurnished in a rural area (they cannot betransferred to an urban provider), andonly by providers that providedesignated health services to apredominantly rural population, we nolonger believe that the extra requirementis necessary. We are therefore proposingto remove it from § 410.356(c).

The August 1995 final regulationadopted the OBRA ’93 standard thatsubstantially all of the designated healthservices furnished by the rural entity arefurnished to individuals residing in arural area. We interpreted ‘‘substantiallyall’’ as meaning at least 75 percent of theservices. In addition, § 411.356(c)provided an exception, until January 1,1995, for an ownership or investmentinterest in a hospital if the physician’sownership or investment interest doesnot relate (directly or indirectly) to thefurnishing of clinical laboratoryservices. This exception was based onsection 1877(b)(4) as it read underOBRA ’90. OBRA ’93, as amended bySSA ’94, retained this provision onlyuntil January 1, 1995.

This proposed rule would revise§ 411.356(c) to reflect the statutoryprovision as it became effective onJanuary 1, 1995 and to apply§ 411.356(c) to entities providing any of

the designated health services. Wewould change the requirement that arural entity be located in a rural area toinstead except referrals for designatedhealth services furnished in a rural areaby an entity that furnishes substantiallyall of its designated health services toindividuals residing in a rural area. Wewould continue to interpret‘‘substantially all’’ as being at least 75percent of the services furnished by theentity. In addition, this proposed rulewould remove the exception thatexpired on January 1, 1995.

5. Exceptions That Apply Only toCertain Compensation Arrangements

Section 1877(e) provides that certaincompensation arrangements are notconsidered a ‘‘financial relationship’’ forpurposes of the prohibition onphysician referrals.

a. Exception—rental of office space

Section 1877(e)(1)(A) provides anexception for payments made by alessee to a lessor for the use of premisesif the following conditions are met:

• The lease is in writing, signed bythe parties, and specifies the premisescovered by the lease.

• The space rented or leased does notexceed that which is reasonable andnecessary for the legitimate businesspurposes of the rental or lease. Also, thespace is used exclusively by the lesseewhen being used by the lessee, exceptthat the lessee may make payments forthe use of space consisting of commonareas under certain conditions. That is,acceptable payments for common areascannot exceed the lessee’s pro rata shareof expenses for that space based uponthe ratio of the space used exclusivelyby the lessee to the total amount ofspace (other than common areas)occupied by all persons using thecommon areas.

• The lease provides for a term ofrental or lease of at least 1 year.

• The rental charges over the term ofthe lease are set in advance, areconsistent with fair market value, andare not determined in a manner thattakes into account the volume or valueof any referrals or other businessgenerated between the parties.

• The lease would be commerciallyreasonable even if no referrals weremade between the parties.

• The lease meets any otherrequirements the Secretary may imposeby regulation, as needed to protestagainst Medicare program or patientabuse.

‘‘Fair market value’’ is defined bysection 1877(h)(3) as the value in arm’s-length transactions, consistent with thegeneral value market, and, with respect


to rentals or leases, the value of rentalproperty for general commercialpurposes (not taking into account itsintended use) and, in the case of a leaseof space by a lessor that is a potentialsource of patient referrals to the lessee,not adjusted to reflect the additionalvalue the prospective lessee or lessorwould attribute to the proximity orconvenience to the lessor. (Meeting thefair market value standard is arequirement for several of the othercompensation-related exceptions in thestatute. We discuss these otherexceptions later in this preamble.)

The August 1995 final ruleincorporated the provisions of section1877(e)(1)(A) into our regulations at§ 411.357(a), without imposing anyadditional requirements. This proposedrule would retain § 411.357(a). Inaddition, the final rule incorporated thedefinition of ‘‘fair market value’’ in§ 411.351. This proposed rule wouldretain the definition. Also, since thestatute requires that fair market value be‘‘consistent with the general marketvalue,’’ we have added to the definitionan explanation of ‘‘general marketvalue.’’

b. Exception—rental of equipmentSection 1877(e)(1)(B) provides an

exception for payments made by alessee of equipment to the lessor for theuse of the equipment if the followingconditions are met:

• The lease is set out in writing,signed by the parties, and specifies theequipment covered by the lease.

• The equipment rented or leaseddoes not exceed that which isreasonable and necessary for thelegitimate business purposes of therental or lease and is used exclusivelyby the lessee when being used by thelessee.

• The lease provides for a term ofrental or lease of at least 1 year.

• The rental charges over the term ofthe lease are set in advance, areconsistent with fair market value, andare not determined in a manner thattakes into account the volume or valueof any referrals or other businessgenerated between the parties.

• The lease would be commerciallyreasonable even if no referrals weremade between the parties.

• The lease meets any otherrequirements the Secretary may imposeby regulation as needed to protectagainst Medicare program or patientabuse.

The August 1995 final ruleincorporated this provision into ourregulations at § 411.357(b), withoutimposing any additional requirements.This proposed rule would retain

§ 411.357(b), with minor editorialchanges.

c. Exception—bona fide employmentrelationship

Under section 1877(e)(2), any amountpaid by an employer to a physician (oran immediate family member of thephysician) who has a bona fideemployment relationship with theemployer for the provision of servicesdoes not constitute a compensationarrangement for purposes of theprohibition if the following conditionsare met:

• The employment is for identifiableservices.

• The amount of the remunerationunder the employment is consistentwith the fair market value of theservices and (except for certainproductivity bonuses) is not determinedin a manner that takes into account(directly or indirectly) the volume orvalue of any referrals by the referringphysician.

• The remuneration is made inaccordance with an agreement thatwould be commercially reasonable evenif no referrals were made to theemployer.

• The employment meets any otherrequirements the Secretary may imposeby regulation as needed to protectagainst Medicare program or patientabuse.

The statute provides that, under thisexception, a productivity bonus that isbased on services performed personallyby the physician (or immediate familymember) does not violate the ‘‘volumeor value of referrals’’ standard.

‘‘Employee’’ is defined in section1877(h)(2) as an individual who wouldbe considered to be an employee of theentity under the usual common lawrules that apply in determiningemployer-employee relationships, asapplied for purposes of section3121(d)(2) of the Internal Revenue Codeof 1986.

The August 1995 final ruleincorporated the provisions of section1877(e)(2) into our regulations at§ 411.357(c), without imposing anyadditional requirements. This proposedrule would retain § 411.357(c), but withadditional requirements that wedescribe in section III. The final rulealso incorporated the definition of‘‘employee’’ into our regulations at§ 411.351. Again, this proposed rulewould retain that definition.

d. Exception—personal servicearrangements

Under section 1877(e)(3)(A),remuneration from an entity under anarrangement (including remuneration

for specific physician services furnishedto a nonprofit blood center) does notconstitute a compensation arrangementfor purposes of the prohibition onreferrals if the following conditions aremet:

• The arrangement is set out inwriting, signed by the parties, andspecifies the services covered by thearrangement.

• The arrangement covers all of theservices to be furnished by thephysician (or immediate familymember) to the entity.

• The aggregate services contractedfor do not exceed those that arereasonable and necessary for thelegitimate business purposes of thearrangement.

• The term of the arrangement is forat least 1 year.

• The compensation to be paid overthe term of the arrangement is set inadvance, does not exceed fair marketvalue, and, except in the case of aphysician incentive plan (as describedbelow) is not determined in a mannerthat takes into account the volume orvalue of any referrals or other businessgenerated between the parties.

• The services to be performed underthe arrangement do not involve thecounseling or promotion of a businessarrangement or other activity thatviolates State or Federal law.

• The arrangement meets any otherrequirements the Secretary may imposeby regulation as needed to protectagainst program or patient abuse.

The August 1995 final ruleincorporated section 1877(e)(3)(A) intoour regulations at § 411.357(d)(1),without imposing any additionalrequirements. This proposed rule wouldretain § 411.357(d)(1), with severalchanges that we discuss in section III ofthis preamble.

Section 1877(e)(3)(B)(i) provides that,in the case of a physician incentive planbetween a physician and an entity, thecompensation may be determined in amanner (through a withhold, capitation,bonus, or otherwise) that takes intoaccount, directly or indirectly, thevolume or value of any referrals or otherbusiness generated between the parties,if the plan meets the followingrequirements:

• No specific payment is made(directly or indirectly) under the plan toa physician or a physician group as aninducement to reduce or limit medicallynecessary services provided withrespect to a specific individual enrolledwith the entity.

• If the plan places a physician or aphysician group at substantial financialrisk as determined by the Secretaryunder section 1876(i)(8)(A)(ii), the plan


complies with any requirements theSecretary may impose under thatsection.

• Upon request by the Secretary, theentity provides the Secretary withaccess to descriptive informationregarding the plan, in order to permitthe Secretary to determine whether theplan is in compliance with therequirements listed above.

(Note: Sections 1876(i)(8) and1903(m)(2)(A) require that physicianincentive plans be regulated. On March27, 1996, we published, at 61 FR 13430,a final rule with comment period thatimplemented this legislation forpurposes of both the Medicare andMedicaid programs by establishingrequirements at § 417.479 (for Medicare)and at § 434.70 (for Medicaid). A finalrule amending the final rule withcomment was published on December31, 1996 at 61 FR 69034.)

The August 1995 final ruleincorporated section 1877(e)(3)(B)(i)into our regulations at § 411.357(d)(2).Because of the establishment at§ 417.479 of requirements concerningincentive plans, this proposed rulewould revise § 411.357(d)(2). It wouldreplace the reference to requirementsestablished by the Secretary undersection 1876(i)(8)(A)(ii) of the Act witha reference to the requirements of§ 417.479. We would also reverse theorder of paragraphs (ii) and (iii) of§ 411.357(d)(2) because we believe thisorder reflects a more logical progression.In addition, we would delete existing§ 411.357(d)(3), which contains a time-sensitive provision related to personalservices arrangements that, based on thestatute, is now obsolete.

Section 1877(e)(3)(B)(ii) defines a‘‘physician incentive plan’’ as anycompensation arrangement between anentity and a physician or physiciangroup that may directly or indirectlyhave the effect of reducing or limitingservices provided with respect toindividuals enrolled with the entity.The August 1995 final rule incorporatedthis definition into our regulations at§ 411.351. This proposed rule wouldretain that definition.

e. Exception—remuneration unrelatedto the provision of designated healthservices

Prior to OBRA ’93, section 1877(b)(4)provided an exception for any financialrelationship with a hospital if thefinancial relationship does not relate tothe provision of clinical laboratoryservices. OBRA ’93 eliminated thisprovision, but SSA ’94 reinstated it untilJanuary 1, 1995. OBRA ’93 also addedparagraph (e)(4) to section 1877,retroactive to January 1, 1992. Under

section 1877(e)(4), remunerationprovided by a hospital to a physicianthat does not relate to the furnishing ofdesignated health services does notconstitute a compensation arrangementfor purposes of the prohibition onreferrals. Section 1877(e)(4) differs fromthe predecessor provision at section1877(b)(4) in that it retains only thecompensation aspect of the exception.In addition, it applies only toremuneration from a hospital to aphysician (that is, it does not includeremuneration from a physician to ahospital) if the remuneration does notrelate to the furnishing of designatedhealth services. Also, the exception doesnot apply to remuneration from ahospital to a member of a physician’simmediate family.

The August 1995 final ruleincorporated the provisions of sections1877(b)(4) and (e)(4) as they wereeffective on January 1, 1992, and as theyrelate to compensation, into ourregulations at § 411.357(g). Thisproposed rule would revise § 411.357(g)by removing that portion that was basedon the predecessor provision of section1877(b)(4), since that provision hasexpired. We would also revise thatportion of § 411.357(g) that was basedon section 1877(e)(4) by changing thereference to remuneration not related tothe furnishing of clinical laboratoryservices to remuneration not related tothe furnishing of designated healthservices. We have also made severalother changes described in section III ofthis preamble.

f. Exception—physician recruitmentSection 1877(e)(5) provides that

remuneration provided by a hospital toa physician to induce the physician torelocate to the area serviced by thehospital in order to be a member of thehospital’s medical staff does notconstitute a compensation arrangementfor purposes of the prohibition onreferrals if the following conditions aremet:

• The physician is not required torefer patients to the hospital.

• The amount of remuneration underthe arrangement is not determined in amanner that takes into account (directlyor indirectly) the volume or value of anyreferrals by the referring physician.

• The arrangement meets any otherrequirements the Secretary may imposeby regulation as needed to protectagainst program or patient abuse.

The August 1995 final ruleincorporated the provisions of section1877(e)(5) into our regulations at§ 411.357(e), with additionalrequirements. Under our authority toimpose additional requirements, we

specified that the arrangement and itsterms must be in writing and signed byboth parties. We also specified that thephysician must not be precluded fromestablishing staff privileges at anotherhospital or referring business to anotherentity. This proposed rule would retain§ 411.357(e), with a minor editorialchange.

g. Exception—isolated transactionSection 1877(e)(6) provides that an

isolated transaction, such as a one-timesale of property or a practice, is notconsidered to be a compensationarrangement for purposes of theprohibition on referrals if the followingconditions are met:

• The amount of remuneration for thetransaction is consistent with fairmarket value and is not determined,directly or indirectly, in a manner thattakes into account the volume or valueof referrals by the physician.

• The remuneration is providedunder an agreement that would becommercially reasonable even if noreferrals were made to the entity.

• The arrangement meets any otherrequirements the Secretary may imposeby regulation as needed to protectagainst Medicare program or patientabuse.

The August 1995 final ruleincorporated the provisions of section1877(e)(6) into our regulations at§ 411.357(f), with additionalrequirements. Under our authority toimpose additional requirements, wespecified that there can be no additionaltransactions between the parties for 6months after the isolated transaction,except for transactions that arespecifically excepted under one of theother exceptions provided in theregulations. This proposed rule wouldretain § 411.357(f), with a minoreditorial change. In addition, weestablished definitions of ‘‘transaction’’and ‘‘isolated transaction’’ at § 411.351.We defined a ‘‘transaction’’ as aninstance or process of two or morepersons doing business. We defined an‘‘isolated transaction’’ as one involvinga single payment between two or morepersons. We specified that a transactionthat involves long-term or installmentpayments is not considered an isolatedtransaction. This proposed rule wouldretain those definitions, with theclarification that ‘‘transactions’’ caninvolve persons or entities.

h. Exception—certain group practicearrangements with a hospital

Section 1877(e)(7) provides that anarrangement between a hospital andgroup under which designated healthservices are furnished by the group but


are billed by the hospital does notconstitute a compensation arrangementfor purposes of the prohibition onreferrals if the following conditions aremet:

• With respect to the servicesfurnished to a hospital inpatient, thearrangement is for the provision ofinpatient hospital services under section1861(b)(3).

• The arrangement began beforeDecember 19, 1989, and has continuedin effect without interruption since thatdate.

• With respect to the designatedhealth services covered by thearrangement, substantially all of thoseservices furnished to patients of thehospital are furnished by the groupunder the arrangement.

• The arrangement is set out in awritten agreement that specifies theservices to be furnished by the partiesand the amount of compensation.

• The compensation paid over theterm of the agreement is consistent withfair market value, and the compensationper unit of services is fixed in advanceand is not determined in a manner thattakes into account the volume or valueof any referrals or other businessgenerated between the parties.

• The compensation is providedunder an agreement that would becommercially reasonable even if noreferrals were made to the entity.

• The arrangement between theparties meets any other requirementsthe Secretary may impose by regulationas needed to protect against Medicareprogram or patient abuse.

The August 1995 final ruleincorporated the provisions of section1877(e)(7), as they relate to clinicallaboratory services, into our regulationsat § 411.357(h), without imposing anyadditional requirements. This proposedrule would revise § 411.357(h) to applythe provisions to the designated healthservices, and would make certain minorchanges described in section III.

i. Exception—payments by a physicianfor items and services

Section 1877(e)(8) provides that thefollowing do not constitutecompensation arrangements forpurposes of the prohibition on referrals:

• Payments made by a physician to alaboratory in exchange for the provisionof clinical laboratory services.

• Payments made by a physician toan entity as compensation for items orservices other than clinical laboratoryservices if the items or services arefurnished at fair market value.

The August 1995 final ruleincorporated the provisions of section1877(e)(8) into our regulations at

§ 411.357(i). This proposed rule wouldretain § 411.357(i), but clarify that‘‘services’’ as used in the provisionmeans services of any kind (not justthose defined as ‘‘services’’ for purposesof the Medicare program in § 400.202).

6. Requirements Related to the‘‘Substantially All’’ Test

As mentioned earlier, the definition of‘‘group practice’’ in section 1877(h)(4)contains a requirement thatsubstantially all of the services of thephysicians who are members of thegroup be furnished through the group.In the August 1995 final rule, weinterpreted ‘‘substantially all’’ to meanat least 75 percent of the total patientcare services of the group practicemembers. Further, we defined‘‘members of the group,’’ at § 411.351, asphysician partners and full-time andpart-time physician contractors andemployees during the time they furnishservices to patients of the group practicethat are furnished through the groupand are billed in the name of the group.This proposed rule would revise thedefinition of ‘‘members of the group’’ toexclude independent contractors, tocount physician owners other thanpartners, and to count physicians asmembers during the time they furnish‘‘patient care services’’ to the group. Wediscuss these changes in section III ofthis preamble.

The August 1995 final rule defined‘‘patient care services,’’ at § 411.351, asany tasks performed by a group practicemember that address the medical needsof specific patients, regardless ofwhether they involve direct patientencounters. We included, as examples,the services of physicians who do notdirectly treat patients, time spent by aphysician consulting with otherphysicians, and time spent reviewinglaboratory tests. Under § 411.351,‘‘patient care services’’ are measured bythe total patient care time each memberspends on these services.

This proposed rule would retain thedefinition of patient care services, butwould broaden the definition to includetasks that benefit patients in general orthe group practice. We are alsoproposing minor changes that webelieve are necessary to clarify whattasks qualify under the definition. Wedescribe these changes in section III ofthis preamble.

The August 1995 final rule alsorequired, at § 411.360, that a grouppractice submit a written statement toits carrier annually to attest that, duringthe most recent 12-month period(calendar year, fiscal year, orimmediately preceding 12-monthperiod) 75 percent of the total patient

care services of group practice memberswas furnished through the group, wasbilled under a billing number assignedto the group, and the amounts soreceived were treated as receipts of thegroup.

Section 411.360 also provides that anewly-formed group practice (one inwhich physicians have recently begunto practice together) or any grouppractice that has been unable in the pastto meet the definition of a grouppractice as set forth at section 1877(h)(4)must—

• Submit a written statement to attestthat, during the next 12-month period(calendar year, fiscal year, or next 12months), it expects to meet the 75percent standard and will take measuresto ensure the standard is met; and

• At the end of the 12-month period,submit a written statement to attest thatit met the 75 percent standard duringthat period, billed for those servicesunder a billing number assigned to thegroup, and treated amounts received forthose services as receipts of the group.If the group did not meet the standard,any Medicare payments made to thegroup during the 12-month period thatwere conditioned on the group meetingthe standard are overpayments.

In addition, § 411.360 specifies that—

• Once any group has chosen to useits fiscal year, the calendar year, or someother 12-month period, the grouppractice must adhere to this choice.

• The attestation must contain astatement that the information furnishedin the attestation is true and accurateand must be signed by a grouprepresentative.

• Any group that intends to meet thedefinition of a group practice in order toqualify for one of the exceptionsprovided in the regulations must submitthe required attestation to its carrier byDecember 12, 1995.

The August 1995 final rule contains adiscussion of the rationale for the aboveprovisions. On December 11, 1995, wepublished in the Federal Register, at 60FR 63438, a final rule that delays thedate by which a group of physiciansmust file an attestation statement. TheDecember final rule amended § 411.360to require that a group that intends tomeet the definition of a group practicemust submit an attestation statement toits carrier no later than 60 days after thegroup receives attestation instructionsfrom its carrier. The preamble to theDecember rule points out that a groupcan regard itself as a group practice inthe interim period before it receivesattestation instructions, provided thegroup believes that it meets the


definition of a group practice under§ 411.351.

This proposed rule would retain§ 411.360, as amended by the December1995 final rule. We propose to makeseveral minor changes to clarify that agroup is only required to complete anattestation if it wishes to qualify as agroup practice for purposes of meetingan exception that requires group status.We are also changing the provision torequire that the attestation be signed byan authorized representative of thegroup practice who is knowledgeableabout the group, and to contain astatement that the information furnishedin the attestation is true and accurate tothe best of the representative’sknowledge and belief. The proposedprovision also states that any personfiling a false statement will be subject toapplicable criminal and civil penalties.

7. Reporting RequirementsPrior to SSA ’94, section 1877(f)

included the requirement that eachentity furnishing Medicare covereditems or services must provide us withcertain information concerning itsownership or investment arrangements.In our December 3, 1991 interim finalrule with comment period, published inthe Federal Register at 56 FR 61374, weextended the rule to include certaininformation concerning an entity’scompensation arrangements for thereasons discussed in the preamble ofthat rule.

Section 1877(f) also gave the Secretarythe option of waiving the reportingrequirements, for certain entities that donot furnish clinical laboratory services,in all but 10 States. The interim finalrule discussed our decision to waive thereporting requirements for all entities(other than those providing clinicallaboratory services) in States other thanthe minimum 10 States specified in thestatute. In the 10 States, we wererequired to obtain data from at least sixspecific types of entities. We gathereddata from these providers in the fall of1991.

Section 152 of SSA ’94 amendedsection 1877(f) extensively. It extendedthe reporting requirements tospecifically cover information not onlyabout an entity’s ownership orinvestment interests, but aboutcompensation arrangements as well.SSA ’94 also eliminated the Secretary’sauthority to waive the reportingrequirements for certain States orservices, although the Secretarycontinues to have the right to determinethat an entity is not subject to thereporting requirements because itprovides services covered underMedicare very infrequently. In addition,

the requirements continue to not applyto designated health services furnishedoutside of the United States. Section1877(f) allows the Secretary to gatherthe information in such form, manner,and at such times as she specifies.

We discussed the provisions ofsection 1877(f), as they relate to clinicallaboratories and as they read underOBRA ’90, in detail in the December1991 interim final rule. The August1995 final rule adopted the provisionsof the interim final rule with revisionsthat reflect the changes made by SSA’94. While the August 1995 final rulereflects the amendments made tosection 1877(f), it did not interpret theseamendments. This proposed rule retainsthe reporting requirements as theyappear in the August 1995 final rule,subject to certain interpretations wehave added in section III of thispreamble. These requirements are setforth at existing § 411.361, and wewould apply them to any futurereporting we may require.

8. SanctionsPrior to OBRA ’93, section 1877(g)(1)

required a denial of payment for aclinical laboratory service that wasprovided in violation of the referralprohibition. Paragraph (g)(2) of section1877 required the timely refund ofamounts collected in violation of theprohibition. OBRA ’93 extended theseprovisions to apply to all of thedesignated health services, effectiveJanuary 1, 1995. The August 1995 finalrule incorporated these provisions asthey relate to clinical laboratory servicesinto our regulations at §§ 411.353(c) and(d), respectively. This proposed rulewould revise §§ 411.353(c) and (d) toextend their application to the otherdesignated health services.

Paragraph (g)(3) of section 1877provides for the imposition of a civilmoney penalty of $15,000 per serviceand exclusion from Medicare and anyState health care program, includingMedicaid, for any person who presentsor causes to be presented a bill or claimthe person knows or should know is fora service for which payment may not bemade under § 1877(a). The same penaltyapplies for a service for which a personhas not made a refund as described inparagraph (g)(2).

Paragraph (g)(4) provides for a$100,000 civil money penalty and thesame exclusion penalty for anyphysician or other entity that enters intoa circumvention scheme that thephysician or entity knows or shouldknow has a principal purpose ofassuring referrals by the physician to aparticular entity which, if the physicianmade the referrals directly, would be in

violation of section 1877. A proposedrule published by the Office of InspectorGeneral on October 20, 1993 (58 FR54096) addresses sections 1877(g)(3)and (g)(4). That rule became final onMarch 31, 1995 (60 FR 16580).

Paragraph (g)(5) of section 1877provides for possible exclusion and acivil money penalty of not more than$10,000 per day for each day in whicha person has failed to meet a reportingrequirement in section 1877(f). TheDecember 1991 interim final rulecovering the reporting requirementsincorporated this provision into ourregulations at § 411.361(g), and theAugust 1995 final rule redesignated§ 411.361(g) as § 411.361(f). Thisproposed rule would retain § 411.361(f).

9. Additional Definitions

In implementing provisions of section1877 as they were effective on January1, 1992, the August 1995 final ruleestablished definitions of the followingterms (which were not discussed above)at § 411.351:

a. Clinical laboratory services meansthe biological, microbiological,serological, chemical,immunohematological, biophysical,cytological, pathological, or otherexamination of materials derived fromthe human body for the purpose ofproviding information for the diagnosis,prevention, or treatment of any diseaseor impairment of, or the assessment ofthe health of, human beings. Theseexaminations also include procedures todetermine, measure, or otherwisedescribe the presence or absence ofvarious substances or organisms in thebody.

b. Entity means a sole proprietorship,trust, corporation, partnership,foundation, not-for-profit corporation,or unincorporated association. Forreasons discussed in section III of thispreamble, this proposed rule wouldrevise the definition of ‘‘entity’’ toinclude a physician’s soleproprietorship and any practice ofmultiple physicians that provides forthe furnishing of a designated healthservice.

c. Hospital means any separatelegally-organized operating entity plusany subsidiary, related, or other entitiesthat perform services for the hospital’spatients and for which the hospital bills.However, we have excluded from thisdefinition entities that perform servicesfor hospital patients ‘‘underarrangements’’ with the hospital. Wepropose to amend this definition tomake it clear that ‘‘hospitals’’ includeregular hospitals, psychiatric hospitals,and rural primary care hospitals.


d. HPSA means, for purposes of theAugust 1995 final rule, an areadesignated as a health professionalshortage area under section 332(a)(1)(A)of the Public Health Service Act forprimary medical care professionals (inaccordance with the criteria specified in42 CFR part 5, Appendix A, Part I—Geographic Areas). In addition, withrespect to dental, mental health, visioncare, podiatric, and pharmacy services,an HPSA means an area designated asa health professional shortage areaunder section 332(a)(1)(A) of the PublicHealth Service Act for dentalprofessionals, mental healthprofessionals, vision care professionals,podiatric professionals, and pharmacyprofessionals, respectively.

e. Immediate family member or‘‘member of a physician’s immediatefamily’’ means husband or wife; naturalor adoptive parent, child, or sibling;stepparent, stepchild, stepbrother, orstepsister; father-in-law, mother-in-law,son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent orgrandchild; and spouse of a grandparentor grandchild.

f. Laboratory means an entityfurnishing biological, microbiological,serological, chemical,immunohematological, hematological,biophysical, cytological, pathological, orother examination of materials derivedfrom the human body for the purpose ofproviding information for the diagnosis,prevention, or treatment of any diseaseor impairment of, or the assessment ofthe health of, human beings. Theseexaminations also include procedures todetermine, measure, or otherwisedescribe the presence or absence ofvarious substances or organisms in thebody. Entities only collecting orpreparing specimens (or both) or onlyserving as a mailing service and notperforming testing are not consideredlaboratories.

g. The August 1995 final rule defineda ‘‘plan of care’’ as the establishment bya physician of a course of diagnosis ortreatment (or both) for a particularpatient, including the ordering of itemsor services. For reasons discussedearlier, this proposed rule wouldremove the words ‘‘items or’’ from thisdefinition.

(We explain our rationale for some ofthese definitions in the March 1992proposed rule, and we explain theremainder in the August 1995 finalrule.) We would extend thesedefinitions to apply to referralsinvolving any of the designated healthservices.

We have made some changes to thedefinitions in addition to those notedabove. Any changes in definitions that

we have included in this proposed ruledo not result from changes in thelegislation, but reflect our most recentinterpretations of the statute. In sectionIII of this preamble, we discuss in detailhow we propose to interpret provisionsin section 1877 and in section 1903(s)that we have either not interpreted inthe August 1995 final rule or that webelieve we must reconsider in thecontext of the designated healthservices. In section III, we also define orinterpret terms that are present in thestatute (such as each of the designatedhealth services) as well as include newdefinitions that we propose to add to therule to enable us to implement otherparts of the statute.

10. Conforming Changes

We propose to revise existing§§ 411.1(a) and 411.350(a), which setforth the statutory basis for theprovisions in part 411, subpart A, andpart 411, subpart J, respectively, bychanging the reference to ‘‘clinicallaboratory services’’ to ‘‘designatedhealth services.’’

11. Editorial Changes

In addition to the proposed changesdiscussed above, we would also make anumber of editorial changes to subpartJ of part 411. These changes would notaffect the substance of the provisions.As an example of the type of change wewould make, in § 411.355(a), we wouldadd the words ‘‘of this chapter’’ after thereference to § 410.20(a).

B. Applying The Referral Prohibition tothe Medicaid Program: Section 1903(s)of the Act and the Provisions of ThisProposed Rule

Title XIX of the Act authorizesFederal grants to States to establishMedicaid programs to provide medicalassistance to needy individuals.Medicaid programs are administered bythe States in accordance with Federallaws and regulations. State Medicaidagencies operate their programs inaccordance with a Medicaid State planthat is approved by us.

While Medicaid programs areadministered by the States, they arejointly financed by the Federal and Stategovernments. The Federal governmentpays its share of medical assistanceexpenditures to the State on a quarterlybasis according to a formula describedin sections 1903 and 1905(b). Theamount of the Federal share for medicalassistance is called Federal financialparticipation (FFP). Before theenactment of OBRA ’93, there were nostatutory or regulatory requirementsconcerning the availability of FFP for

Medicaid services resulting fromphysician referrals.

Section 13624 of OBRA ’93, entitled‘‘Application of Medicare RulesLimiting Certain Physician Referrals,’’added a new paragraph (s) to section1903 of the Act. This new provisionextends aspects of the Medicareprohibition on physician referrals toMedicaid. Specifically, this provisionrestricts FFP for expenditures formedical assistance under the State planconsisting of designated health services,as defined under section 1877(h)(6), thatare furnished to an individual on thebasis of a physician referral that wouldresult in the denial of payment underthe Medicare program if Medicarecovered the services to the same extentand under the same terms andconditions as under a State’s Medicaidplan.

This proposed rule would revise§ 435.1002, ‘‘FFP for services,’’ to reflectsection 1903(s). We would specify in§ 435.1002(a) that the availability of FFPfor expenditures for Medicaid servicesis subject to the limitations set forth innew § 435.1012. We would entitle§ 435.1012 as ‘‘Limitation on FFPRelated to Prohibited Referrals.’’ Theproposed new provision states that wewill deny FFP for designated healthservices (as defined in § 431.351)furnished under the State plan to anindividual on the basis of a physicianreferral that would result in the denialof payment under the Medicare programif Medicare covered the services to thesame extent and under the same termsand conditions as under the State plan.We believe that certain aspects ofsection 1903(s) require ourinterpretation, and we discuss theseaspects in section III of this preamble.

Section 4314 of the Balanced BudgetAct of 1997 established section1877(g)(6) of the Act. It requires that theSecretary issue written advisoryopinions to outside parties concerningwhether the referral of a Medicarepatient by a physician for designatedhealth services (other than clinicallaboratory services) is prohibited underthe physician referral provisions insection 1877. Because the Medicarerules can affect whether a State willreceive FFP for certain services, States,as well as individuals and entities thatprovide services under the Medicaidprogram, may be interested in theadvisory opinion process. As a result,we have included in § 435.1012(c) across reference to the Medicareregulations that set forth the specificprocedures we will use in issuingadvisory opinions.

Section 1903(s) also specifies that thereporting requirements of section


1877(f) and the penalties for failing toreport in section 1877(g)(5) apply to aprovider of a designated health servicefor which payment may be made underMedicaid in the same manner as theyapply to a provider that furnishes adesignated health service for whichpayment may be made under Medicare.

This proposed rule would incorporatethe provisions of sections 1877(f) and(g)(5) into our Medicaid regulations byadding new §§ 455.108 and 455.109 topart 455 (‘‘Program Integrity:Medicaid’’). These two provisionswould appear under a new subpart Centitled ‘‘Disclosure of Information byProviders for Purposes of theProhibition on Certain PhysicianReferrals.’’ Section 455.108, ‘‘Purpose,’’would specify that subpart Cimplements section 1903(s) of the Act.Section 455.109, ‘‘Disclosure ofownership, investment, andcompensation arrangements,’’ would listthe specific disclosure requirements,and the sanctions for failing to comply.We interpret these disclosurerequirements, as we believe they applyto Medicaid providers, in section III ofthis preamble.

III. Interpretations of Sections 1877 and1903(s) of the Act

In this section of the preamble, wediscuss in detail how we propose tointerpret provisions in section 1877 andin section 1903(s) that we either did notinterpret in the August 1995 final ruleor that we interpreted in the context ofreferrals for clinical laboratory services,but must reconsider in the context of theadditional designated health services.We propose to define or interpret termsthat are present in the statute (such aseach of the designated health services)or to reinterpret or clarify certainstatutory terms that we interpreted inthe past. We also propose to add certainnew terms and definitions to the rulethat we believe are necessary for us toimplement parts of the statute. Thissection is structured in the order weused to present the statutory provisionsand our interpretations in the August1995 final rule. We would like to pointout that, in these proposed regulations,we intend to interpret only theprovisions of section 1877 of the Act,and not the provisions of any other Stateor Federal laws, such as the antitrustlaws, the anti-kickback statute, or theInternal Revenue Code.

A. Definitions

1. Designated Health Services

As we noted above, OBRA ’93expanded the physician referralprohibition to apply to ten designated

health services in addition to clinicallaboratory services. Section 1877(h)(6)lists these services, but does not definethem. Because the designated healthservices are not defined in section 1877,we would define them in § 411.351.

Designated health services ascomponents of other services. Webelieve that a designated health serviceremains one, even if it is billed assomething else or is subsumed withinanother service category by beingbundled with other services for billingpurposes. For example, most servicesprovided by a skilled nursing facility(SNF) are considered SNF services,which are not themselves designatedhealth services. Nonetheless, SNFservices can encompass a variety ofdesignated health services, such asphysical therapy services or laboratoryservices.

Similarly under Medicaid, servicesprovided by a clinic are considered‘‘clinic services’’ under section1905(a)(9) of the Act, but couldencompass a variety of designatedhealth services, such as occupationaltherapy, physical therapy, or radiologyservices.

We base our interpretation on the factthat Congress compiled its list ofdesignated health services based onabuses or potential abuses it perceivedin regard to a variety of specific kindsof services. The list in section1877(h)(6), in fact, does not exactlytrack the service categories as they aredefined under either Medicare orMedicaid. In short, we regard theservices designated in section 1877 assubject to the requirements of thatsection regardless of the setting inwhich they are provided or the paymentcategory under which they are billed.

On the other hand, we are also awarethat designated health services aresometimes provided as merelyperipheral parts of some other majorservice that a physician has prescribed.For example, physicians often employechocardiography (to obtain ultrasoundsignals from the heart) as a mechanismto intraoperatively view the results ofbypass surgery. We do not believe thata physician using echocardiography thisway has made a specific referral for adesignated health service; instead, weregard the physician as prescribing aphysician service that happens toincidentally include echocardiography.In other words, it is our view that aphysician is unlikely to over-prescribebypass surgery in order to enhance hisor her investment in anechocardiography machine. Because webelieve that Congress meant to includeunder designated health servicesspecific services that are or could be

subject to abuse, we are proposing todefine those services accordingly. Thus,we propose to deviate from standardMedicare or Medicaid definitions ofcertain services in order to meet theintent of the statute.

How we define designated healthservices. We have chosen, in general, tobase the definitions for the designatedhealth services on existing definitions inthe Medicare program. Except forinpatient hospital services and homehealth services, our definitions arebased on how Medicare covers a serviceunder Part B. As noted above, we havechosen to deviate from these definitionswhen we believe it is appropriate tofulfill the purpose of the statute.

These definitions would apply forpurposes of physician referrals that aremade for services covered underMedicare and for analogous servicescovered under the Medicaid program.However, section 1903(s) precludes FFPfor medical assistance under a Stateplan consisting of a designated healthservice furnished to an individual onthe basis of a referral that would resultin a denial of payment under Medicareif Medicare provided for coverage of theservice to the same extent and under thesame terms and conditions as under theState plan. We believe that in enactingsection 1903(s), Congress was clearlyconcerned that financial relationships ofthe kind that would prohibit a referralfor services under Medicare may alsolead to improper utilization of Medicaidservices. However, because Medicaidhas its own unique set of coveragerequirements, a State can cover andreimburse designated health servicesvery differently from the way theseservices are covered and reimbursedunder the Medicare program. Webelieve that Congress was aware of theseprogram differences and specificallymeant to provide us with someflexibility in applying the Medicarephysician referral rules in the Medicaidcontext. Therefore, we intend to applythis flexibility in the following manner,which we believe will further the goalsof the statute:

When the definition of a designatedhealth service is the same under bothprograms, we intend to use the samedefinition, as described in thispreamble, for both programs. However,when the definition of a designatedhealth service differs under a State’splan from the definition underMedicare, we will assume that theservices under the State’s plan takeprecedence, even if the definition willencompass services that are not coveredby Medicare. However, we propose notto include Medicaid services asdesignated health services in situations


in which including those servicesappears to run counter to the underlyingpurpose of the legislation. BecauseMedicaid is administered by the States,we do not believe that we are in the bestposition to determine when includingparticular services will have this effect.As a result, we are specifically solicitingcomments on how to implement ourpolicy in a manner that will achieve thegoals of the statute.

We have received a number ofinquiries from individuals who wereconfused about whether a particularservice falls under one of the designatedservice categories listed in section1877(h)(6). In order to remedy thisproblem, we have included belowgeneral explanations of each of thedesignated health services, includingexplanations of how we interpretsimilar or parallel services underMedicare. In the text of the proposedregulation, however, we have defineddesignated health services whenever wecould by simply cross-referencingexisting definitions in the Medicarestatute, regulations, or manuals or byincluding specific language wheneverwe believe the definitions shoulddeviate from standard Medicaredefinitions.

a. Clinical laboratory servicesWe would retain the definition that

was incorporated into our regulations at§ 411.351 by the August 1995 rule.

b. Physical therapy services (includingspeech-language pathology services)

Physical therapy services. Sections1861(s)(2)(D) and 1832 provide forcoverage of outpatient physical therapyservices under Part B, which are definedin section 1861(p). Under section1861(p), outpatient physical therapyservices may be furnished by a providerof services, a clinic, rehabilitationagency, or public health agency, or byothers under arrangements with andunder the supervision of one of theseentities. The services must be furnishedto an outpatient who is under the careof a doctor of medicine or osteopathy,or a doctor of podiatric medicine, undera plan of care established by one ofthese physicians or by a qualifiedphysical therapist. The plan must beperiodically reviewed by the physicianand must include the type, amount, andduration of physical therapy services tobe furnished. No service is included asoutpatient physical therapy if it wouldnot be included as an inpatient hospitalservice if furnished to an inpatient of ahospital. Outpatient physical therapymay be furnished by a provider to anindividual as an inpatient of a hospitalor extended care facility if the

individual has exhausted or is otherwiseineligible for benefit days underMedicare Part A.

Outpatient physical therapy servicesmay be furnished by an independentphysical therapist in his or her office orin an individual’s home. The physicaltherapist must meet any standardscreated by the Secretary in regulations,including health and safety standards.Special provisions concerning servicesfurnished by a physical therapist inindependent practice are set forth at§ 410.60(c).

Under section 1861(p), the term‘‘outpatient physical therapy services’’also includes speech-languagepathology services. Medicare coversspeech-language pathology services iffurnished to an outpatient by a providerof services, a clinic, rehabilitationagency, or public health agency, or byothers under arrangements with andunder the supervision of one of theseentities. However, the statute does notprovide for coverage of servicesfurnished by speech-languagepathologists in independent practice.

Plan of treatment requirements foroutpatient physical therapy and speech-language pathology services are set forthin § 410.61. Conditions for outpatientphysical therapy services are set forth in§ 410.60(a) and (b), and conditions andexclusions for outpatient speech-language pathology services are set forthin § 410.62.

Basically, covered outpatient physicaltherapy services include three types ofservices, which are best described in§ 410.100(b) (which specificallyconcerns services provided by acomprehensive outpatient rehabilitationfacility). Section 410.100(b) providesthat the following are physical therapyservices:

• Testing and measurement of thefunction or dysfunction of theneuromuscular, musculoskeletal,cardiovascular, and respiratory systems.

• Assessment and treatment related todysfunction caused by illness or injuryand aimed at preventing or reducingdisability or pain and restoring lostfunction.

• The establishment of a maintenancetherapy program for an individualwhose restoration has been reached.(However, maintenance therapy itself isnot covered as part of these services.Sections 3101.8 of the MedicareIntermediary Manual (HCFA Pub. 13,Part 3) and 2210 of the MedicareCarriers Manual provide guidelines forcoverage of restorative therapy andmaintenance programs.)

Speech-language pathology services.These services are defined in section1861(ll)(1) as such speech, language,

and related function assessment andrehabilitation services furnished by aqualified speech-language pathologist asthis pathologist is legally authorized toperform under State law (or the Stateregulatory mechanism) as wouldotherwise be covered if furnished by aphysician. Section 1877(ll)(3) defines a‘‘qualified speech-languagepathologist.’’

Speech-language pathology servicesare briefly described in § 410.100(d) asthose necessary for the diagnosis andtreatment of speech and languagedisorders that create difficulties incommunication. Section 2216 of theMedicare Carriers Manual provides thatspeech-language pathology services arealso services necessary for the diagnosisand treatment of swallowing disorders(dysphagia), regardless of the presenceof a communication disability. Thissection of the manual also discussesrestorative therapy and maintenanceprograms and group speech pathologyservices under the two main categoriesof diagnostic or evaluation services andtherapeutic services.

Services that are essentially the sameas ‘‘outpatient physical therapyservices’’ and ‘‘outpatient speechpathology services’’ are also covered byMedicare in other contexts and indifferent settings, and may be billedunder different categories. For example,section 1861(b)(3) lists as ‘‘inpatienthospital services’’ other diagnostic ortherapeutic items or services furnishedby a hospital or by others underarrangements with the hospital, as areordinarily furnished to inpatients. Wehave a longstanding policy of coveringphysical therapy and occupationaltherapy as diagnostic or therapeutic‘‘inpatient hospital services.’’ TheMedicare regulations in § 482.56, in fact,include conditions of participation forhospitals that provide physical therapy,occupational therapy, or speechpathology services.

Similarly, these services can also becovered as SNF services. Section1861(h)(3) includes as ‘‘extended careservices’’ physical or occupationaltherapy or speech-language pathologyservices furnished by the SNF (or byothers under arrangements made by thefacility), to an inpatient of the facility.These services can also be furnished as‘‘incident to’’ a physician’s servicesunder section 1861(b)(2)(A). Thisprovision covers services and suppliesfurnished as an incident to a physician’sprofessional service, of kinds that arecommonly furnished in physicians’offices and are commonly eitherfurnished without charge or included inthe physicians’ bills. Physical andoccupational therapy can qualify as


‘‘incident to’’ services, as reflected insection 2050.2 of the Carriers Manual, ifthe physician directly supervisesauxiliary personnel who furnish theseservices and if these personnel areemployed by the physician.

Section 1877(h)(6)(B) lists as adesignated health service ‘‘physicaltherapy services,’’ rather than the morelimited category of ‘‘outpatient physicaltherapy services.’’ Therefore, we believethat we can include within ourdefinition of these services any physicaltherapy or speech-language pathologyservices that are covered underMedicare, regardless of where they arefurnished and by whom, or how theyare billed.

For purposes of section 1877, wewould define ‘‘physical therapyservices’’ as those outpatient physicaltherapy services (including speech-language pathology services) describedat section 1861(p) of the Act and at§ 410.100(b) and (d). Physical therapyservices also include any other serviceswith the characteristics described in§ 410.100(b) and (d) that are coveredunder Medicare Part A or B, regardlessof who provides them, the location inwhich they are provided, or how theyare billed.

c. Occupational therapy servicesSections 1861(s)(2)(D) and 1832 of the

Act provide for coverage of outpatientoccupational therapy services underPart B. Section 1861(g) defines‘‘outpatient occupational therapyservices’’ by substituting the word‘‘occupational’’ for the word ‘‘physical’’each place that it appears in thedefinition of outpatient physical therapyservices in section 1861(p).

Under section 1861(g), outpatientoccupational therapy services may befurnished by a provider of services, aclinic, rehabilitation agency, or publichealth agency, or by others underarrangements with and under thesupervision of one of these entities. Theservices must be furnished to anoutpatient who is under the care of adoctor of medicine or osteopathy, or adoctor of podiatric medicine, under aplan of care established by one of thesephysicians or by a qualifiedoccupational therapist. The plan mustbe periodically reviewed by thephysician and must include the type,amount, and duration of occupationaltherapy services to be furnished. Noservice is included as outpatientoccupational therapy if it would not beincluded as an inpatient hospital serviceif furnished to an inpatient of a hospital.Outpatient occupational therapy may befurnished by a provider to an individualas an inpatient of a hospital or extended

care facility if the individual hasexhausted or is otherwise ineligible forbenefit days under Medicare Part A.

Outpatient occupational therapyservices may be furnished by anindependent occupational therapist inhis or her office or in an individual’shome. The occupational therapist mustmeet any standards created by theSecretary in regulations, includinghealth and safety standards.

Coverage guidelines for occupationaltherapy services are set forth in sections3101.9 of the Medicare IntermediaryManual (HCFA Pub. 13, Part 3) and2217 of the Medicare Carriers Manual.The purpose of occupational therapyservices is described generally insection 3101.9 of the IntermediaryManual as follows: ‘‘Occupationaltherapy is a medically prescribedtreatment concerned with improving orrestoring functions which have beenimpaired by illness or injury or, wherefunction has been permanently lost orreduced by illness or injury, to improvethe individual’s ability to perform thosetasks required for independentfunctioning.’’

Basically, covered outpatientoccupational therapy services includethe following types of services, whichare best described in section 410.100(c),a section that specifically concernsservices provided by a comprehensiveoutpatient rehabilitation facility. Forpurposes of section 1877, we would usethe same services that are described insection 410.100(c). In § 411.351,occupational therapy services wouldinclude the following:

• Teaching of compensatorytechniques to permit an individual witha physical impairment or limitation toengage in daily activities.

• Evaluation of an individual’s levelof independent functioning.

• Selection and teaching of task-oriented therapeutic activities to restoresensory-integrative function.

• Assessment of an individual’svocational potential, except when theassessment is related solely tovocational rehabilitation.

As we pointed out in the sectioncovering physical therapy services,services that are essentially the same as‘‘outpatient occupational therapyservices’’ are also covered by Medicarein other contexts and in differentsettings, and may be billed underdifferent categories. For example, theymight be covered as ‘‘inpatient hospitalservices’’ under section 1861(b)(3) as‘‘other diagnostic or therapeutic items orservices’’ furnished by a hospital or byothers under arrangements with thehospital; they might be covered as SNFservices under section 1861(h)(3) as part

of a patient’s ‘‘extended care services’’;or they might be furnished in aphysician’s office as services ‘‘incidentto’’ the physician’s services undersection 1861(b)(2)(A).

Section 1877(h)(6)(C) lists as adesignated health service ‘‘occupationaltherapy services,’’ rather than the morelimited category of ‘‘outpatientoccupational therapy services.’’Therefore, we believe that we caninclude within our definition of theseservices any occupational therapyservices which are covered underMedicare, regardless of where they arefurnished and by whom, or how theyare billed.

For purposes of section 1877, wewould define ‘‘occupational therapyservices’’ as those outpatientoccupational therapy services describedat section 1861(g) of the Act and at 42CFR 410.100(c). Occupational therapyservices also include any other serviceswith the characteristics described in§ 410.100(c) that are covered underMedicare Part A or B, regardless of whofurnishes them, the location in whichthey are furnished, or how they arebilled.

d. Radiology services, includingmagnetic resonance imaging,computerized axial tomography scans,ultrasound services, and radiationtherapy services and supplies

Section 1877(h)(6)(D) identifies‘‘radiology services, including magneticresonance imaging, computerized axialtomography scans, and ultrasound’’ as adesignated health service. Section1877(h)(6)(E) identifies ‘‘radiationtherapy services and supplies’’ as adesignated health service.

Sections 1861(s)(3) and 1832 establishthat ‘‘diagnostic X-ray tests,’’ includingdiagnostic mammography servicesunder certain conditions, are consideredmedical or other health services underPart B. Similarly, section 1861(s)(4)establishes that ‘‘X-ray, radium, andradioactive isotope therapy, includingmaterials and services of technicians’’are considered medical or other healthservices under Part B. Even though thestatute does not define these terms, thepayment provisions in section1833(a)(2)(E) prescribe rules for payingfor outpatient hospital radiologyservices. These include diagnostic andtherapeutic radiology, nuclear medicine,computer assisted tomography (CATscan) procedures, magnetic resonanceimaging, and ultrasound and otherimaging services (but excludingscreening mammography). We coverthese services under the conditionsdescribed in §§ 410.32(a) and 410.35 ofthe regulations and in the Coverage


Issues Manual (HCFA Pub. 6) and inother manuals.

Section 1861(s)(13) includes asmedical or other health servicesscreening mammography services,which are defined in section 1861(jj) asa ‘‘radiologic procedure’’ provided to awoman for the purpose of earlydetection of breast cancer. We believethat screening mammography couldqualify as one of the ‘‘radiologyservices’’ listed in section 1877(h)(6)(D)as a designated health service. However,as we have stated elsewhere, we believethat Congress enacted the physicianreferral prohibition to limit thetendency for referring physicians tooverutilize services because they have afinancial incentive to do so. It is ourview that screening mammographyservices cannot be subject tooverutilization. We base this conclusionon the fact that the statute specificallylimits the frequency with which theMedicare program will cover theseservices. That is, section 1834(c)(2)specifically prescribes how frequentlythe screenings will be covered fordifferent age groups. In addition, wenever consider the covered level ofscreenings to be unnecessary services—we believe that all women shouldreceive the screenings that are coveredfor them under the statute. (We coverthese screening services under theconditions described in § 410.34 and inthe Coverage Issues Manual.)

We wish to make it clear that the onlytype of mammography that we wouldexclude from the definition of‘‘radiology services’’ listed undersection 1877(h)(6)(D) would bescreening mammography as coveredunder section 1861(s)(13) and as definedin section 1861(jj). It is our view that‘‘radiology services’’ does includediagnostic mammography, which is notsubject to the same limits. (Diagnosticmammography services are defined in§ 410.34(a) as mammography furnishedto a symptomatic patient for the purposeof detecting breast disease, whilescreening mammography is furnished toasymptomatic patients.)

Although Congress did not set upsection 1877(h)(6)(D) and (E) in amanner that parallels section 1861(s)(3)and (4), we believe that paragraphs (D)and (E) of section 1877(h)(6), takentogether, cover the same services thatare covered as Part B services undersection 1861(s)(3) and (4). Therefore,throughout this document the terms‘‘radiology’’ and ‘‘imaging’’ mean anydiagnostic test or therapeutic procedureusing X-rays, ultrasound and otherimaging services, CT scans, MRIs,radiation, or nuclear medicine,including diagnostic mammography

services, except for the distinctions thatfollow.

The physician’s professionalcomponent—Medicare has traditionallyconsidered a physician’s professionalservices related to radiology to ingeneral be covered as physician servicesunder section 1861(s)(1) rather than asradiology services under eitherparagraph (3) or (4) of section 1861(s).However, we believe that it isappropriate for purposes of section 1877to consider radiology services asincluding these physician services. Weare proposing to include theprofessional component becauseradiology always consists of a technicalservice combined with a physician’sprofessional service. Whenever atechnical radiological service isoverutilized, it follows that aphysician’s radiological service will alsobe overutilized.

Several studies have found thatnonradiologists with imaging facilitiesin their own offices order imaging testsfar more frequently than physicians whorefer their patients to imaging facilitiesoutside their practices. We mentionedseveral of these studies in section I.A ofthis preamble in the general discussionconcerning studies that have raisedserious concerns about physicians whomake self-referrals. For example, oneGAO study found that Floridanonradiologists who were solepractitioners or in group practices orother practice affiliations with imagingfacilities in their own offices, whencompared to physicians who referredoutside their practices, had imagingrates about 3 times higher for MRIs;about 2 times higher for CT scans; 4.5to 5.1 times higher for ultrasound,echocardiography, and diagnosticnuclear medicine imaging; and about 2times higher for complex and simple X-rays. (GAO Report, ‘‘Medicare: Referralsto Physician-owned Imaging FacilitiesWarrant HCFA’s Scrutiny,’’ No. B–253835, pages 2, 3, and 10 (October1994).)

Similarly, a study appearing in theNew England Journal of Medicinecompared the frequency and costs ofdiagnostic imaging furnished by self-referring physicians to the frequencyand costs of these same services whenphysicians refer patients to an unrelatedradiologist. The study covered referralsfor four medical conditions. The studydetermined that the self-referringphysicians obtained imagingexaminations 4.0 to 4.5 times more oftenthan the physicians who referred tounrelated radiologists. In addition, withrespect to three of the four medicalconditions, the self-referring physicianscharged significantly more than the

radiologists for imaging examinations ofsimilar complexity. The combination ofmore frequent imaging and highercharges resulted in mean imagingcharges per episode of care that were 4.4to 7.5 times higher for the self-referringphysicians. (Bruce J. Hillman, M.D., andothers, ‘‘Frequency and Costs ofDiagnostic Imaging In Office Practice—A Comparison of Self-Referring andRadiologist-Referring Physicians,’’ TheNew England Journal of Medicine, Vol.323, No. 23 (Dec. 6, 1990), pp. 1604–1608)

Exclusion for Invasive or InterventionalRadiology

We would exclude from the meaningof radiology, for the purposes of section1877, any ‘‘invasive’’ radiology (alsocommonly referred to as interventionalradiology). Invasive radiology is anyprocedure in which the imagingmodality is used to guide a needle,probe, or a catheter accurately.Examples include percutaneoustransluminal angioplasty (PTA); theplacement of catheters for therapeuticembolization of tumors, arteriovenousmalformations, or bleeding sites; theplacement of drainage catheters;removal of stones; balloon dilation ofstrictures; biopsies; arthrograms; andmyelograms.

We are basing this exclusion on thetheory that the radiology services inthese procedures are merely incidentalor secondary to another procedure thatthe physician has ordered. As we havestated earlier, we believe that Congressmeant for the categories listed in thestatute as designated health services toencompass services that tend to besubject to abuse. It is our view thatphysicians do not routinely referpatients for the main procedures listedin the last paragraph, such asangioplasty, in order to profit fromunnecessary radiology services. As aresult, we are proposing not to includethese ‘‘secondary’’ radiology proceduresas designated health services. We arealso specifically soliciting comments onany other types of services that wouldqualify as designated health services,but which may actually be incidental toother procedures.

We would include the followingdefinition at § 411.351:

Radiology services and radiation therapyand supplies means any diagnostic test ortherapeutic procedure using X-rays,ultrasound or other imaging services,computerized axial tomography, magneticresonance imaging, radiation, or nuclearmedicine, and diagnostic mammographyservices, as covered under section 1861(s)(3)and (4) of the Act and §§ 410.32(a), 410.34,and 410.35, including the professional


component of these services, but excludingany invasive radiology procedure in whichthe imaging modality is used to guide aneedle, probe, or a catheter accurately.

e. Durable medical equipment and suppliesSections 1861(s)(6) and 1832 establish

DME as one of the ‘‘medical or other healthservices’’ covered under Medicare Part B.Section 1861(n) defines DME as includingiron lungs, oxygen tents, hospital beds, andwheelchairs (under certain conditions), usedin a patient’s home (including certaininstitutions that can qualify as the patient’shome), whether furnished on a rental basis orpurchased. The definition of DME isexplained further in the Medicareregulations. Section 414.202 defines DME asequipment furnished by a supplier or a homehealth agency that meets the followingconditions:

• Can withstand repeated use.• Is primarily and customarily used to

serve a medical purpose.• Generally is not useful to an individual

in the absence of an illness or injury.• Is appropriate for use in the home.Durable medical equipment includes

equipment such as wheelchairs, hospitalbeds, nebulizers, and walkers. We also regardDME that is furnished to a patient under ahome health plan under section 1861(m)(5)as DME for purposes of section 1877. Theconditions under which we cover DME aredescribed in § 410.38. For the purposes ofthis proposed rule, we would use thedefinition of DME set forth in section 1861(n)and in § 414.202.

We have received a number of inquiriesconcerning Medicare claims processed by thefour Durable Medical Equipment RegionalCarriers (DMERCs). Many people erroneouslybelieve that all devices, items, or suppliesprocessed by the DMERCs are items of DME.This is not so, because the DMERCs are alsoresponsible for paying claims for other items,such as immunosuppressive drugs, orthotics,prosthetics, and prosthetic devices andrelated supplies.

We have received requests that we clearlyidentify in this regulation which items areconsidered DME and which are not. Becausethe number of items considered to be DMEis so extensive, we cannot in this proposedrule identify each of them. However, inresponse to these requests, we have providedbelow the general categories of DME.

We have also listed below the types ofsupplies used with the DME. We are listingthe supplies because when identifying DMEas a designated health service, Congress alsoincluded the supplies necessary for theeffective use of the DME as part of thedesignated health service. For example,supplies used with DME could include suchitems as test strips and lancets used withblood glucose monitoring equipment or drugsused with a nebulizer. In general, suppliesare items that cannot be reused. We wouldalso like to point out that, effective December1, 1996, in order for drugs used inconjunction with DME to be covered byMedicare, the entity dispensing the drugmust have a Medicare supplier number, mustbe licensed to dispense the drug in the Statein which it will be dispensed, and must billand receive payment in its own name.

An infusion pump may be covered as DME,in which case the supplies necessary for itseffective use are covered as designated healthservices; these supplies include the drugsand biologicals that must be put directly intothe infusion pump.

External infusion pumps—Externalinfusion pumps may be covered as DMEunder Medicare if certain coveragerequirements are met, including use in thehome. The Medicare Coverage Issues Manualprovides for the coverage of infusion pumpsfor certain indications and under certaincircumstances, as described in sections 60–9 and 60–14. Other uses of external infusionpumps are covered if the DMERC’s medicalstaff verifies the appropriateness of thetherapy and of the prescribed pump for theindividual patient. Payment may also bemade for the drugs necessary for the effectiveuse of an infusion pump as long as they arereasonable and necessary for the patient’streatment.

Section 1877(b)(2) provides an exceptionfor in-office ancillary services ‘‘other thandurable medical equipment (excludinginfusion pumps) and parenteral and enteralnutrients, equipment, and supplies.’’ Section1877(b)(2) has the effect of specificallyexcepting infusion pumps from theprohibition on a physician referring durablemedical equipment furnished in thephysician’s own office. External infusionpumps may be used in a physician’s officeto administer drug therapy, includingchemotherapy. However, external infusionpumps (or other drug delivery systems usedin the physician’s office (and not in thepatient’s home) are covered by Medicareunder section 1861(s)(2)(A) as a serviceincident to the physician’s service and not asDME. In addition, we do not believe that thein-office ancillary exception applies toexternal infusion pumps used outside aphysician’s office. That is, we do not believethat Congress intended for the in-officeexception to apply to infusion pumps that areonly picked up at a physician’s office to beused in the home, or that are delivered to thehome.

Implantable infusion pumps—Implantableinfusion pumps may also be covered as DMEin accordance with the policy described inthe Medicare Coverage Issues Manual whenthey are used for certain indications.Coverage for other uses of implantableinfusion pumps is allowed if the carrier’smedical staff verifies that the drug and theinfusion pump are reasonable and necessary.(Implantable devices are not billed to theDMERC carriers; rather, they are billed to thelocal carrier.)

If an implantable infusion pump isimplanted in the physician’s office, but willbe used at home and elsewhere, we believethat it qualifies as DME that has beenfurnished in the physician’s office. Hence,the in-office ancillary services exceptioncould apply, since section 1877(b)(2)specifically includes infusion pumps, but notother DME.

End-Stage Renal Disease equipment andsupplies—Section 1861(s)(2)(F) includes ascovered medical and other health serviceshome dialysis supplies, equipment, and self-care home dialysis support services, as well

as institutional dialysis services and suppliesprovided to individuals with end-stage renaldisease (ESRD). This ESRD benefit is separatefrom the DME benefit under section1861(s)(6). Therefore, the equipment,services, and supplies covered under thissection of the statute are not covered as DMEunder Medicare. Examples of home dialysisequipment and supplies include needles andsyringes, blood pressure cuffs, dialysatesolution, and intermittent peritonealdialyzers.

Other items of equipment furnished in aphysician’s office—As mentioned above,Medicare does not cover equipment used ina physician’s office as DME but may pay forthe equipment under other provisions in thestatute. For example, section 1861(s)(2)(A)covers services and supplies furnishedincident to a physician’s services, and caninclude the use of any equipment that isneeded in order for a physician to provide acovered service.

In addition, we may cover diagnostictesting under the diagnostic services benefitunder section 1861(s)(3), which wouldinclude equipment used in diagnostic testingirrespective of where the equipment is used.For example, dynamic electrocardiography(EKG), commonly known as Holtermonitoring, is a diagnostic procedure thatprovides a continuous record of theelectrocardiographic activity of a patient’sheart while he or she is engaged in dailyactivities. Diagnostic services under section1861(s)(3) are not themselves included as adesignated health service and thus are notspecifically covered by this rule.

General Categories of DME—Under certaincircumstances (which include use in thepatient’s home), the following items may becovered as DME. (Readers should refer tosection 60–9 of the Medicare Coverage IssuesManual for additional information.)Alternating pressure pads and mattresses and

miscellaneous support surfacesBed pansBlood glucose monitorsCanes/crutches and walkersCommodesContinuous positive airway pressureCushion lift, power seatDecubitus care equipmentGel flotation pads and mattressesHeating padsHeat lampsHospital beds and accessoriesIntermittent positive pressure breathing

equipmentInfusion pumps, supplies and drugsLymphedema pumpsManual wheelchair baseMotorized wheelchair/power wheel chair

baseNebulizersWheel chair options/accessoriesOxygen and related respiratory equipmentPacemaker monitorPatient liftsPneumatic compressor and appliancesPower operated vehiclesRestraintsRoll about chairsSafety equipmentSupport surfaces


Suction pumpsTraction equipmentTranscutaneous electric nerve simulators and

suppliesTrapeze equipment, fracture frame, and other

orthopaedic devicesUltraviolet cabinets

We would include the followingdefinition at § 411.351:

Durable medical equipment has themeaning given in section 1861(n) of the Actand § 414.202.

f. Parenteral and enteral nutrients,equipment, and supplies

Coverage of enteral and parenteral therapyas a Medicare Part B benefit is providedunder the prosthetic device benefit provisionin section 1861(s)(8). The regulations coverprosthetic devices in § 410.36(a)(2). Detailsfor enteral and parenteral therapy are setforth in the Medicare Coverage Issues Manualat section 65–10. When the coveragerequirements for enteral or parenteralnutritional therapy are met, Medicare alsocovers related supplies, equipment andnutrients.

Enteral nutrients, equipment, andsupplies—Enteral nutrition therapy providesnutrients to an individual with a functioninggastrointestinal tract who, due to pathologyto or nonfunction of the structures thatnormally permit food to reach the digestivetract, cannot maintain weight and strengthcommensurate with his or her generalcondition. Enteral nutritional therapy may beadministered by nasogastric, jejunostomy, orgastrostomy tubes. This benefit also includessupplies appropriate for the method ofadministration.

Therefore, at § 411.351, we would define‘‘enteral nutrients, equipment, and supplies’’as ‘‘items and supplies needed to provideenteral nutrition to a patient with afunctioning gastrointestinal tract who, due topathology to or nonfunction of the structuresthat normally permit food to reach thedigestive tract, cannot maintain weight andstrength commensurate with his or hergeneral condition, as described in section 65–10 of the Medicare Coverage Issues Manual(HCFA Pub. 6).’’

Parenteral nutrients, equipment, andsupplies—Parenteral nutrition therapyprovides nutrients to an individual withsevere pathology of the alimentary tract thatdoes not allow adequate absorption ofsufficient nutrients to maintain weight andstrength commensurate with the patient’sgeneral condition. Since the alimentary tractof such a patient does not functionadequately, parenteral nutrition may beprovided through an indwelling catheterplaced percutaneously in the subclavian veinand then advanced into the superior venacava. An example of a condition that maytypically qualify for coverage is a massivesmall bowel resection resulting in a severeinability to absorb nutrition in spite of oralintake.

Parenteral nutritional therapy wouldinclude the equipment and suppliesnecessary to furnish the parenteral nutritiontherapy. (Parenteral nutrients are commonlyconsidered as prescription drugs. Effective

December 1, 1996, any entity dispensingdrugs that are used in conjunction with aprosthetic device, including parenteralequipment, must meet certain conditions inorder for the drugs to be covered underMedicare. These conditions are described inthe section covering DME and the suppliesused in conjunction with DME.)

At § 411.351, we would define ‘‘parenteralnutrients, equipment, and supplies’’ as‘‘items and supplies needed to providenutriment to a patient with permanent,severe pathology of the alimentary tract thatdoes not allow absorption of sufficientnutrients to maintain strength commensuratewith the patient’s general condition, asdescribed in section 65–10 of the MedicareCoverage Issues Manual (HCFA Pub. 6).’’

We wish to point out that section1877(b)(2) specifically excludes parenteraland enteral nutrients, equipment, andsupplies as a service that can qualify for thein-office ancillary services exception.

g. Prosthetics, orthotics, and prostheticdevices

Prosthetics—Section 1861(s)(9) providesfor inclusion as medical and other healthservices artificial legs, arms, and eyes,including replacements if required because ofa change in a patient’s physical condition.Prosthetics are covered in the regulations in§§ 410.36(a)(3) and 414.202. As described insection 2133 of the Medicare CarriersManual, these appliances are covered whenfurnished under a physician’s order. We alsocover adjustments to artificial limbs or otherappliances required by wear or by a changein the patient’s condition when ordered by aphysician.

We would define ‘‘prosthetics,’’ at§ 411.351, as artificial legs, arms, and eyes, asdescribed in section 1861(s)(9) of the Act.

Orthotics—Orthotics are included as amedical service under section 1861(s)(9) asleg, arm, back, and neck braces. Theregulations at § 410.36(a)(3) allow paymentfor these services to include replacements ifrequired because of a change in theindividual’s condition. We have interpretedthe statute in section 2133 of the MedicareCarriers Manual to cover these items whenused for the purpose of supporting a weak ordeformed body member or restricting oreliminating motion in a diseased or injuredpart of the body. In the Carriers Manual,orthotics are covered only when furnishedunder a physician’s order.

Under section 2133D of the MedicareCarriers Manual, orthopedic footwear iscovered under the orthotic benefit if thefootwear is an integral part of a leg brace.Diabetic shoes are covered under section1861(s)(12) of the Act in a separate benefitcategory. Splints, casts, and other devicesused for the reduction of fractures anddislocations are covered under section1861(s)(5). We do not consider diabeticshoes, casts, splints, or these other devices tobe included under orthotics, prosthetics, orprosthetic devices.

At § 411.351, we would define ‘‘orthotics’’as ‘‘leg, arm, back, and neck braces, as listedin section 1861(s)(9) of the Act.’’

Prosthetic devices—Section 1861(s)(8)provides for inclusion as medical and other

health services ‘‘prosthetic devices (otherthan dental) which replace all or part of aninternal body organ (including colostomybags and supplies directly related tocolostomy care), including replacement ofsuch devices, and including one pair ofconventional eyeglasses or contact lensesfurnished subsequent to each cataract surgerywith insertion of an intraocular lens.’’ Thisdefinition is reflected in the regulations at§§ 410.36(a)(2) and 414.202. The statutespecifically excludes dental devices fromMedicare coverage as prosthetic devices. (Inaddition, renal dialysis machines are coveredunder the end stage renal disease benefit andare discussed elsewhere in this section.)

Under the prosthetic device benefit,Medicare also includes supplies that arenecessary for the effective use of a prostheticdevice, for example, tape to secure anindwelling catheter. Section 1877(h)(6)(H)includes prosthetic devices as a designatedhealth service and also specifically includesthe supplies associated with these devices.(Effective December 1, 1996, any entitydispensing drugs that are used in conjunctionwith a prosthetic device must meet certainconditions in order for the drugs to becovered under Medicare. These conditionsare described in the section covering DMEand drugs used in conjunction with DME.)Section 410.100(f)(2) provides that servicesnecessary to design the device, selectmaterials and components, measure, fit, andalign the device, and instructions to thepatient are also included in this benefit.Examples of prosthetic devices includecochlear implants, cardiac pacemakers, andincontinence control appliances.

We have received many questionsconcerning whether Medicare considers anintraocular lens to be a prosthetic device. Theanswer is yes. We have also been asked, forpurposes of the designated health serviceslisted in section 1877(h)(6), to define aprosthetic device to exclude any device thatis implanted by a physician as part of asurgical procedure. The theory behind thisexclusion is that such devices are only asmall component of a central procedure,which is the surgery needed to implant them.Physicians would not unnecessarily subjectpatients to a surgical procedure just to boostprofits on intraocular lenses or otherimplantable devices, and are thus not thekind of services Congress meant to cover. Inaddition, some physicians believe that it iscritical in many cases that they have thefreedom to prescribe their own choice of animplantable device because they haveparticularized the design or find the devicebetter to work with than others.

On the other hand, we have also beenadvised that only a very small percentage ofsurgeons ‘‘customize’’ prosthetic devices bydeveloping their own, or by modifyingexisting devices. In addition, it is notuncommon for physicians to receivecompensation from companies thatmanufacture or supply these devices,sometimes in the form of ‘‘consulting fees,’’perhaps in exchange for the physician’sagreement to use that company’s deviceexclusively. Physicians might also have anownership interest in a supplier ormanufacturer, thus realizing a profit everytime the device is used.


It has also come to our attention thatphysicians who have some relationship witha manufacturer or supplier are in a positionto manipulate a hospital’s or an ASC’s choiceof a prosthetic device in exchange for thephysicians’ referrals. Although thesepractices might not lead to the overutilizationof services, we believe that they can drive upthe cost of certain services that are notsubject to a fee schedule, which we wouldregard as a form of potential program abuse.Such an arrangement might also result inpatient abuse, since a physician may choosea prosthetic device based on financialincentives rather than on the best interest ofthe patient. Because of the controversysurrounding surgically implanted devices,we have not excluded them from thedefinition of ‘‘prosthetic devices,’’ butspecifically solicit comments on this issue.

We would also like to point out thatintraocular lenses that are implanted in anambulatory surgical center (ASC) would becovered under the ASC payment rate. Wehave excluded any services covered underthe ASC rate from the referral prohibitionunder an exception we created in§ 411.355(d).

We have also been asked whether, if anophthalmologist has an optical shop as partof his or her office, he or she can referMedicare patients to the optical shop foreyeglasses. Medicare coverage of eyeglassesand contact lenses is very limited, coveringonly those that qualify as ‘‘prostheticdevices’’ used after intraocular lenses areimplanted during cataract surgery. Thus, aphysician would not be prohibited fromreferring a Medicare patient to the opticalshop for any conventional eyewear that is notcovered under the Medicare program. Foreyeglasses that are covered by Medicare, thephysician could prescribe and fill theeyeglass prescription if an exception applies.For example, the services might meet the in-office ancillary services exception if theoptical shop is located in the physician’soffice suite. Alternatively, the optical shopmight qualify as a rural provider so that theexception for rural ownership in section1877(d)(2) of the Act could apply.

At § 411.351, we would define a‘‘prosthetic device’’ as a device (other than adental device) listed in section 1861(s)(8) thatreplaces all or part of an internal body organ,including colostomy bags and including onepair of conventional eyeglasses or contactlenses furnished subsequent to each cataractsurgery with insertion of an intraocular lens.We would define ‘‘prosthetic supplies’’ as‘‘supplies that are necessary for the effectiveuse of a prosthetic device (including suppliesdirectly related to colostomy care).’’

h. Home health services

How we will define home health services.Medicare-covered home health services aredefined in section 1861(m), and requirementsfor payment for home health servicesfurnished to eligible beneficiaries are setforth in part 409, subpart E (‘‘Home HealthServices Under Hospital Insurance’’) of ourregulations. For purposes of the physicianreferral prohibition, ‘‘home health services’’would have the same meaning as theappropriate provisions described in part 409,

subpart E. A brief explanation of the homehealth benefit follows:

Home health services are items andservices furnished to an individual who isconfined to the home, under the care of aphysician, and in need of at least one of thefollowing skilled services: intermittentskilled nursing services, physical therapyservices, speech-language pathology services,or continuing occupational therapy services.

To receive covered home health services, abeneficiary must be under a plan of careestablished and periodically reviewed by aphysician. Home health services arefurnished by, or under arrangements madeby, a participating home health agency.Home health services are furnished on avisiting basis in a place of residence used asan individual’s home. (A patient may notreceive home health services in a physician’soffice.) An individual’s home is wherever theindividual makes his or her home. This maybe his or her own dwelling, an apartment, arelative’s home, a home for the aged, or someother type of institution. However, aninstitution is not considered a patient’s homeif the institution meets the basicrequirements in the definition of a hospital(as defined in section 1861(e)(1)), an SNF (asdefined in section 1819(a)(1)), or a nursingfacility (as defined in section 1919(a)(1)).

• The following services may be furnishedunder the home health services benefit ifappropriate requirements are met:

• Part-time or intermittent nursing carefurnished by or under the supervision of aregistered professional nurse.

• Physical therapy, occupational therapy,and speech-language pathology services.

• Medical social services furnished underthe direction of a physician.

• Part-time or intermittent services of ahome health aide.

• Medical supplies (including catheters,catheter supplies, ostomy bags, and suppliesrelated to ostomy care, and a coveredosteoporosis drug, but excluding biologicalsand other drugs), the use of durable medicalequipment, and appliances suitable for homeuse.

• The medical services of an intern orresident in training under an approvedhospital teaching program if a home healthagency is affiliated with or under thecommon control of the hospital furnishingthe medical services.

A beneficiary may also receive homehealth services on an outpatient basis at ahospital, SNF, or a rehabilitation centerunder arrangements made by the homehealth agency if equipment is required thatcannot be made available at the beneficiary’shome or the services are furnished while thebeneficiary is at the facility to receiveservices requiring equipment that cannot bemade available at the beneficiary’s home.Home health services do not includetransportation of the beneficiary to thefacility for these home health services.

Existing § 409.49 identifies services thatare excluded from payment under theMedicare home health benefit. Note thatincluded among those services is any servicethat would not be covered as inpatienthospital services.

Also note that under the Medicare statute,home health services can be provided only

by an HHA. That is, under section 1814(a),payments for services furnished to anindividual may be made only to providers ofservices that are eligible for that payment. Tobe eligible, an HHA must, among otherthings, have in effect its own provideragreement with Medicare, as described insection 1866, and meet the specificconditions of participation for HHAs, asdescribed in section 1891. As a result, weregard home health services as services‘‘provided by an HHA’’ and not as servicesprovided by any other entity, even if theHHA is owned by the other entity or isotherwise financially related to it. (We regardhospital services the same way; that is, theycan be provided only by an entity that meetsthe requirements for participation as ahospital.) Therefore, even if a hospital ownsan HHA, the exception for hospitalownership in section 1877(d)(3), whichapplies to designated health services‘‘provided by a hospital,’’ would not apply tohome health services provided by a hospital-based HHA.

At § 411.351, we would include thefollowing definition: ‘‘Home health services’’means the services described in section1861(m) of the Act and part 409, subpart Eof this chapter.’’

How We Propose to Reconcile Section1877 and the Physician CertificationRequirements for Home Health ServicesUnder 42 CFR 424.22(d)

Section 903 of the OmnibusReconciliation Act of 1980 amendedsections 1814(a) and 1835(a) of the Actto prohibit the certification of need forhome health services, and theestablishment and review of a homehealth plan of care for those services, bya physician who has a significantownership interest in, or a significantcontractual or financial relationshipwith, the home health agency thatprovides those services. Theseamendments were incorporated into theregulations at 42 CFR 405.1633(d)(which was redesignated as section424.22(d)), by an interim final rule withcomment period that we published inthe Federal Register on October 26,1982, at 42 FR 47388, and that becameeffective on November 26, 1982.

On June 30, 1986, we published a final rulein the Federal Register at 51 FR 23541 thatconfirmed the provisions of the October 26,1982 rule and clarified that under the term,‘‘significant ownership interest in or asignificant financial or contractualrelationship with’’ the home health agency,we intended to include salaried employment.This clarification was made effective onAugust 29, 1986.

The only exceptions to the home healthregulations were uncompensated officers ordirectors of an HHA, HHAs operated byFederal, State, or local governmentalauthority, and sole community HHAs. Thehome health certification restrictions ofsections 1814(a) and 1835(a) and § 424.22(d)have not been significantly updated since1986.


On November 5, 1997, we published anotice with comment period in the FederalRegister (62 FR 59818) that announced ourintention to reconcile the statutoryprohibitions in sections 1814(a) and 1835(a)concerning physician certification for homehealth services with the related section 1877prohibition. In that notice we stated that wehad decided to reexamine appropriateprovisions of section 1877 and the homehealth regulations as they pertain to indirectcompensation arrangements involvingphysicians who are compensated by entitiesthat own HHAs. We announced that, pendingthat evaluation, we had decided to withdrawcertain recent interpretations of § 424.22(d),as it applies to certification andrecertification or establishment and review ofplans of care by physicians who are salariedemployees of, or have a contractualarrangement to provide services to, an entitythat also owns the HHA. In addition, westated that we would address the issue ofindirect compensation, applicable to thehealth services designated in section 1877, inthis proposed rule.

We believe that sections 1814(a), 1835(a),and 1877 address the same behaviors and areidentical in purpose: they each prohibit aphysician who has a significant ownershipinterest in, or a significant financialrelationship with, a home health agency fromcertifying or recertifying a patient’s need forhome health services. We have defined theconcepts of ‘‘significant ownership interestsand significant financial relationships’’ in thehome health context in § 424.22(d)(1)through (d)(3), based on a fixed percentage ofownership and, for financial or contractualrelationships, based on a specific dollaramount of compensation (or, if less, a percentof the agency’s operating expenses).

Under section 1877, in contrast, any levelof ownership or compensation amounts to afinancial relationship unless the arrangementmeets any of a number of exceptions. Webelieve that the provisions we are developingunder section 1877 are more effective thanthe current provisions in § 424.22(d) inaccommodating Congress’ desire todiscourage physicians from overutilizingcertain services. Furthermore, section 1877relates more specifically and in greater detailto the issue of referrals for home healthservices by physicians who have a financialrelationship with the entity providing thoseservices, and reflects Congress’ most recentthoughts on that issue.

We believe that it is confusing to have ineffect two provisions that address prohibitedreferrals, each of which includes differentcriteria, and can lead to different results.

We are therefore proposing to use thesection 1877 definition of a ‘‘financialrelationship,’’ and our interpretations ofthis definition, for the concept of a‘‘significant ownership interest in, or asignificant financial or contractualrelationship with, a home healthagency’’ in sections 1814(a) and 1835(a).In order to do this, we are proposing toamend § 424.22(d) to state that aphysician cannot certify or recertify apatient’s need to receive home health

services from an agency if the physicianhas a ‘‘financial relationship’’ with thatagency, as defined in § 411.351, unlessthe financial relationship meets one ofthe exceptions in §§ 411.355 through411.357. In addition, we will listsections 1814(a) and 1835(a) in § 411.1as part of the statutory basis for thisproposed regulation.

Section 424.22, paragraphs (d)(4), (e), (f),and (g) relate to certain specific exceptions tothe prohibition on certification in sections1814(a) and 1835(a). These paragraphs exceptphysicians who serve as uncompensatedofficers or directors of an HHA, HHAs thatare operated by a Federal, State, or localgovernmental authority, or HHAs that areclassified as sole community HHAs inaccordance with our regulations. Even if aphysician and an HHA are involved in anarrangement that meets one of theseexceptions, the arrangement simultaneouslyremains subject to the requirements insection 1877. That is, if an exception in§ 424.22 is subsumed within the exceptionsin section 1877, a physician will be able torefer; if it is not, the arrangement willdisqualify the physician from referring inspite of § 424.22. Thus, we believe theexceptions listed in § 424.22 have beensuperseded by section 1877 and should notbe separately listed; we are thereforeproposing to eliminate them. We areparticularly interested in hearing from thepublic about these proposed changes.

i. Outpatient prescription drugs

Medicare does not cover a category ofservices called ‘‘outpatient prescriptiondrugs.’’ Without additional direction fromCongress on what constitutes ‘‘outpatientprescription drugs’’ for the purposes ofsection 1877, we believe that it is reasonableto assume that Congress intended to includeonly drugs furnished to individuals underthe Medicare Part B benefit and to excludedrugs furnished by providers under MedicarePart A. We also propose to limit ‘‘outpatientprescription drugs’’ to drugs that a patientwould be able to obtain from a pharmacywith a prescription. We consider that thiscategory includes any drugs that a patientcould get with a prescription, even if patientsgenerally do not do so. For example, wewould include such drugs as oncology drugsthat are routinely furnished in a physician’soffice, under the physician’s directsupervision, provided the drugs could beobtained by prescription from a pharmacy.

Coverage for prescription drugs furnishedoutside of a provider setting is very limitedunder Medicare Part B. ‘‘Drugs andbiologicals’’ are defined in the Medicarestatute in section 1861(t) and the coverage ofdrugs and biologicals is explained in part 410of our regulations. We consider a‘‘biological’’ to be a drug product that isderived from a living organism or itsproducts, including, but not limited to,serums, vaccines, antigens, and antitoxins.We apply to biologicals the same rules thatwe apply to any drugs. Therefore, forpurposes of section 1877, we propose todefine outpatient prescription drugs toinclude biologicals.

An explanation of the drug andbiological benefit is set forth in section2049 of the Medicare Carriers Manual.This section of the manual providesgeneral requirements for drugs andbiologicals that are covered underMedicare Part B. (These requirementsdo not apply to certain kinds of drugsthat are covered under specificprovisions of the statute. We discussthese other provisions below, followingthe general requirements.) In general,drugs are covered only if all of thefollowing requirements are met:

• The drug or biological is included,or approved for inclusion, in the latestofficial edition of the United StatesPharmacopoeia, the NationalFormulary, or the United StatesHomeopathic Pharmacopoeia, unlessunfavorably evaluated in AMA DrugEvaluations or Accepted DentalTherapeutics.

• The drug or biological is furnishedincident to a physician’s services.

• The drug or biological is reasonableand necessary for the diagnosis ortreatment of the illness for which it isadministered according to acceptedstandards of medical practice.

• The drug or biological is notexcluded as a preventive immunization.

• The drug or biological has not beendetermined by the Food and DrugAdministration (FDA) to be less thaneffective. Drugs or biologicals must beapproved for marketing by the FDA tobe considered safe and effective, forpurposes of the Medicare program,when used for indications specified onthe labeling.

• Based on the usual method ofadministration of the form of a drug orbiological as furnished by a physician,the drug or biological is of a type thatcannot be self-administered.

Drugs and biologicals that arespecifically covered under Part B wouldinclude those furnished in a physician’soffice incident to the physician’sprofessional services under section1861(s)(2)(A); as part of outpatienthospital services under section1861(s)(2)(B); and, even though they arepreventive immunizations,pneumococcal vaccine, influenzavaccine, and hepatitis B vaccine undersection 1861(s)(10); and antigens undersection 1861(s)(2)(G).

Drugs that are or can be self-administered, such as those in pill formor in a self-injectable form, are notcovered by Medicare Part B unless thestatute specifically provides thiscoverage. The statute currently providesfor the coverage of the following self-administered drugs under limitedconditions: blood clotting factors undersection 1861(s)(2)(I), drugs used in


immunosuppressive therapy undersection 1861(s)(2)(J), erythropoietin(EPO) for dialysis patients under section1861(s)(2)(O), and certain oral cancerdrugs under section 1861(s)(2)(Q). (Thestatute provides under section 1861(m)for the coverage of certain osteoporosisdrugs, defined in section 1861(kk), thatcan be self-administered but arefurnished to a home health patient whois unable to self-administer the drugs.However, these drugs are covered undersection 1861(m) as part of the MedicarePart A home health services benefit.)

After much consideration, we believeit would be inappropriate to include asoutpatient prescription drugs, forpurposes of section 1877, EPO and otherdrugs furnished as part of dialysistreatment for ESRD patients who dialyzeat home or in a dialysis center, eventhough these drugs are not included inthe end stage renal disease compositepayment rate, but are billed separately.We base this policy on our perceptionthat what the patient is primarilyreceiving is the dialysis treatment. EPOand several other drugs are a relativelyminor (although important) part of amuch larger and more complicatedtreatment and are inextricably linked tothe dialysis service. That is, it wouldnot be possible to provide dialysis safelyand effectively without these drugsbecause they are critical to the overalleffectiveness of the treatment and well-being of the patient. In addition,although many dialysis patients self-administer EPO, we believe that theopportunity for program abuseinvolving EPO is extremely unlikely.That is because section1881(b)(11)(B)(ii)(I) establishes thepayment rate for EPO, regardless ofwhether the beneficiary purchases thedrug for self-administration or it isadministered by the dialysis facility.Also, we have recently implemented aclaims processing mechanism to ensurethat payment is not made for excessiveadministration. That is, payment willnot be made for EPO when a patient’shematocrit reading over a 3-monthaverage exceeds 36.5, the upper limit ofthe drug labeling indication.

We would define ‘‘outpatientprescription drugs’’ at § 411.351 as‘‘those drugs (including biologicals)defined or listed under section 1861(t)and (s) of the Act and part 410 of thischapter, that a patient can obtain froma pharmacy with a prescription (even ifpatients can only receive the drug undermedical supervision), and that arefurnished to an individual underMedicare Part B, but excluding EPO andother drugs furnished as part of adialysis treatment for an individual whodialyzes at home or in a facility.’’

j. Inpatient hospital services

Services generally regarded asinpatient hospital services. Inpatienthospital services are a Part A benefitdefined under section 1861(b). Thedefinition of these services in section1861(b) is reflected in § 409.10(a) of ourregulations. As defined at § 409.10(a),inpatient hospital services include thefollowing services when furnished to aninpatient of a participating hospital or,in the case of emergency services orservices in foreign hospitals, to aninpatient of a qualified hospital (asdescribed below).

• Bed and board.• Nursing services and other related

services.• Use of hospital facilities.• Medical social services.• Drugs, biologicals, supplies,

appliances, and equipment.• Certain other diagnostic or

therapeutic services.• Medical or surgical services

provided by certain interns or residents-in-training.

We propose to use the definition insection 1861(b) and § 409.10(a). As aclarification, we would state in thedefinition that inpatient hospitalservices include services that a hospitalprovides for its patients that arefurnished either by the hospital or byothers under arrangements with thehospital; that is, the hospital bills forthese services on behalf of its patients.We would specify that the definitiondoes not encompass the services ofother physicians, physician assistants,nurse practitioners, clinical nursespecialists, certified nurse midwives,and certified registered nurseanesthetists and qualified psychologistswho bill independently. Also, we wouldrefer to existing § 409.10(b), whichstates that ‘‘inpatient hospital services’’do not include SNF-type care furnishedby a hospital or an RPCH that has aswing-bed approval, or any nursingfacility-type care that may be furnishedas a Medicaid service.

Psychiatric hospital and RPCHservices. We propose to also include asinpatient hospital services inpatientpsychiatric hospital services, which aredefined in section 1861(c). Theseservices are defined as ‘‘inpatienthospital services’’ furnished to aninpatient of a psychiatric hospital(defined in section 1861(ff)), whichmeans that they are essentially the sameservices as those furnished to aninpatient of a regular hospital. Inaddition, we believe that a psychiatrichospital qualifies as a hospital, for allpractical purposes, except that it isprimarily engaged in providing

psychiatric services for the diagnosisand treatment of mentally ill personsrather than the more general care andtreatment that a regular hospitalprovides to injured, disabled, or sickpersons. Also, a psychiatric hospitalmust meet all of the nine basicrequirements that a regular hospitalmust meet in order to qualify as ahospital, except that for two of therequirements, it must meet analogousstandards that relate particularly topsychiatric care.

We also propose to regard as‘‘inpatient hospital services,’’ forpurposes of section 1877, inpatientservices provided by a participatingrural primary care hospital (RPCH). Thisterm refers to facilities designated asRPCHs by the Secretary under section1820(i)(2). ‘‘Inpatient rural primary carehospital services’’ are defined in section1861(mm)(2) as items and services,furnished to an inpatient of an RPCH bysuch a hospital, that would be inpatienthospital services if furnished to aninpatient of a hospital by a hospital.

Section 1861(e) of the Act states that‘‘the term ’hospital’ does not include,unless the context otherwise requires, arural primary care hospital * * *.’’While it seems clear from this provisionthat RPCHs are not to be consideredhospitals under the Medicare law formost purposes, we also believe thereference to context in this provisionindicates that RPCHs may be classifiedas hospitals where, in specific contexts,it is consistent with the purpose of thelegislation to do so. We base the policyto include inpatient RPCH services as‘‘inpatient hospital services’’ on ourbelief that a physician who has afinancial relationship with an RPCH isin as much of a position to profit fromoverutilizing referrals to the RPCH as heor she would be if the financialrelationship were with an ordinaryhospital. In addition, the RPCH providesservices that are very similar toinpatient hospital services.

Because we propose to consider RPCHand psychiatric hospital services asinpatient hospital services, theexception for hospital services includedin section 1877(d)(3) could apply. Thisexception applies to services furnishedby a hospital if a physician refers to ahospital in which he or she isauthorized to perform services and if thephysician has an ownership orinvestment interest in the hospital as awhole, and not in a subdivision of thehospital.

Emergency hospital services. Wepropose to not include within thedefinition of ‘‘inpatient hospitalservices’’ emergency inpatient servicesprovided by a hospital located outside


the United States and covered under theauthority in section 1814(f)(2) of the Actand part 424, subpart H. We alsopropose to exclude inpatient hospitalservices provided by a nonparticipatinghospital within the United States underemergency conditions, as authorized bysection 1814(d) and described in part424, subpart G. We are excluding theseservices because Medicare covers theminfrequently and only when they resultfrom an emergency situation.

The regulations define ‘‘emergencyservices’’ in § 424.101 as only thoseservices necessary to prevent death orserious impairment of health and,because of the danger to life or health,require use of the most accessiblehospital available and equipped tofurnish the services. In order to receivepayment, a physician or the hospitalmust submit medical information thatdescribes the nature of the emergencyand specifies why it required that thebeneficiary be treated in the mostaccessible hospital. Because Medicarecovers these services only if theyinvolve a documented emergencysituation, we do not believe thatphysicians have the opportunity orincentive to overutilize them.

For the reasons cited above, we arealso proposing to exclude from thedefinition of ‘‘designated healthservices’’ any physician services thatotherwise qualify as designated healthservices but are furnished to anindividual in conjunction withemergency inpatient hospital servicesfurnished outside of the United States.These physician services are covered byMedicare under the authority in section1862(a)(4), which permits coverage ofinpatient hospital services,accompanying physician services, andambulance services (which are notdesignated health services) furnishedoutside of the United States undercertain limited conditions. To reflectthis proposal, we are defining‘‘designated health services’’ forpurposes of the referral prohibition toexclude emergency physician servicesfurnished outside of the United States.

Certain dialysis services. We areaware that there are situations in whicha physician might own a dialysismachine, rent it to a hospital, andprovide the hospital with a technicianto run the machine. This arrangementmight fail to meet an exception if thephysician refers patients for dialysisservices, and also receives rentalpayments based on the volume or valueof those referrals. The physician mightalso fail to meet an exception if he orshe owns a part of the dialysis unit inthe hospital (rather than owning part ofthe hospital as a whole, as required

under the ‘‘hospital exception’’ insection 1877(d)(3)).

We believe there are certain uniquesituations involving dialysis in whichthere would be no risk ofoverutilization. We intend to excludefrom the definition of ‘‘inpatienthospital services’’ dialysis furnished bya hospital that is not certified to provideend stage renal dialysis (ESRD) servicesunder subpart U of 42 CFR 405. In thesecircumstances, we do not believe therewould be a risk of program or patientabuse because dialysis would beprovided only under the followingemergency circumstances, when there isno other appropriate treatment:

• A non-ESRD patient needs dialysisbecause of renal dysfunction or foraugmenting clearance of toxins. Forexample, a patient with acute tubularnecrosis or a patient with theophyllineoverdose requires dialysis.

• The primary reason for a hospitaladmission for an ESRD patient is notmaintenance dialysis. For example, anESRD patient needs surgery unrelated tohis or her kidney condition, and thesurgeon has operating privileges only ata participating Medicare, but non-ESRD,certified hospital and the individualreceives maintenance dialysis while heor she is an inpatient.

Certain lithotripsy services. We havebeen asked to consider excluding fromthe definition of ‘‘inpatient hospitalservices’’ services involving certainlithotriptors. Specifically, we arereferring to services involvinglithotriptors that employ extracorporealshock wave lithotripsy (ESWL) whenused to break up upper urinary tractkidney stones. ESWL focuses shockwaves generated outside of the bodyspecifically on stones under X-rayvisualization, pulverizing them byrepeated shocks. (The use of lithotripsyfor breaking up kidney stones isdiscussed in section 35–81 of theMedicare Coverage Issues Manual.)

The theory behind excluding from‘‘inpatient hospital services’’ servicesinvolving ESWL is that there is no riskof overutilization of these services. Ingeneral, severe obstruction, infection,intractable pain, or serious bleeding areindications of the need for surgicalremoval of a stone. Only when a patientrequires surgical treatment would aphysician prescribe ESWL. When apatient needs additional treatment,there is no alternative available that isless invasive or less expensive thanESWL. In addition, the procedure itselfapparently documents the medicalnecessity to prescribe it. As weunderstand ESWL, the kidney stone islocated, identified, and the progress of

the therapy is recorded as part of thevisualization process.

While we agree that it might beunlikely that physicians wouldoverutilize ESWL, we wish to raisesome of the same concerns that weraised under our discussion onsurgically-implanted prosthetic devices.That is, we believe that thesearrangements can potentially lead topatient abuse, with physicians requiringthe use of certain equipment based onfinancial incentives, rather than on thebest interests of the patient. Because ofthe controversial nature of lithotripsy,we have not excluded it from thedefinition, but specifically solicitcomments on this issue.

Inpatient hospital services and thedefinition of a ‘‘hospital.’’ Note that ourproposed definition of ‘‘inpatienthospital services’’ would affect in onlya limited way the definition of the term‘‘hospital’’ that we included in theAugust 1995 final rule. We included thedefinition of a ‘‘hospital’’ in § 411.351solely for the purpose of determiningownership of a hospital as an entity, andwe did not include as part of thehospital any entities furnishing servicesunder arrangements. However, wewould amend the definition of ahospital to make it clear that the entitiescovered by that definition are those thatqualify as a ‘‘hospital’’ under section1861(e), as a ‘‘psychiatric hospital’’under section 1861(f), or as a ‘‘ruralprimary care hospital’’ under section1861(mm)(1).

We would include the followingdefinition at § 411.351: ‘‘Inpatienthospital services’’ are those servicesdefined in section 1861(b) of the Actand § 409.10(a) and (b) and includeinpatient psychiatric hospital serviceslisted in section 1861(c) of the Act andinpatient rural primary care hospitalservices, as defined in section1861(mm)(2). ‘‘Inpatient hospitalservices’’ do not include emergencyinpatient services provided by ahospital located outside the UnitedStates and covered under the authorityin section 1814(f)(2) and 42 CFR part424, subpart H and emergency impatientservices provided by a nonparticipatinghospital within the United States, asauthorized by section 1814(d) anddescribed in 42 CFR part 424, subpart G.These services also do not includedialysis furnished by a hospital that isnot certified to provide end stage renaldialysis (ESRD) services under subpartU of 42 CFR 405.

Inpatient hospital services includeservices that a hospital provides for itspatients that are furnished either by thehospital or by others underarrangements with the hospital. They do


not encompass the services of otherphysicians, physician assistants, nursepractitioners, clinical nurse specialists,certified nurse midwives, and certifiedregistered nurse anesthetists andqualified psychologists who billindependently.

k. Outpatient hospital servicesSections 1861(s)(2)(B) and (C) and

1832 provide for coverage of outpatienthospital services under Part B. Section1861(s)(2)(B) provides for coverage ofhospital services (including drugs andbiologicals that cannot, as determined inaccordance with regulations, be self-administered) incident to physicianservices furnished to outpatients (weconsider these ‘‘therapeutic services’’)and partial hospitalization servicesincident to these services. Section1861(s)(2)(C) provides for coverage of‘‘diagnostic services which are—(i)furnished to an individual as anoutpatient by a hospital or by othersunder arrangements with them made bya hospital; and (ii) ordinarily furnishedby such hospital (or by others undersuch arrangements) to its outpatients forthe purpose of diagnostic study.’’ Wedescribe below the coverage provisionsconcerning outpatient hospital servicesunder the categories of therapeutic anddiagnostic services, and partialhospitalization services. We also discussbriefly the special rules for physicaltherapy, occupational therapy, andspeech pathology services furnished toa hospital outpatient.

We would consider all coveredservices (either diagnostic ortherapeutic) performed on hospitaloutpatients that are billed by thehospital to Medicare (includingarranged for services) as outpatienthospital services. In addition, it shouldbe noted that outpatient hospitalemergency services may be therapeutic(furnished incident to a physician’sservice) or may be diagnostic in nature.Unlike other outpatient hospitalservices, emergency services may becovered in nonparticipating hospitalssubject to the conditions described insection 1835(b) and 42 CFR part 424,subpart G. We propose to exclude theseemergency services from the definitionof ‘‘outpatient hospital services’’ for thesame reasons that we cited above inexcluding them from the definition of‘‘inpatient hospital services.’’

We have also been asked to excludeservices involving lithotriptors thatemploy ESWL when used to break upupper urinary tract kidney stones. Wehave the same concerns in theoutpatient context about the potentialfor patient abuse that we raised in ourdiscussion about excluding these

services from the definition of‘‘inpatient hospital services.’’ Inaddition, we have learned of situationsin which urologists in a particulargeographic area invest in lithotriptors,then require that outpatient departmentsuse the physicians’ equipment if theywant to receive any urology referrals.Because this kind of manipulation canlead to increases in the cost of services,we regard it as creating the potential forprogram abuse. Because of thecontroversial nature of lithotripsy, wehave not excluded it as an outpatienthospital service, but specifically solicitcomments on this issue.

However, we are proposing to includeunder the definition of ‘‘outpatienthospital services’’ outpatient servicesfurnished by a psychiatric hospital (asdefined in section 1861(f)) and RPCHservices, which are included underMedicare Part B by section1832(a)(2)(H). ‘‘Outpatient rural primarycare hospital services’’ are defined insection 1861(mm)(3) as medical andother health services furnished by anRPCH. We are including both of thesekinds of services as ‘‘outpatient hospitalservices’’ for the same reasons that wehave included them as ‘‘inpatienthospital services,’’ as described in thesection above covering inpatienthospital services.

Outpatient hospital services incidentto physician services (therapeuticservices)—Under sections 1861(s)(2)(B)of the Act and 42 CFR 410.27, these‘‘incident to’’ services specificallyinclude drugs and biologicals thatcannot be self-administered. ‘‘Incidentto’’ services must be furnished by orunder arrangements made by aparticipating hospital and as an integralthough incidental part of a physician’sservices. We consider these services astherapeutic services that aid thephysician in the treatment of thepatient. Under section 230.4 of theMedicare Hospital Manual (HCFA Pub.10), therapeutic services that hospitalsfurnish on an outpatient basis are thoseservices and supplies (including the useof hospital facilities) that are incident tothe services of physicians in thetreatment of patients. These servicesinclude clinic services and emergencyroom services. To be covered as‘‘incident to’’ a physician’s services, theservices and supplies must be furnishedon a physician’s order by hospitalpersonnel under hospital medical staffsupervision in the hospital or, if outsidethe hospital, by hospital-affiliatedpersonnel who are under the directpersonal supervision of a physician whois treating the patient.

Diagnostic outpatient hospitalservices—Under § 410.28, diagnostic

services furnished in a hospital tooutpatients, including certain drugs andbiologicals required to perform theservices (even if those drugs orbiologicals are self-administered), arecovered if the services meet thefollowing conditions:

• They are furnished by or underarrangements made by a participatinghospital.

• They are ordinarily furnished by, orunder arrangements made by, thehospital to its outpatients for thepurpose of diagnostic study.

• They would be covered as inpatienthospital services if furnished to aninpatient.

• If furnished under arrangements,they are furnished in the hospital or inother facilities operated by or under thesupervision of the hospital or itsorganized medical staff.

Section 230.3 of the MedicareHospital Manual explains that a serviceis diagnostic if it is an examination orprocedure to which the patient issubjected, or which is performed onmaterials derived from a hospitaloutpatient, to obtain information to aidin the assessment of a medical conditionor the identification of a disease. Amongthese examinations and tests arediagnostic laboratory services such ashematology and chemistry; diagnostic x-rays; isotope studies; EKGs; pulmonaryfunction tests; and other tests given todetermine the nature and severity of anailment or injury. Hospital personnelmay furnish diagnostic services outsidethe hospital premises without the directpersonal supervision of a physician.

Partial hospitalization services—Partial hospitalization services areincluded as ‘‘medical or other healthservices’’ covered by Medicare Part Bunder section 1861(s)(2)(B) and must beprovided ‘‘incident to’’ a physician’sservices. Partial hospitalization servicesare defined in section 1861(ff). Thisdefinition is reflected in §§ 410.27(d)and 410.43, which provide that partialhospitalization services consist of avariety of outpatient psychiatricservices. These services must beprescribed by a physician, who certifiesand recertifies the need for the services,and the services must be furnishedunder a plan of treatment, all inaccordance with provisions in subpart Bof part 424. Section 424.24(e)(1) requiresthat a physician certify that anindividual would require inpatientpsychiatric care if the partialhospitalization services were notprovided.

Section 230.5 of the MedicareHospital Manual further explains thepartial hospitalization services benefit.It points out that there is a wide range


of services and programs that a hospitalmay provide to its outpatients who needpsychiatric care, ranging from a fewindividual services to comprehensive,full-day programs. However, paymentmay be made only for services meetingthe requirements of the outpatienthospital benefit. That is, the servicesmust be incident to a physician’s serviceand be reasonable and necessary for thediagnosis or treatment of the patient’scondition. This means the services mustbe for the purpose of diagnostic study orthe services must reasonably beexpected to improve the patient’scondition.

Special rules that apply to physicaltherapy, occupational therapy, andspeech pathology services furnished to ahospital outpatient covered under PartB—The rules for these services appearin sections 241 and 242 of the MedicareHospital Manual. Sections 210.8, 210.9,and 210.11 of the Medicare HospitalManual describe these therapies (whichdo not require direct physiciansupervision) and set forth the conditionsthat must be met for the services to becovered as outpatient hospital services.

We would include the followingdefinition at § 411.351: ‘‘Outpatienthospital services’’ means thetherapeutic, diagnostic, and partialhospitalization services listed undersection 1861(s)(2)(B) and (C); outpatientservices furnished by a psychiatrichospital, as defined in section 1861(f);and outpatient rural primary carehospital services, as defined in section1861(mm)(3); but excluding emergencyservices covered in nonparticipatinghospitals under the conditionsdescribed in section 1835(b) and 42 CFRpart 424, subpart G.

2. Direct SupervisionSection 1877(b)(2) provides an

exception for in-office ancillaryservices. To qualify as in-office ancillaryservices, the services must, among otherthings, be furnished personally by areferring physician or another physicianin the same group practice, or befurnished by individuals who are‘‘directly supervised’’ by one of thesephysicians.

In the August 1995 final rule, wedefined ‘‘direct supervision’’ assupervision by a physician who ispresent in the office suite andimmediately available to provideassistance and direction throughout thetime that clinical laboratory services arebeing performed. We are proposing toapply this definition to referrals for anyof the other designated health servicesthat can be excepted under section1877(b)(2). We also propose to revisethis definition to make it clear that

‘‘present in the office suite’’ means thephysician must be present in the officesuite in which the services are beingfurnished, at the time they are beingfurnished. We believe this clarificationis necessary for situations in which aphysician might be working in morethan one suite in a building, such aswhen he or she provides services otherthan designated health services in onesuite, while the designated healthservices are furnished in a separate suitein the same building.

We also wish to clarify that webelieve the supervision requirement ismeant to establish the services as thosethat are integral to the physician’s ownpractice, and that are conducted withinhis or her own sphere of activity: hencethe title in-office ancillary services. It isour view that Congress did not intendto except referrals made by a physicianto a separate, profit-making enterprise inwhich the physician has invested orfrom which he or she receivespayments. Hence, we do not believe thein-office ancillary exception applies toservices that are performed in a locationthat is separate and distinct from one inwhich the physician conducts his or herown everyday activities.

Consistent with our interpretationthat Congress intended this exception toapply to services that are closelyattached to the activities of the referringphysician, we used the definition of‘‘direct supervision’’ that appears insection 2050 of the Medicare CarriersManual, Part 3—Claims Processing,which describes services that are‘‘incident to’’ a physician’s professionalservices under section 1861(s)(2)(A).This provision requires that thephysician be present in the office suiteand immediately available to provideassistance and direction throughout thetime the aide or technician isperforming services. The very samedefinition appears in the regulations at§ 410.32(a), which states, in general, thatdiagnostic x-ray tests are covered only ifperformed under the ‘‘directsupervision’’ of certain physicians or bycertain radiology departments. As westated in the preamble to the August1995 final rule, we believe Congress wasadopting and ratifying the Secretary’slongstanding definition of this term.

Nonetheless, since the publication ofthe August 1995 final rule, we havebecome aware that many of the ancillaryservices that physicians and physiciangroups provide are subject to a range ofsupervision requirements for coveragepurposes, some of which are morestringent than the current ‘‘incident to’’supervision requirements, and some ofwhich are less stringent. (Therequirements for diagnostic services, for

example, currently appear in § 410.32 ofthe regulations, in various places in theMedicare Carriers Manual, and as partof certain CPT codes. The requirementsfor physician supervision of diagnostictests in all settings in which thetechnical component is payable underthe physician fee schedule have beenconsolidated in a proposed regulationthat was published on June 18, 1997 at62 FR 33158.)

We recognize, in examiningsupervision requirements that include aphysician’s presence, that they eachhave some of the same and someseparate purposes. The ‘‘incident to’’rule is intended to ensure that thephysician is at hand when the servicesare furnished because the law onlycovers them when they are ‘‘incident toa physician’s professional services,’’making the physician’s presenceessential, for both quality control andbilling purposes, as a condition ofcoverage. In the case of the diagnosticservices, the service is explicitly relatedto a medical need for the personalsupervision or involvement of aphysician in performing or monitoringthe tests. These two sets of coverage-based ‘‘supervision’’ tests have theirparticular purposes and both remain acondition of coverage and payment forMedicare, in addition to anysupervision requirements that appear inthe section 1877 referral provisions.

The ‘‘direct supervision’’ requirementin the in-office ancillary servicesexception appears to us to share withthe ‘‘incident to’’ test the need to tie theservices directly to the activities of thephysician, to ensure that they are partof his or her own medical practice. Wecontinue to believe that Congressintended in including ‘‘directsupervision’’ in the law the concept of‘‘direct supervision’’ that appears as partof the ‘‘incident to’’ requirements.However, in the context of physicianreferrals, we believe the physician’spresence is necessary for ‘‘management’’purposes (that is, to demonstrate thatthe physician is there, actively runningthe practice), rather than for coveragepurposes. Thus, the requirement thatthe physician be on the premises theentire time that a designated healthservice is being furnished can haveabsurd and impractical results,preventing a physician from leaving theoffice suite for even brief periods whenthere may be no health and safetystandards requiring his presence.

Accordingly, we propose to departfrom our interpretation that thedefinition of ‘‘direct supervision’’ forpurposes of the referral prohibition isidentical to the definition in the‘‘incident to’’ context. That is, we


propose to continue to require that theservices in general be performed byaides or technicians only when thephysician is present in the office suiteso that they are tied to his or heractivities, but allow very limitedabsences from the office. We propose toamend the definition as follows:

Direct supervision means supervision by aphysician who is present in the office suitein which the services are being furnished,throughout the time they are being furnished,and immediately available to provideassistance and direction. ‘‘Present in theoffice suite’’ means that the physician isactually physically present. However, thephysician is still considered ‘‘present’’during brief unexpected absences as well asduring routine absences of a short duration(such as during a lunch break), provided theabsences occur during time periods in whichthe physician is otherwise scheduled andordinarily expected to be present and theabsences do not conflict with any otherrequirements in the Medicare program for aparticular level of physician supervision.

Under this definition, a physicianmust actually be physically present inthe office suite at the time designatedhealth services are being furnished, orbe absent only under the limitedconditions described in the definition.We anticipate that the question of whenan absence qualifies as ‘‘brief andunexpected’’ or as a ‘‘routine absence ofa short duration’’ will be adetermination that only the local carriercan make, based on individualcircumstances.

A service will not qualify as an in-office ancillary service during any timeperiod in which the physician isscheduled to be in the office, but inreality is specifically or routinelyexpected to be somewhere else orduring any time period in which thephysician is scheduled to be somewhereelse. Therefore, laboratory services orother designated health servicesperformed by technicians or aideswould not qualify as in-office ancillaryservices if they are performed duringtime periods that occur before or afterthe physician’s regularly scheduledoffice hours. (Aides or technicians canperform other tasks in the absence of thephysician, such as setting up equipmentor cleaning up, as long as the tasks arenot components of designated healthservices provided to Medicare orMedicaid patients.) Also, a physician’sabsences to perform medical servicesoutside the office would not bepermissible under ‘‘direct supervision,’’such as absences to do hospital roundsor provide care in an outpatient clinic.However, we would allow absences forunexpected medical emergencies.

While this definition for referralpurposes would allow a physician to

occasionally be absent for short periods,specific coverage requirements forservices furnished and billed as‘‘incident to’’ a physician’s services, fordiagnostic services, or for any otherservices with separate supervisionrequirements would continue to operateto determine whether a specific serviceis covered. We recognize that thisapproach will require a physician to payclose attention to the specific coveragerequirements that apply to individualservices, as well as the supervisionrequirement in section 1877(b).Nonetheless, most of the coverage ruleshave been in effect for many years, sophysicians have had experience incomplying with them. In coordinatingthe separate supervision requirementswith the requirement in section 1877,physicians must only comply with theseparate coverage requirement if it ismore stringent than the requirement insection 1877, as interpreted in thisproposed rule.

We believe that our proposedamendment to the definition of ‘‘directsupervision’’ addresses the concerns ofphysicians who feel that, as a practicalmatter, they cannot be in the officeevery single minute of every day. Theamendment will allow physicians whomust be called away briefly to avoid thesanctions that could arise from section1877 if they are not present at themoment when a medical service isfurnished, provided there are no healthand safety reasons for them to be on thepremises.

In line with the ‘‘incident to’’ manualprovision, we are also proposing that aphysician is directly supervising anindividual outside the office suite (suchas in an SNF) if the physician is in theroom with the technician when thetechnician is performing services. (Wederive this rule from section 2050,which states that direct supervisiondoes not exist if a physician is onlyavailable by phone or is only physicallypresent somewhere in the building.)Section 45–15 of the Coverage IssuesManual discusses situations in which aphysician establishes an office withinan SNF or other institution. Under thisprovision, a physician’s office within aninstitution must be confined to aseparately identified part of the facilitythat is used solely as the physician’soffice and cannot be construed to extendthroughout the entire institution.(However, to qualify for the in-officeancillary exception in either of these‘‘out of office’’ situations, the servicesmust meet the additional statutoryrequirements for location and billingdescribed in section 1877(b)(2).)

We are not proposing that there mustbe any particular configuration of rooms

for an office to qualify as one office‘‘suite.’’ However, direct supervisionmeans that a physician must be in theoffice suite and immediately available toprovide assistance and direction. Thus,a group of contiguous rooms should inmost cases satisfy this requirement. Wehave been asked whether it would bepossible for a physician to directlysupervise a service furnished on adifferent floor. We think the answerwould depend upon individualcircumstances that demonstrate that thephysician is close at hand. The questionof physician proximity for physicianreferral purposes, as well as for incidentto purposes, is a decision that only thelocal carrier could make based on thelayout of each group of offices. Forexample, a carrier might decide that incertain circumstances it is appropriatefor one room of an office suite to belocated on a different floor, such aswhen a physician practices on twofloors of a townhouse.

3. EntityIn-office referrals are referrals to an

‘‘entity.’’ Section 1877(a)(1) prohibits aphysician from referring Medicarepatients for the furnishing of designatedhealth services to an entity with whichthe physician (or an immediate familymember) has a financial relationship,unless an exception applies. The statuteencompasses any entity that providesdesignated health services, withoutqualifications or limits. We attempted toreflect the breadth of the concept in theAugust 1995 final rule at § 411.351,where we defined an ‘‘entity’’ as a soleproprietorship, trust, corporation,partnership, foundation, not-for-profitcorporation, or unincorporatedassociation.

We wish to clarify that we regard anindividual physician or group ofphysicians as referring to an ‘‘entity’’when they refer to themselves, or amongthemselves. The concept of a ‘‘referral’’under section 1877(h)(5)(A) and (B)covers the request by a physician for anitem or service under Part B, or therequest or establishment of a plan ofcare by a physician that includes theprovision of a designated health service.This statutory definition does notexclude in-office referrals, nor does itspecify that a referral occurs only whena physician refers to an outside entity.

In addition, the in-office ancillaryservices exception in section 1877(b)(2)would not be necessary if in-officereferrals were free from the prohibition.Section 1877(b)(2) makes it clear thatdesignated health services that arefurnished personally by the referringphysician who is a solo practitioner or,in the case of a group practice, by


another member of the physician’sgroup practice, or by other individualswho are directly supervised by thesephysicians, are subject to the referralprohibition. Physicians who refer to oramong themselves are excepted from theprohibition only if they meet the criteriaspecified in section 1877(b)(2).Similarly, physician services providedpersonally by (or under the personalsupervision of) another physician in thesame group practice as the referringphysician are specifically exceptedunder section 1877(b)(1). To clarify ourposition on in-office referrals, wepropose revising the definition of an‘‘entity’’ in § 411.351 to include anyphysician’s solo practice or any practiceof multiple physicians that provides forthe furnishing of a designated healthservice.

4. Fair Market ValueThe term ‘‘fair market value’’ appears

in most of the compensation relatedexceptions. These exceptions, amongother things, require that compensationbetween physicians (or family members)and entities be based on the fair marketvalue of the particular items or servicesthat these parties are exchanging. Wedefined this term in the August 1995final rule by using the definition insection 1877(h)(3). This provisiondefines fair market value as the value inarm’s-length transactions, consistentwith the general market value, withother specific terms for rentals or leases.

We have previously defined the termfair market value in our regulations inpart 413, in the context of reasonablecost reimbursement in payments for endstage renal disease services. Section413.134(b)(2) explains thecircumstances under which anappropriate allowance for depreciationon buildings and equipment used infurnishing patient care can be anallowable cost. This provision defines‘‘fair market value’’ for purposes ofdetermining the costs incurred by apresent owner in acquiring an asset.‘‘Fair market value’’ is defined as ‘‘theprice that the asset would bring by bonafide bargaining between well-informedbuyers and sellers at the date ofacquisition. Usually the fair marketprice is the price that bona fide saleshave been consummated for assets oflike type, quality, and quantity in aparticular market at the time ofacquisition.’’

To be consistent, we are incorporatingthis definition of what constitutes ‘‘fairmarket value’’ into this proposed rule toexplain, for purposes of thoseexceptions that involve compensationpaid for assets, what we believeconstitutes a value that is ‘‘consistent

with the general market value.’’However, we are modifying thedefinition as follows so that it alsoapplies to any arrangements involvingitems or services, includingemployment relationships, personalservices arrangements, and rentalagreements:

General market value is the price that anasset would bring, as the result of bona fidebargaining between well-informed buyersand sellers, or the compensation that wouldbe included in a service agreement, as theresult of bona fide bargaining between well-informed parties to the agreement, on thedate of acquisition of the asset or at the timeof the service agreement. Usually the fairmarket price is the price at which bona fidesales have been consummated for assets oflike type, quality, and quantity in a particularmarket at the time of acquisition, or thecompensation that has been included in bonafide service agreements with comparableterms at the time of the agreement.

The definition of ‘‘fair market value’’will continue to include the additionalrequirements in section 1877(h)(3) forrentals or leases. Among other things,the statute defines the fair market valueof rental property as its value for generalcommercial purposes, not taking intoaccount its intended use.

5. Financial RelationshipA referral alone is not a financial

relationship. We wish to clarify thatwhen a physician simply refers patientsto an outside entity, he or she does nothave a financial relationship with thatentity. A financial relationship consistsof an ownership or investment interestin the entity or a compensationarrangement with the entity. If thephysician does not own any portion ofthe entity, and does not pay the entityor receive any kind of payment from theentity for the referral or for anythingelse, there is no financial relationship.

A financial relationship can involvemore than the Medicare or Medicaidprograms. In § 411.351 we defined afinancial relationship as a direct orindirect relationship in which aphysician or immediate family memberhas an ownership or investment interestin an entity or a compensationarrangement with the entity. We wouldlike to emphasize that a financialrelationship can exist between aphysician and an entity even if thatrelationship does not involve designatedhealth services or the Medicare orMedicaid programs. For example, acompensation arrangement is defined in§ 411.351 as, in general, anyarrangement involving anyremuneration between a physician (orfamily member) and an entity. Thisremuneration can involve payments foranything, such as payments for rent,

payments for nonmedical types of itemsor services, or for housing or travelexpenses.

Ownership interests can be indirect.The statute and the August 1995 finalregulation specify that an ownership orinvestment interest in an entity canexist through equity, debt, or othermeans and includes an interest in anentity that holds an ownership orinvestment interest in any entityproviding designated health services.We do not regard the last part of thisprovision as a limiting factor, but ratheras an indication that Congress wished toinclude, in the concept of ‘‘ownership,’’an interest that is at least one levelremoved from direct ownership. Wepropose to interpret this provision toapply to interests that are removed byan unlimited number of levels.

This interpretation would coversituations involving multiple levels,such as when a physician has aninterest in an entity that has an interestin another entity that in turn holds theownership interest in the entity thatprovides designated health services. Webelieve that this interpretation fulfillsthe intent of the statute, which wasmeant to prevent physicians fromevading the prohibition by establishingtheir ownership interests indirectly in‘‘holding companies’’ rather than in theentities that furnish designated healthservices. It is our view that the numberof layers of ownership is irrelevant, aslong as a physician or family memberhas established an indirect interest. Toreflect this interpretation, we wouldrevise the description of ownership in§ 411.351 (as part of the definition of‘‘financial relationship’’) as follows:‘‘An ownership or investment interest inan entity that exists in the entitythrough equity, debt, or other meansand includes any indirect ownership orinvestment interest, no matter howmany levels removed from a directinterest; for example, ownershipincludes situations in which a physicianor immediate family member has aninterest in any entity that holds anownership or investment interest in anyentity providing designated healthservices.’’

Payments that result from anownership or investment interest are notcompensation. We would like toemphasize a point that we discussed atlength in the preamble to the August1995 final regulation. We explainedthere that when a physician or familymember has an ownership orinvestment interest in an entity, we willnot count as compensation any returnson that investment. For example, if aphysician has an investment interest inan entity in the form of stock or


securities, we will not count any of thedividends or other payments that derivefrom that ownership or investmentinterest as a compensation arrangementbetween the physician and the entity.(However, a physician or familymember can receive an ownershipinterest from an entity in a manner thancould constitute a compensationarrangement, such as when a physicianreceives stock as part of a salarypayment or in exchange for the sale ofhis or her practice.)

6. Group PracticeThe value of group practice status

under the law. When a group ofphysicians qualifies as a ‘‘grouppractice’’ as defined under section1877(h)(4), the group may qualify forseveral exceptions in the law that arespecifically designed to accommodategroups. For example, section 1877(b)(1)excepts from the referral prohibitionphysician services provided personallyby (or under the personal supervisionof) another physician in the same grouppractice as the referring physician.Similarly, section 1877(b)(2) excepts in-office ancillary services that arefurnished personally by or are directlysupervised by either the referringphysician or by another physician whois a member of the same group practiceas the referring physician. However, agroup of physicians does not have tomeet the definition of a group practicein order to qualify for other exceptionsunder the law that are based oncharacteristics other than the referringphysician’s group practice status.

We wish to also point out that thedefinition of a group practice in section1877(h)(4) is particular to the referralrules. That is, it was designed to allowphysicians in specific kinds of groups tocontinue to refer patients for designatedhealth services under certaincircumstances. Therefore, the definitionmay have little or no bearing on whichphysicians qualify as a group practicefor purposes of other Medicare orMedicaid provisions.

Who can organize and control a grouppractice. The statute defines a ‘‘grouppractice’’ as a group of two or morephysicians legally organized into apartnership, professional corporation,foundation, not-for-profit corporation,faculty practice plan, or similarassociation. The statute requires that agroup practice consist of a legal entity.Thus, a group that is not legallyorganized, but is instead only holdingitself out as a group, would not qualifyas a group practice under the statutorydefinition. Moreover, we believe thatthe statute specifically requires that apartnership consist of two or more

physicians who are partners and that aprofessional corporation consist of twoor more physicians who areincorporated together.

We believe that more complexbusiness configurations may beinvolved when two or more physiciansare ‘‘legally organized’’ into afoundation, not-for-profit corporation,or a faculty practice plan. As we pointedout in the preamble to the August 1995final rule, the statute is silent about whomust actually legally organize thesekinds of associations. As a result, weinterpreted this provision in the finalrule to allow any individuals or entitiesto set up legal structures for these kindsof associations, provided two or morephysicians have a role in providingservices and the physicians meet all ofthe other specific requirements insection 1877(h)(4). In addition, thestatute is silent about who must operateany of the group practice associations.We have interpreted the statute, in theAugust 1995 final rule, to allow anyindividuals or entities to do this. Forexample, a hospital could own andoperate a group practice, provided thereare no State laws to prevent this.

A group practice as one legal entity.In the August 1995 final rule we tookthe position that the statutecontemplates a group practice that iscomposed of one single group ofphysicians who are organized into onelegal entity. We stated that a grouppractice could not consist of two ormore groups of physicians, eachorganized as separate legal entities,although we believed that a single grouppractice (that is, one single group ofphysicians) could own other legalentities (such as a billing entity) for thepurpose of providing services to thegroup practice. We based thisconclusion on the fact that section1877(h)(4)(A) defines a group practice asa group of two or more physicians whoare legally organized as a partnership,professional corporation, etc. However,we continue to receive numerousinquiries about whether a group canconsist of several legal entities that are,in turn, legally organized into the onegroup.

We believe that Congress meant thata group must be one legal entity, andthat it regarded this characteristic as amark of a true group practice. It is ourview that any other interpretation couldpose the risk of multiple groups ofphysicians remaining in many waysseparate, but joining together for thesole purpose of taking advantage of theexceptions in section 1877 that apply togroup practices. Therefore, we proposeto continue to require that a groupconsist of just one legal entity.

Nonetheless, we would like to clarifythat we believe that a group practice isstill ‘‘one legal entity’’ even if it iscomposed of owners who are actuallyindividual professional corporations oris owned by physicians who areindividually incorporated. It is ourunderstanding that a group can containphysicians who are individuallyincorporated as professionalcorporations, and who provide servicesto group patients. This kind ofconfiguration is apparently common ingroup situations and generally resultswhen an individual physician wishes toqualify for certain tax and pensionadvantages. The physician is employedby the professional corporation, whichin turn contracts with the group. Webelieve that such a group is not aconglomeration of multiple physiciangroups, but may instead be a true grouppractice, provided all the other criteriain section 1877(h)(4) are met.

We have also considered the issue ofwhether individuals who are separatelyincorporated as individual professionalcorporations and who contract with thegroup practice qualify as ‘‘members’’ ofthe group. We are proposing (in thissection under the heading ‘‘Therequirement for physician-patientencounters’’) to, in general, eliminatecontractors from qualifying as‘‘members’’ of a group practice, aproposal that a major group practiceassociation asserted would be highlyimportant to its membership. Theassociation believes that many grouppractices would have difficulty meetingthe ‘‘substantially all’’ requirement inthe group practice definition if thegroups have to consider as members themany specialists with whom theycontract to furnish services through thegroup practice on a part-time basis.Thus, we are proposing to include onlyowner and employee physicians as‘‘members’’ of a group practice.However, we are also proposing toconsider as owner ‘‘members’’physicians who belong to individualprofessional corporations that, in turn,own the group practice.

The ‘‘full range of services’’ test. A‘‘group practice’’ is defined in somedetail in section 1877(h)(4) of thestatute. One of the criteria in thestatutory definition is that eachphysician who is a member of the groupmust furnish substantially the full rangeof services that the physician routinelyfurnishes, including medical care,consultation, diagnosis, and treatmentthrough the joint use of shared officespace, facilities, equipment, andpersonnel. We defined the term ‘‘grouppractice’’ in § 411.351 of the August1995 final rule by using the statutory


definition and by adding certaininterpretations. In one of these, werequired physician members to furnishthe full range of ‘‘patient care services’’that they routinely furnish, rather thanjust ‘‘services.’’ Elsewhere in § 411.351,we defined ‘‘patient care services’’ asany tasks performed by a member thataddress the medical needs of specificpatients, regardless of whether theyinvolve direct patient encounters.

On considering this issue further, wepropose revising the definition of‘‘patient care services’’ to apply to anyof a physician’s tasks that address themedical needs of specific patients orpatients in general, or that benefit thepractice.

We believe that the ‘‘full range ofservices’’ provision, along with most ofthe other criteria in the group practicedefinition, was designed to ensure that,as part of the group, a physician isactually practicing medicine as he orshe ordinarily would and has notsimply joined the group in name only.We realize, however, that a physicianmember can legitimately furnish otherkinds of services to the group, beyondservices that benefit only specificpatients. For example, a physicianmember might spend time training staffmembers, arranging for equipment, orperforming administrative ormanagement tasks. As long as thesetasks actually benefit the operation ofthe group practice, we believe theyshould be counted as part of the test forgauging ‘‘substantially the full range of’’a physician’s services.

The ‘‘substantially all’’ test and thegroup billing number requirement. The‘‘Substantially All’’ Test—EffectiveJanuary 1, 1995, substantially all of theservices of the group members must befurnished through the group and bebilled under a billing number assignedto the group (the ‘‘substantially all’’test). We discussed the substantially alltest, as it was effective on January 1,1992, at great length in the August 1995final rule. We wish to clarify certainaspects of the test, which appears aspart of the definition of a group practicein § 411.351.

Section 411.351 requires thatsubstantially all of the ‘‘patient careservices’’ of the physicians who aregroup members (at least 75 percent ofthe total patient care services of themembers) be furnished through thegroup. The change we have describedabove in the section on the ‘‘full rangeof services’’ test, concerning ourdefinition of ‘‘patient care services,’’would affect this test as well. As aresult, a group would count any of aphysician’s tasks that address themedical needs of specific group patients

or group patients in general or thatbenefit the group practice. The groupwould not consider in the calculationany time during a physician’s week thathe or she spent on nonpatient careservices, such as teaching in a medicalschool or doing outside research. Forexample, if a physician spends 3 daysa week furnishing patient care servicesas part of a group practice and 2 daysa week doing research outside thepractice, the physician is providing 100percent of his or her patient careservices through the group practice.

The definition in § 411.351 alsorequires that patient care services bemeasured in terms of total patient caretime that each member spends onpatient care services. We wish to clarifythat we expect a group practice to lookat a physician’s total patient care timeduring a week, furnished both insideand outside of the group practice, todetermine what percentage of this timeis furnished through the one group. Forexample, if a physician provides patientcare services to a group practice 4 daysa week and patient care services in anunrelated clinic 1 day a week, thephysician is providing 80 percent of hisor her patient care services through thegroup practice.

Some group practices have informedus that patient care time is not acommon measurement of how groupskeep track of a physician’s contributionsto the group. The time standard in theregulation, they claim, will create awhole separate, burdensomeadministrative process. In light of thesecomments, we explored alternativeoptions that were suggested to us. Theseincluded counting a percentage of thephysician’s personal income, countingphysician-patient encounters, orcounting resource-based Relative ValueUnits (RVUs), a method of assigningresources to CPT codes ([Physicians’]Current Procedural Terminology, 4thedition, 1993 (copyrighted by theAmerican Medical Association)). Wefound that there is no perfect measure;each of these methods has advantagesand disadvantages.

The income option would require thata group determine what percentage ofthe physician’s overall practice incomeis derived from the group practice.While this would be perhaps the easiestcalculation to make, many physiciansmight consider the data involved to beintensely private. In addition, to theextent that a physician’s billingpractices differ among settings, anequivalent amount of income derivedfrom within the practice may notaccount for the same amount of patientcare activity that occurs outside thepractice. For example, a physician who

works at a clinic for low incomepatients while outside the group couldreceive considerably less income forpatient care than he or she wouldreceive for equivalent services furnishedthrough the group practice.

We also explored the possibility ofcounting the number of a physician’spatient encounters. However,encounters do not capture the level ofintensity involved in any task. Forexample, a physician might completeone encounter in an entire day, if itinvolves complex surgery. Anotherphysician could have 30 encounters inthe same day, each of which took 15minutes to complete. In addition, agroup would need to gather informationabout the number of a physician’sencounters outside of the group practiceto determine the percentage ofencounters furnished through the group.One problem with counting the numberof patient care encounters and also withcounting RVUs, which is discussedimmediately below, is that neithermethod can take into account work thatbenefits the group in general but is nota service furnished to a patient, forexample, time a physician spendstraining technical personnel.

We next explored the possibility ofcounting RVUs to determine the share ofa physician’s efforts furnished through agroup practice, since RVUs capture theintensity level of different services. ForMedicare purposes, a physician is paidbased on the CPT code that is billed fora particular service. Each CPT code hasassigned to it a certain intensity level(based on the content of the service andthe time the physician has spent), andeach intensity level translates into aspecified number of RVUs. It is thisassociated RVU amount that determinesa physician’s payment for a service. TheMedicare billing system can reveal all ofthe procedures for which a physicianhas billed, based on the CPT codes, andthe value of all of the associated RVUs.There are thousands of CPT codes,many of which can be modified (forinstance, to state that a physician actedas an assistant at surgery or co-surgeon,rather than as the surgeon). There issoftware available that can assign RVUsbased on the CPT code and modifiers.

To use this method, it would benecessary for a group to collect all CPTand modifier billing data for thephysician both inside and outside thepractice, assign RVUs, and compare thetotals. There is no ‘‘full-time’’equivalent RVU amount that a groupcould use as a proxy to measure theinside RVUs against; therefore, thegroup would have to collect detaileddata about outside practice time. Webelieve that the RVU method could


impose a burden on groups because ofthe high volume of codes thatphysicians are likely to submit,especially in large group practices. Thismethod is further complicated by thefact that it is not clear that all insurersuse CPT codes in all cases. For example,some HMOs provide a given paymentfor a particular kind of service and maynot collect data on individual officevisits or tests.

As a result of our assessment, webelieve that measuring a physician’sactivities by using time spent doingwork for the group, as required in theAugust 1995 final rule, may be the moststraightforward and least burdensomemethod for measuring a physician’sefforts, especially because we do notintend to require that physicians keepdetailed time sheets to verify their time.Practices should already be able to trackthe amount of time spent by eachmember in activities related to thepractice. While this data may not bepresent in billing records, it should bepresent in appointment databases,personal schedules, and other easilyaccessible sources. To simplify matters,a group can assume a physician worksa standard 40 hour week unless he orshe can present evidence of a shorter orlonger work week. A practice should beable to maintain records in the form ofgeneral schedules that are sufficient todemonstrate its calculations in the eventof an audit. Finally, we consultedseveral group practice associationsabout their preference for measuring thestandard. They informed us that theyfavor using time in calculating thestandard.

As a result of our investigation, we aretherefore proposing to use the measureof physician time as the ‘‘default’’standard. We believe that our carrierscan evaluate the ‘‘substantially all’’ testonly if we have one, or perhaps a few,standards. Therefore, we are solicitingcomments on other possible methodsthat groups might use, provided thesemethods will provide verifiable datathat demonstrates that a group meets the‘‘substantially all’’ criteria. We willreview all alternative methods, but onlyinclude those in the final rule that webelieve are both verifiable andadministratively feasible.

The Billing Number Requirement—We are interpreting the new billingnumber requirement in the‘‘substantially all’’ test to mean that asingle group can have more than onebilling number, as long as the groupbills under a billing number that hasbeen assigned to the group. We do notbelieve there is anything in the statuteto preclude a group practice fromhaving more than one number. This

interpretation will accommodatesituations in which one group practicehas multiple numbers because it hasmany locations or operates in more thanone State.

It has also come to our attention thatthere are an increasing number ofsituations in which a group has anotherentity (not a wholly-owned entity) billfor it, such as a management servicesorganization (MSO) or billing agent. Wepropose to allow a group to meet therequirement that services have been‘‘billed under a billing number assignedto the group’’ if an agent bills for thegroup, under the group’s name, usingthe group’s billing number, provided thearrangement meets the requirements in§ 424.80(b)(6). However, because of thespecific terms of the statute, we do notbelieve a group can receive paymentsfor its services through a separate entity(one that is not wholly owned) that billsin its own right, under its own billingnumber, even if the payments ultimatelyconstitute group revenues.

The requirement for physician-patientencounters and the definition of group‘‘members’’. Effective January 1, 1995,the group practice definition in section1877(h)(4)(A)(v) requires that membersof the group must personally conduct noless than 75 percent of the physician-patient encounters of the group practice.We believe this provision may havebeen designed to differentiate betweenlegitimate group practices and thosewith ‘‘member’’ owners or investorswho are members in name, but whotreat few, if any, patients. In such ascenario, nonmember physiciancontractors could be hired to treat mostof the group’s patients. Thisarrangement would allow thenonpracticing ‘‘outside’’ physicianowners to refer to the ‘‘group’’ for thefurnishing of laboratory services orother ancillary types of services that aredesignated health services.

In § 411.351 of the August 1995 finalrule, we defined ‘‘members’’ of a grouppractice broadly as physician partnersand full-time and part-time physiciancontractors and employees during thetime they furnish services to patients ofthe group practice that are furnishedthrough the group and are billed in thename of the group. This definitionwould cover all of the physicians whoare involved, in some capacity, in agroup practice arrangement, while theyare furnishing services to grouppatients. As a result, all group practicepatients who have an encounter in thegroup setting with a physician would betreated by a member of the grouppractice. Our interpretation would thusrender the encounter requirement insection 1877(h)(4)(A)(v) superfluous.

It has come to our attention that grouppractices generally do not regardindependent contractors as members ofthe group. In addition, when a grouppractice contracts with a number ofindependent contractors, the group canexperience difficulties in meeting the‘‘substantially all’’ requirement,especially if the contractors work for thegroup only on a part-time basis. In orderto remedy this problem, and to givemeaning to the encounter requirementin section 1877(h)(4)(A)(v), we proposea change in the definition of a memberof a group practice. We propose toexclude independent contractors fromthe definition. In addition, we proposeto redefine ‘‘members of the group’’ toinclude not just physician partners, butphysicians with any other form ofownership in the practice (includingphysicians whose ownership is held bytheir individual professionalcorporations). We also propose to countany of the physicians listed under thedefinition as ‘‘members’’ during thetime they furnish ‘‘patient care services’’to the group rather than just during thetime they furnish services to patients ofthe group that are furnished through thegroup and are billed in the name of thegroup. This change reflects our beliefthat a physician can legitimately beparticipating as a group member whileproviding services to the group forwhich the practice cannot directly bill,such as certain administrative services.We are also proposing to extend thisdefinition to group practices in thecontext of the additional designatedhealth services.

Group practices should note thatunder the revised definition of a group‘‘member,’’ independent contractorscannot supervise the provision ofdesignated health services under the in-office ancillary services exception.Under section 1877(b)(2), services mustbe furnished personally by the referringphysician, personally by a physicianwho is a member of the same grouppractice, or by individuals who aredirectly supervised by the referringphysician or another physician in thegroup practice. We will no longerconsider independent contractors asphysicians who are ‘‘in the grouppractice.’’ An independent contractormay be able to refer to the grouppractice for the provision of designatedhealth services, provided the physicianqualifies for the personal servicesexception in section 1877(e)(3) of theAct, or the new general compensationexception in § 411.357. We would alsolike to point out that the definition ofwho qualifies as a ‘‘member of a grouppractice’’ in § 411.351 applies only in


the context of the referral provisions insection 1877 of the Act. The concept ofgroup membership may be different forpurposes of other provisions of theMedicare or Medicaid statutes.

As a result of our change in whoconstitutes a group practice member, atleast 75 percent of all physician-patientencounters must occur between owneror employee physicians and patients.We regard an ‘‘encounter’’ as anyappointment during which a grouppractice patient is actually examined ortreated by a physician.

Methods for distributing group costsand revenues. The statute requires thata group distribute its income andoverhead in accordance with methodsthat are ‘‘previously determined.’’ Weregard this provision as ambiguous,since it is not clear prior to what eventthese methods must be in place. Amethod will always be in place justprior to a distribution, since adistribution can occur only if there issome method in place to carry it out.

It is our view that this provision wasmeant to require that a group have anestablished plan for its distributions,rather than making ad hoc decisionsabout distributions just before makingthem. Congress may have feared that adhoc disbursements would be more likelyto reflect a physician’s referrals. To givemeaning to this provision, we proposeto interpret it so that a group must havein place methods for distributiondetermined prior to the time period thegroup has earned the income orincurred the costs. We believe thesemethods can be determined by anyparty, and not just members of the grouppractice. For example, if a hospital hasestablished a group practice to run ahospital affiliated clinic, the hospitalmight be the party that determines howclinic income will be distributed.

We are also proposing that theoverhead expenses of and the incomefrom the practice be distributedaccording to methods that indicate thatthe practice is a unified business. Thatis, the methods must reflect centralizeddecision making, a pooling of expensesand revenues, and a distribution systemthat is not based on each satellite officeoperating as if it were a separateenterprise. We would impose thisadditional standard under our authorityunder section 1877(h)(4)(A)(vi) to addstandards by regulation to the definitionof a group practice.

Volume or value of referrals cannot bereflected in a physician member’scompensation. Beginning on January 1,1995, physicians who are group practicemembers cannot directly or indirectlyreceive compensation based on thevolume or value of their own referrals.

However, the statute qualifies this ruleby allowing physicians to be paid ashare of over-all profits of the group, ora productivity bonus, as describedunder the next two subheadings.(Groups should take note that thefollowing discussion only describeswhat is appropriate under section 1877.You should be aware of and complywith other applicable statutes, includingthe anti-kickback statute, when enteringinto arrangements.)

We believe that the ‘‘volume or value’’standard precludes a group practicefrom paying physician members foreach referral they personally make orbased on the value of the referredservices. This standard applies to any ofa physician’s actions that constitute‘‘referrals,’’ as these are defined insection 1877(h)(5)(A) and (B) of the Act.We include here a brief discussion ofwhat constitutes a ‘‘referral’’ forpurposes of the ‘‘volume or value’’standard:

Section 1877(h)(5)(A) states thatreferrals include, subject to an exceptionfor certain specialized services, therequest by a physician for an item orservice for which payment may be madeunder Part B, including the request fora consultation with another physician(and any test or procedure ordered by,or to be performed by (or under thesupervision of) that other physician).We are interpreting this provision toapply not to a physician’s requests forany Part B items or services, but only toa physician’s requests for designatedhealth services covered under Part B.We explain our rationale for thisposition in the next section, whichdiscusses the definition of a ‘‘referral.’’

The second part of the statutorydefinition of ‘‘referral’’ in section1877(h)(5)(B) covers (subject to anexception for certain specific services)the request or establishment of a plan ofcare by a physician that includes theprovision of a designated health service.Although this second part is not draftedin Medicare-specific terms and could beinterpreted to cover situations involvingany designated health service, we areinterpreting it as applying only to thosedesignated health services coveredunder Medicare. We discuss thisposition, and our interpretation ofreferrals for Medicaid covered services,in more detail in the section dealingwith what constitutes a ‘‘referral.’’

Because of our interpretation of whatconstitutes a ‘‘referral,’’ an entitywishing to be considered a grouppractice in order to use the in-officeancillary services exception cannotcompensate its members based on thevolume or value of referrals fordesignated health services for Medicare

or Medicaid patients but could do so inthe case of other patients. However, themost straightforward way for a group todemonstrate that it is meeting therequirements for the exception would befor the group to avoid a link betweenphysician compensation and the volumeor value of any referrals, regardless ofwhether the referrals involve Medicareor Medicaid patients. Alternatively, agroup that wants to compensate itsmembers on the basis of non-Medicareand non-Medicaid referrals would berequired to separately account forrevenues and distributions relating toreferrals for designated health servicesfor Medicare and Medicaid patients. Ifa group purports to be making paymentsto its physicians for nonprogramreferrals, but these appear to us to beinordinately high or otherwiseinconsistent with the fair market valueof those referrals, we could determinethat the physicians’ compensation doesnot meet the fair market value standard,and thus may actually reflect additionalcompensation for Medicare or Medicaidreferrals.

A physician member’s compensationcan reflect over-all profits. Althoughphysician members cannot becompensated directly or indirectlybased on their own referrals, undersection 1877(h)(4)(A)(iv) and (B)(i), aphysician can be paid a share of over-all profits of the group, as long as theshare is not determined in a manner thatis directly related to the volume or valueof that physician’s own referrals.

In the case of over-all profits, we areinterpreting the statute as follows: First,we are taking the position that thestatute does not affect a physician’scompensation for services other thandesignated health services. Thus, forpurposes of section 1877, a grouppractice can distribute profits fromservices other than designated healthservices in any way it sees fit. Forexample, a group can distribute profitsfrom the physicians’ own nondesignatedhealth services under an even split,based on referrals, or according to theamount of a physician’s investment inthe group, seniority, hours spentdevoted to the practice, or the numberor difficulty of services the physicianhas furnished. The practice can alsooffer different types of sharing of profitsor other kinds of compensationarrangements, or combinations ofarrangements, to different physicians orgroups of physicians. (Groups should becareful to comply with other statutes,including the anti-kickback statute,when creating compensationarrangements.)

However, when a physician makes areferral for a designated health service


for a Medicare or Medicaid patient (forexample, orders a laboratory test oroccupational therapy), we believe thestatute requires a different scheme. Thatis, the referring physician can receive aportion of the group’s overall pooledrevenues from these services as long asthe group does not share these profits ina manner that relates directly to whomade the referrals for them. We believe,for example, that these profits can beshared according to most of theprinciples described above, such as aneven split, a physician’s investment inthe group, the number of hours aphysician in general devotes to thegroup, or the difficulty of a physician’swork. However, each physician’spersonal compensation cannot includepayments based directly on the numberor value of the referrals he or she hasmade.

Since self-referrals are referrals undersection 1877, profits should not bepooled and divided between groupmembers so that they relate directly tothe number of designated healthservices for Medicare or Medicaidpatients physicians referred tothemselves or the value of those self-referrals (such as a value based on thecomplexity of the service). Thus, aphysician should not receive extra,specific compensation from the pooledprofits for performing a designatedhealth service he or she has self-referred. We believe that rewarding aphysician each time he or she self-refersfor a designated health service canconstitute an incentive to overutilizeservices. Nor should a physician’scompensation relate directly to thenumber of referrals for designatedhealth services he or she has made toother group physicians, to the group’snonphysician staff, or to any otherentity or individual.

We regard ‘‘over-all profits of thegroup’’ to mean all of the profits orrevenues a group can distribute in anyform to group members, even if thegroup is located in two different Statesor has many different locations withinone State. We would not interpret theconcept of ‘‘overall profits’’ as theprofits that belong only to a particularspecialty or subspecialty group. Webelieve that the narrower the pooling,the more likely it will be that aphysician will receive compensation forhis or her own referrals (for example, asubspecialty group or location couldcontain only one or two physicians).

A physician member’s compensationcan reflect productivity bonuses. Undersection 1877(h)(4)(A)(iv) and (B)(i), aphysician’s compensation cannotdirectly or indirectly reflect the volumeor value of his or her referrals, except

that the physician can receive aproductivity bonus, as long as the bonusis not determined in a manner that isdirectly related to the volume or valueof that physician’s own referrals. Aproductivity bonus must be based onservices that are personally performedby a physician or incident to personallyperformed services.

As we have noted above for sharing ofprofits, we have interpreted section1877 as imposing no restrictions onproductivity bonuses based on revenuesthat have nothing to do with aphysician’s referrals for designatedhealth services under Medicare orMedicaid. Thus, for all nondesignatedhealth services, a physician can becompensated under any productivityscheme that a group derives. Weunderstand that group practices usemany different measures of aphysician’s productivity, such ascounting patient encounters, charges orcollections attributable to the physician,or hours of patient care services, orfactoring in the degree of difficulty of aphysician’s procedures, ways in whichthe physician has improved his or herprofessional qualifications, or theamount of time the physician is willingto be on-call. In addition, a group canpay physicians based on a percentage ofprofits, straight salary, or anycombination of base and incentivepayments.

In terms of designated health servicesthat a physician refers for Medicare orMedicaid patients, a physician’sproductivity bonus can only indirectlyreflect those services that he or shepersonally performed or that areincident to those personally performedservices. We regard services as‘‘personally performed’’ by a physicianwhen he or she participates directly inthe delivery of the service. As we havenoted elsewhere, we believe that aphysician has made a ‘‘referral’’ if thephysician refers a patient for adesignated health service to him orherself, to other physicians in the group,or to the physician’s own or the grouppractice’s employees or contractors or toany other entity or individual. Unlikethe over-all profit situation, in whichamounts can be aggregated, theproductivity bonus by its very naturewill be based on a physician’sindividual referrals and performance,and will fluctuate accordingly.However, the statute precludes aproductivity bonus for a physician thatdirectly reflects the volume or value ofthat physician’s own referrals.

Thus, we believe a physician’scompensation can reflect a bonus fordesignated health services the physicianpersonally performs or ‘‘incident to’’

services the physician directlysupervises, provided the services resultfrom the referral of a physician otherthan the one performing or supervisingthe service. A physician in this situationis not being compensated based on thevolume or value of his or her ownreferrals. A physician can receivecompensation for his or her ownreferrals for designated health servicesonly through the aggregation that occursas part of over-all sharing of profits.

We regard the reference in section1877(h)(4)(B)(i) to services performed‘‘incident to a physician’s personallyperformed services’’ as a reference to theservices defined in section 1861(s)(2)(A)of the Act. Here they are listed under‘‘Medical and Other Health Services’’ asservices and supplies (including drugsand biologicals that cannot, asdetermined in accordance withregulations, be self-administered)furnished as an incident to a physician’sprofessional service, of kinds that arecommonly furnished in physicians’offices and are commonly eitherfurnished without charge or included inthe physicians’ bills.

Our longstanding interpretation ofthis provision appears in section 2050 ofthe Medicare Carriers Manual, Part 3—Claims Processing. This provision statesthat ‘‘incident to’’ services are those thatare furnished as an integral, althoughincidental part, of the physician’spersonal professional services in thecourse of diagnosis or treatment of anillness or injury. The services ofnonphysicians must be furnished underthe physician’s direct supervision byemployees of the physician.

Because the provision in section1877(h)(4)(B)(i) on productivity bonusesis a difficult one, and becausephysicians are now compensated inmany ways, we directly solicitcomments on our interpretation of thisprovision.

7. ReferralWe have received a number of

inquiries about what constitutes a‘‘referral’’ for purposes of section 1877.The concept of a referral appears inseveral places: physicians are prohibitedfrom making certain referrals and anumber of the compensation-relatedexceptions require that any paymentpassing between a physician and anentity not reflect the volume or value ofthe physician’s referrals. We believe thatthe concept of a ‘‘referral’’ in the statuteis a broad one, and that prohibitedreferrals are a subset of these. Below wediscuss our interpretation of whatconstitutes a ‘‘referral.’’

Under section 1877(h)(5)(A), referralsinclude, subject to an exception for


certain specialized services, the requestby a physician for an item or service forwhich payment may be made under PartB, including the request for aconsultation with another physician(and any test or procedure ordered by,or to be performed by (or under thesupervision of) that other physician).

We believe that ‘‘an item or service forwhich payment may be made under PartB’’ means a Part B item or service thatordinarily ‘‘may be’’ covered underMedicare (that is, that could be acovered service under Medicare at thepresent time in the community in whichthe service has been furnished) for aMedicare-eligible individual, regardlessof whether Medicare would actually payfor this particular service, at the time,for the particular eligible individualwho has been referred. (For example,Medicare might not pay for a service ifthe individual has not yet met his or herdeductible.)

The second part of the statutorydefinition of ‘‘referral’’ in section1877(h)(5)(B) covers (subject to anexception for certain specializedservices) the request or establishment ofa plan of care by a physician thatincludes the provision of a designatedhealth service. Although this secondpart is not drafted in Medicare-specificterms and could be interpreted to coversituations involving any designatedhealth service, we are interpreting it asapplying only to those designated healthservices that ‘‘may be’’ covered underMedicare. We base this position on thefact that the referral prohibition insection 1877(a)(1) applies only todesignated health services coveredunder Medicare.

We are not aware of any rationale forthe distinction between the definitionfor Part B services, in which aphysician’s request for any Part B itemor service constitutes a referral, and thedefinition for other items or services, inwhich a referral consists of a physician’srequest for, or a plan of care providingfor, only a designated health service.The broader definition for Part Bservices has no ramifications in terms ofthe actual referral prohibition, whichencompasses only referrals fordesignated health services. However, itis significant in terms of the standardthat appears in the ‘‘group practice’’definition and in a number of thecompensation-related exceptions thatprecludes compensation betweenparties that reflects the volume or valueof a physician’s referrals.

It is our understanding that section1877 was designed to preventphysicians from overutilizing thespecific health care services designatedin the statute, a list Congress derived

based on its sense of which servicestend to be subject to abuse. We do notbelieve the statute was meant topreclude physicians from beingcompensated for their referrals fortotally different Part B services. Thus,we are taking the position that, since theprohibition relates only to referrals fordesignated health services, the conceptof a referral for a Part B service undersection 1877(h)(5)(A) should be limitedto just referrals for designated healthservices.

As we explained in the discussion onthe definition of an ‘‘entity,’’ we believethat the concept of a ‘‘referral’’ coverssituations in which physicians refer tothemselves or among themselves. (Aswe noted in that discussion, a physiciancould be prohibited from referring tohim or herself or to other group practicemembers if the services do not meet thein-office ancillary services exception insection 1877(b)(2) or the physicianservices exception in section 1877(b)(1)of the Act or some other exception.) Webelieve that a physician has made areferral under section 1877(h)(5) whenhe or she requests any designated healthservice covered under Part A or Part Bor establishes a plan of care thatincludes a designated health servicecovered under Part A or B, even if thephysician furnishes the servicepersonally. We interpret this language tocover a physician’s certifying orrecertifying a patient’s need for adesignated health service. For Part Bservices, a referral can also include aconsultation with another physician.

We are interpreting a physician’s‘‘request’’ for an item or service, or theestablishment of a plan of care, as a stepthat occurs after a physician hasinitially examined a patient or furnishedphysician services that are notdesignated health services, or otherwiseconcluded that the patient needs adesignated health service. (We describeour rationale for this interpretation inmore detail in section III.C.2 of thispreamble, where we discuss the in-office ancillary services exception.)

We are interpreting a ‘‘request’’ asoccurring whenever a physician asks fora service in any way or indicates that heor she believes the service is necessary(for example, by verbally stating that theservice is necessary, by enteringdescription of the service into thepatient’s records or onto a medical chartor by writing a prescription).

What constitutes a ‘‘referral’’ for aMedicaid service. Section 1903(s) of theAct applies aspects of the referralprohibition to the Medicaid program forreferrals that would result in a denial ofpayment for the service under Medicare,if Medicare covered the service to the

same extent and under the same termsand conditions as under the State plan.We interpret this provision to mean thata State should apply the Medicare rulesin section 1877 to a referral for aMedicaid service, even if the service isnot covered under Medicare.

However, the definition of a referralin section 1877(h)(5)(A) and (B) is castspecifically in terms of a request forcertain Part B Medicare services and for‘‘other items,’’ which in the Medicarecontext we have interpreted to meanPart A services. Since Medicaid servicesare not categorized this way, we proposeto interpret this provision byestablishing an analogous definition.That is, (subject to an exception forcertain specialized services, which wedescribe below) a physician has made areferral if he or she has requested aMedicaid covered designated healthservice that is comparable to a servicecovered under Part B of Medicare(including a request for a consultationwith another physician). A physicianhas also made a referral for any otherMedicaid covered item or service if theservice is a designated health serviceand the physician has requested it orhas established a plan of care thatincludes it.

We are also translating a ‘‘referral’’from the Medicare context to mean aphysician’s requests for, or plan of careincluding, a designated health servicethat ordinarily ‘‘may be’’ covered underthe particular State Medicaid programfor an individual in the patient’seligibility category, regardless ofwhether the State Medicaid agencywould actually pay for this particularservice, at the time, for the particularMedicaid-eligible individual who hasbeen referred.

Prohibited referrals only involvedesignated health services. It isimportant to keep in mind that the onlyreferrals that are prohibited undersection 1877 of the Act are those thatinvolve the furnishing of a designatedhealth service listed in section1877(h)(6). As we note in section IV.A.5of this preamble in our discussion onreferrals to immediate family members,a physician is free to make a referral fora service that is not a designated healthservice (or a service that does notinclude a designated health service),such as certain physician services. Forexample, a physician can refer a patientto an obstetrician for general prenatalcare. If the obstetrician prescribesultrasound as part of this prenatal care,it is the obstetrician who has made areferral for a designated health service,and not the original physician.

The statutory exception to thedefinition of a ‘‘referral.’’ Before OBRA


’93, the definition of a ‘‘referral’’ undersection 1877(h)(5)(A) was qualified byan exception in section 1877(h)(5)(C) fora request by a pathologist for certainclinical diagnostic laboratory tests andpathological examination services.These services had to be furnished by(or under the supervision of) thepathologist, as the result of aconsultation requested by anotherphysician. We incorporated thisprovision into the August 1995 finalrule in § 411.351.

We are also proposing to interpret thelevel of supervision that a pathologistmust provide if another individual, suchas a technician, actually furnishes theservices. The statute requires‘‘supervision,’’ rather than the ‘‘directsupervision’’ that appears as part of thein-office ancillary services exception.We are interpreting ‘‘supervision’’ tomean the level of supervision ordinarilyrequired under Medicare coverage andpayment rules or, when they apply, thehealth and safety standards, for theparticular services at issue in theparticular locations in which theservices will be furnished.

As the result of OBRA ’93, beginningon January 1, 1995, the exception towhat constitutes a ‘‘referral’’ in section1877(h)(5)(C) was expanded to includea request by a radiologist for diagnosticradiology services and a request by aradiation oncologist for radiationtherapy, if the services are furnished by(or under the supervision of) theradiologist or radiation oncologist as theresult of a consultation requested byanother physician. We are incorporatingthis amendment into the definition of a‘‘referral’’ in § 411.351. Diagnosticradiology services and radiation therapyare also defined in § 411.351, where wehave presented our proposed definitionsof the different designated healthservices.

When a physician has requested a‘‘consultation.’’ The services that areexcepted from the ‘‘referral definition’’under section 1877(h)(5)(C) must resultfrom a consultation requested by aphysician other than the pathologist,radiologist, or radiation oncologist whoactually performs or supervises theperformance of the services listed above.We discussed the concept of aconsultation briefly in the preamble tothe proposed rule covering referrals forclinical laboratory services at 57 FR8595. We said that, for purposes ofMedicare coverage, a ‘‘consultation’’is—a professional service furnished to a patientby a physician (the consultant) at the requestof the patient’s attending physician. Aconsultation includes the history andexamination of the patient as well as a

written report that is transmitted to theattending physician for inclusion in thepatient’s permanent record ***. Otherreferrals, such as sending a patient to aspecialist who assumes responsibility forfurnishing the appropriate treatment, orproviding a list of referrals for a secondopinion, are not ‘‘consultations’’ or‘‘referrals’’ that would trigger the laboratoryservices use prohibition.

We would like to clarify that aconsultation occurs whenever aphysician requests that a patient seeanother physician, such as a particularspecialist, but the original physicianretains control over the care of thepatient, including any care related to thecondition that prompted theconsultation. Section 1877(h)(5)(A)implies that a ‘‘consultation’’ is still aconsultation even if the consultantphysician takes the initiative to order,perform, or supervise the performanceof, tests for the patient. The consultantphysician, as we noted in the preambleof the August 1995 rule, must providethe original physician with a report.Nonetheless, we regard this as aconsultation as long as it is the originalphysician who gathers information fromthe consultant physician about his orher examination of the patient and anytest results and then makes a decisionabout how to proceed with the patient’scare.

Conversely, the original physician hasnot arranged for a consultation, butinstead has made a referral, in situationsin which the specialist takes over thepatient’s care for purposes of thecondition that prompted the referral.For example, a physician might send apatient to a specific cardiologist, whoexamines the patient thoroughly, sendsa report to the attending physician butis the only one who sees the patientthereafter for the purpose of treating aheart problem.

8. Remuneration

Remuneration that does not result ina compensation arrangement. Acompensation arrangement is defined insection 1877(h)(1) as any arrangementinvolving any remuneration between aphysician (or family member) and anentity, other than an arrangementinvolving only remuneration describedin section 1877(h)(1)(C). Section1877(h)(1)(C) lists certain specific kindsof remuneration that do not result in acompensation arrangement, such as theforgiveness of amounts owed forinaccurate tests, mistakenly performedtests, or for the correction of minorbilling errors.

We believe there is some ambiguity insection 1877(h)(1) concerning therequirement that excepted remuneration

must result from an arrangementinvolving only the remunerationdescribed in section 1877(h)(1)(C). Thisprovision could be read to mean that theitems in section 1877(h)(1)(C) areexcepted when the arrangement thatexists between the physician and entityinvolves nothing but the excepted formsof payment. As a practical matter, werealize that the kinds of remunerationlisted in section 1877(h)(1)(C) seldomoccur as isolated transactions, but areoften subsets or components of otherarrangements. For example, theforgiveness of minor billing errorssuggests that the parties transact andexchange services or items for paymentwhen there are no billing errors; thosetransactions that contain billing errorsmay be only a small fraction of theparties’ overall business dealings.

To clarify this provision, we areinterpreting it to mean that the portionof a business arrangement that consistsof the remuneration listed in section1877(h)(1)(C) alone does not constitutea compensation arrangement. Any otherforms of remuneration that mightaccompany these payments are notexcepted and could constitute acompensation arrangement, providedthey do not otherwise meet one of theother exceptions in this proposedregulation.

Section 1877(h)(1)(C)(ii) excepts fromthe definition of ‘‘remuneration’’ theprovision of items, devices, or suppliesthat are used solely to collect, transport,process, or store specimens for theentity providing the item, device, orsupply, or order or communicate theresults of tests or procedures for theentity. We believe that some pathologylaboratories have been furnishingphysicians with materials ranging frombasic collection items and storage items(for example, jars for urine samples andvials for blood samples) to morespecialized or sophisticated items,devices, or equipment (snares used toremove gastrointestinal polyps, needlesused for biopsies or to draw bonemarrow or samples of amniotic fluid foramniocentesis, and computers or faxmachines used to transmit results).

In order for these items and devicesto meet the statutory requirement, theymust be used solely to collect, transport,process, or store specimens for thelaboratory or other entity that providedthe items and devices. We interpret‘‘solely’’ in this context to mean thatthese items are used solely for thepurposes listed in the statute, such ascups used for urine collection or vialsused to hold and transport blood to theentity that supplied the items ordevices.


We do not believe that an item ordevice meets this requirement if it isused for any purposes besides these. Forexample, we do not regard specializedequipment such as disposable orreusable aspiration and injectionneedles and snares as solely collectionor storage devices. Instead, these itemsare also surgical tools that are routinelyused as part of a surgical or medicalprocedure. For example, the Food andDrug Administration (FDA) regulationsin 21 CFR 878.4800(a) define a ‘‘manualsurgical instrument for general use’’ asa ‘‘non-powered, hand-held, or hand-manipulated device, either reusable ordisposable, intended to be used invarious general surgical procedures.’’Surgical instruments listed in theregulation include disposable orreusable aspiration and injectionneedles, snares, and other similardevices. Snares are also listed in theseregulations as components of variousspecialized surgical devices, such as ear,nose, and throat manual surgicalinstruments, endoscopic electrosurgicalunits, and manual gastroenterology-urology surgical instruments andaccessories.

In addition, to ensure that items ordevices that could qualify for thisexception are used solely for the entitythat supplied them, the number oramount of these items should beconsistent with the number or amountthat is used for specimens that areactually sent to this entity forprocessing. That is, if a physician tendsto annually perform 400 blood tests thatare sent to a particular laboratory foranalysis, we would not expect thephysician to accept from that laboratoryitems, devices, or supplies in excess ofan amount that is reasonable for theprojected tests. In determining theamount of goods that are reasonable, wewould consider not just quantity, butsuch facts as whether the laboratorypackages together a set of items to beused for just one tissue collection or oneuse, or whether an item can be usedmultiple times, for multiple entities.

If, on the other hand, a physiciankeeps a particular item or device anduses it repeatedly or could use itrepeatedly for any patients or for otheruses, we would presume that the itemor device is not one that meets therequirement, unless the physician candemonstrate otherwise. For example, ifcomputer equipment or fax machinescan be used for a number of purposesin addition to ordering or receivingresults from an entity, we wouldpresume that the ‘‘solely’’ requirementis not met, unless the physician candemonstrate that the equipment isintegral to, and used exclusively for,

performing the outside entity’s work.Detailed records concerning the use ofthe machine would be necessary toovercome this presumption.

Section 1877(h)(1)(C)(iii) ‘‘excepts’’from a compensation arrangementsituations involving certain paymentsmade by an insurer or a self-insuredplan to a physician. The payments mustbe those that satisfy a claim, submittedon a fee-for-service basis, for thefurnishing of health services by thatphysician to an individual who iscovered by a policy with the insurer orby the self-insured plan. The paymentsmust meet certain specified conditions.

We believe that this provision wasdesigned for situations in which aninsurer is involved in the delivery ofhealth care services. If the insurer ownsa health care facility, a physician mightotherwise be precluded from referring tothat facility just because the physicianreceives compensation from the insurerin the form of payments that satisfyclaims the physician has submitted. Ifthe physician is seeking fee-for-servicepayments from an insurer, he or shemay not have an arrangement with theinsurer that could qualify as a personalservices arrangement, or otherwisequalify under any of the other statutoryexceptions.

Discounts can be a form ofremuneration for some of the designatedhealth services. In the August 1995 finalrule, we defined remuneration toinclude discounts. In the preamble tothat rule, we explained that we believethat, for most items or services that aphysician might purchase, the statutedictates this result. Section 1877(e)(8)(B)excepts from a compensationarrangement payments made by aphysician to an entity as compensationfor items or services (other than clinicallaboratory services) if the items orservices are furnished at fair marketvalue. As a result, any amounts that aphysician pays for items or services thatdo not reflect fair market value, such ascertain discounted items or services,would not meet the exception.

We may have implied in the August1995 final rule that all discounts wouldfail to meet the fair market valuestandard. We wish to clarify here thatwe believe a discount does meet the fairmarket value standard if it is an arm’s-length transaction; an entity offers it toall similarly situated individuals,regardless of whether they makereferrals to the entity; the discount doesnot reflect the volume or value of anyreferrals the physician has made or willmake to the entity; and the discount ispassed on to Medicare or other insurers.We are aware of situations in whichdiscounts enure to the benefit of

referring physicians. For example,physicians will sometimes purchaseoncology drugs from manufacturers at adiscount, yet mark the drugs up toeliminate the discount when billingMedicare. Such arrangements would notmeet the standard.

We are also creating a new exceptionunder our authority in section1877(b)(4), which allows us to exceptany other financial relationship that wedetermine does not pose a risk ofprogram or patient abuse. The newexception would allow physicians toreceive a discount based on the volumeof their referrals to an entity, providedthe discount is passed on in full to thepatients or their insurers (includingMedicare), and does not enure to thebenefit of the physicians in any way.

The statute provides a differentexception for laboratory services.Section 1877(e)(8)(A) states that there isno compensation arrangement when aphysician makes payments to alaboratory in exchange for the laboratoryproviding clinical laboratory services.This exception does not include a fairmarket value standard. Congress maynot have included this standard basedon its belief that, under the Medicareprogram, physicians cannot purchaselaboratory services at a discount, andthen bill the Medicare program for themat a marked up rate.

We agree that physicians areprecluded from purchasing and markingup laboratory services covered underMedicare under section 1833(h)(5)(A) ofthe Act. This provision states that, ingeneral, Medicare payment for a clinicaldiagnostic laboratory test may be madeonly to the person or entity thatperformed or supervised theperformance of the test. In addition,payment for laboratory tests is made onthe basis of a fee schedule.

B. General Prohibition on Referrals

Which designated health services arecovered by the prohibition. Section1877(a)(1)(A) prohibits referrals to anentity for the furnishing of designatedhealth services ‘‘for which paymentotherwise may be made under[Medicare], * * *.’’ We believe that thismeans any designated health servicethat ordinarily ‘‘may be’’ covered underMedicare (that is, that could be acovered service under Medicare in thecommunity in which the service hasbeen provided) for a Medicare-eligibleindividual, regardless of whetherMedicare would actually pay for thisparticular service, at the time, for thatparticular individual (for example, theindividual may not have met his or herdeductible).


We believe that the same principlesapply for designated health servicesunder the Medicaid program. Section1903(s) says that the Secretary cannotmake Federal financial participationpayments to a State for designatedhealth services, as they are definedunder section 1877(h)(6), furnished toan individual on the basis of a referralthat would result in a denial of paymentunder Medicare, if Medicare covered theservices to the same extent and underthe same terms and conditions as underthe State plan. We interpret thisprovision to mean that the Medicarerules in section 1877 apply to Medicaidservices, as if Medicare covered thesame items and services as a State’sMedicaid program.

As a result, a referral could affect aState’s FFP if the designated healthservice is one ‘‘for which paymentotherwise may be made’’ under a State’sMedicaid program, regardless ofwhether a State agency would actuallypay for this particular service, at thetime, for that particular individual.Therefore, if a State plan could coverthe service for a Medicaid eligibleindividual in the individual’s eligibilitygroup, we believe it is a service that iscovered by the referral prohibition.

Limitations on billing and refunds ona timely basis. As part of the prohibitionon referrals in section 1877(a), thestatute also provides that an entity maynot present or cause to be presented aMedicare claim or a bill to anyindividual, third party payor, or otherentity for designated health servicesfurnished under a prohibited referral. Inthe August 1995 final rule, we includedin § 411.353(d) the requirement that anentity that collects payment for alaboratory service that was performedunder a prohibited referral must refundall collected amounts on a timely basis.We are proposing to apply thisprovision to such amounts collected forany of the designated health services.We are also proposing to define ‘‘timelybasis’’ by cross referring to § 1003.101 inthe OIG civil money penalty regulations.While § 1003.101 currently defines thisterm as ‘‘the 60-day period from thetime the prohibited amounts arecollected by the individual or entity,’’the OIG is planning to issue shortlyrevised final regulations that will amendthis term. Under the amended version,the 60-day timeframe for a refund willbegin when the individual or entityknew or should have known that theamount collected was related to aprohibited referral. We plan to adoptthis revised definition as well.


1. Exception for Physician ServicesThe statute provides that the referral

prohibition does not apply in casesinvolving physician services (as definedin section 1861(q)) provided personallyby (or under the personal supervisionof) another physician in the same grouppractice as the referring physician.Physician services are generally definedin section 1861(q) as professionalservices performed by physicians,including surgery, consultation, andhome, office, and institutional calls. TheMedicare regulations have interpretedthis provision in § 410.20(a) to includediagnosis, therapy, surgery,consultations, and home, office, andinstitutional calls, provided the servicesare furnished by one of the types ofdoctors listed in § 410.20(b).

Note that this exception applies tophysician services that constitutedesignated health services, as we woulddefine designated health services in§ 411.351. The exception in theMedicare context does not coverservices that are performed bynonphysicians but are furnished undera physician’s supervision, such asancillary or ‘‘incident-to’’ services.Under Medicare, physician services canonly be performed by a physician. Thus,we believe the exception applies only toservices that are provided personally bya physician who is a member of thesame group practice as the referringphysician or that are provided by anonmember physician who ispersonally supervised by a grouppractice physician. We would interpret‘‘personal supervision’’ to mean that thegroup practice physician is legallyresponsible for monitoring the results ofany test or other designated healthservice and is available to assist theindividual who is furnishing theservice, even though the memberphysician need not be present while theservice is being furnished.

2. Exception for In-office AncillaryServices

This exception applies to servicesother than parenteral and enteralnutrients, equipment and supplies anddurable medical equipment (although itdoes apply to infusion pumps) that arereferred by a solo practitioner or grouppractice member within his or her ownpractice. The exception requires that theservices be performed by the referringphysician or group practice member, orby another member of the same grouppractice as the referring physician, or bedirectly supervised by one of these

physicians (we discussed the directsupervision requirement in sectionIII.A.2 of this preamble), that theservices be furnished in certainlocations, and that the services be billedin a particular way. We discuss theselast two requirements below.

a. The site requirement

Where a service is actually‘‘furnished.’’ Section 1877(b)(2)(A)(ii)(I)requires, for a solo or group practice,that the services be furnished in abuilding in which the referringphysician or another member of thegroup practice furnishes physicianservices unrelated to the furnishing ofdesignated health services. It is our viewthat a service is furnished wherever aprocedure is actually performed upon apatient or in the location in which apatient receives and begins using anitem.

For example, if a patient receives anMRI (magnetic resonance image) in aphysician’s office, the service has beenfurnished there. If a patient is fitted forand receives a brace in the physician’soffice, the brace has been furnishedthere. The same rule would apply to aprosthetic device that is implanted in aphysician’s office. However, any itemthat is given to a patient but is meantto be used at home or outside thephysician’s office, or any item that isdelivered to the patient’s home, has notbeen ‘‘furnished’’ in the physician’soffice.

What constitutes the ‘‘same building’’in which the physician is practicing. Weare interpreting ‘‘the same building’’ tomean one physical structure, with oneaddress, and not multiple structures thatare connected by tunnels or walkways.In addition, we believe ‘‘the building’’consists of parts of the physicalstructure that are used as office or othercommercial space. For example, amobile X-ray van that is pulled into thegarage of a building would not be partof that building.

When a physician is furnishingphysician services ‘‘unrelated to thefurnishing of designated healthservices.’’ To meet this criterion, webelieve that a physician must beproviding in the same building anyamount of physician services (asdefined in § 410.20(a)) other than thoselisted as designated health services aswe have defined them in § 411.351.Thus, we would regard as ‘‘unrelated todesignated health services’’ aphysician’s examination of a patient anddiagnosis, even if these lead to thephysician requesting a designatedhealth service, such as an X-ray orlaboratory test.


The location test for group practices.In the case of a group practice, the grouphas the option of meeting a location testother than the one requiring that thedesignated health services be providedin the same building in which a groupmember provides physician services.The group can provide clinicallaboratory services in any other buildingthat is used by the group for theprovision of some or all of the group’sclinical laboratory services.

A group can furnish the otherdesignated health services in anotherbuilding that is used by the group forthe centralized provision of the group’sdesignated health services. We believethat a location meets this ‘‘centralized’’requirement if it services more than oneof a group’s offices, and if it furnishesone or any combination of designatedhealth services. It is also our view thata group can have more than one of thesecentralized locations. To meet the in-office ancillary exception, a groupwould be required to have a physicianmember present in the ‘‘centralized’’location to perform or directly supervisethe performance of designated healthservices, but the physician would not berequired to perform physician servicesthat are unrelated to the designatedhealth services in this location.

b. The billing requirementSection 1877(b)(2)(B) requires that in-

office ancillary services be billed by thephysician performing or supervising theservices, by the referring or supervisingphysician’s group practice under abilling number assigned to the group, orby an entity that is wholly owned by thephysician or group practice. For a grouppractice that bills, we discussed asimilar requirement for a group billingnumber in section III.A.6 of thispreamble, where we covered thedefinition of a group practice. There, ashere, we are interpreting this provisionto allow a single group to bill under anybilling number that has been assigned tothe group in situations in which a grouphas more than one number, and to allowan agent to bill for the group in thegroup’s name, using the group’snumber, provided the arrangementmeets the requirements in§ 424.80(b)(6).

In situations in which a ‘‘wholly-owned’’ entity bills for a group, we donot believe the statute requires that theservice be billed under the groupnumber, if the wholly owned entity canbill under its own provider number.Also, we are interpreting ‘‘a wholly-owned’’ entity that bills to cover anentity that provides billing oradministrative services to a physician orgroup practice. Alternatively, this entity

can be a wholly-owned provider ofdesignated health services, such as alaboratory or radiology facility that iswholly owned by a physician or group,but bills for its own services. However,because the provision refers to an entitythat is ‘‘wholly owned,’’ we do notbelieve that it covers billing entities thatare owned jointly by a physician orgroup practice with any otherindividuals or entities.

We also believe that a group practicemember cannot use the in-officeancillary services exception to refer toother group practice members forservices he or she intends to billindependently. Section 1877(b)(2)(B)states that the services must be billed bythe physician performing or supervisingthe services or by a group practice ofwhich the physician is a member, or byentities wholly owned by the physicianor the group. Nonetheless, under thedefinition of who qualifies as a‘‘member’’ of a group practice in§ 411.351, a group practice physicianbilling under his or her own providerstatus would be considered a solopracticing physician for purposes of thein-office ancillary exception.

In § 411.351, we defined who canqualify as a ‘‘member’’ of a grouppractice broadly in order toaccommodate the many part-time andcontract physicians who oftenparticipate in one or more grouppractices. The definition of a ‘‘member’’covered physician partners and full andpart-time physician contractors andemployees. Physicians under thedefinition qualify as ‘‘members’’ onlyduring the time they furnish services topatients of the group practice that arefurnished through the group and arebilled in the name of the group.Therefore, whenever a physician billsseparately for a lab service the physicianhas personally performed or supervised,he or she is functioning as a solopractitioner and not as a group member.(We are currently proposing to amendthe definition of a ‘‘member’’ to excludeindependent contractors and to regard aphysician as a member during the timehe or she furnishes ‘‘patient careservices’’ to the group. These changeswould not affect our interpretation.)

If a physician bills for a serviceindependently, other group memberscannot directly supervise those servicesfor the referring physician. In addition,if a group member bills for too manyservices independently, the grouppractice may fail to meet the‘‘substantially all’’ test under thedefinition of a group practice in section1877(h)(4)(A)(ii). That provisionrequires that substantially all of theservices provided by group members be

billed under a billing number assignedto the group.

c. Designated health services that do nottrigger the in-office exception

The location requirements for thisexception specify that designated healthservices must be provided in a buildingin which a solo practitioner or a grouppractice physician also providesphysician services unrelated to thefurnishing of designated health servicesor, for group practices, in a building thatserves as a centralized location in whicha group provides designated healthservices. Thus, this exception would notcover services provided elsewhere, suchas home health services.

If services are furnished in a hospitalor skilled nursing facility, we believethey can be covered under thisexception if these locations serve as acentralized location in which a groupprovides designated health services or ifthe referring physician or a member ofthe same group practice furnishesunrelated physician services in thebuilding, and the physicians can meetthe requirement for direct supervisionand billing.

3. Exception for Services ProvidedUnder Prepaid Health Plans

We are aware that the health careworld is evolving rapidly, consisting ofa broad spectrum that ranges fromtraditional practices using fee-for-service billing all the way to fullycapitated managed care systems, manyof which are excepted under the‘‘prepaid’’ provision in the statute. Inbetween these extremes exist a host of‘‘hybrid’’ systems that display a mixtureof fee-for-service and managed carecharacteristics. Section 1877 addressessome of these systems directly; mostothers we believe can continue tofunction by meeting the exceptions inthe statute and in this proposedregulation. We specifically solicitcomments on whether our assessment isaccurate.

In this section we describe how wepropose to interpret the law in a mannerthat we believe will help to safeguardthe Medicare and Medicaid programsfrom abuse, while facilitating theevolution of integrated delivery andother health care delivery systems. Wealso discuss how we believe the lawaffects referrals for designated healthservices provided under demonstrationprojects and waivers.

a. Physicians, suppliers, and providersthat contract with prepaid organizations

The ‘‘prepaid plan’’ exception coversservices furnished by certain specifiedorganizations to their enrollees. Under


section 1877(b)(3), these include healthmaintenance organizations andcompetitive medical plans that have acontract with Medicare, certain prepaidorganizations functioning under ademonstration project, and Federallyqualified health maintenanceorganizations. We have incorporatedthis exception into the regulations at§ 411.355(c). We are aware that anumber of these organizations do notfurnish services directly but oftencontract with outside physicians,providers, or suppliers to furnish itemsor services to their enrollees, for whichthe organizations bill. The outsidephysicians, providers, or suppliers may,in turn, contract with other physiciansor entities for certain supplies orservices. In order to accommodate thesesituations, we are interpreting thisexception broadly to cover not onlyservices furnished by the organizationsthemselves, but also those furnished tothe organization’s enrollees by outsidephysicians, providers, or suppliersunder contract with these organizations.The exception would also cover servicesfurnished to enrollees by those withwhom the outside physicians,providers, or suppliers have contracted.

b. Managed care organizations underthe Medicaid program

We propose to add to the regulationa new exception in § 435.1012(b) fordesignated health services provided bymanaged care entities analogous tothose listed in section 1877(b)(3) thatprovide services to Medicaid eligibleenrollees under contracts with StateMedicaid agencies. We are basing thisaddition on our analysis of section1903(s) of the Act. Under section1903(s), a State can receive no FFP forexpenditures for medical assistanceunder the State plan consisting of adesignated health service furnished toan individual on the basis of a referralthat would result in a denial of paymentfor the service under Medicare ifMedicare covered the service to thesame extent and under the same termsand conditions as under the State plan.We read this provision to mean that theMedicare-based rules in section 1877must be applied to services furnishedunder a State’s Medicaid program todetermine when a referral is a‘‘prohibited’’ one.

Section 1877(b)(3) excepts from thereferral prohibition services furnished toenrollees of certain ‘‘prepaid’’ plans;however, all of the entities listed in thatexception provide services to Medicarepatients. As a result, the exception forprepaid arrangements has no meaningfor physicians who wish to refer in thecontext of the Medicaid program. In

order to give some meaning to thisprovision in the Medicaid context,when it is read in conjunction withsection 1903(s), we are adding anexception for services furnished by theMedicaid counterparts of the Medicaremanaged care contracts expresslyreferenced in section 1877(b).

In section 1877(b)(3), Congressexempted all types of Medicarecontracts with prepaid managed carehealth plans. We propose to extend thisexemption to the categories ofMedicaid-contracting managed careplans analogous to those exempted forMedicare in section 1877(b)(3). Like thesection 1876 Medicare contractsexempted under section 1877(b)(3)(A),section 1903(m) governs Medicaid HMOcontracts (specifically, comprehensiverisk contracts), and requires thatcontracting HMOs comply with thephysician incentive plan requirementsin section 1876(i)(8).

The type of Medicare prepaid healthplan exempted under section1877(b)(3)(B) is an entity with a lessthan comprehensive contract (involvingonly Part B, or outpatient, services)under section 1833(a)(1)(A) of the Actand regulations at 42 CFR Part 417,Subpart U. These entities are known as‘‘health care prepayment plans’’(HCPPs). The Medicaid equivalent of aMedicare HCPP is a ‘‘prepaid healthplan,’’ or PHP. Like an HCPP, PHPsgenerally contract for less than acomprehensive range of services (a PHPcan also be a nonrisk comprehensivecontract, since section 1903(m) onlygoverns comprehensive risk contracts).Like HCPPs, PHPs are not subject to thefull range of requirements that HMOsmust satisfy under section 1876 orsection 1903(m).

Section 1877(b)(3)(C) exempts entitiesreceiving payment on a prepaid basisunder a demonstration project undersection 402(a) of the Social SecurityAmendments of 1967 or section 222(a)of the Social Security Amendments of1972. The Medicaid counterpart ofsection 402(a) is section 1115(a) of theSocial Security Act. Indeed, severaldemonstration projects under section402(a) involving Medicaid-eligibleMedicare beneficiaries also involveMedicaid capitation payments under theauthority in section 1115(a). Weaccordingly are proposing to exemptentities receiving payments on a prepaidcapitation basis under a demonstrationproject under section 1115(a) of the Act.

Finally, in order to cover the fullrange of Medicaid managed carecontractors paid on a prepaid basis, asCongress did for Medicare, it is alsonecessary to exempt ‘‘Health InsuringOrganizations’’ (HIOs) if they furnish or

arrange for services as a managed carecontractor. We are accordinglyproposing to exempt these entities aswell.

c. Evolving structures of integrateddelivery and other health care deliverysystems

As described above, the statutedirectly excepts from the referralprohibition all of the services providedby ‘‘prepaid’’ entities described insection 1877(b)(3) to the entities’enrollees. We realize that a host oforganizations and integrated systems arenot specifically excepted under thestatute, so the services they provide toMedicare and Medicaid patients may besubject to the referral prohibition. Forexample, Medicare may providesecondary coverage to patients whoparticipate in employer group healthplans and are treated by HMOs that donot have contracts with Medicare or arenot Federally qualified. Also, there arenontraditional systems that use both fee-for-service and capitated billing and arenot specifically excepted under the law.We can find no grounds to create ablanket exception for thesearrangements; we see no guarantee thatthese ‘‘hybrid’’ structures will all be freefrom any risk of patient or programabuse.

It is our view that a large percentageof the new and evolving structures willcontinue to thrive by meeting theexceptions in the statute and in thisproposed regulation. For example,entities such as preferred providerorganizations (PPOs) and physicianhospital organizations (PHOs) that arenot excepted under section 1877(b)(3)normally contract with physicians toprovide services to the organization’spatients, including Medicare orMedicaid patients. These physicians cancontinue to refer Medicare andMedicaid patients to the organizationfor designated health services, providedthe physicians’ arrangements with theorganization qualify for the personalservices exception in section 1877(e)(3)(and in § 411.357(d) of this proposedregulation).

This exception provides, among otherthings, that the arrangement must be forat least 1 year, the physician’scompensation must be based on fairmarket value and cannot reflect thevolume or value of the physician’sreferrals, except as allowed undercertain physician incentive plans. Wehave defined ‘‘fair market value’’ in§ 411.351 to allow payment that isconsistent with the general market valueof the services; that is, the compensationthat would be included in a comparableservice agreement, as the result of bona


fide bargaining between well-informedparties, at the time the agreement takesplace.

If a physician has contracted with anorganization for less than 1 year, thearrangement could meet the new generalexception for compensationarrangements that we have added in§ 411.357(l). We have added this newexception to accommodate the manycomplex arrangements that we believeexist between physicians and entities, asdescribed below in section II.E.1. Also,as described in section II.E.3, we haveinterpreted the ‘‘volume or value ofreferrals’’ standard (one of the standardsin the personal services exception andin many of the compensation-relatedexceptions) in a manner that we believewill not obstruct physicians who arerequired to refer for certain serviceswithin a network when the entityfurnishing the services is at substantialfinancial risk for their cost. In sectionIV, in which we answer questions aboutthe law, we present a discussion aboutphysicians who have contracted withHMOs or other prepaid organizations,but who wish to refer fee-for-servicepatients to the HMO or to otherphysicians or providers who areaffiliated with the HMO.

d. Designated health services furnishedunder a demonstration project or waiver

We propose to interpret section 1877in a manner that we believe will allowmost Medicare or Medicaid patients tocontinue to receive designated healthservices under demonstration projectsor waivers. Our analysis of this issuedepends upon whether the organizationis paid on a prepaid basis under section1115(a) of the Social Security Act orunder one of the demonstrationauthorities specified in section1877(b)(3)(C).

Prepaid demonstration contracts.Entities receiving payment on a prepaidbasis under section 402(a) of the SocialSecurity Amendments of 1967 orsection 222 of the Social SecurityAmendments of 1972, have beenexempted from the referral prohibitionby section 1877(b)(3)(C). Entitiesreceiving payment on a prepaid basisunder a Medicaid demonstration projectunder section 1115(a) of the SocialSecurity Act would be exempt under theproposed Medicaid analogue, asdiscussed earlier in this section.

We would note that the exemption forMedicare prepaid demonstrationcontractors extends not only todemonstration projects initiated by theSecretary under her discretionaryauthority in sections 402(a) and 222, butto all demonstrations that incorporate orrely upon section 402 authority,

including such congressionally-mandated demonstrations as the PACE(‘‘Program for All-inclusive Care for theElderly’’) demonstration projects, underwhich a public or non-profit entitycontracts to provide comprehensive careto frail elderly Medicare beneficiaries,including dual eligibles who have beencertified for skilled nursing facility levelcare, and the ‘‘Social HMO’’ (SHMO)demonstration projects, including theESRD SHMO demonstration.

Demonstration projects that are notprepaid. If a demonstration project doesnot involve an organization receivingpayments on a prepaid basis, theMedicare ‘‘prepaid’’ exception insection 1877(b)(3)(C) and the Medicaidanalogue we are proposing in this rulewould not apply.

We believe that the referralprohibition applies to services furnishedunder a demonstration project or waiverthat does not qualify under section1877(b)(3)(C) or the Medicaid prepaiddemonstration exception proposed inthis rule; however, the Secretary canexercise authority to waive or otherwisealter the requirements in sections 1877or 1903(s). For example, section 402(a)of the Social Security Amendments of1967 permits the Secretary to conductdemonstrations for a variety of purposesspecified in section 402(a)(1)(A) through(K) (for example, to test whetherchanges in methods of reimbursementand payment for services, or coveringadditional services, would have theeffect of increasing efficiency andeconomy without adversely affectingquality). Section 402(b) of theseamendments permits the Secretary towaive compliance with therequirements of the Medicare statute forsuch research, insofar as theserequirements are related toreimbursement or payment. We havedetermined that the requirements insection 1877 constitute requirementsrelated to reimbursement and paymentand thus may be waived for the kind ofdemonstration project described above,when there are no prepaid payments.

In the Medicaid context, where ademonstration project does not fallwithin the general exception proposedin this rule, the Secretary has theauthority under section 1115(a)(2) toconsider as expenditures under theState plan costs of the demonstrationproject that would not otherwise beincluded as expenditures under section1903, to the extent and for the periodprescribed by the Secretary. Hence,section 1115 could allow the Secretaryto provide to a State the FFP that wouldotherwise be precluded under section1903(s).


1. Exception for Ownership in PubliclyTraded Securities

To qualify for the securities exceptionunder section 1877(c)(1), the statuteoriginally required that a physician’s orfamily member’s investment had to bein securities ‘‘which were purchased onterms generally available to the public* * *.’’ (Emphasis added.) OBRA ’93amended this provision to require thatthe securities be those ‘‘which may bepurchased on terms generally availableto the public.’’ (Emphasis added.) Thisamendment went into effectretroactively to January 1, 1992, and isreflected in the August 1995 final rule.We did not, however, interpret thischange in the final rule.

We believe the purpose of thisexception is to allow physicians orfamily members to acquire stock in largecompanies if the transaction does notparticularly favor the physicians overother purchasers. In keeping with thispurpose, we propose to interpret ‘‘maybe purchased’’ to mean that, at the timethe physician or family memberobtained the securities, they could bepurchased on the open market, even ifthe physician or family member did notactually purchase the securities on thoseterms. For example, the physician orfamily member may have inherited thesecurities or otherwise acquired themwithout actually purchasing them. Wehave reflected this interpretation in§ 411.356(a).

Section 1877(c)(1) also requires thatthe securities be in a corporation thathad, at the end of the corporation’s mostrecent fiscal year, or on average duringthe previous 3 fiscal years, stockholderequity exceeding $75,000,000. Inproposed 411.356(a)(2), we definestockholder equity as the difference invalue between a corporation’s totalassets and total liabilities.

2. Exception for Hospital OwnershipSection 1877(d)(3) excepts designated

health services ‘‘provided by a hospital’’(other than a hospital located in PuertoRico) if the referring physician isauthorized to perform services at thehospital, and the ownership orinvestment interest is in the hospitalitself (and not merely in a subdivisionof the hospital). We believe that thisexception applies only to designatedhealth services that are furnished by ahospital, and not to services furnishedby any other health care providers thehospital owns, such as a hospital-ownedhome health agency or SNF. It is ourview that services ‘‘provided by ahospital’’ corresponds only to those


services provided by an entity thatqualifies as a ‘‘hospital’’ under theMedicare conditions of participation.We further believe that section1877(d)(3) covers any ‘‘designatedhealth services’’ provided by a hospital,rather than just ‘‘inpatient or outpatienthospital services,’’ because hospitalscan provide services to individuals whoare neither inpatients nor outpatients(for example, they provide laboratoryservices to outside patients).


1. A new exception for all compensationarrangements that meet certainstandards

Section 1877 of the Act contains anumber of exceptions to the referralprohibition that apply only tocompensation arrangements. Section1877(e) contains eight exceptions to thereferral prohibition based specificallyon various kinds of compensationarrangements, and these are reflected in§ 411.357 of the August 1995 final rule.If a physician’s (or family member’s)arrangement with an entity falls withinone of the categories covered by theseexceptions, and the arrangement meetsthe specific criteria listed for thatcategory, the physician is not prohibitedfrom making referrals to the entity.

It has come to our attention that thestatutory categories, because of theirspecificity, do not encompass somecompensation arrangements eventhough they may be common in theprovider community, are based on fairmarket value or are otherwisecommercially reasonable, and do notreflect the volume or value of aphysician’s referrals. For example, aphysician can continue to make referralsto an entity under section 1877(e)(8)(B)even if the physician purchases itemsfrom the entity, provided the items arefurnished at fair market value. On theother hand, the law does not exemptfrom the referral prohibition situationsin which entities purchase items from aphysician, even if the purchase price iscomparably fair.

In light of the increase in recent yearsof integrated delivery systems, and thecomplex nature of financialarrangements between physicians andentities, it is our view that anycompensation arrangements that arebased on fair value, and that meetcertain other criteria, should beexcepted. Therefore, we are proposingto establish a new paragraph (l) in§ 431.357 to provide an additionalexception for compensationarrangements under the authority ofsection 1877(b)(4). This provision

allows the Secretary to establishexceptions for any other financialrelationship that she determines, andspecifies in regulations, does not pose arisk of program or patient abuse. Tomeet this requirement, we are proposingan exception for any compensationarrangement between a physician (orimmediate family member), or anygroup of physicians (even if the groupdoes not qualify as a group practice) andan entity, provided the arrangementmeets the following criteria, which webelieve by their terms will preventprogram or patient abuse. Thearrangement must—

• Be in writing, be signed by theparties, and cover only identifiableitems or services, all of which arespecified in the agreement;

• Cover all of the items and servicesto be provided by the physician orimmediate family member to the entityor, alternatively, cross refer to any otheragreements for items or servicesbetween any of these parties.

• Specify the timeframe for thearrangement, which can be for anyperiod of time and contain a terminationclause, provided the parties enter intoonly one arrangement covering the sameitems or services during the course of ayear. An arrangement made for less than1 year may be renewed any number oftimes if the terms of the arrangementand the compensation for the sameitems or services do not change;

• Specify the compensation that willbe provided under the arrangement,which has been set in advance. Thecompensation must be consistent withfair market value and not be determinedin a manner that takes into account thevolume or value of any referrals (asdefined in § 411.351), payments forreferrals for medical services that arenot covered under Medicare orMedicaid, or other business generatedbetween the parties;

• Involve a transaction that iscommercially reasonable and furthersthe legitimate business purposes of theparties; and

• Meet a safe harbor under the anti-kickback statute or otherwise be incompliance with the anti-kickbackprovisions in section 1128B(b) of theAct.

We would advise the parties involvedin a compensation arrangement to usethis exception if they have any doubtsabout whether they meet therequirements in the other exceptionslisted in § 411.357.

2. A new exception for certain forms of‘‘de minimis’’ compensation

We are aware that there are a numberof situations in which physicians or

their immediate family members receivecompensation in the form of incidentalbenefits that are not part of a formal,written agreement. For example, aphysician might receive free samples ofcertain drugs or chemicals from alaboratory, training sessions for his orher staff before entering into anagreement with a facility that furnishesa designated health service, or trainingsessions that are not considered part ofthe agreement. Also, a provider mightfurnish a physician with free coffeemugs or note pads. We are exercisingour authority under section 1877(b)(4)to create a new exception that webelieve will allow physicians or theirfamily members to receive de minimisamounts of compensation, without arisk that the compensation will result inany Medicare program or patient abuse.

We have drafted the exception, whichwould appear at § 411.357(k), to applyto noncash items or services. Itemscannot include cash equivalents, suchas gift certificates, stocks or bonds, orairline frequent flier miles. We proposeto limit the exception to a value of $50per gift, with a $300 per year aggregate.This exception would apply only insituations in which the entity providingthe compensation makes it available toall similarly situated individuals,regardless of whether these individualsrefer patients to the entity for services.In addition, any compensation aphysician or family member receivesfrom an entity cannot be based in anyway on the volume or value of thephysician’s referrals. We believe thecriteria for this exception, by theirterms, will prevent patient or programabuse.

3. The ‘‘volume or value of referrals’’standard

Most of the exceptions in the lawcovering specific kinds of compensationarrangements state that thecompensation involved cannot reflectthe volume or value of any referrals.(We have included a similar standard inthe two new compensation exceptionsdescribed above.) We are applying ourinterpretation of that standard as itappears in section III.A.6 under ourdiscussion of the criteria a group ofphysicians must meet to qualify as a‘‘group practice.’’ In that section, wedescribe what constitutes a ‘‘referral’’for purposes of the ‘‘volume or value’’standard.

The volume or value of referralsstandard appears in the exceptions forthe rental of space or equipment, bonafide employment relationships, personalservices arrangements, physicianrecruitment, isolated transactions, andgroup practice arrangements with a


hospital. It also appears in the definitionof ‘‘remuneration,’’ which exceptscertain payments made by an insurer orself-insured plan to a physician tosatisfy a claim, and in the definition ofa group practice. The exceptions for therental of office space, rental ofequipment, personal servicearrangements, and group practicearrangements with a hospital also statethat the compensation cannot reflect,directly or indirectly, the volume orvalue of referrals or any other businessgenerated between the parties.

It is our view that Congress intendedto except arrangements in which aphysician or family member receivesfair market compensation for providinga particular item or service. We believeCongress may not have wished to exceptarrangements that include additionalcompensation for other businessdealings. We also believe that it wouldbe administratively difficult for us tosort out, from a particular businessarrangement, different strands ofpayment that are meant to compensatean individual for things other than theitems or services that qualify for theexception. In sum, we believe that the‘‘or other business generated betweenthe parties’’ merely clarifies thisconcept.

As a result of this analysis, we areproposing to interpret the ‘‘volume orvalue’’ standard that appears in thecompensation exceptions and elsewhereas a standard that uniformly is meant tocover (and thus exclude from anexception) other business generatedbetween the parties. We are doing sounder our authority, in each of thecompensation exceptions and under thedefinitions, to add other requirementsthat we may impose by regulation asneeded to protect against patient andprogram abuse. If a party’scompensation contains payment forother business generated between theparties, we would expect the parties toseparately determine if this extrapayment falls within one of theexceptions.

The volume or value standard alsovaries from exception to exception interms of simply precludingcompensation that takes into accountthe volume or value of referrals, asopposed to not taking into account,directly or indirectly, the volume orvalue of referrals. We regard theseprovisions as essentially equivalent,since we believe not accounting forreferrals can be interpreted as notaccounting for them in any way.

We have been asked whether anarrangement fails to meet the ‘‘volumeor value’’ of referrals standard only insituations in which a physician’s

payments from an entity fluctuate in amanner that reflects referrals. It is ourview that an arrangement can also failto meet this standard in some caseswhen a physician’s payments from anentity are stable, but predicated, eitherexpressly or otherwise, on the physicianmaking referrals to a particular provider.For example, a hospital might includeas a condition of a physician’semployment the requirement that thephysician refer only within thehospital’s own network of ancillaryservice providers, such as to thehospital’s own home health agency. Webelieve that in these situations, aphysician’s compensation reflects thevolume or value of his or her referralsin the sense that the physician willreceive no future compensation if he orshe fails to refer as required.

However, we do not intend toinclude, in this interpretation, situationsin which physicians are not required torefer within the entity’s network, butchoose to on their own. Nor do webelieve the volume or value standard isviolated in those situations in whichphysicians refer patients within anetwork at the patients’ own request,rather than under an entity’s mandate,even if the entity has encouragedpatients to remain within the networkthrough various incentives.

In addition, we do not believe that anarrangement affects the volume or valuestandard for any designated healthservices a physician is required to referwithin a network, provided the entityitself is, through a risk sharingarrangement, at substantial financialrisk for the cost or utilization of itemsor services that the entity is obligated toprovide. In these situations, we believethe requirement that a physician referwithin the network addresses the issueof where a physician must refer, ratherthan whether the physician isencouraged or discouraged from makinga referral (resulting in under oroverutilization).

4. The commercial reasonablenessstandard

A number of the compensation-related exceptions in section 1877(e)include the requirement thatremuneration provided under anagreement ‘‘would be commerciallyreasonable’’ even if no referrals weremade between the parties. We areinterpreting ‘‘commercially reasonable’’to mean that an arrangement appears tobe a sensible, prudent businessagreement, from the perspective of theparticular parties involved, even in theabsence of any potential referrals.

5. The Secretary’s authority to createadditional requirements

Several of the statutory exceptions(particularly the compensation-relatedexceptions) permit the Secretary toimpose additional conditions if theconditions are needed to protect againstprogram or patient abuse. Inpromulgating these regulations, theSecretary has taken into account the factthat many of the excepted arrangementsare also subject to the Medicare andMedicaid anti-kickback statute. TheSecretary believes that the proposedregulatory exceptions, in conjunctionwith the independent requirements ofthe anti-kickback statute, are such thatin most cases no additional conditionsare necessary at this time to protectagainst program or patient abuse (wehave included in this proposedregulation several specific newrequirements that we believe arenecessary). However, with respect tothose exceptions for which the Secretaryhas authority to impose additionalrequirements, the Secretary invitescomments from interested parties onwhether additional conditions arenecessary and if so, what conditionswould be appropriate.

6. Exception for bona fide employmentrelationships

Section 1877(e)(2) excepts from a‘‘compensation arrangement’’ anyamount paid by an employer to aphysician (or immediate familymember) who has a bona fideemployment relationship for theprovision of services if the employmentarrangement meets certain standards(these appear in § 411.357(c)). Onestandard specifies that remunerationunder the employment cannot bedetermined in a manner that takes intoaccount (directly or indirectly) thevolume or value of referrals by thereferring physician. Nonetheless, thisexception specifically allowsremuneration in the form of aproductivity bonus based on servicesperformed personally by the physicianor an immediate family member. Thus,under the terms of the statute, physicianor family member employees canreceive payments based on any workthey actually personally perform,including designated health servicesthat a physician refers to him or herself.Under such a scheme, the more aphysician self-refers, the more profit heor she will make.

Because we regard this provision asan open-ended invitation for physiciansto generate self-referrals for designatedhealth services, we are proposing toequalize this provision with the one


allowing productivity bonuses underthe definition of a group practice insection 1877(h)(4)(B)(i). This provisionallows group practices to pay membersa productivity bonus only if the bonusis not directly related to the volume orvalue of a physician’s own referrals. Weare equalizing the provisions in thisregard under the authority in section1877(e)(2)(D), which allows theSecretary to impose by regulation otherrequirements as are needed to protectagainst patient or program abuse.Without this change, we believe thatphysicians have an incentive tooverutilize designated health services,since they can be compensated directlyfor every self referral they make.

We would like to point out thatbecause we have interpreted the conceptof a ‘‘referral’’ to involve only aphysician’s requests for designatedhealth services covered under Medicareor Medicaid, the new requirement willin no way affect a physician’s ability toreceive a productivity bonus for anynondesignated health services ornoncovered services he or she refers orperforms, or designated health servicesreferred by another physician.

The bona fide employment exceptiondoes not, by its terms, allow for indirectcompensation based on profit sharingand productivity bonuses for aphysician’s ‘‘incident to’’ services. Thegroup practice definition does allow forsuch compensation. We do not believethat we can equalize the provisions inthis regard, since it is our view thatthere are situations in whichcompensating a physician evenindirectly for his or her self referralscould encourage overutilization andabuse.


Section 1877(e)(3) excepts from thereferral prohibition situations involvingremuneration from an entity under apersonal services arrangement if certaincriteria are met. The statute does notspecify to whom the remuneration mustbe paid or for what kinds of services,although we believe the services mustbe ‘‘personal services.’’

One of the criteria for this exceptionrequires that the arrangement cover allof the services to be furnished to theentity by the referring physician or animmediate family member of thephysician. Therefore, we areinterpreting this exception as coveringservices furnished by these individuals.We believe there is nothing in thestatute to preclude a physician or familymember from having personal servicesarrangements with several entities. (Forexample, a physician might have a

contract to serve as a hospital’s medicaldirector and another contract with anunrelated group practice to performsurgery.) However, the statute doesappear to require, in section1877(e)(3)(A)(ii), that an exceptedarrangement with one entity cover all ofthe services to be provided by thephysician (or family member) to thatentity.

We are aware that at times it will notbe logical for all of a physician’s orfamily member’s contracts for personalservices to be in one agreement.However, we are also aware that entitieshave used multiple contracts, at times,in devising schemes to rewardphysicians for their referrals. In order toprovide physicians and entities withmore flexibility than the statutoryrequirement that all services appear inone agreement, we propose to allowmultiple agreements, provided that theagreements each meet all of therequirements described in section1877(e)(3) and all separate agreementsbetween the entity and the physicianand the entity and any family membersincorporate each other by reference. Webase our proposal on section 1877(b)(4),which allows the Secretary to specify, inregulations, an exception for any otherfinancial relationship that shedetermines does not pose a risk ofpatient or program abuse. In this case,because all excepted agreements will besubject to the fair market value andother standards, and because eachagreement will make us aware of allother agreements, we see no potentialrisk for abuse.

It is our view that ‘‘personal services’’are not simply the generic Medicareservices (which are defined in § 400.202to include ‘‘items’’) but are services ofany kind performed personally by anindividual for an entity (but notincluding any items or equipment). Weare using the broader, more commonnotion of what constitutes a ‘‘service’’based on the fact that all kinds ofbusiness relationships can trigger thereferral prohibition; hence, theexception should be read to apply tobusiness-oriented services in general.

We are also interpreting the exceptionto mean that the physician or familymember can actually perform theservices, or that these individuals canenter into an agreement to provide theservices through technicians or otherswhom they employ. A physician orfamily member cannot, though, includeequipment or other items as part of anexcepted personal services arrangement.For example, if a hospital contracts witha nephrologist to provide dialysisservices to its patients, the physiciancould have a personal services

arrangement with the hospital even ifthe dialysis services are actuallyfurnished by technicians whom thephysician employs. However, if thephysician also provides dialysisequipment to the hospital, thisarrangement would have to separatelymeet the exception for the rental ofequipment in section 1877(e)(1), sincewe do not regard items or equipment as‘‘personal services.’’

The personal services exceptionspecifies that compensation under anarrangement cannot be determined in amanner that takes into account thevolume or value of any referrals or otherbusiness generated between the parties.However, this requirement is qualifiedto allow compensation to reflect theseunder certain situations in which thereis a physician incentive plan between aphysician and an entity. We would liketo emphasize that the physicianincentive plan aspect of section1877(e)(3) applies only in the context ofpersonal services arrangements, and notto any other compensationarrangements.

‘‘Physician incentive plans’’ aredefined in section 1877(e)(3)(B)(ii) ascertain compensation arrangementsbetween an entity and a physician orphysician group. We have defined aphysician group for purposes of thephysician incentive rules more broadlythan a group practice under section1877, so that a group practice is a subsetof physician groups. (A final rule withcomment period governing physicianincentive plans was published on March27, 1996, at 61 FR 13430. This rule wasamended on December 31, 1996, at 61FR 69034.)

A physician incentive plan is anycompensation arrangement between anentity and a physician or physiciangroup that may directly or indirectlyhave the effect of reducing or limitingservices provided with respect toindividuals enrolled with the entity. Webelieve that the incentive planqualification applies only when theentity paying the physician or physiciangroup is the kind of entity that enrollsits patients, such as a healthmaintenance organization. Section1877(b)(3), the exception for prepaidplans, does exempt from the referralprohibition almost all designated healthservices provided by these entities toMedicare patients who are enrollees. Inaddition, this regulation proposes toexempt services provided to Medicaidpatients by analogous kinds of entities(see our discussion of this issue earlierin this preamble). Nonetheless, thepersonal services exception, with itsphysician incentive aspect, is still aviable exception. This exception could


apply, for example, to situations inwhich a physician refers a fee forservice patient covered under Medicareto an HMO when he or she also has acontract to provide services to theHMO’s enrollees. The physician’scontract with the HMO is an underlyingfinancial relationship and, in order forthe physician to refer fee-for-servicepatients to the HMO, the financialrelationship must meet an exception. Inorder to qualify for the personal servicesexception, the physician’s paymentsfrom the HMO for treating HMOenrollees cannot vary with the volumeor value of his or her referrals, exceptunder a physician incentive plan, asdescribed in section 1877(e)(3)(B).

The personal services exception insection 1877(e)(3) as a whole is silentabout to whom an entity must be payingremuneration or with whom it musthave an arrangement. As a result, we areinterpreting the personal servicesexception to apply to situations inwhich an entity has an arrangementwith either an individual physician (orfamily member) or a group practice toprovide personal services. For example,a hospital could use the exception if itcontracts with a group practice forpurposes of having group membersserve as the hospital’s staff.

8. Exception for remuneration unrelatedto the provision of designated healthservices

Section 1877(e)(4) provides for anexception for remuneration that isprovided by a hospital to a physician ifthe remuneration does not relate to theprovision of designated health services.(As we have noted earlier in thispreamble, this exception does not applyto remuneration from entities other thanhospitals, nor does it apply to paymentsto a physician’s family members.) Weare interpreting this provision to exceptany remuneration that is completelyunrelated to the furnishing ofdesignated health services. By this wemean that the parties must be able todemonstrate that the remuneration doesnot in any direct or indirect way involvethese services, and that theremuneration in no way reflects thevolume or value of a physician’sreferrals for designated health services.If a physician is receiving paymentsfrom a hospital that appear to beinordinately high for an ‘‘unrelated’’item or service and is also makingreferrals to the hospital for designatedhealth services, we will presume thatthe overpayments relate to thedesignated health services because theyreflect the volume or value of thephysician’s referrals.

On the other hand, we realize therecan be situations in which a hospital’spayments are completely unrelated tothe provision of designated healthservices. For example, a teachinghospital might pay a physician rentalpayments for his or her house in orderto use the house as a residence for avisiting faculty member. If the partiesinvolved can demonstrate that the rentalpayments are based on fair market valueand in no way reflect the physicianowner’s referrals to the hospital, webelieve this exception would apply.Similarly a physician might receivecompensation for teaching or forproviding an entity with generalutilization review or administrativeservices.

We do not intend to apply thisexception in any situation involvingremuneration that might have a nexuswith the provision of, or referrals for, adesignated health service. For example,if a hospital pays a physician to supplya heart valve that the physician hasperfected, we believe that the exceptiondoes not apply. It is our position thatthe physician is receiving payment foran item that will likely be used by thehospital in furnishing inpatient hospitalservices, which are a designated healthservice. Similarly, if a hospital pays fora physician’s malpractice insurance orother general costs to enable thephysician to provide a designated healthservice, such as radiology, the paymentsare related to furnishing a designatedhealth service. Nonetheless, thesefinancial relationships could still beexcepted under one of the statutoryexceptions or under the new exceptionwe would include in § 431.357(l), whichcovers any compensation arrangementthat meets certain criteria.

9. Exception for a hospital’s paymentsfor physician recruitment

Section 1877(e)(5) includes anexception for remuneration provided bya hospital to an individual physician toinduce the physician to relocate to thegeographic area served by the hospitalin order to be a member of the medicalstaff of the hospital. We believe that theterms of the statute dictate that thisexception applies just to thosesituations in which a physician residesoutside the geographic area and mustactually relocate in order to join thehospital’s staff.

We considered a number of ways todefine the concept of a hospital’s‘‘geographic area,’’ including mileagerequirements or the likelihood that thephysician would be able to bringpatients along when he or she relocates.Because we believe that whatconstitutes a hospital’s ‘‘geographic

area’’ may depend on a variety ofcircumstances, we are specificallysoliciting comments on how to definethis term.

If a hospital makes recruitmentpayments to physicians who are livingin the hospital’s geographic area (forexample, to retain residents) or to agroup practice that intends to employthe physician and contracts with thehospital, these payments might beexcepted under the new compensation-related exception that we have includedin § 431.357(l).

10. Exception for certain group practicearrangements with a hospital

Under section 1877(e)(7), thisexception applies to only a limitednumber of arrangements; that is,arrangements that began beforeDecember 19, 1989, and have continuedin effect without interruption since thatdate. We are interpreting this provisionto mean that the arrangement betweenthe hospital and the specific grouppractice must have been in effect withinthe timeframe specified in the statute.However, we realize that mostagreements do not remain static overtime. As a result, it is our view that thiscriterion may still be met, even if theagreement between the parties haschanged over time so that it coversdifferent services or so that the servicesare provided by different individualswithin the same group practice.

We also intend in this provision tomake an editorial change that webelieve removes an ambiguity in thestatutory language. Existing§ 411.357(h)(2) states ‘‘[t]he arrangementbegan before December 19, 1989, andhas continued in effect withoutinterruption since then.’’ Upon closerconsideration, we believe that ‘‘sincethen’’ is ambiguous. (Does it mean sincethe actual date before December 19,1989 on which the arrangement began,or does it mean since December 19,1989?) We believe that by revising thisprovision to read ‘‘[t]he arrangementbegan before, and has continued ineffect without interruption since,December 19, 1989,’’ we have provideda reasonable interpretation that removesthis ambiguity.

Section 1877(e)(7)(A)(ii) requires that,with respect to the designated healthservices covered under the arrangement,substantially all of the servicesfurnished to patients of the hospital arefurnished by the group under thearrangement. We believe this standardmeans that whatever portion of aparticular designated health service theagreement covers, the group mustactually provide ‘‘substantially all’’ ofthat portion. For example, if the group


has agreed to provide 35 percent of ahospital’s laboratory services, the groupmust actually provide a substantial partof this percentage.

In keeping with our interpretation ofthe term ‘‘substantially all’’ in otherparts of section 1877, we areinterpreting that term here as being 75percent of all the services at issue.

11. Exception for payments by aphysician for items and services

Section 1877(e)(8) excepts paymentsthat a physician makes to a laboratoryin exchange for clinical laboratoryservices (we have discussed thisprovision in some detail in sectionIII.A.8 of this preamble). In addition, thestatute excepts payments that aphysician makes to any entity for otheritems or services if these are furnishedat fair market value. We are proposingto interpret ‘‘other items or services’’ tomean any kinds of items or services thata physician might purchase, but notincluding clinical laboratory services orthose specifically listed under the othercompensation exceptions. For example,we do not believe that Congress meantfor the ‘‘items or services’’ exception tocover a rental agreement as a servicethat a physician might purchase, whenit has already included in the statute aspecific rental exception, with specificstandards, in section 1877(e)(1).

F. The Reporting Requirements

1. Which financial relationships must bereported

Under section 1877(f), each entityproviding Medicare-covered servicesmust provide the Secretary withinformation concerning the entity’sownership, investment, andcompensation arrangements, includingthe names and UPINs (unique physicianidentification numbers) of all physicianswith an ownership or investmentinterest (as described in section1877(a)(2)(A)) in the entity or with acompensation arrangement (asdescribed in section 1877(a)(2)(B)) withthe entity, or whose immediate relativeshave such a relationship. Theinformation must be provided in suchform, manner, and at such times as theSecretary specifies.

Section 411.361 currently states thatentities must submit the requiredinformation on a HCFA-prescribed formwithin the time period specified by theservicing carrier or intermediary.Entities are given at least 30 days fromthe date of the request to provide theinformation. Thereafter, entities mustprovide updated information within 60days from the date of any change in thesubmitted information.

At this time, we are still developinga procedure for implementing thereporting requirements and plan tonotify affected parties about theprocedure at a later date. Until thattime, physicians and entities are notrequired to report to us. In addition, weare aware that the 60 day timeframe forupdated information could be onerous,especially for large entities that mustcollect information about theiremployees, owners, and contractors andwho would then have to update thatinformation approximately every twomonths. As a result, we are proposing tomodify § 411.361 to require that entitiesreport to us once a year on all of thechanges that have occurred in theprevious 12 months.

Under the reporting regulation in§ 411.361(d), a ‘‘reportable financialrelationship’’ is any ownership orinvestment interest or anycompensation arrangement, as describedin section 1877 of the Act. Undersection 1877(a)(2), a financialrelationship of a physician (or familymember) with an entity is defined as anownership or investment interest in theentity, except as provided in subsections(c) and (d), or a compensationarrangement between the physician (orfamily member) and the entity, exceptas provided in subsection (e).Subsections (c) and (d) contain lists ofownership interests that ‘‘shall not beconsidered to be an ownership orinvestment interest described insubsection (a)(2)(A).’’ Subsection (e)contains a list of arrangements that arenot to be considered as ‘‘compensationarrangements described in (a)(2)(B).’’Thus, entities must only report theirownership or investment interests, orcompensation arrangements, if theserelationships do not meet the exceptionsin subsections (c), (d), or (e) of section1877. However, if an entity’s financialrelationship is excepted undersubsection (b) of section 1877 (whichcontains exceptions for physicianservices, in-office ancillary services,services furnished under certain prepaidplans, or other new exceptions includedby the Secretary) the entity must stillreport.

As the rule reads now, an entity candecide that it is excepted under (c), (d),or (e) and not report any data. As aresult, we will have no opportunity toscrutinize the entity’s arrangements tosee if its assessment is correct. Webelieve that the statute allows us togather a broader scope of data. We basethis interpretation on the openingparagraph in section 1877(f), whichstates that each entity providing anycovered items or services for whichpayment may be made under Medicare

shall provide the Secretary ‘‘with theinformation’’ concerning the entity’sownership, investment, andcompensation arrangements, includingthe names and UPINs of all physicianswith an ownership interest (as describedin (a)(2)(A)), or with a compensationarrangement (as described in (a)(2)(B)).Thus, we believe the statute allows usto gather any data on financialrelationships, including, but notnecessarily limited to, relationships forwhich there are no exceptions under(a)(2)(A) or (B). Therefore, we areproposing to amend the rule, at§ 411.361(d), to reflect our authority toask for a broader scope of informationthan the regulation currently allows.

A number of entities have pointed outto us that the amounts of data they arerequired to report under the statute will,in some circumstances, beoverwhelming and perhaps almostimpossible to acquire. In addition, if werequire every entity that is subject to thereferral rules to report on every financialrelationship, excepted or not, theadministrative burden could beenormous. For example, a largepublicly-held enterprise would berequired to report (and hence retainrecords documenting) all of its ownerswho are physicians, all owners who arerelatives of physicians, all physicianswith whom it has compensationarrangements of any kind, and allrelatives of physicians with whom it hascompensation arrangements.

A publicly traded corporation withthousands of stockholders may find itextremely difficult to identify all of itsowners and their relatives, and toidentify which of these owners andrelatives are physicians. In addition,such a corporation could be owned bymutual funds which in turn havehundreds of thousands of additionalowners, some of whom may bephysicians or have relatives who arephysicians. In order to make thereporting requirements moremanageable, we intend to develop astreamlined ‘‘reporting’’ system thatdoes not require entities to retain andsubmit large quantities of data.However, we believe that entitiesshould retain enough records todemonstrate, in the event of an audit,that they have correctly determined thatparticular relationships are exceptedunder the law.

We are proposing to limit theinformation that an entity must acquire,retain and, at some later point, possiblysubmit to us. We would include onlythose records covering information thatthe entity knows or should know about,in the course of prudently conductingbusiness, including records that the


entity is already required to retain tomeet Internal Revenue Service andSecurities and Exchange Commissionrules, and other rules under theMedicare or Medicaid programs. We arecircumscribing these records under theSecretary’s discretion in section 1877(f)to ask entities to provide information insuch form, manner, and at such times asthe Secretary specifies. When wedevelop a form for reporting informationto us, we plan to first publish it as aproposed notice in order to receivepublic comment. If we later find thatthis plan is inadequate and elect tochange the scope of the requirement, wewill provide entities with adequatenotice to comply. We specifically solicitcomments on this proposal.

2. What entities outside the UnitedStates must report

Section 1877(f) states that thereporting requirements do not apply todesignated health services furnishedoutside the United States. The reportingrequirements in general apply to eachentity furnishing services covered underMedicare, and not just to thosefurnishing designated health services.Arguably, then, the statute relieves anentity from the reporting requirementsinvolved when it furnishes designatedhealth services, but not when itfurnishes other covered services.Because we believe that referrals fordesignated health services are the focusof section 1877, and because Medicarecovers only a limited number of serviceswhen they are furnished outside of theUnited States, we are interpretingsection 1877(f) to relieve an entity fromreporting any Medicare services it hasfurnished outside of the United States.

G. How the Referral Prohibition Appliesto the Medicaid Program

1. Who qualifies as a ‘‘physician’’ forpurposes of section 1903(s)

Under the Medicare definition of‘‘physician’’ in section 1861(r),paragraphs (r)(1) through (r)(5) cover adoctor of medicine or osteopathy, adoctor of dental surgery or of dentalmedicine, a doctor of podiatricmedicine, a doctor of optometry, and achiropractor. Under the Medicaidstatute in section 1905(a)(5)(A),physician services are those furnishedby a physician as defined in section1861(r)(1), which covers only a doctor ofmedicine or osteopathy.

In determining whether an individualis a ‘‘physician’’ for purposes of section1903(s), we believe that it is theMedicare definition that would apply.That is because this provision prohibitsthe Secretary from paying FFP to a State

for services that result from a referral fora designated health service that wouldbe prohibited under Medicare ifMedicare covered the service in thesame way (to the same extent and underthe same terms and conditions) as underthe State plan. A referral by any of the‘‘physicians’’ listed in section 1861(r)could result in a prohibited referralunder Medicare.

We believe that a physician is still aphysician for purposes of section1903(s), even if he or she does notparticipate in the Medicaid program.For example, a provider of designatedhealth services may participate in andbill Medicaid when the referringphysician, who has an interest in theentity, does not participate. The rules insection 1877 apply to services furnishedunder Medicaid in the same manner asthey would apply if furnished underMedicare. As a general rule undersection 1877(a)(1), if a physician (orimmediate family member) has afinancial relationship with an entity,then the physician may not make areferral to the entity to furnishdesignated health services for whichpayment may otherwise be made underMedicare. This provision appears toapply to all physicians, regardless ofwhether they participate in either theMedicare or Medicaid programs, as longas the services involved are coveredservices under Medicare or Medicaid.

2. How the referral prohibition andsanctions affect Medicaid providers

Absent an exception, section1877(a)(1) in general prohibits aphysician from making a referral to anentity with which he or she has afinancial relationship for the furnishingof a designated health service coveredunder Medicare. The entity, in turn,may not present a claim to Medicare orbill any other individual or entity forthe service furnished as the result of aprohibited referral. If physicians orentities violate these rules, they aresubject to certain sanctions undersection 1877(g). However, we do notbelieve these rules and sanctions applyto physicians and providers when thereferral involves Medicaid services. Thefirst part of section 1903(s) prohibits theSecretary from paying FFP to a State fordesignated health services furnished onthe basis of a referral that would resultin a denial of payment under Medicareif Medicare covered the services in thesame way as the State plan. This part ofthe provision is strictly an FFPprovision. It imposes a requirement onthe Secretary to review a Medicaidclaim, as if it were under Medicare, anddeny FFP if a referral would result inthe denial of payment under Medicare.

Section 1903(s) does not, for the mostpart, make the provisions in section1877 that govern the actions of Medicarephysicians and providers of designatedhealth services apply directly toMedicaid physicians and providers. Assuch, these individuals and entities arenot precluded from referring Medicaidpatients or from billing for designatedhealth services. A State may pay forthese services, but cannot receive FFPfor them. However, States are free toestablish their own sanctions forsituations in which physicians refer torelated entities.

3. How the referral rules apply whenMedicaid-covered designated healthservices differ from the services coveredunder Medicare

The statute specifically provides thata State cannot receive FFP for adesignated health service if it isfurnished to an individual on the basisof a referral that would result in a denialof payment for the service underMedicare if Medicare covered theservices to the same extent and underthe same terms and conditions as underthe State plan. We believe this meansthat Congress was aware of differencesin the two programs and specificallyintended to cover under section 1877designated health services as they arecovered under a State’s Medicaid planwhenever this coverage differs fromcoverage under Medicare.

4. How the reporting requirementsapply under the Medicaid program

Section 1903(s) states that subsections(f) and (g)(5) of section 1877 shall applyto a provider of Medicaid-covereddesignated health services in the samemanner as these subsections apply to aprovider of Medicare-covereddesignated health services. Section1877(f) requires that each entityproviding Medicare-covered items orservices must provide the Secretarywith certain information about theentity’s ownership, investment, andcompensation arrangements. Theinformation must include the covereditems and services the entity provides,and the names and UPINs of allphysicians who have (or whoseimmediate relatives have) an ownershipor investment interest in orcompensation arrangement with theentity. These requirements do not applyto designated health services furnishedoutside of the United States, or toentities the Secretary determines furnishMedicare-covered services infrequently.

Section 1903(s) could be read to meanthat section 1877(f) must applyidentically to Medicare and Medicaidproviders, so that Medicaid entities


must furnish information to theSecretary (that is, to HCFA). However,we are taking the position that theprovision allows us to require thatentities report directly to the States.Section 1903(s) provides that section1877(f) applies ‘‘in the same manner’’ inthe Medicaid program as it does inMedicare. In Medicare, the reports aremade to the Secretary, the official whois responsible for making paymentunder Medicare. ‘‘In the same manner,’’in the context of the Medicaid program,would mean that the reports would bemade to the entity that makes payment;that is, the State, thus maintaining asymmetry between reporting in the twoprograms.

We have taken this position because,under section 1903(s), it is the Statesthat are at risk of losing FFP for payingimproper claims for designated healthservices submitted by entities that havefinancial relationships with physicians.Therefore, in order to ensure that FFPwill be available, States must determinewhether a physician has a financialrelationship with an entity that wouldprohibit referrals under Medicare. Ourinterpretation will allow States toprotect themselves and to avoid anyduplication of effort with HCFA.

We are amending the regulations tocreate a new Subpart C, ‘‘Disclosure ofInformation by Providers for Purposes ofthe Prohibition on Certain PhysicianReferrals.’’ In § 455.108, ‘‘Basis,’’ westate that, based on section 1903(s), weare applying the reporting requirementsof section 1877(f) and (g) to Medicaidproviders of designated health services.Section 455.109(a) would state that theMedicaid agency must require that eachentity that furnishes designated healthservices submit information to theMedicaid agency concerning itsfinancial relationships, in such form,manner, and at such times as the agencyspecifies. Although the statute requiresthat entities submit information to theSecretary, we believe that the Stateshould receive this information in theMedicaid context, in order to helpStates ensure that they will receive FFP.

Section 455.109(b) would specify thatthe requirements of § 455.109(a) do notapply to entities that provide 20 orfewer designated health services underthe State plan during a calendar year, orto any entity for items or servicesprovided outside the United States. Wehave derived the limit of 20 or fewerdesignated health services from theMedicare regulation interpreting section1877(f) (§ 411.361).

Section 455.109(c) would specify thatthe information submitted to theMedicaid agency under § 455.109(a)must include at least the following:

• The name and Medicaid StateSpecific Identifier (MSSI) of eachphysician who has a financialrelationship with the entity thatprovides services.

• The name and MSSI of eachphysician who has an immediaterelative (as defined in § 411.351) whohas a financial relationship with theentity.

• The covered items and servicesfurnished by the entity.

• With respect to each physicianidentified above, the nature of thefinancial relationship (including theextent and/or value of the ownership orinvestment interest or the compensationarrangement), if requested by theMedicaid agency.

Section 455.109(d) would define areportable financial relationship as anownership or investment interest or anycompensation arrangement, as definedin § 411.351, including relationshipsthat qualify for an exception describedin §§ 411.355 through 411.357.

Section 455.109(e) would specifythat—

• Entities that are subject to thereporting requirements must submit therequired information on a prescribedform within the time period specified bythe Medicaid agency. Similarly, entitiesmust report to the Medicaid agency allchanges in the submitted informationwithin a timeframe specified by theState. We believe that States have thediscretion to determine these deadlinesin line with § 455.109(a), which requiresthat the Medicaid agency gatherinformation on financial relationshipsin such form, manner, and at such timesas the agency specifies.

• Entities must retain documentationsufficient to verify the informationprovided on the forms and, uponrequest, must make that documentationavailable to the Medicaid State agency,HCFA, or the OIG.

Section 455.109(f) would reflectsection 1877(g)(5), specifying that anyentity that is required, but has failed, tomeet the reporting requirements of§ 455.109(a), is subject to a civil moneypenalty of not more than $10,000 foreach day of the period beginning on theday following the applicable deadlineuntil the information is submitted. Itwould further specify that assessment ofthe penalty will comply with theapplicable provisions of 42 CFR part1003.

IV. Our Responses to Questions Aboutthe Law

In this section of the preamble, wehave included some of the mostcommon questions concerningphysician referrals that we have

received from physicians, providers,and others in the health carecommunity. (Note that, in this section,we are using the term ‘‘provider’’ in thegeneric sense to include all providers ofhealth care services. That is, we are notusing the term with the special meaninggiven in our regulations at § 400.202.)We summarize these questions belowand present our interpretation of howwe believe the law applies in thesituations that have been described tous. We have organized this section sothat the issues raised by the questionsappear in the order in which theyappear in the regulation.

A. Definitions

1. Compensation Arrangement

What is an ‘‘indirect’’ compensationarrangement? We defined a‘‘compensation arrangement’’ in theAugust 1995 final rule, in line with thestatute, as any arrangement involvingany remuneration, direct or indirect,between a physician (or family member)and an entity. This means that acompensation arrangement can resultwhen remuneration flows from an entityto a physician or family member, orfrom a physician or family member toan entity. We have received a number ofinquiries on what constitutes an‘‘indirect’’ compensation arrangement.We believe that a physician or familymember can receive compensation froman entity, even if the payment is‘‘funneled through’’ a business or otherentity or association and even if thepayment changes form before thephysician actually receives it.

For example, suppose that a hospitalhas contracted with a group practice forthe group to furnish physician servicesand to otherwise staff the hospital. Thehospital pays the group practice, whichmight be a professional corporation or asimilar association or entity, for thephysician services under a personalservices arrangement, rather thandirectly compensating the individualphysicians. The group practice, in turn,pays the individual physicians a salarythat in some way reflects the hospital’spayments.

It is our position that, in such ascenario, each physician has beenindirectly compensated by the hospitalfor his or her own services. As a result,the physicians have a compensationarrangement with the hospital. In theabsence of an exception, the physicianswould be prohibited from referring tothe hospital for the furnishing ofdesignated health services.

We believe that a physician hasreceived indirect compensation whetherthe ‘‘intervening’’ professional


association, corporation, or other entitydirectly receiving payment is a grouppractice or any other type of physicianor nonphysician owned entity. We alsobelieve a physician can receive indirectcompensation through a nonprofitenterprise if that enterprise is controlledby an individual who is in a position toinfluence the physician’s referrals. Forexample, the owner of a clinicallaboratory who also serves as thedirector of a nonprofit research facilitycould provide a physician with researchgrants in exchange for referrals to thelaboratory. We are considering regardingas indirect compensation any paymentto a physician that passes from an entitythat provides for the furnishing ofdesignated health services, no matterhow many intervening ‘‘levels’’ thepayment passes through or how often itchanges form. We directly solicitcomments on this approach.

We would also like to reiterate a pointthat we made in the preamble to theAugust 1995 final rule. Just because ahospital or similar entity is affiliatedwith a physician or group of physiciansdoes not automatically mean that thehospital or similar entity iscompensating the physicians.Physicians and entities can have jointventures and similar relationships inwhich the hospital or similar entity andthe physicians share profits, but do notcompensate each other.

Which exceptions apply in indirectsituations? We have also receivedquestions about which exceptionapplies when an indirect paymentchanges form. For example, in thesituation described above, a hospitalmakes payments to a group practiceunder a personal services arrangement.The group practice, in turn, passes thepayments on in the form of salarypayments to its physician employees.We believe that the compensation atissue involves a personal servicesarrangement between the hospital andthe group practice (see the discussion inIII.E.6 of this preamble about personalservices arrangements between entitiesand group practices, rather thanbetween entities and individualphysicians).

We are interpreting the statute tofocus on the payment the entityfurnishing designated health servicesinitially makes to determine theappropriate exception. In this case, thehospital is making a payment under apersonal services arrangement, and isnot in any way making a salary paymentto its own employees. Thus, we believethe physicians could make referrals tothe hospital if the group practice’spersonal services arrangement with the

hospital meets the criteria under thepersonal services exception.

It is our view that the salary paymentfrom the group practice to its physicianemployees is a payment separate fromthe remuneration flowing indirectlyfrom the hospital to the physicians. Asa result, this payment, as a paymentfrom the group practice, should itselfhave no additional effect on aphysician’s ability to refer to thehospital. (The nature of the paymentmight, however, affect whether thephysicians qualify as a group practice.See the discussion in section III.A.6 ofthis preamble covering thecharacteristics of a group practice.)

2. EntityWhat are the characteristics of an

‘‘entity’’ that provides for the furnishingof designated health services? We havereceived a number of questions aboutwhat constitutes an ‘‘entity’’ involved inthe furnishing of designated healthservices and who owns that entity. Forexample, a group of individuals askedus whether they own a hospital basedsolely on the fact that they own thebuilding that houses the hospital. Webelieve that an ‘‘entity’’ for purposes ofsection 1877 is the business,organization, or other association thatactually furnishes, or provides for thefurnishing of, a service to a Medicare orMedicaid patient and bills for thatservice (or receives payment for theservice from the billing entity as part ofan ‘‘under arrangements’’ or similaragreement).

An ‘‘entity,’’ therefore, does notinclude any person, business, or otherorganization or association that ownsthe components of the operation—suchas owning the building that houses theentity or the equipment the entityuses—without owning the operationitself. For example, a physician mightown and operate an MRI machine in hisor her office. If this physician entersinto a lease arrangement for the use ofthe MRI machine every Tuesday by thephysician down the hall, who bills forthe services, we believe that thephysician down the hall is the entityproviding MRI services to his or herpatients on Tuesday. This physiciancould refer patients for MRI services ifhe or she qualifies for an exception,such as the in-office ancillary servicesexception.

When is an entity furnishing, orproviding for the furnishing of,designated health services? Section1877(a)(1)(A) prohibits a physician frommaking a referral to an entity ‘‘for thefurnishing of designated healthservices’’ if the physician or a familymember has a financial relationship

with that entity. The health carecommunity has expressed someconfusion about when an entity is oneinvolved in the ‘‘furnishing of’’designated health services.

We have, for example, receivedquestions about which entities are therelevant ones when some entities onlybill for services, while others actuallydirectly ‘‘furnish’’ the services. Forexample in an ‘‘under arrangements’’situation, a hospital, rural primary carehospital, skilled nursing facility (SNF),home health agency, or hospice programcontracts with a separate provider tofurnish services to the hospital’s, SNF’s,or other contracting entity’s patients, forwhich the hospital, SNF or othercontracting entity ultimately bills.

The statutory provisions that mention‘‘under arrangements’’ draw adistinction between services that areactually furnished by the hospital orSNF and those that are actuallyfurnished by the separate, outsideentity. (Under section 1861(w)(1),HCFA’s payment to the hospital, SNF,or other contracting entity dischargesthe beneficiary’s liability. ‘‘Underarrangements’’ situations are furtherreferenced in sections 1861(b)(3) and1862(a)(14).) We are aware that there arecomparable agreements in thecommunity between entities other thanhospitals, SNFs, and the othercontracting entities listed above, such asagreements between group practices thatfurnish services to HMO patients, withthe HMO billing for the services.

We believe that, absent an exception,the referral prohibition applies to aphysician’s referrals to any entity thatdirectly furnishes designated healthservices to Medicare or Medicaidpatients. We believe the prohibition alsoapplies to referrals to any entities thatarrange ‘‘for the furnishing of’’ theseservices to Medicare or Medicaidpatients by contracting with otherproviders, whenever it is the arrangingentity that bills for the services.

This interpretation is consistent withthe intent of the statute. Congressintended, in enacting section 1877, toprohibit referrals in situations in whicha physician has a financial incentive tooverutilize the various designatedhealth services and to steer patientstoward certain providers of theseservices. For example, a physicianmight routinely refer patients to a SNFin which he has a financial interest andprescribe occupational therapy (OT)services. The SNF, in turn, mightcontract with a separate, unrelatedentity to furnish SNF patients with theOT, for which the SNF bills. Even if thephysician has no relationship with theseparate OT provider, he does have a


financial relationship with the SNF thatis providing for ‘‘the furnishing of’’ OTto referred patients. As a result, thephysician can potentially profit fromeach referral he or she makes for OT,even if the SNF must first purchasethose services from an outside sourcebefore passing on the cost to its patients.

If, however, the unrelated OT entityitself bills for the services under Part B,so that the SNF only helps to makethese services available to its patients,our conclusion would be different. Inthis situation, we do not believe that thephysician has a financial incentive tooverutilize OT services. As a result, wewould not regard the SNF as an entityinvolved in ‘‘the furnishing of’’ adesignated health service.

We also believe that a physician canhave an incentive to overutilize servicesif he or she has a financial relationshipwith the entity that directly furnishesdesignated health services, even if thisis not the entity ultimately billing forthe services. In these situations, thephysician can potentially recognize aprofit from each referral based on thefact that the designated health serviceswill, in essence, be sold to the entitythat bills.

For example, a physician who is amember of a group practice might workin a hospital as a staff physician andrefer patients to the group’s own outsidelaboratory in which the physician hasan ownership interest. The laboratory,in turn, furnishes services to hospitalpatients under arrangements. Thehospital will therefore be billingMedicare for laboratory servicesfurnished by the physician’s ownlaboratory. In this case, the physician isin a position to influence how manyservices the laboratory will be able to‘‘sell’’ to the hospital. Thus, thephysician should be prohibited frommaking these referrals, unless one of theexceptions applies.

We believe our policy of includingentities that contract for services asthose that provide for ‘‘the furnishingof’’ designated health services isconsistent with the structure of section1877 and the way the exceptions aredrafted. For example, under section1877(b)(3), services are excepted iffurnished by an organization thatfunctions under a prepaid plan, such asan HMO. It is our understanding thatsuch services are very often madeavailable in a manner that is comparableto ‘‘under arrangements’’ situations; thatis, the prepaid organization contractswith a broad range of independentsuppliers and providers to furnishservices to its enrollees. This exceptionmakes no distinction between servicesthat are furnished directly by the HMO

and those that are furnished undercontract by outside providers: all suchservices appear to be considered asfurnished by the HMO, and would beexcepted.

Similarly, section 1877(d)(3) exceptscertain ‘‘designated health servicesprovided by a hospital,’’ but makes nodistinctions between services thehospital itself furnishes and thosefurnished by the hospital underarrangements.

3. Financial RelationshipHow do equity and debt qualify as

ownership? The statute states that anownership interest can be throughequity or debt. We have received anumber of inquiries about what thisprovision means and what kinds of debtsituations constitute a form ofownership. We believe that ‘‘ownershipthrough equity’’ refers to a directownership interest that does not involvedebt; for example, one in which thephysician or family member hasactually purchased assets of a businessentity with cash or other property. Thisinterest could be in the form of stock ina publicly-held entity or an investment(such as a capital contribution) in apartnership.

We believe that a physician or familymember holds an ownership interest inan entity ‘‘through debt’’ anytime thephysician or family member has lentmoney or given other valuableconsideration to the entity and the debtis secured (in whole or in part) by theentity or by the entity’s assets orproperty. For example, the physiciancould hold such an interest byproviding the entity with a note, amortgage or by purchasing bonds. Thisinterpretation is consistent with thedefinition of an ownership or controlinterest in section 1124(a)(3) of the Act,which governs which suppliers andproviders must disclose these intereststo us for purposes other than the referralprohibition. Section 1124(a)(3)(A)(ii)defines a person with an ownership orcontrol interest as a person who is theowner of a whole or part interest in anymortgage, deed of trust, note, or otherobligation secured (in whole or in part)by the entity or any of the entity’sproperty or assets, if the interest isworth a certain amount.

We also believe that ownershipthrough debt can exist in any otherdebtor-creditor relationships that havesome indicia of ownership. Forexample, such indicia could include thecreditor’s participation in revenue orprofits, subordinated payment terms,low or no interest terms, or ownershipof convertible debentures (bonds that aphysician or family member can convert

into the common stock of the issuer oran affiliate until the convertible featureexpires).

However, if a physician or familymember has made an unsecured ornonconvertible loan to an entity, or aloan with no other indicia of ownership,we do not believe the loan is anownership interest. The loan wouldlikely qualify as a compensationarrangement, to which an exceptionmight apply.

We do not believe that a physician orfamily member has ‘‘ownership throughdebt’’ when either of them has receiveda loan from an entity. In ordinarybusiness transactions, when a debtorreceives a loan, this transaction in noway establishes for the debtor anownership interest in the creditor. Wealso assume that in providing the loan,the creditor entity has providedremuneration to the physician or familymember, resulting in a compensationarrangement. This kind of compensationarrangement could meet one of theexceptions to the prohibition. Forexample, the loan might be one form ofpayment an entity makes to a physicianto recruit the physician or as part of thephysician’s employment contract. Theloan would be an excepted arrangementif it met the fair market value and otherstandards in these exceptions.

Is membership in a nonprofitcorporation an ownership or investmentinterest? We have received a number ofinquiries concerning whethermembership in a nonprofit corporationconstitutes an ownership or investmentinterest in that corporation. (We areassuming that a ‘‘member’’ is someonewho establishes, sponsors, directs, orcontrols a nonprofit corporation.) Mostnonprofit health care corporations thatare exempt from Federal incometaxation are exempt under section501(c)(3) or (4) of the Internal RevenueCode. These provisions state that the netearnings of such a corporation cannotinure to the benefit of any privateshareholder or individual. Therefore,while members of such a nonprofitcorporation may exercise control overthe activities of the corporation, they donot have the pecuniary incentive thatfor-profit investors have to enhancetheir investment interests. As such, wedo not regard being a member of thesekinds of nonprofit corporations as anownership or investment interestanalogous to being a shareholder in afor-profit corporation. However, anyremuneration that the physician orfamily member receives from thecorporation, such as a salary, would becompensation and must meet anexception.


Do stock options and nonvestedinterests constitute ownership? We havebeen asked whether a physician orfamily member has an ownershipinterest in an entity if he or she receivesan option to purchase the stock of theentity or an affiliate, such as when anemployee has a stock option thatconstitutes part of his or her pay. Wehave also received questions aboutretirement funds or similar options thatdo not vest until a future date. Forexample, a physician might hold anoption to purchase stock at a particularprice, but not be able to exercise thatoption until he or she retires. Similarly,a physician might be entitled to certainretirement funds only after he or she hasretired after having worked a specifiednumber of years.

The statute defines an ownershipinterest in section 1877(a)(2) as aninterest held through equity, debt, orother means. It is our view that optionsand nonvested interests are inchoate orpartial ownership interests that qualifyas ‘‘ownership’’ for purposes of this law.We base our interpretation on the factthat a physician has a tremendousincentive to refer to an entity in whichhe or she is invested, whether theinterest is a present or future one. Forexample, if a physician has an option tobuy stock at a certain price in a clinicallaboratory, the physician will have aninterest in generating business for theentity in order to enhance the value ofthat stock.

4. Group practiceWhat is the ‘‘full range of services’’

test? One of the criteria in the statutorydefinition of a group practice is thateach member must furnish substantiallythe full range of services that thephysician routinely furnishes, includingmedical care, consultation, diagnosis,and treatment through the joint use ofshared office space, facilities,equipment, and personnel. We havebeen asked about the meaning andpurpose of this provision, and how itwill affect a physician’s normal practicepatterns. only token tasks, for the group.It is our view that this standard shouldnot alter a physician’s ordinaryschedule or practice habits. Forexample, one physician describedhimself as having two specialty areas,which resulted in his providingdermatology services to one group oneday a week, and another kind of serviceto another group on a different day. Webelieve that different kinds of servicessuch as these on different days canreflect a physician’s normal ‘‘routine ofservices.’’ That is, a physician canfurnish one type of service that is thatphysician’s ‘‘full range of services’’ on a

particular day, as long as the physicianis legitimately practicing medicine forthe group practice on that day.

5. Immediate family member or memberof a physician’s immediate family

How does the prohibition affect aphysician’s referrals to immediatefamily members? The referralprohibition in section 1877(a) states thatif a physician, or immediate familymember, has a financial relationshipwith an entity, the physician cannotrefer a Medicare patient to that entity forthe furnishing of designated healthservices, unless an exception applies. In§ 411.351 of the August 1995 final rule,we listed the individuals who qualify asa physician’s ‘‘immediate’’ familymembers. These individuals include,among others, spouses and children ofa referring physician.

We have received a number ofinquiries from physicians about whetherthe statute precludes a physician fromreferring patients to a family member toreceive designated health services, if thereferring physician has no financialrelationship with the entity furnishingthe services. We believe the answer tothis question depends upon the natureof the family member’s financialrelationship with the furnishing entity.

If a family member has acompensation arrangement with theentity furnishing the designated healthservices, the physician cannot refer tothe entity, unless the arrangement meetsone of the exceptions under the statute.For example, a physician might wish torefer a patient to her husband foroccupational therapy services. Thehusband furnishes OT services as anemployee of an occupational therapyfacility. The husband, who is animmediate family member of thereferring physician, has a compensationarrangement with an entity thatfurnishes a designated health service(the OT facility pays him a salary).However, the referral would beacceptable if the arrangement meets therequirements in section 1877(e)(2),which excepts bona fide employmentrelationships between employers andphysicians or immediate familymembers if the relationship meets fairmarket value and other standards.

The situation is similar if a physicianrefers a patient to an immediate familymember who has an ownership orinvestment interest in the facility thatfurnishes the designated health services.For example, the physician may wish torefer a patient to his wife, who is a solopracticing physician who herselffurnishes OT. If the wife owns thepractice, she would have a financialrelationship with the entity that

furnishes the designated health services.The husband’s referral would not beprohibited if the wife’s relationshipqualifies for one of the exceptions underthe statute. For example, the wife’spractice might qualify as a rural entity,the ownership of which is exceptedunder section 1877(d)(2) of the Act.However, if an exception does notapply, the referring physician would beprecluded from referring to his spouse.

Physicians have also asked uswhether the in-office ancillary servicesexception in section 1877(b)(2) appliesto those situations in which a physicianrefers a patient to an immediate familymember who furnishes designatedhealth services outside of the referringphysician’s practice. The ancillaryservices exception applies when aphysician refers a patient for a servicethat the referring physician either willpersonally perform or directlysupervise, or that will be personallyperformed or directly supervised byanother member of the referringphysician’s group practice. As a result,referring physicians can refer patients toand among themselves, within theirown practices, if they meet the section1877(b)(2) requirements. However, theexception does not apply whenphysicians refer to their spouses or toother close relatives who furnishservices outside of the practice.

In creating the in-office ancillaryservices exception, we believe thatCongress made a policy decision not torestrict certain referrals that occurwithin the confines of one practice. Weare not aware of any rationale forextending this ‘‘single practice’’exception to any outside entities,whether or not those entities have afinancial relationship with animmediate family member.

We would also like to point out thata physician may send a patient to animmediate relative without actually‘‘referring’’ that patient for a designatedhealth service. A referral is defined insection 1877 for purposes of Part Bservices as, with an exception forcertain specialized services, the requestby a physician for an item or service,including the request for a consultationwith another physician (including anytest or procedure ordered by, or to beperformed by (or under the supervisionof) that other physician). We haveinterpreted this provision in sectionIII.A.7 of this preamble to apply to justrequests by the physician for designatedhealth services covered under Part B,rather than any Part B item or service.For other kinds of items and services, areferral is, with an exception for certainspecialized services, the request orestablishment of a plan of care by a


physician, which includes the provisionof a designated health service.

We believe a referral would beacceptable where the referral is not fora designated health service. Forexample, a physician who is a generalpractitioner might believe that a patienthas a neurological problem, but beunsure of a diagnosis. This physiciancould refer the patient to his or herneurologist spouse, if the referral is nota ‘‘consultation’’ (see our discussion of‘‘consultations’’ in section III.A.7 of thispreamble). That is because the referringphysician has not requested adesignated health service or establisheda plan of care including one, nor has heor she requested a consultation. Webelieve the referral, in this case, is forphysician services, which are generallynot designated health services. If thespouse, in turn, determines that thepatient requires an MRI, the spousewould be the one making the referral forthis designated health service.

If one member of a group practicecannot make a referral to an entity, areall other group practice physicians alsoprecluded? Group practices haveinformed us that they are concernedabout the definition of a ‘‘referringphysician’’ in § 411.351, and how itaffects a group when one member isprecluded from referring to a particularentity that furnishes designated healthservices. In particular, several groupswondered whether having a physicianmember whose immediate relative hasan unexcepted ownership interest in anentity would preclude all group practicemembers from referring to that entity.Groups believe that the preamble to thefinal rule covering referrals to clinicallaboratories implied that the referralprohibition would be imputed to allphysician members.

Section 411.351 defines a ‘‘referringphysician’’ as a physician (or grouppractice) who makes a referral (asdefined elsewhere in the regulations).We interpreted this definition to meanthat when an individual group memberrefers, the entire group has referred. Asa result, any member of a group who hasan unexcepted financial relationship (orwhose relative has such a relationship)with an entity could ‘‘taint’’ the referralsof the entire group.

We have reconsidered this issue andnow propose to amend the definition toexclude any reference to the entiregroup practice. We believe that thestatute was drafted to cover the referralbehavior of individual physicians and toregulate the entities to which they refer.There does not appear to us to be anyclear reason to extend the effects of onephysician’s relationships and behaviorsto other physicians, just because they

are all members of the same grouppractice. As several practices havepointed out to us, being members of thesame group practice does not mean thatphysicians automatically have theopportunity, power, or incentive toexert pressure on each other to refer totheir related entities.

However, in any instance in which agroup member is in a position to exertinfluence or control over the referrals ofother group physicians, the prohibitioncould still apply. For example, groupmembers could be subject to sanctionsif their referral patterns reveal acircumvention scheme between them.Similarly, if a group practice ownerconditions payment to his or heremployee members on referrals to theowner’s laboratory, the employmentcould be a compensation arrangementthat triggers the prohibition.

6. RemunerationDo payments qualify as remuneration

only if they result in a net benefit?Certain members of the providercommunity have requested that weinterpret a payment as remunerationonly if it is made in exchange foridentifiable property or services. Underthis theory, if the physician or entitymaking the payment has no expectationof or entitlement to something of valuein return for the payment, there wouldbe no compensation arrangement, evenif other physicians or entities mightbenefit from the exchange.

In the August 1995 final regulation,we defined remuneration as ‘‘anypayment, discount, forgiveness of debt,or other benefit made directly orindirectly, overtly or covertly, in cash orin kind,’’ except for a narrow list ofremuneration excluded from thedefinition by section 1877(h)(1)(C). Webelieve that remuneration generallyinvolves any payment of cash, property,or services, whether or not either orboth parties receive a net benefit. Forexample, we would regard asremuneration the repayment of a loan,even if there are no accompanyinginterest payments.

We base this interpretation on thestatute, which excepts fromcompensation arrangements undersection 1877(h)(1)(C) only very limitedand specific types of remuneration.Among the list is the forgiveness ofamounts for the correction of minorbilling errors; that is, small amounts thatare excused by one party in order toeven out the parties’ accounts. However,the statute does not except amounts thatare forgiven to even out larger billingerrors, nor does it contain a generalexception for remuneration that doesnot result in a net benefit for one or both

of the parties. (The correction of a largebilling error might, however, qualify asan ‘‘isolated transaction’’ or qualify forthe new exception in § 411.357(l) as partof a fair market value exchange.)

We believe that the statute is designedto prohibit referrals whenever aphysician makes a payment to an entityor an entity makes a payment to aphysician, regardless of who profits orgains. The statute, in our view, containsa presumption that if there has been apayment of any kind, a physicianshould not refer. As a result, the agencyneed not ‘‘look behind’’ each transactionto ascertain whether the physician hasgained some benefit as a result of thetransaction, has realized little or no netbenefit, or has benefitted too much. Thelaw does, however, designate certainvery specific compensationarrangements that require that theSecretary ‘‘look behind’’ them andexcept them if the exchanges ofpayment meet fair market value andcertain other standards.

It is our view that the one-waypayments described by the providers areremuneration. If a payment does notreflect an actual fair market valueexchange, it could easily serve as thevehicle for referral payments. Webelieve the law was meant to prevent aphysician from referring to an entity ifthat physician (or a family member) isreceiving payments of any kind thatcannot be accounted for as part of a fairexchange.

B. General Prohibition—WhatConstitutes a Prohibited Referral

Does the prohibition apply only if aphysician refers directly to a particularrelated entity? As we mentioned in thesection above covering the definition of‘‘entity,’’ section 1877(a)(1) prohibits aphysician from making a referral to anentity for the furnishing of designatedhealth services if the physician orimmediate family member of thephysician has a financial relationshipwith that entity. Section 1877(h)(5)defines a referral very broadly: Areferral is the request by a physician fora Part B item or service (includingcertain consultations). In addition, ‘‘therequest or establishment of a plan ofcare by a physician that includes theprovision of [a] designated healthservice’’ constitutes a ‘‘referral’’ by a‘‘referring physician.’’ We haveinterpreted this provision in § 411.351of the August 1995 final clinicallaboratory rule to mean that a physicianhas made a referral if he or she hasmade a request for a Part B item orservice or a request for other items orservices that includes the provision oflaboratory services or if he or she has


established a plan of care that includesthe provision of laboratory services.

The ‘‘referral’’ provision requires thata physician only request an item orservice or include it in a plan of care;it does not require that the physiciandirectly send a patient to a particularentity or specifically indicate in a planof care that the service must be providedby a particular entity. However, section1877(h)(5) must be read in conjunctionwith the prohibition in section1877(a)(1). The general prohibitionapplies only when a physician makes areferral to an entity for the furnishing ofa designated health service if thephysician or a family member has afinancial relationship with that entity.

For example, a physician might havea small noncontrolling ownershipinterest in a provider of a designatedhealth service, such as a physicaltherapy (PT) facility. The physiciandoes not directly refer patients to thisprovider. However, the physician doesestablish plans of care for patients in ahospital setting, which include PTservices. When a particular patientleaves the hospital, the physician mayrefer the patient to an unrelated skillednursing facility (SNF) that, in turn,refers the patient to the related PTprovider. The PT facility bills thepatient separately. As a result, thepatient may receive services prescribedby the physician from an entity withwhich the physician has a financialrelationship.

In situations such as this one, thephysician has prescribed a plan of carethat includes designated health services,an action that constitutes a referral.However, the physician has not madethe referral to an entity with which heor she has a financial relationship.Instead, the physician has made thereferral to an SNF with which he or shehas no financial relationship. As such,the referral prohibition would generallynot apply. Nonetheless, if there was anyevidence that the physician has anagreement with the SNF that involvesthe SNF systematically referring thephysician’s Medicare patients to thephysician’s PT facility, we would likelyinvestigate the situation as a possiblecircumvention scheme.

When is the owner of a designatedhealth services provider considered asequivalent to that provider? We havereceived several comments about whena physician who has an ownershipinterest in an entity that furnishesdesignated health services should beequated with that entity. For example,suppose that a physician regularly referspatients to an SNF in which thephysician has no investment interest.The SNF, in turn, buys PT services froma PT facility that also provides other

noncovered items and services to theSNF and is owned solely by thephysician. Arguably the referringphysician, as sole proprietor of the PTfacility, is related to the SNF becausethe physician’s PT facility sells PT andother, noncovered services to the SNF.We believe that it is likely, in thissituation, that the physician is in aposition to negotiate or influence theterms of the arrangement, as well as toinitiate patient referrals to the SNF.

We believe that there is a potential forabuse in such situations. For example,the physician may be referring as manypatients as possible to the SNF inexchange for inflated rates from the SNFfor the variety of noncovered items andservices that the PT facility furnishes, orfor any covered services that are notsubject to a fee schedule. Although theSNF may be negotiating with the PTfacility as a corporate or other businessentity, we would equate the referringphysician and the PT facility with eachother when the referring physician (or afamily member) has a significantownership or controlling interest thatallows him or her to determine how thePT facility conducts its business andwith whom. We will consider a numberof factors in these situations, such aswhether the physician or the physicianin combination with his or herimmediate family members owns all ora controlling amount of the stock of anentity, and whether the physician and/or the family members are makingdecisions for the entity, particularly ona day-to-day basis. Our analysis willdepend upon the entire record of theinterrelationship between the physicianand/or immediate family members andthe entity, whether the relationships aredirect or indirect, and the totality of thecircumstances.

We believe the analysis is similarwhen a referring physician receivescompensation from an entity that isowned or controlled by a party that alsoowns a designated health servicesprovider. For example, suppose that aphysician owns a controlling interest ina general practice clinic, and alsoindependently owns a controllinginterest in an outside laboratory inwhich the clinic itself has no interest.The clinic also employs a number ofphysicians who receive salaries from theclinic corporation.

Arguably, the employee physicians inthis situation have no financialrelationship with the outside laboratory.That is, they do not themselves own anypart of the laboratory, nor do theyreceive compensation from or paycompensation to the laboratory entity.However, if we were to take the positionthat there is no financial relationship,and hence no referral prohibition, the

physician owner of the laboratory, bycontrolling the clinic, could arrange tocompensate the employee physicianswith inflated salaries based directly onthe number of referrals they make to theoutside laboratory.

In order to avoid this result, wepropose to equate the owner physicianwith the outside laboratory and with theclinic when he or she owns or controlsthem. Under this interpretation, wewould regard the employee physiciansas receiving compensation from thelaboratory. Although this compensationis indirect, we believe it is covered bythe statute. Section 1877(h)(1) defines a‘‘compensation arrangement’’ as anyarrangement involving anyremuneration (with certain narrowexceptions). ‘‘Remuneration,’’ in turn, isdefined as any remuneration paiddirectly or indirectly.

If the physician, on the other hand,has a noncontrolling interest in theoutside laboratory, we would not equatethe owner physician with thelaboratory. However, we would regardthis situation as a potentialcircumvention scheme. That is, wewould regard the physician owner inthis situation as referring indirectly,through the employee physicians, to adesignated health services provider towhich the owner physician cannotpersonally refer. The inflated salaries ofthe employee physicians, in fact, couldserve as evidence of the existence ofsuch a circumvention scheme.

The analysis would vary somewhat ifthe referring physicians arecompensated by an entity, rather thanan individual physician. Suppose, forexample, that a hospital hiresphysicians to serve on its staff. Thehospital compensates the physicians fortheir services, but inflates their salariesto reflect all the referrals they make toa separate MRI subsidiary that is notpart of the hospital but is owned by it.If the hospital owns a controlling shareof the MRI entity, we would regard thehospital and the entity as equivalent.

The analysis would be different if thehospital owns less than a controllinginterest in the MRI facility. Arguably,the physicians are compensated by anentity (the hospital) that is technicallyseparate from the one providing thereferred MRI services. The physiciansdo not own the MRI facility, nor do theyreceive payment from it. Nonetheless, ifthe physicians receive payments fromthe hospital that exceed fair marketvalue for the services they are otherwiseproviding, we propose to presume thatthey are being indirectly compensatedby the MRI facility, through thehospital, for their referrals.


Has a physician made a referral to aparticular entity if another individualdirects the patient there?

We have received inquiries aboutsituations in which a physician requestsa designated health service, but it isanother individual, such as a dischargeplanner, who follows the physician’splan of care and refers the patientdirectly to a specific provider. Wediscussed this issue in the August 1995final rule. In the preamble to that ruleat 60 FR 41941, we stated that aphysician who establishes a plan of careor requests an item or service isresponsible for the referral, even if it isanother individual or an institutionalentity that carries out that plan of carefor the physician. For example, westated that we would not allow ahospital physician to avoid the referralprohibition by claiming that it is thehospital that actually makes the referralor selects the provider in his or herplace. We took this position in order toprevent a physician from disavowing allreferrals by having personnel oremployers carry them out.

In light of our analysis in theresponses to the last two questions, wewould like to refine our position on thisissue. That is, we want to qualify ourposition to ‘‘impute’’ a physician’sreferrals to others only in thosesituations in which the physician hasthe ability to control or influence theindividuals who select an entity. Wewould also ‘‘impute’’ referrals if aphysician is him or herself in a positionto be compensated for the referrals bythose who can control or influence theactions of the person who actuallyselects the entity.

For example, suppose that a physicianworks for a hospital and refers a patientto the hospital’s discharge planner forlaboratory tests. The discharge plannerin turn refers the patient to thehospital’s laboratory. We would regardthe physician’s request and referral tothe discharge planner as a referral to anagent of the entity that owns thelaboratory; that is, to an agent of theentity that furnishes designated healthservices. We believe that such a referralwould be governed by the rules insection 1877. Suppose, on the otherhand, that the discharge planner refersthe patient to an outside laboratory thathappens to be owned by the hospital.The physician in this situation may notbe able to compensate the dischargeplanner or otherwise in any wayinfluence that individual’s actions.Nonetheless, if the hospital pays thephysician to order as many laboratorytests as possible, and in turn pays thedischarge planner to refer patientsdirectly to a hospital-owned provider,

we would impute the referral to thephysician.

We can translate these rules into agroup practice setting. For example, agroup practice member might request adesignated health service, but allow anonphysician employee to direct thepatient to a particular provider. If thenonphysician refers the patient to thegroup’s own provider, we would regardthe referral as the physician’s ownreferral to an agent of a provider ofdesignated health services. Thisarrangement, we believe, would besubject to the referral rules. For outsidereferrals, we would gauge whether thephysician member is in any position tocontrol the actions of the nonphysician.In order to gauge whether a physician isin a position to affect a nonphysician’sactions, we propose to use the sameownership and control rules that wementioned above. We would alsoimpute the referral to the physician ifthe entity compensating the physician isin a position to both compensate thephysician for his or her referrals and tocontrol the actions of the individualwho selects the provider.

How will HCFA interpret situations inwhich it is not clear whether a physicianhas referred to a particular entity?

A physician might request or order adesignated health service for a patientwithout establishing a record of whetherhe or she referred the patient to aspecific provider. If the patient receivesthe designated health service from anentity with which the physician (or afamily member) has a financialrelationship, as the result of the referral,we will presume that the service resultsfrom the physician referring to thatspecific entity. We will allowphysicians to rebut that presumption byestablishing that they mentioned nospecific provider or supplier or that thepatient was directly referred by someother independent individual orthrough an unrelated entity.


1. The in-office ancillary servicesexception

Can a physician supply crutches asin-office ancillary services? The in-officeancillary services exception in section1877(b)(2) applies to services that meetthe requirements for supervision,location, and billing, but not to anyparenteral and enteral nutrients,equipment and supplies or to durablemedical equipment (DME) (although theexception does apply to infusionpumps). Many physicians have broughtto our attention the problems with

excluding crutches from the exception.That is, an orthopaedist might diagnosea patient with a broken leg, set the leg,personally furnish the patient in his orher own office with crutches, and thenbill for those crutches. If the patient willuse the crutches at home, they qualifyas DME. Physicians have pointed outthat this exclusion will cause greatinconvenience to such patients, whowill have to obtain crutches or similarequipment elsewhere.

We agree that excluding crutches fromthe section 1877(b)(2) exception couldcause great inconvenience to patients,and disrupt the efficient delivery ofhealth care services. We regard crutchesas different from other DME in that apatient very often needs themimmediately after treatment for aninjury that has resulted from anunexpected traumatic event. Thus,patients may often be precluded fromarranging to receive crutches in advancefrom other, unrelated entities.Nonetheless, the Secretary does nothave the authority to simply create ablanket exception for crutches. TheSecretary only has the authority, undersection 1877(b)(4), to create newexceptions in the case of any otherfinancial relationship that the Secretarydetermines, and specifies in regulations,does not pose a risk of program orpatient abuse. We have no evidence thatallowing physicians a blanket exceptionto self-refer for crutches will be freefrom abuse. In the ownership context,for example, each referral willinherently increase a physician’s orgroup practices’ profits.

We are thus proposing to create anexception, at § 411.355(e), that webelieve will remedy this problem, whilemeeting the statutory condition. That is,the exception would apply only tosituations in which a physicianfurnishes crutches in a manner thatmeets the in-office ancillary servicesrequirements in section 1877(b)(2) (andin § 411.355(b)), provided the physicianrealizes no direct or indirect profit fromfurnishing the crutches. In other words,Medicare will pay for the crutches if thephysician bills only for the cost he orshe incurred to acquire and supply thecrutches or to create or manufacture thecrutches. We believe that there is nothreat of abuse in these situations, sincephysicians will have no incentive tooverutilize crutches.

2. Exception for services furnished byorganizations operating under prepaidplans

Can a physician refer non-enrollees toa related prepaid organization or to itsphysicians and providers?


We have been asked about situationsin which a physician furnishes servicesto managed care patients under apersonal services contract, but wishes torefer his or her own outside, fee-for-service Medicare patients for designatedhealth services to the managed careentity, or to physicians, suppliers, orproviders that are affiliated with themanaged care entity. If the physicianrefers to an otherwise unrelatedphysician, provider, or supplier that isaffiliated with the managed care entity,but is not part of it and accepts the fee-for-service patient independently, thereferral prohibition should not apply.That is, the physician would not bereferring to the managed care entitywith which he or she has a financialrelationship.

The analysis would be different,however, if the other physician,provider, or supplier is functioning aspart of the managed care entity. Forexample, a physician might provideservices to enrollees of a Federallyqualified HMO under a contractarrangement. These services areexcepted from the referral prohibitionby section 1877(b)(3). However, whenthe physician wishes to refer a fee-for-service Medicare patient to the HMO’slaboratory, the physician is making areferral to an entity with which thephysician has a financial relationship.That is, the physician’s personalservices contract constitutes acompensation arrangement with theHMO.

In order for the physician in thissituation to refer, the financialrelationship must meet one of thecompensation-related exceptions insection 1877 or in this proposed rule.For example, the physician couldcontinue to refer if his or herarrangement meets the criteria in thepersonal services exception in section1877(e)(3) and in § 411.357(d) of thisproposed rule. The compensation thephysician receives from the HMO wouldhave to be, among other things,consistent with fair market value, andcould not reflect the volume or value ofthe physician’s referrals (except asallowed under a physician incentiveplan). We have proposed to define theconcept of a ‘‘referral,’’ for purposes ofsection 1877, as limited to a referral fora designated health service that may becovered under Medicare or Medicaid(see our discussion of the definition insection III.A.7 of this preamble). Thus,the ‘‘volume or value’’ standard wouldautomatically be met if (in the contextof the physician’s HMO practice) thephysician treated and referred only non-Medicare or non-Medicaid HMOenrollees (that is, the physician’s HMO

compensation would never reflect thevolume or value of Medicare orMedicaid referrals).

If, on the other hand, the physician iscompensated by the HMO for treatingHMO enrollees who are covered byMedicare or Medicaid, thecompensation would be subject to the‘‘volume or value’’ standard. Hence, thearrangement could still meet thepersonal services exception if thephysician’s compensation does notreflect Medicare or Medicaid coveredreferrals or reflects them only as part ofa physician incentive plan, as theseplans are described in section1877(e)(3)(B), and in § 411.351 of thisproposed rule.

As noted earlier in this preamble, webelieve that, for the most part,physicians working for managed careorganizations or as part of an integrateddelivery system will be able to referMedicare and Medicaid patients withinthese systems, provided theirarrangements with these entities meetcertain standards. However, weanticipate that there may be someunusual situations in which anexception does not apply. One exampleof providers in a delivery system whomay be adversely affected by the referralprohibition involves providers underMedicaid primary care casemanagement (PCCM) programs.

We are aware that, under certaincircumstances, some providerscontracting under these managed fee-for-service programs may not be eligiblefor any of the existing exceptionswritten into the law or proposed in thisrule. Because the Secretary can onlycreate new exceptions for financialrelationships which she determinespose no risk of program or patientabuse, we have not created a blanketexception for Medicaid PCCM programs.However, we do not wish, as anunintended consequence of thisdecision, to discourage the participationof Medicaid providers in PCCMprograms, thereby threatening Medicaidbeneficiaries’ access to care. Therefore,we are soliciting comments from Statesand others on the potential impact ofthe referral prohibition on MedicaidPCCM programs and the providers whocontract under them.

One example of a situation in whicha PCCM provider might be prohibitedfrom making a referral involves HMOsthat contract as primary care casemanagers. While HMO participation inPCCM programs is relatively rare, HMOsin some States have contracted to serveas case managers to the disabledpopulation. Such contracts allow theHMO to gain experience in serving thedisabled without having to accept the

financial risk that an HMO wouldnormally accept under a capitationcontract. As States move to enroll moreof their disabled populations intocapitated programs, involving HMOs inPCCM programs could serve as atransitionary method of developing amanaged care provider network that isexperienced in caring for the disabled.

If an HMO physician who is requiredby contract to refer within the HMO’snetwork wishes to refer a PCCM patientwithin that network, his or her financialrelationship with the HMO would haveto meet one of the existing exceptions inthe law or in this proposed rule.Because the HMO in the above exampleis paid on a fee-for-service basis underthe PCCM program, none of theexceptions for services furnished by pre-paid risk plans would be appropriate.

The manner in which we haveinterpreted the volume or value ofreferrals standard in this proposed rulecould prevent the financial relationshipfrom qualifying for one of thecompensation-related exceptions. Mostof these exceptions can be satisfied onlyif a physician’s compensation does notreflect the volume or value of his or herreferrals. Certain provider contracts thatrequire a physician to refer within adefined network of providers couldviolate that standard. (We discuss ourinterpretation of this standard in sectionIII.E.3.) That is, regardless of whetherthe physician’s income actually variesbased on the volume or value ofreferrals, the physician’s income reflectsthe referrals because it could be lostentirely if the physician repeatedlyrefers patients out-of-network. If thefinancial relationship does not qualifyfor an exception, there may be noFederal matching funds for any in-network referral of PCCM patients madeby this physician.

3. Other permissible exceptions forfinancial relationships that do not posea risk of program or patient abuse

Should situations that meet a safeharbor under the anti-kickback statutebe automatically excepted? We havereceived inquiries about the Secretary’sauthority under section 1877(b)(4) tocreate additional exceptions forfinancial relationships which theSecretary determines, and specifies inregulations, do not pose a risk ofprogram or patient abuse. We have hadsome requests that the Secretary createan exception for any financialrelationship that meets a safe harborunder the anti-kickback statute. As wehave stated elsewhere in this preamble,the anti-kickback statute in section1128B(b) and section 1877 are totallyindependent laws, with separate


requirements. In order for a physicianwho has a financial relationship with anentity to refer to that entity, thearrangement must meet therequirements in both laws. However, weare willing to consider this option andspecifically solicit comments onwhether meeting a safe harbor wouldqualify an arrangement as one thatinvolves no risk of program or patientabuse.


1. Exception for ownership in publiclytraded securities or mutual funds

Does the exception for publicly tradedsecurities apply to stock options? Wehave been asked whether ownership ofan option to purchase stock in an entitythat furnishes a designated healthservice constitutes an exceptedownership interest in the entity. As westated in section IV.A.3 above, weregard the option to purchase stock inan entity as an inchoate ownershipinterest that could subject a physician tothe referral prohibition. As such, all ofthe exceptions that ordinarily apply toownership interests would apply.However, the exception for publiclytraded securities would not apply if thestock option involves investmentsecurities that may not be purchased onterms generally available to the public,as required by section 1877(c)(1).

2. Exception for services provided by ahospital in which a physician or familymember has an interest

Can a physician or family memberown an interest in a chain of hospitals?Section 1877(d)(3) contains anexception for designated health servicesprovided by a hospital (other than ahospital in Puerto Rico) if the referringphysician is authorized to performservices there, and the ownership orinvestment interest is in the hospitalitself (and not merely in a subdivisionof the hospital). We discussed at somelength in the August 1995 final rule howwe believe an individual can hold aninterest in a subdivision of a hospital.

We have received inquiries aboutwhether this exception applies if aphysician or family member holds aninterest in a company or network thatowns a chain of hospitals, rather than aninterest in the one hospital to which thephysician makes referrals. It is our viewthat a physician can have an ownershipor investment interest in a hospital thatis part of a chain by virtue of holdingan interest in the organization that ownsthe chain. We base our position on thelanguage of the exception, which doesnot require that the physician have a

direct interest in the hospital. Inaddition, we believe that the exceptionin section 1877(d)(3) must be read inconjunction with section 1877(a)(2),which states that a physician’s or familymember’s ownership or investmentinterest in an entity that provides adesignated health service constitutes afinancial relationship with that entity.This provision further defines anownership or investment interest in anentity to include an interest in an entitythat holds an ownership or investmentinterest in any entity providing thedesignated health services. Thus, bydefinition, a physician who has anownership interest in a health systemthat owns a hospital that providesdesignated health services has anownership interest in that individualhospital. If that indirect interest is in thehospital as a whole, and not in asubdivision, then the exception shouldapply. In fact, we believe that it wouldbe illogical to specifically apply thereferral prohibition in section 1877(a)(1)to any indirect ownership interest, yetdeny an exception in section 1877(d)that is based on ownership just becausethe interest is indirect, especially whenthe exception itself does not require adirect interest.

Nonetheless, in order to meet thehospital ownership exception, webelieve the law requires that thephysician be authorized to performservices at the hospital to which he orshe wishes to refer. We do not believethat this last requirement is met if thephysician has these privileges with anyone of the other hospitals in the chain,but not with the referral hospital.

We also wish to make the point thatany ownership interest a physician orfamily member has in a hospital couldinvolve a separate compensationarrangement. For example, if aphysician acquires an interest in ahospital from a health care network, thisacquisition could constituteremuneration from an entity thatprovides designated health services.Consequently, for the physician to referto the entity, the arrangement wouldhave to meet a compensation-relatedexception.


1. Compensation arrangements ingeneral

Can a lease or arrangement for itemsor services have a termination clause?The lease exceptions for space andequipment and a number of the othercompensation exceptions require that,among other things, the arrangement bein writing and provide for a term of at

least 1 year. We believe that thisrequirement has been met as long as thearrangement clearly establishes abusiness relationship that will last for atleast 1 year. Nonetheless, it is our viewthat the arrangement can still qualify forthe exception even if it also includes aclause allowing the parties to terminatesooner for good cause, provided theparties do not enter into a newarrangement within the originallyestablished 1 year time period.

We believe that Congress included the1 year requirement with the intention ofexcepting stable arrangements thatcannot be renegotiated frequently toreflect the current volume or value of aphysician’s referrals. Nonetheless, wedo not believe that Congress intended,in creating this requirement, to bindparties to an arrangement once thatarrangement has become unsatisfactoryto some or all of the parties. Therefore,we are interpreting all of the exceptionswith the 1 year requirement to allowterminations for good cause, providedthe parties do not, within the 1 yearperiod, enter into a new arrangement.We also believe that a lease orarrangement must be renewed in at least1 year increments, so that it is alwaysan agreement that provides for a term ofat least 1 year. That is, once the firstyear of an agreement expires, it cannotbe converted into, for example, a month-by-month arrangement that couldfluctuate with a physician’s referrals.

Will a physician’s referrals beprohibited if an entity pays for certainincidental benefits? Entities, such ashospitals, often provide physicians withcertain incidental benefits, such as theirmalpractice insurance, or with reducedor free parking, meals, or otherincidental benefits. We believe theanswer to this question hinges on thenature of any other financialrelationship the physician has with theentity. For example, if a physicianreceives free ‘‘extras’’ such asmalpractice insurance, parking, or mealswhile he or she serves as the entity’semployee, then these extras mightqualify as part of the compensation thatthe physician receives under a bona fideemployment relationship, provided theyare specified in the employmentagreement. If the physician or entity candemonstrate that the extras constitutepart of the payment that such entitiestypically provide to physicians,regardless of whether they makereferrals to the entity, the extras mightconstitute payment that is consistentwith fair market value and that furthersthe entity’s legitimate businesspurposes. If an incidental benefit cannotmeet the requirements under a statutoryexception or the new general exception


for compensation arrangements we haveincluded in § 411.357(l), it might stillmeet the de minimis exception we haveadded in § 411.357(k) if it has limitedvalue. We have also been asked aboutparking spaces that a hospital providesto physicians who have privileges totreat their patients in the hospital. It isour view that, while a physician ismaking rounds, the parking benefitsboth the hospital and its patients, ratherthan providing the physician with anypersonal benefit. Thus, we do not intendto regard parking for this purpose asremuneration furnished by the hospitalto the physician, but instead as part ofthe physician’s privileges. However, if ahospital provides parking to a physicianfor periods of time that do not coincidewith his or her rounds, that parkingcould constitute remuneration.

2. Exception for agreements involvingthe rental of office space or equipment

Can a lessee sublet office space orequipment? Section 1877(c)(1) and (2)excepts from compensationarrangements that trigger the referralprohibition, payments made by a lesseeto a lessor for the use of premises orequipment if certain criteria are met. Wehave listed these requirements in theregulation at § 411.357(a) and (b).Among these is the requirement that theoffice space or equipment be ‘‘usedexclusively by the lessee when beingused by the lessee.’’ We believeCongress included this requirement toensure that excepted rental agreementsare valid ones, rather than ‘‘paper’’leases that might involve paymentspassing between the lessor and lessee,when the lessee is not actually using orintending to use the space or theequipment. As a result, we believe thatthis requirement precludes the lesseefrom subletting the space or equipmentduring any portion of a lease duringwhich the lessee is expected to be usingthem.

A sublease arrangement mightnonetheless qualify under the newcompensation exception that we areproposing under § 411.357(l). Thatexception requires, among other things,that the rental payments be consistentwith fair market value and not take intoaccount the volume or value of anyreferrals between the parties. Inaddition, the lease arrangement must becommercially reasonable and further thelegitimate business purposes of theparties. We envision that there could bearrangements in which both the leasearrangement and the sublease wouldmeet all of these criteria.

Does the lease exception apply to anykind of lease covering space orequipment? As we understand general

accounting principles, there aredifferences between operational leasesand capital leases that may be relevantto our application of section 1877.Operational leases are basic, simpleleases in which the lessee makes rentalpayments to the lessor in order to usethe lessor’s property or space. Thesekinds of leases, we believe, could fallwithin the exceptions in section1877(e)(1)(A) and (B) because theyconstitute payments made by the lesseefor the use of space or equipment.

Capital leases, on the other hand, arevery much like installment salespurchases. Upon entering into such alease, the lessee receives all of thebenefits and obligations of ownership ofthe property. That is, the lessee (and notthe lessor) can depreciate the propertyand record it on its books as a capitalasset and the long-term capital leasepayments as a liability (very much likethe way the lessee would record a loan).In most cases, the title to the propertyat issue will pass to the lessee at the endof the term of the lease. In other words,the property that is covered by capitalleases is treated by accountants asproperty that a lessee has purchased oris in the process of purchasing. Webelieve that such leases go beyond thesection 1877(e)(1) exceptions, whichexcept only payments for the use ofequipment or space.

Can a lease provide for paymentbased on how often the equipment isused? We have been asked aboutsituations in which a physician rentsequipment to an entity that furnishes adesignated health service, such as ahospital that rents an MRI machine,with the physician receiving rentalpayments on a ‘‘per click’’ basis (that is,rental payments go up each time themachine is used). We believe that thisarrangement will not prohibit thephysician from otherwise referring tothe entity, provided that these kinds ofarrangements are typical and complywith the fair market value and otherstandards that are included under therental exception. However, because aphysician’s compensation under thisexception cannot reflect the volume orvalue of the physician’s own referrals,the rental payments cannot reflect ‘‘perclick’’ payments for patients who arereferred for the service by the lessorphysician.


How does the physician incentiveplan exception apply when an enrollingentity contracts with a group practice?The exception for personal servicesarrangements includes the criteria thatany compensation paid by an entity

under the arrangement cannot reflectthe volume or value of a physician’sreferrals, unless the compensation ispaid under a physician incentive plan,as that term is defined in section1877(e)(3)(B). A physician incentiveplan is defined by this provision as anycompensation arrangement between anentity and a physician or physiciangroup that may directly or indirectlyhave the effect of reducing or limitingservices furnished with respect toindividuals enrolled with the entity. Wehave defined ‘‘physician group’’ broadlyin our March 27, 1996, final rule (61 FR13430) interpreting physician incentiveplans under section 1876(i)(8), of whichgroup practices as defined under section1877(h) are a subset.

Although an entity can compensate aphysician group to reflect the volume orvalue of referrals under a physicianincentive plan, the definition of a grouppractice under section 1877(h)(4)(A)(iv)precludes the group, with certainexceptions, from compensating itsmembers based directly or indirectly onthe volume or value of their referrals (itdoes not contain the exception forphysician incentive plans). As we havedescribed earlier in this preamble, webelieve the volume or value standardapplies only to a physician’s ownreferrals for designated health servicescovered under Medicare or Medicaid.

Several interested parties have askedus whether these provisions containcontradictory standards, which couldmake it difficult for entities that enrollpatients to continue their commonpractice of contracting with grouppractices to provide services to theentities’ enrollees. We believe that thetwo provisions need not be read ascontradictory. While the group practicedefinition in general precludes a groupfrom compensating its physicianmembers based on their referrals, it doesallow groups to pay physicians a shareof the overall profits of the group, or aproductivity bonus based on servicespersonally performed or servicesincident to such personally performedservices, so long as the share or bonusis not determined in a manner that isdirectly related to the volume or valueof a physician’s own referrals. We havediscussed our interpretation of theseprinciples elsewhere in this preamble.In the context of a physician incentiveplan, a physician group as a wholecould be compensated more by an entitybased on providing or referring for fewerservices. We believe that the grouppractice could then pass any additionalcompensation it receives from aphysician incentive plan on to theindividual physician members viaoverall profit sharing, which would only


indirectly compensate them for thevolume of their referrals. Also, thephysicians could receive a productivitybonus for their decreased utilization ofany services that are not designatedhealth services covered under Medicareor Medicaid.

V. Regulatory Impact Statement

A. Background

We have examined the impacts of thisproposed rule as required by ExecutiveOrder 12866 and the RegulatoryFlexibility Act (RFA) (Public Law 96–354). Executive Order 12866 directsagencies to assess all costs and benefitsof available regulatory alternatives and,when regulation is necessary, to selectregulatory approaches that maximizenet benefits (including potentialeconomic, environmental, public healthand safety effects, distributive impacts,and equity). The RFA requires agenciesto analyze options for regulatory reliefof small businesses. For purposes of theRFA, most hospitals, and most otherproviders, physicians, and health caresuppliers are small entities, either bynonprofit status or by having revenuesof $5 million or less annually.

Section 202 of the UnfundedMandates Reform Act provides for‘‘Regulatory Accountability andReform.’’ It requires the agency toengage in certain procedures, includinga cost benefit analysis and consultationwith affected State and localgovernments, for proposed and certainfinal rules that include ‘‘Federalmandates’’ that may result in theexpenditure by State, local, and tribalgovernments, in the aggregate, or by theprivate sector, of $100 million or moreannually. Section 201 of the UnfundedMandates Reform Act requires thisassessment only to the extent that aregulation incorporates requirementsother than those specifically set forth inthe law.

Section 1102(b) of the Social SecurityAct requires us to prepare a regulatoryimpact analysis for any proposed rulethat may have a significant impact onthe operations of a substantial numberof small rural hospitals. This analysismust conform to the provisions ofsection 603 of the RFA. For purposes ofsection 1102(b) of the Act, we define asmall rural hospital as a hospital that islocated outside a MetropolitanStatistical Area and has fewer than 50beds.

Sections 1877 and 1903(s) of the Actwere enacted in order to correct anabuse highlighted by a number ofstudies: The ordering by somephysicians of unnecessary servicesbecause they have a financial incentive

do so. (See section I.A. of this preamblefor citations to the studies.) Thelegislation identified those types ofservices (referred to as ‘‘designatedhealth services’’) where the existence of,or potential for, abuse appeared to bethe greatest. The approach taken in thelegislation was to assume that, ingeneral, if a financial relationship existsbetween a physician or a physician’simmediate family member and an entitythat provides designated health services,an incentive to overutilize thoseservices also exists. The statute defineda financial relationship as an ownershipor investment interest in, orcompensation arrangement with, anentity. Congress created a number ofexceptions to the prohibition inrecognition of certain existing businesspractices. In addition, the legislationprovides the Secretary with authority tocreate new exceptions. However, wemust first determine, and specify inregulations, that any new exception willnot pose a risk of program or patientabuse.

Because of its exceptions, the currentlaw is complicated. However, theessence of the prohibition in section1877 is clear: If a physician or aphysician’s immediate family memberhas a financial relationship with anentity, the physician cannot referpatients to that entity for the furnishingof a designated health service for whichpayment otherwise may be made underMedicare. Unlike the anti-kickbackstatute discussed in the preamble, thelaw is triggered by the mere fact that afinancial relationship exists; theintention of the referring physician isnot taken into consideration.

Section 1903(s) denies Federalfinancial participation payment underthe Medicaid program to a State fordesignated health services furnished toan individual on the basis of a physicianreferral that would result in a denial ofpayment under the Medicare program ifMedicare covered the services to thesame extent and under the same termsand conditions as under the StateMedicaid plan.

The goal of this proposed rule is tointegrate section 1877 (as amended byOBRA ’93 and SSA ’94) into theMedicare regulations and section1903(s) into the Medicaid regulations,and to interpret the statute inaccordance with its language and intent.

B. Anticipated Effects and AlternativesConsidered

For the reasons described below, webelieve any estimate of the individual oraggregate economic impact of theprovisions of this proposed rule wouldbe purely speculative. Although the

provisions proposed in this rule do notlend themselves to a quantitative impactestimate, for reasons discussed belowand elsewhere in the preamble, we donot anticipate that they would have asignificant economic impact on asubstantial number of small entities.However, to the extent that ourproposals may have significant effectson some health care practitioners or beviewed as controversial, we believe it isdesirable to inform the public of whatwe view as the possible effects of theproposals. This analysis, together withthe other sections of the preamble,constitutes a regulatory flexibilityanalysis and analysis for purposes ofsection 1102(b) of the Act.

We expect that some kinds of entitiescould be affected to varying degrees bythis proposed rule. Following are thegroups we believe are most likely toexperience some economic impact:

1. PhysiciansA physician can be financially related

to an entity either through an ownershipor investment interest in the entity, orthrough a compensation arrangementwith the entity. We begin by firstdiscussing ownership/investmentinterests.

Ownership or investment interests. Aphysician who has (or whose immediatefamily member has) an ownership orinvestment interest in an entity anddoes not qualify for an exception isprohibited from referring Medicarepatients to that entity for the provisionof designated health services. Also,when a physician with such anownership or investment interest makesa prohibited referral, there is a risk thatthe entity will receive no Medicarepayment for those designated healthservices. Under Medicaid, a State mayreceive no FFP for services that resultfrom a referral that would be prohibitedunder Medicare, if Medicare covered thesame designated health services as arecovered under the State plan. The Statemay, in turn, choose not to pay thefurnishing entity.

The American Medical Association’s(AMA) Center for Health PolicyResearch (hereafter, the Center)reviewed three studies that analyze self-referral: (1) ‘‘Financial ArrangementsBetween Physicians and Health CareBusinesses: Report to Congress,’’ Officeof Inspector General, DHHS, pages 18and 21 (May 1989); (2) ‘‘Joint VenturesAmong Health Care Providers inFlorida,’’ State of Florida Health CareCost Containment Board (Sept. 1991);and (3) ‘‘Frequency and Costs ofDiagnostic Imagining in OfficePractice—A Comparison of Self-Referring and Radiologist-Referring


Physicians,’’ Bruce J. Hillman andothers, The New England Journal ofMedicine (December 1990; pp. 1604–1608). As reported in the Journal of theAmerican Medical Association (JAMA,May 6, 1992, Vol 267. No. 17), theCenter found that approximately 10percent of physicians nationwide haveownership interests in health careentities that have been associated withpotential self-referral issues. It pointedout, however, that not all of thesephysicians engage in self-referral. TheCenter also reported that there was noevidence in the studies they reviewedon the extent to which physicians mayprofit from self-referrals. Therefore, itconcluded that the degree of conflict ofinterest presented by a physician’sinvestment in entities to which he orshe refers patients is unknown.

If we were to assume that the 10percent figure cited above is currentlytrue, this would mean, based on thenumber of active physicians in 1995,that approximately 79,000 physicianshave an ownership interest in healthcare entities that furnish designatedhealth services. Note, however, thatothers cite higher percentages. Forexample, the 1991 study issued by theFlorida Health Care Cost ContainmentBoard found that at least 40 percent ofFlorida physicians involved in directpatient care had an investment in ahealth care business to which theycould—in the absence of prohibitinglegislation—refer patients for services.We would also like to point out thatownership information or informationon the investments of physicians and allof their immediate family members inthe entities that furnish any of elevendesignated health services constitutesan enormous amount of data that iscontinually subject to change.

In 1991, the AMA’s Council onEthical and Judicial Affairs hadconcluded that physicians should notrefer patients to a health care facilityoutside their office at which they do notdirectly provide services if they have aninvestment interest in the facility. TheCouncil stated that physicians have aspecial fiduciary responsibility to theirpatients and that there are someactivities involving their patients thatphysicians should avoid whether or notthere is evidence of abuse. In December1992, the AMA voted to declare self-referral unethical, with a fewexceptions. Exceptions are allowed ifthere is a demonstrated need in thecommunity and alternative financing isnot available.

As of October 1994, 27 States hadenacted legislation that restricts orqualifies self-referral. There is greatvariation among the States. Some only

require disclosure of the financialrelationship to the patient, while othersprohibit such referrals.

We believe that this increasedexamination of self-referralarrangements and enactment of bothFederal and State laws prohibiting sucharrangements has led to a decline inself-referral activity and financialrelationships between physicians andentities. However, we lack the datanecessary to either confirm or refute thissupposition. We also lack data thatwould tell us how many of the financialrelationships that physicians have withan entity that furnishes a designatedhealth service would be exemptedunder the statute. We would welcomereceiving current relevant data.

One exception that may have broadapplication is the in-office ancillaryservices exception. With regard to thisexception, which applies to bothownership/investment interests andcompensation arrangements, we offerthe following discussion.

To qualify as in-office ancillaryservices, the services must, among otherthings, be furnished personally by thereferring physician or another physicianin the same group practice as thereferring physician, or be furnished byindividuals who are directly supervisedby one of these physicians. How weinterpret a number of elements in thisprovision would affect whether certainreferrals qualify for the in-officeancillary services exception. Theseinclude how we define ‘‘grouppractice,’’ ‘‘members of the group,’’ and‘‘direct supervision.’’ We discuss thesedefinitions below.

The in-office ancillary servicesexception allows physicians who aremembers of a group practice tosupervise designated health servicesreferred by any group member.Paragraph (h)(4)(A) of section 1877provides a definition of a ‘‘grouppractice.’’ That definition, however,consists of elements that requireinterpretation—for example, whatqualifies a group of physicians as ‘‘alegal entity,’’ what is meant by the ‘‘fullrange of a physician’s services,’’ whichmust be furnished through grouparrangements, and what constitutes‘‘substantially all’’ of a physician’sservices, which must also be furnishedthrough the group. We discuss theseelements in section III.A.6 of thispreamble. As noted in that discussion,we propose to modify some of theinterpretations that we made in theAugust 1995 final rule. We believe thatthese modifications, which recognizeestablished business practices that donot pose the risk of program or patientabuse, will enable more physicians to

meet the definition of a group practicethan would the interpretations in theAugust 1995 rule. If a group ofphysicians qualifies as a group practice,services can be furnished by certainindividuals other than the referringphysician and still qualify for the in-office ancillary services exception. Weare unable, however, to make anestimate of the economic impact ofthese modifications.

Also affecting the in-office ancillaryservices exception is how we woulddefine ‘‘members of the group.’’ Again,this proposed rule would modify thedefinition we established in the August1995 final rule. This modification,discussed in detail in section III.A.6 ofthis preamble, would not regardindependent contractors as members ofthe group. This interpretation may makeit easier for a group of physicians tomeet the ‘‘substantially all’’ test toqualify as a group practice than wouldthe interpretation in the August 1995rule. On the other hand, independentcontractors could not supervise theprovision of designated health services.We are unable to estimate the impact ofthese opposing effects.

The in-office ancillary servicesexception provides both solopractitioners as well as group practicephysicians with the ability to referwithin their own practices. As wediscussed in detail in the August 1995final rule, this provision can except solopractitioners with certain sharedarrangements who do not wish tobecome a group practice. For example,two solo practitioners who share oneoffice and jointly own a laboratory cancontinue to refer to that laboratory, aslong as each physician furnishesphysician services unrelated to thedesignated health services in the office,directly supervises the laboratoryservices for his or her own Medicareand Medicaid patients while they arebeing furnished, and bills for theservices. If only one of the solopractitioners owns the laboratory in ashared office, the non-owning physiciancan refer to the laboratory as long as heor she is not receiving compensationfrom the owner in exchange forreferrals. We are aware, however, thatthis exception may not accommodatethe variety of different arrangementsphysicians have entered into to sharefacilities or otherwise group togetherwithout losing their status as solopractitioners. We directly solicitcomments on the effects of the referralprohibition on these arrangements.

The proposed regulation defines thestatutory requirement for a physician’s‘‘direct supervision’’ of individualsfurnishing designated health services


under the in-office ancillary servicesexception. Under the definition, ‘‘directsupervision’’ requires that a physicianbe present in the office suite andimmediately available to provideassistance and direction during the timeservices are being performed.

One option for defining ‘‘directsupervision’’ would be to say that itmeans that the service is furnishedunder the physician’s overallsupervision and control but that thephysician need not be physicallypresent in the office suite in which theservices are performed while they arebeing performed. This rule would notadopt such a definition, however. Webelieve that the supervision requirementis meant to establish as ‘‘in-officeancillary’’ services those services thatare integral to the physician’s ownpractice and that are conducted withinhis or her own sphere of activity. Webelieve Congress intended thisexception to apply to services that areclosely attached to the activities of thereferring physician.

If we were to allow physicians tosupervise the furnishing of designatedhealth services from a distance, webelieve that we would be creating anopportunity for physicians to refer toentities outside their own practices, forservices which are not actually ‘‘in-office ancillary’’ in nature. Although ourproposed definition may result in fewerreferrals qualifying for the ‘‘in-office’’exception than a more liberal definition,we believe our definition is necessary toachieve the purposes of the statute. Weare not, however, proposing that theremust be a particular configuration ofrooms for an office to qualify as a‘‘suite,’’ for example, that the rooms becontiguous. As stated in section III.A.2of this preamble, the question ofphysician proximity for purposes ofmeeting the direct supervisionrequirement is a decision that would bemade by the local carrier based on thecircumstances. We have also proposedto liberalize the concept of ‘‘present inthe office suite,’’ as we interpreted it inthe August 1995 final rule, to allow briefabsences from the office under certainconditions.

Because we do not have data on howmany physicians have financialrelationships that already qualify for thein-office exception, and how manywould have to alter their practices, evengiven the modifications discussedimmediately above, we cannot judge theeconomic impact of our definition. Wespecifically solicit information on thisissue.

As already stated, we do not havecurrent data on the number ofphysicians with ownership/investment

interests in entities that furnishdesignated health services. Nor do weknow how many of these physicianswould qualify for an exception to thereferral prohibition. However, even ifwe were to assume that a substantialnumber of physicians have nonexceptedownership interests in entities thatfurnish a designated health service, wedo not believe that, in general, theeconomic impact on these physiciansnecessarily has to be substantial, for thefollowing reasons:

If a physician’s ownership interest inan entity would lead to a prohibition onhis or her referrals to that entity, thephysician has three options: First, he orshe can stop making referrals to thatentity and make referrals to anotherunrelated entity. Second, the physiciancan divest him or herself of the interest.Third, the physician can, if possible,position him or herself to qualify for anexception. Below we discuss theeconomic impact of each of theseoptions.

While the impact on an individualphysician may be significant, we do notbelieve that physicians, in general, willbe significantly affected if they have tostop making referrals to an entity inwhich they have an ownership interest.We come to this conclusion because weassume that the majority of physiciansreceive most of their income from theservices they personally furnish, notfrom those they refer. In addition, weassume that unless the physicianestablished the entity to serve only hisor her own patients, the entity receivesreferrals from other sources. Thus, thephysician may still receive a return onthe investment. Further, it is possiblethat, if physician ownership of entitiesproviding the particular designatedhealth services is prevalent in the area,what may occur is a ‘‘shifting’’ ofreferrals; that is, the loss of a physician’sown referrals to the entity might beoffset by other physicians shiftingreferrals to unrelated entities. Theseshifts would be acceptable undersection 1877, provided they do notresult from circumvention schemes.

We do not believe the second option,divesting of the ownership interest,would necessarily have a significanteconomic effect. However, we assume,that, at least from an economicstandpoint, most physicians invest inentities because they are income-producing. If an investment issuccessful, a physician may not havedifficulty finding new investors willingto take over the physician’s investment.The physician, in turn, can then investthe monies received in some otherinvestment. We believe the cost ofdivesting will vary from situation to

situation. (A search of the literature onthis issue resulted in only anecdotalinformation that indicated that somephysicians sustained a loss in divesting,while others did not.) We do see thepossibility of a significant effect in thecase of a physician who has, atconsiderable expense, established anentity to serve only his or her ownpatients, with the expectation of futurereturn on that investment. We believe,however, that the exceptions in thestatute and regulation allowingphysicians to refer within their ownpractices (primarily the in-officeancillary services exception) will greatlyreduce the number of physiciansotherwise subject to the prohibition.

It is difficult to estimate how manyphysicians would select the third optionof changing the circumstances of theirpractices in order to meet an exceptionto the referral prohibition. It is alsodifficult to estimate the extent of thechanges that would be necessary or thepotential economic impact of anymodifications. As an example of onemodification, a physician maintainswith other independently-practicingphysicians a nonrural facility forfurnishing X-rays. The physicians sharepremises, equipment, employees, andoverhead costs. If an individualphysician does not meet therequirements for the in-office ancillaryexception found in section 1877(b)(2),the physician’s Medicare referrals tothat entity would be prohibited. In sucha situation, as an alternative to options1 and 2 above (stopping referrals ordivesting), the physician could chooseto form a group practice with the otherphysicians in order to qualify for the in-office ancillary services exception. Byforming a group practice, the referralswould not be prohibited if the serviceswere furnished personally by thereferring physician, personally byanother physician who is a member ofthe same group practice as the referringphysician, or if they are furnishedpersonally by individuals who aredirectly supervised by any of thesephysicians and the billing and locationrequirements specified in the in-officeancillary exception are met.

Although we realize that a physicianreorganizing his or her practice in thisway may be subject to various economicand noneconomic effects, we believethose effects will differ widely from caseto case. Some physicians may need tomake major alterations in theirpractices, while others may need onlyminor changes, with minimal or no helpfrom legal or financial advisors. It ispossible that some physicians wouldprofit from reorganizing, while othersmight suffer losses. Thus, we cannot


judge whether any particular physician,or physicians in general, will sustain asignificant economic impact becausethey have reconfigured their practices.

Compensation arrangements: Thestatute defines a compensationarrangement very broadly as anyarrangement involving anyremuneration between a physician (oran immediate family member) and anentity, with certain narrowly definedexceptions. We believe that thisdefinition involves almost everysituation in which a physician orrelative receives payment from an entityor makes payments to an entity,including payments under personalservices contracts, employmentagreements, sales contracts, and rentalsor leases. The amount of data we wouldneed to account for every compensationarrangement that might be affected bythe law would likely be overwhelming,as well as subject to the constantchanges inherent in the business world.As a result, it is difficult for us to assesshow many physicians (or their relatives)are currently involved in compensationarrangements.

We believe that most physicians whohave compensation, rather thanownership, arrangements with an entityand are receiving fair payments willqualify for one of the manycompensation-related exceptions setforth in this proposed rule, especiallysince we propose to exercise ourauthority to create several additionalexceptions related to compensation. Weexpect that those who do not will be fewin number, and, thus, this rule wouldnot have an impact on a substantialnumber of physicians whose financialrelationships are based oncompensation.

2. Entities, Including HospitalsWe lack the data to determine the

number of entities that would beaffected by this proposed rule. However,even if we were to assume that asubstantial number of entities would beaffected, we do not believe that, ingeneral, the impact would besignificant. In order for the effect on asubstantial number of entities to besignificant, this rule would have toresult in a very significant decline inutilization of the designated healthservices. The statute was enacted tocurb an abusive practice: the orderingby some physicians of unnecessaryservices because they have a financialincentive to do so. We do not believe,however, that the abuse is so prevalentthat the survival of entities would bethreatened because a physician’sfinancial incentive to make referrals isremoved. It is our view that most health

care entities exist because they providemedically necessary services and thatthese services will continue to befurnished.

In addition, the statute contains anumber of exceptions to the referralprohibition that will allow physicians tocontinue to refer to any entityfurnishing designated health services ifcertain criteria are met. Theseexceptions are set forth in this proposedrule. For example, § 411.356(c) includesexceptions for ownership or investmentinterests in certain hospitals or incertain rural entities. Sections411.357(c) and (d) include relevantexceptions related to compensationarrangements: Paragraph (c) provides anexception for bona fide employmentrelationships that meet certainconditions, and paragraph (d) providesan exception for remuneration forpersonal service arrangements that meetcertain conditions. Also, this proposedrule would provide an additionalexception for any compensation that is,among other things, based on fairmarket value. We believe many, if notmost, of the financial relationshipsbetween physicians and entities,including hospitals, are covered bythese exceptions.

C. ConclusionFor the reasons stated above, we have

determined, and the Secretary certifies,that, based on the limited data currentlyavailable to us, this proposed rulewould not result in a significanteconomic impact on a substantialnumber of small entities or on theoperations of a substantial number ofsmall rural hospitals. In addition, forpurposes of the Unfunded MandatesReform Act, we believe that anysignificant economic results of thisproposed rule originate from the generalreferral prohibition in the statute andnot from an agency mandate. We have,in fact, liberalized the requirements inthe law by adding new exceptions. Inthe relatively few instances in which wehave added additional requirements, asauthorized by the statute, our data is toolimited for us to ascertain whether thesenew provisions alone may result in theexpenditure by State, local, and tribalgovernments, in the aggregate, or by theprivate sector, of $100 million or morein any one year. In terms ofrequirements on State governments, it isthe statute that applies aspects of thereferral prohibition to State Medicaidagencies. This proposed rule doesinterpret the statute to apply thereporting requirements in section1877(f) of the Act to States, but does notmandate any action. The proposed ruleallows States to collect financial

information from Medicaid providers inany form, manner, and at whatevertimes they choose.

In accordance with the provisions ofExecutive Order 12866, this regulationwas reviewed by the Office ofManagement and Budget.

VI. Collection of InformationRequirements

Under the Paperwork Reduction Actof 1995, we are required to provide 60-day notice in the Federal Register andsolicit public comment before acollection of information requirement issubmitted to the Office of Managementand Budget (OMB) for review andapproval. In order to fairly evaluatewhether an information collectionshould be approved by OMB, section3506(c)(2)(A) of the PaperworkReduction Act of 1995 requires that wesolicit comment on the following issues:

• The need for the informationcollection and its usefulness in carryingout the proper functions of our agency.

• The accuracy of our estimate of theinformation collection burden.

• The quality, utility, and clarity ofthe information to be collected.

• Recommendations to minimize theinformation collection burden on theaffected public, including automatedcollection techniques.

Sections 411.360 and 411.361 of thisproposed rule contain informationcollection requirements that are subjectto the Paperwork Reduction Act of 1995.However, we are not requiring thepublic to comply with these reportingrequirements at this time. Instead we areseeking public comment to determinepossible methods of implementing theseinformation collection andrecordkeeping requirements. Once wehave determined how to impose theserequirements in the least burdensomemethod, while meeting programrequirements, we will publish a separate60-day notice in the Federal Registerseeking comments on the proposedinformation collection before it issubmitted to OMB for review.

Below is a discussion of theinformation collection requirementsreferenced in §§ 411.360 and 411.361.

As stated earlier in this preamble, anumber of entities have pointed out tous that the amounts of data they arerequired to report under the statute asreflected in our current regulations will,in some circumstances, beoverwhelming and perhaps almostimpossible to acquire. Therefore, inorder to make the reportingrequirements more manageable, weintend to develop a streamlined‘‘reporting’’ system that does not requireentities to retain and submit large


quantities of data. We believe, however,that entities should retain enoughrecords to demonstrate, in the event ofan audit, that they have correctlydetermined that particular relationshipsare excepted under the law.

We are proposing to limit theinformation that an entity must acquire,retain and, at some later point, possiblysubmit to us. We would include onlythose records covering information thatthe entity knows or should know about,in the course of prudently conductingbusiness, including records that theentity is already required to retain tomeet Internal Revenue Service andSecurity Exchange Commission rules,and other rules under the Medicare orMedicaid programs. We arecircumscribing these records under theSecretary’s discretion in section 1877(f)to ask entities to provide information insuch form, manner, and at such times asthe Secretary specifies. As stated above,when we develop a form for reportinginformation to us, we plan to firstpublish it as a proposed notice in orderto receive public comment. If we laterfind that this plan is inadequate andelect to change the scope of therequirement, we will provide entitieswith adequate notice to comply.

While we are not at this timeproposing to impose reportingrequirements, we do propose to makemodifications to the existinginformation collection requirementsreferenced in this proposed rule.Existing § 411.361 reflects the reportingrequirements in section 1877(f) of theAct. Specifically, § 411.361 requires,with certain exceptions, that all entitiesfurnishing services for which paymentmay be made under Medicare submitinformation to us concerning theirfinancial relationships (as described in§ 411.361(d)). The requirement does notapply to entities that furnish 20 or fewerPart A and Part B services during acalendar year, or to designated healthservices furnished outside the UnitedStates. Paragraph (a) of § 411.361requires that all entities furnishingservices for which payment may bemade under Medicare submitinformation to us concerning theirfinancial relationships in the form,manner, and at the times we specify. Wewould revise this to add that thisinformation must be submitted on aHCFA-prescribed form. As stated above,this form would first be published as aproposed notice in order to receivepublic comment.

Paragraph (c) of § 411.361 requiresthat the entity submit information thatincludes at least the following withregard to each physician who has, orwhose immediate family member has, a

financial relationship with the entity:The name and unique physicianidentification number (UPIN) of thephysician, the covered servicesfurnished by the entity, and the natureof the financial relationship. We nowpropose to specify that the entity submitinformation that may include theinformation described above dependingupon the process we select.

Existing § 411.361(d) provides that areportable financial relationship is anyownership or investment interest or anycompensation arrangement, as describedin section 1877 of the Act. Thisproposed, would revise this section tospecify that a financial relationship isany ownership or investment interest orany compensation arrangement, asdefined in § 411.351, including thoserelationships excepted under §§ 411.355through 411.357.

We would also revise existing§ 411.361(e) as follows. Currently thatparagraph requires that an entityprovide updated information within 60days from the date of any change in thesubmitted information. We propose torequire instead that an entity report toHCFA once a year all changes in thesubmitted information that occurred inthe previous 12 months.

OBRA ’93 amended section 1903 ofthe Act by adding a new paragraph(s)that, among other things, applied thereporting requirements of 1877(f) to aprovider of a designated health servicefor which payment may be made underMedicaid in the same manner as thoserequirements apply to a Medicareprovider. Therefore, at § 455.109(a) ofthis proposed rule, we would specifythat the Medicaid agency must requirethat each provider of services thatfurnishes designated health services thatare covered by Medicaid submitinformation to the Medicaid agencyconcerning its financial relationships insuch form, manner, and at such times asthe agency specifies. Paragraph (c) of§ 445.109 would specify that the entitysubmit the same information identifiedwith regard to Medicare providers/suppliers except that, instead of theUPIN, the entity would report theMedicaid State Specific Identifier ofeach physician who has, or whoseimmediate relative has, a financialrelationship with the entity. Paragraph(d) of § 445.109 would establish thesame definition of what constitutes areportable financial relationship asunder Medicare, and paragraph (e)would give States the discretion toestablish the timeframes within whichproviders must submit and updateinformation. We solicit comments onthese proposed changes to the existingreporting requirements.

This proposed rule would also retainexisting § 411.360, which requires that agroup practice that wants to beidentified as such submit a writtenstatement to its carrier annually to attestthat it meets the ‘‘substantially all’’ test,one of the criteria that qualifies a groupof physicians as a group practice (thecriteria are set forth under the definitionof a group practice in § 411.351). Thisprovision would now apply to anygroup of physicians who refer for orfurnish designated health services andwho wish to qualify as a group practice.We believe that, since this requirementhas already been established by theAugust 1995 final rule, a significantnumber of physician groups mayalready be subject to the reportingrequirements. We base this conclusionon the fact that many groups have theirown clinical laboratories and willalready be prepared to attest forpurposes of complying with the finalregulation covering referrals for clinicallaboratory services. Once a group isidentified as a group practice forpurposes of laboratory services, it isidentified as a group practice for allservices. Thus it was the August 1995final rule that established the burden forthose groups. However, we have no wayof estimating how many other groups ofphysicians will want to try to qualify asgroup practices exclusively for purposesof referring for some or all of the otherdesignated health services. Wespecifically solicit information on thisissue. A group of physicians mustsubmit the attestation required by§ 411.360 within 60 days after receivingattestation instructions from its carrier.

If you comment on these informationcollection and recordkeepingrequirements, please mail copiesdirectly to the following:Health Care Financing Administration,

Office of Financial and HumanResources, Management Planning andAnalysis Staff, Attention: HCFA–1809–P, Room C2–26–17, 7500Security Boulevard, Baltimore, MD21244–1850.

Office of Information and RegulatoryAffairs, Office of Management andBudget, Room 10235, New ExecutiveOffice Building, Washington, DC20503, Attn: Allison Herron Eydt,HCFA Desk Officer.

VII. Response to CommentsBecause of the large number of items

of correspondence we normally receiveon a proposed rule, we are not able toacknowledge or respond to themindividually. We will, however,consider all comments that we receiveby the date specified in the DATESsection of this preamble and, if we


proceed with a final rule, we willrespond to the comments in thepreamble of the final rule. We will alsorespond, in that final rule, to commentsthat we received on the August 1995final rule with comment coveringreferrals for clinical laboratory services.

List of Subjects

42 CFR Part 411Kidney diseases, Medicare, Physician

referral, Reporting and recordkeepingrequirements.

42 CFR Part 424Emergency medical services, Health

facilities, Health professions, Medicare.

42 CFR Part 435Aid to Families with Dependent

Children, Grant programs-health,Medicaid, Reporting and recordkeepingrequirements, Supplemental SecurityIncome (SSI), Wages.

42 CFR Part 455Fraud, Grant programs-health, Health

facilities, Health professions,Investigations, Medicaid, Reporting andrecordkeeping requirements.

42 CFR chapter IV would be amendedas set forth below:

PART 411—EXCLUSIONS FROMMEDICARE AND LIMITATIONS ONMEDICARE PAYMENT

A. Part 411 is amended as follows:1. The authority citation for part 411

continues to read as follows:Authority: Secs. 1102 and 1871 of the

Social Security Act (42 U.S.C. 1302 and1395hh).

2. In § 411.1, paragraph (a) is revisedto read as follows:

§ 411.1 Basis and scope.(a) Statutory basis. Sections 1814(a)

and 1835(a) of the Act require that aphysician certify or recertify a patient’sneed for home health services, but ingeneral, prohibit a physician fromcertifying or recertifying the need forservices if the services will be furnishedby a home health agency in which thephysician has a significant ownershipinterest, or with which the physicianhas a significant financial or contractualrelationship. Sections 1814(c), 1835(d),and 1862 of the Act exclude fromMedicare payment certain specifiedservices. The Act provides special rulesfor payment of services furnished byFederal providers or agencies (sections1814(c) and 1835(d)), by hospitals andphysicians outside the United States(sections 1814(f) and 1862(a)(4)), and byhospitals and SNFs of the Indian HealthService (section 1880). Section 1877 sets

forth limitations on referrals andpayment for designated health servicesfurnished by entities with which thereferring physician (or an immediatefamily member of the referringphysician) has a financial relationship.* * * * *

3. In § 411.350, paragraphs (a) and (c)are revised, and paragraph (b) isrepublished, to read as follows:

§ 411.350 Scope of subpart.(a) This subpart implements section

1877 of the Act, which generallyprohibits a physician from making areferral under Medicare for designatedhealth services to an entity with whichthe physician or a member of thephysician’s immediate family has afinancial relationship.

(b) This subpart does not provide forexceptions or immunity from civil orcriminal prosecution or other sanctionsapplicable under any State laws orunder Federal law other than section1877 of the Act. For example, althougha particular arrangement involving aphysician’s financial relationship withan entity may not prohibit the physicianfrom making referrals to the entityunder this subpart, the arrangement maynevertheless violate another provisionof the Act or other laws administered byHHS, the Federal Trade Commission,the Securities and ExchangeCommission, the Internal RevenueService, or any other Federal or Stateagency.

(c) This subpart requires, with someexceptions, that certain entitiesfurnishing covered services under PartA or Part B report informationconcerning their ownership, investment,or compensation arrangements in theform, manner, and at the times specifiedby HCFA.

4. Section 411.351 is revised to readas follows:

§ 411.351 Definitions.As used in this subpart, unless the

context indicates otherwise:Clinical laboratory services means the

biological, microbiological, serological,chemical, immunohematological,hematological, biophysical, cytological,pathological, or other examination ofmaterials derived from the human bodyfor the purpose of providing informationfor the diagnosis, prevention, ortreatment of any disease or impairmentof, or the assessment of the health of,human beings. These examinations alsoinclude procedures to determine,measure, or otherwise describe thepresence or absence of varioussubstances or organisms in the body.

Compensation arrangement meansany arrangement involving any

remuneration, direct or indirect,between a physician (or a member of aphysician’s immediate family) and anentity.

Designated health services means anyof the following services (other thanthose provided as emergency physicianservices furnished outside of the UnitedStates), as they are defined in thissection:

(1) Clinical laboratory services.(2) Physical therapy services.(3) Occupational therapy services.(4) Radiology services and radiation

therapy services and supplies.(5) Durable medical equipment and

supplies.(6) Parenteral and enteral nutrients,

equipment, and supplies.(7) Prosthetics, orthotics, and

prosthetic devices and supplies.(8) Home health services.(9) Outpatient prescription drugs.(10) Inpatient and outpatient hospital

services.Direct supervision means supervision

by a physician who is present in theoffice suite in which the services arebeing furnished, throughout the timethey are being furnished, andimmediately available to provideassistance and direction. ‘‘Present in theoffice suite’’ means that the physician isactually physically present. However,the physician is still considered‘‘present’’ during brief unexpectedabsences as well as during routineabsences of a short duration (such asduring a lunch break), provided theabsences occur during time periods inwhich the physician is otherwisescheduled and ordinarily expected to bepresent and the absences do not conflictwith any other requirements in theMedicare program for a particular levelof physician supervision.

Durable medical equipment has themeaning given in section 1861(n) of theAct and § 414.202 of this chapter.

Employee means any individual who,under the usual common law rules thatapply in determining the employer-employee relationship (as applied forpurposes of section 3121(d)(2) of theInternal Revenue Code of 1986), isconsidered to be employed by, or anemployee of, an entity. (Application ofthese common law rules is discussed at20 CFR 404.1007 and 26 CFR31.3121(d)–1(c).)

Enteral nutrients, equipment, andsupplies means items and suppliesneeded to provide enteral nutrition to apatient with a functioninggastrointestinal tract who, due topathology to or nonfunction of thestructures that normally permit food toreach the digestive tract, cannotmaintain weight and strength


commensurate with his or her generalcondition, as described in section 65–10of the Medicare Coverage Issues Manual(HCFA Pub. 6).

Entity means a physician’s solepractice or a practice of multiplephysicians that provides for thefurnishing of designated health services,or any other sole proprietorship, trust,corporation, partnership, foundation,not-for-profit corporation, orunincorporated association.

Fair market value means the value inarm’s-length transactions, consistentwith the general market value. ‘‘Generalmarket value’’ means the price that anasset would bring, as the result of bonafide bargaining between well-informedbuyers and sellers, or the compensationthat would be included in a serviceagreement, as the result of bona fidebargaining between well-informedparties to the agreement, on the date ofacquisition of the asset or at the time ofthe service agreement. Usually the fairmarket price is the price at which bonafide sales have been consummated forassets of like type, quality, and quantityin a particular market at the time ofacquisition, or the compensation thathas been included in bona fide serviceagreements with comparable terms atthe time of the agreement. With respectto the rentals and leases described in§ 411.357(a) and (b), fair market valuemeans the value of rental property forgeneral commercial purposes (not takinginto account its intended use). In thecase of a lease of space, this value maynot be adjusted to reflect the additionalvalue the prospective lessee or lessorwould attribute to the proximity orconvenience to the lessor when thelessor is a potential source of patientreferrals to the lessee.

Financial relationship means a director indirect ownership or investmentinterest (including an option ornonvested interest) in any entity thatexists through equity, debt, or othermeans and includes any indirectownership or investment interest nomatter how many levels removed froma direct interest (for example, a financialrelationship in an entity furnishingdesignated health services exists if theindividual has an ownership orinvestment interest in an entity thatholds an ownership or investmentinterest in an entity that furnishesdesignated health services), or acompensation arrangement with anentity.

Group practice means a group of twoor more physicians, legally organized asa single partnership, professionalcorporation, foundation, not-for-profitcorporation, faculty practice plan, orsimilar association, with the exception

that a group can consist of physicianswho are also individually incorporatedas professional corporations. To qualifyas a group practice, a group must meetthe following conditions:

(1) Each physician who is a memberof the group, as defined in this section,furnishes substantially the full range ofpatient care services that the physicianroutinely furnishes, including medicalcare, consultation, diagnosis, andtreatment, through the joint use ofshared office space, facilities,equipment, and personnel.

(2) Except as provided in paragraphs(2)(i) and (2)(ii) of this definition,substantially all of the patient careservices of the physicians who aremembers of the group (that is, at least75 percent of the total patient careservices of the group practice members)are furnished through the group andbilled under a billing number assignedto the group and the amounts receivedare treated as receipts of the group.‘‘Patient care services’’ are measured bythe total patient care time each memberspends on these services (for example,if a physician practices 40 hours a weekand spends 30 hours on patient careservices for a group practice, thephysician has spent 75 percent of his orher time providing countable patientcare services).

(i) The ‘‘substantially all’’ test doesnot apply to any group practice that islocated solely in an HPSA, as defined inthis section.

(ii) For group practices locatedoutside of an HPSA (as defined in thissection) any time spent by grouppractice members providing services inan HPSA should not be used tocalculate whether the group practicelocated outside the HPSA has met the‘‘substantially all’’ test, regardless ofwhether the members’ time in the HPSAis spent in a group practice, clinic, oroffice setting.

(3) The overhead expenses of andincome from the practice are distributedaccording to methods that aredetermined prior to the time periodduring which the group has earned theincome or incurred the costs.

(4) The overhead expenses of and theincome from the practice are distributedaccording to methods that indicate thatthe practice is a unified business. Thatis, the methods must reflect centralizeddecision making, a pooling of expensesand revenues, and a distribution systemthat is not based on each satellite officeoperating as if it were a separateenterprise.

(5) No physician who is a member ofthe group directly or indirectly receivescompensation based on the volume orvalue of referrals by the physician,

except that a physician in a grouppractice may be paid a share of overallprofits of the group or a productivitybonus based on services he or she haspersonally performed or servicesincident to these personally performedservices, as long as the share or bonusis not determined in any manner that isdirectly related to the volume or valueof referrals by the physician.

(6) Members of the group personallyconduct no less that 75 percent of thephysician-patient encounters of thegroup practice.

(7) In the case of faculty practiceplans associated with a hospital,institution of higher education, ormedical school that has an approvedmedical residency training program inwhich faculty practice plan physiciansperform specialty and professionalservices, both within and outside thefaculty practice, as well as performother tasks such as research, thisdefinition applies only to those servicesthat are furnished within the facultypractice plan.

Home health services means theservices described in section 1861(m) ofthe Act and part 409, subpart E of thischapter.

Hospital means any entity thatqualifies as a ‘‘hospital’’ under section1861(e) of the Act, as a ‘‘psychiatrichospital’’ under section 1861(f) of theAct, or as a ‘‘rural primary carehospital’’ under section 1861(mm)(1) ofthe Act, and refers to any separatelegally-organized operating entity plusany subsidiary, related entity, or otherentities that perform services for thehospital’s patients and for which thehospital bills. However, a ‘‘hospital’’does not include entities that performservices for hospital patients ‘‘underarrangements’’ with the hospital.

HPSA means, for purposes of thissubpart, an area designated as a healthprofessional shortage area under section332(a)(1)(A) of the Public Health ServiceAct for primary medical careprofessionals (in accordance with thecriteria specified in 42 CFR part 5,appendix A, Part I-Geographic Areas). Inaddition, with respect to dental, mentalhealth, vision care, podiatric, andpharmacy services, an HPSA means anarea designated as a health professionalshortage area under section 332(a)(1)(A)of the Public Health Service Act fordental professionals, mental healthprofessionals, vision care professionals,podiatric professionals, and pharmacyprofessionals, respectively.

Immediate family member or memberof a physician’s immediate familymeans husband or wife; natural oradoptive parent, child, or sibling;stepparent, stepchild, stepbrother, or


stepsister; father-in-law, mother-in-law,son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent orgrandchild; and spouse of a grandparentor grandchild.

Inpatient hospital services are thoseservices defined in section 1861(b) ofthe Act and § 409.10(a) and (b) of thischapter, and include inpatientpsychiatric hospital services listed insection 1861(c) of the Act and inpatientrural primary care hospital services, asdefined in section 1861(mm)(2) of theAct. ‘‘Inpatient hospital services’’ do notinclude emergency inpatient servicesprovided by a hospital located outsidethe United States and covered under theauthority in section 1814(f)(2) of the Actand part 424, subpart H of this chapterand emergency inpatient servicesprovided by a nonparticipating hospitalwithin the United States, as authorizedby section 1814(d) of the Act anddescribed in part 424, subpart G of thischapter. These services also do notinclude dialysis furnished by a hospitalthat is not certified to provide end stagerenal dialysis (ESRD) services undersubpart U of 42 CFR 405.

Inpatient hospital services includeservices that a hospital provides for itspatients that are furnished either by thehospital or by others underarrangements with the hospital. They donot encompass the services of otherphysicians, physician assistants, nursepractitioners, clinical nurse specialists,certified nurse midwives, and certifiedregistered nurse anesthetists andqualified psychologists who billindependently.

Laboratory means an entity furnishingbiological, microbiological, serological,chemical, immunohematological,hematological, biophysical, cytological,pathological, or other examination ofmaterials derived from the human bodyfor the purpose of providing informationfor the diagnosis, prevention, ortreatment of any disease or impairmentof, or the assessment of the health of,human beings. These examinations alsoinclude procedures to determine,measure, or otherwise describe thepresence or absence of varioussubstances or organisms in the body.Entities only collecting or preparingspecimens (or both) or only serving asa mailing service and not performingtesting are not considered laboratories.

Members of the group meansphysician partners and other physicianowners (including physicians whoseinterest is held by an individualprofessional corporation), and full-timeand part-time physician employees.These physicians are ‘‘members’’ duringthe time they furnish ‘‘patient careservices’’ to the group.

Occupational therapy services meansthose services described at section1861(g) of the Act and § 410.100(c) ofthis chapter. Occupational therapyservices also include any other serviceswith the characteristics described in§ 410.100(c) that are covered underMedicare Part A or B, regardless of whofurnishes them, the location in whichthey are furnished, or how they arebilled.

Orthotics means leg, arm, back, andneck braces, as listed in section1861(s)(9) of the Act.

Outpatient hospital services meansthe therapeutic, diagnostic, and partialhospitalization services listed undersection 1861(s)(2)(B) and (C) of the Act;outpatient services furnished by apsychiatric hospital, as defined insection 1861(f); and outpatient ruralprimary care hospital services, asdefined in section 1861(mm)(3); butexcluding emergency services coveredin nonparticipating hospitals under theconditions described in section 1835(b)of the Act and subpart G of part 424 ofthis chapter.

Outpatient prescription drugs meansthose drugs (including biologicals)defined or listed under section 1861(t)and (s) of the Act and part 410 of thischapter, that a patient can obtain froma pharmacy with a prescription (even ifthe patient can only receive the drugunder medical supervision), and that arefurnished to an individual underMedicare Part B, but excludingerythropoietin and other drugsfurnished as part of a dialysis treatmentfor an individual who dialyzes at homeor in a facility.

Parenteral nutrients, equipment, andsupplies means those items andsupplies needed to provide nutriment toa patient with permanent, severepathology of the alimentary tract thatdoes not allow absorption of sufficientnutrients to maintain strengthcommensurate with the patient’s generalcondition, as described in section 65–10of the Medicare Coverage Issues Manual(HCFA Pub. 6).

Patient care services means any tasksperformed by a group practice memberthat address the medical needs ofspecific patients or patients in general,regardless of whether they involvedirect patient encounters, or tasks thatgenerally benefit a particular practice.They can include, for example, theservices of physicians who do notdirectly treat patients, such as timespent by a physician consulting withother physicians or reviewing laboratorytests, or time spent training staffmembers, arranging for equipment, orperforming administrative ormanagement tasks.

Physical therapy services means thoseoutpatient physical therapy services(including speech-language pathologyservices) described at section 1861(p) ofthe Act and at § 410.100(b) and (d) ofthis chapter. Physical therapy servicesalso include any other services with thecharacteristics described in § 400.100(b)and (d) that are covered under MedicarePart A or B, regardless of who providesthem, the location in which they areprovided, or how they are billed.

Physician incentive plan means anycompensation arrangement between anentity and a physician or physiciangroup that may directly or indirectlyhave the effect of reducing or limitingservices furnished with respect toindividuals enrolled with the entity.

Plan of care means the establishmentby a physician of a course of diagnosisor treatment (or both) for a particularpatient, including the ordering ofservices.

Prosthetic device and supplies:Prosthetic device means a device (otherthan a dental device) listed in section1861(s)(8) that replaces all or part of aninternal body organ, includingcolostomy bags and including one pairof conventional eyeglasses or contactlenses furnished subsequent to eachcataract surgery with insertion of anintraocular lens. Prosthetic supplies aresupplies that are necessary for theeffective use of a prosthetic device(including supplies directly related tocolostomy care).

Prosthetics means artificial legs, arms,and eyes, as described in section1861(s)(9) of the Act.

Radiology services and radiationtherapy and supplies means anydiagnostic test or therapeutic procedureusing X-rays, ultrasound or otherimaging services, computerized axialtomography, magnetic resonanceimaging, radiation, or nuclear medicine,and diagnostic mammography services,as covered under section 1861(s)(3) and(4) of the Act and §§ 410.32(a), 410.34,and 410.35 of this chapter, including theprofessional component of theseservices, but excluding any invasiveradiology procedure in which theimagingmodality is used to guide aneedle, probe, or a catheter accurately.

Referral—(1) Means either of the following:(i) Except as provided in paragraph (2)

of this definition, the request by aphysician for, or ordering of, or thecertifying or recertifying of the need for,any designated health service for whichpayment may be made under MedicarePart B (or, for purposes of the Medicaidprogram, a comparable service coveredunder the Medicaid State plan),including a request for a consultation


with another physician and any test orprocedure ordered by or to be performedby (or under the supervision of) thatother physician.

(ii) Except as provided in paragraph(2) of this definition, a request by aphysician that includes the provision ofany other designated health service forwhich payment may be made underMedicare (or, for purposes of theMedicaid program, a comparable servicecovered under the Medicaid State plan)the establishment of a plan of care by aphysician that includes the provision ofsuch a designated health service, or thecertifying or recertifying of the need forsuch a designated health service.

(2) Does not include a request by apathologist for clinical diagnosticlaboratory tests and pathologicalexamination services, by a radiologistfor diagnostic radiology services, and bya radiation oncologist for radiationtherapy, if—

(i) The request results from aconsultation initiated by anotherphysician; and

(ii) The tests or services are furnishedby or under the supervision of thepathologist, radiologist, or radiationoncologist.

Referring physician means aphysician who makes a referral asdefined in this section.

Remuneration means any payment,discount, forgiveness of debt, or otherbenefit made directly or indirectly,overtly or covertly, in cash or in kind,except that the following are notconsidered remuneration:

(1) The forgiveness of amounts owedfor inaccurate tests or procedures,mistakenly performed tests orprocedures, or the correction of minorbilling errors.

(2) The furnishing of items, devices,or supplies that are used solely tocollect, transport, process, or storespecimens for the entity furnishing theitems, devices, or supplies or are usedsolely to order or communicate theresults of tests or procedures for theentity.

(3) A payment made by an insurer ora self-insured plan to a physician tosatisfy a claim, submitted on a fee-for-service basis, for the furnishing ofhealth services by that physician to anindividual who is covered by a policywith the insurer or by the self-insuredplan, if—

(i) The health services are notfurnished, and the payment is not made,under a contract or other arrangementbetween the insurer or the plan and thephysician;

(ii) The payment is made to thephysician on behalf of the covered

individual and would otherwise bemade directly to the individual; and

(iii) The amount of the payment is setin advance, does not exceed fair marketvalue, and is not determined in amanner that takes into account directlyor indirectly the volume or value of anyreferrals or other business generatedbetween the parties.

Transaction: A transaction is aninstance or process of two or morepersons or entities doing business. Anisolated transaction is one involving asingle payment between two or morepersons or entities. A transaction thatinvolves long-term or installmentpayments is not considered an isolatedtransaction.


§ 411.353 Prohibition on certain referralsby physicians and limitations on billing.

(a) Prohibition on referrals. Except asprovided in this subpart, a physicianwho has a financial relationship with anentity, or who has an immediate familymember who has a financialrelationship with the entity, may notmake a referral to that entity for thefurnishing of designated health servicesfor which payment otherwise may bemade under Medicare.

(b) Limitations on billing. An entitythat furnishes designated health servicesunder a referral that is prohibited byparagraph (a) of this section may notpresent or cause to be presented a claimor bill to the Medicare program or to anyindividual, third party payer, or otherentity for the designated health servicesperformed under that referral.

(c) Denial of payment. No Medicarepayment may be made for a designatedhealth service that is furnished under aprohibited referral.

(d) Refunds. An entity that collectspayment for a designated health servicethat was performed under a prohibitedreferral must refund all collectedamounts on a timely basis, as defined in§ 1003.101 of Chapter V.


§ 411.355 General exceptions to thereferral prohibition related to bothownership/investment and compensation.

The prohibition on referrals set forthin § 411.353 does not apply to thefollowing types of services:

(a) Physician services, as defined in§ 410.20(a), that are furnishedpersonally by (or under the personalsupervision of) another physician in thesame group practice as the referringphysician.

(b) In-office ancillary services.Services (including infusion pumps and

crutches, but excluding all other durablemedical equipment and parenteral andenteral nutrients, equipment, andsupplies), that meet the followingconditions:

(1) They are furnished personally byone of the following individuals:

(i) The referring physician.(ii) A physician who is a member of

the same group practice as the referringphysician.

(iii) Individuals who are directlysupervised by the referring physician or,in the case of group practices, byanother physician member of the samegroup practice as the referringphysician.

(2) They are furnished in one of thefollowing locations:

(i) The same building in which thereferring physician (or anotherphysician who is a member of the samegroup practice) furnishes physicianservices unrelated to the furnishing ofdesignated health services. The ‘‘samebuilding’’ means the same physicalstructure, with one address, and notmultiple structures connected bytunnels or walkways.

(ii) A building that is used by thegroup practice for the provision of someor all of the group’s clinical laboratoryservices.

(iii) A building that is used by thegroup practice for the centralizedprovision of the group’s designatedhealth services (other than clinicallaboratory services).

(3) They are billed by one of thefollowing:

(i) The physician performing orsupervising the service.

(ii) The group practice of which theperforming or supervising physician is amember under a billing numberassigned to the group practice.

(iii) An entity that is wholly owned bythe physician or the physician’s grouppractice.

(4) In the case of crutches, thephysician realizes no direct or indirectprofit from furnishing the crutches.

(c) Services furnished to prepaidhealth plan enrollees by one of thefollowing organizations:

(1) An HMO or a CMP in accordancewith a contract with HCFA undersection 1876 of the Act and part 417,subparts J through M of this chapter.

(2) A health care prepayment plan inaccordance with an agreement withHCFA under section 1833(a)(1)(A) of theAct and part 417, subpart U of thischapter.

(3) An organization that is receivingpayments on a prepaid basis forMedicare enrollees through ademonstration project under section402(a) of the Social Security


Amendments of 1967 (42 U.S.C. 1395b-1) or under section 222(a) of the SocialSecurity Amendments of 1972 (42U.S.C. 1395b-1 note).

(4) A qualified health maintenanceorganization (within the meaning ofsection 1310(d) of the Public HealthService Act).

(d) Services furnished under certainpayment rates. (1) Services furnished inan ambulatory surgical center (ASC) orESRD facility or by a hospice if paymentfor those services is included in the ASCpayment rate, the ESRD compositepayment rate, or as part of the hospicepayment rate, respectively; and

(2) Services furnished under otherpayment rates that the Secretarydetermines provide no financialincentive for under or overutilization, orany other risk of program or patientabuse.


§ 411.356 Exceptions to the referralprohibition related to ownership orinvestment interests.

For purposes of § 411.353, thefollowing ownership or investmentinterests do not constitute a financialrelationship:

(a) Publicly-traded securities.Ownership of investment securities(including shares or bonds, debentures,notes, or other debt instruments) that atthe time they were obtained could bepurchased on the open market and thatmeet the requirements of paragraphs(a)(1) and (a)(2) of this section.

(1) They are either—(i) Listed for trading on the New York

Stock Exchange, the American StockExchange, or any regional exchange inwhich quotations are published on adaily basis, or foreign securities listedon a recognized foreign, national, orregional exchange in which quotationsare published on a daily basis, or

(ii) Traded under an automatedinterdealer quotation system operatedby the National Association ofSecurities Dealers.

(2) They are in a corporation that hadstockholder equity exceeding $75million at the end of the corporation’smost recent fiscal year or on averageduring the previous 3 fiscal years.‘‘Stockholder equity’’ is the differencein value between a corporation’s totalassets and total liabilities.

(b) Mutual funds. Ownership ofshares in a regulated investmentcompany as defined in section 851(a) ofthe Internal Revenue Code of 1986, ifthe company had, at the end of its mostrecent fiscal year, or on average duringthe previous 3 fiscal years, total assetsexceeding $75 million.

(c) Specific providers. Ownership orinvestment interest in the followingentities, for purposes of the servicesspecified:

(1) A rural provider, in the case ofdesignated health services furnished ina rural area by the provider. A ‘‘ruralprovider’’ is an entity that furnishessubstantially all (not less than 75percent) of the designated healthservices that it furnishes to residents ofa rural area (that is, an area that is notan urban area as defined in§ 412.62(f)(1)(ii) of this chapter).

(2) A hospital that is located in PuertoRico, in the case of designated healthservices furnished by such a hospital.

(3) A hospital that is located outsideof Puerto Rico, in the case of designatedhealth services furnished by such ahospital, if the referring physician isauthorized to perform services at thehospital, and the physician’s ownershipor investment interest is in the entirehospital and not merely in a distinctpart or department of the hospital.


§ 411.357 Exceptions to the referralprohibition related to compensationarrangements.

For purposes of § 411.353, thefollowing compensation arrangementsdo not constitute a financialrelationship:

(a) Rental of office space. Paymentsfor the use of office space made by alessee to a lessor if there is a rental orlease agreement that meets the followingrequirements:

(1) The agreement is set out inwriting, is signed by the parties, andspecifies the premises it covers.

(2) The term of the agreement is atleast 1 year.

(3) The space rented or leased doesnot exceed that which is reasonable andnecessary for the legitimate businesspurposes of the lease or rental and isused exclusively by the lessee whenbeing used by the lessee, except that thelessee may make payments for the useof space consisting of common areas ifthe payments do not exceed the lessee’spro rata share of expenses for the spacebased upon the ratio of the space usedexclusively by the lessee to the totalamount of space (other than commonareas) occupied by all persons using thecommon areas.

(4) The rental charges over the term ofthe agreement are set in advance and areconsistent with fair market value.

(5) The charges are not determined ina manner that takes into account thevolume or value of any referrals or otherbusiness generated between the parties.

(6) The agreement would becommercially reasonable even if no

referrals were made between the lesseeand the lessor.

(b) Rental of equipment. Paymentsmade by a lessee to a lessor for the useof equipment under the followingconditions:

(1) A rental or lease agreement is setout in writing, is signed by the parties,and specifies the equipment it covers.

(2) The equipment rented or leaseddoes not exceed that which isreasonable and necessary for thelegitimate business purposes of the leaseor rental and is used exclusively by thelessee when being used by the lessee.

(3) The agreement provides for a termof rental or lease of at least 1 year.

(4) The rental charges over the term ofthe agreement are set in advance, areconsistent with fair market value, andare not determined in a manner thattakes into account the volume or valueof any referrals or other businessgenerated between the parties.

(5) The agreement would becommercially reasonable even if noreferrals were made between the parties.

(c) Bona fide employmentrelationships. Any amount paid by anemployer to a physician (or immediatefamily member) who has a bona fideemployment relationship with theemployer for the provision of services ifthe following conditions are met:

(1) The employment is for identifiableservices.

(2) The amount of the remunerationunder the employment is—

(i) Consistent with the fair marketvalue of the services; and

(ii) Except as provided in paragraph(c)(4) of this section, is not determinedin a manner that takes into account(directly or indirectly) the volume orvalue of any referrals by the referringphysician or other business generatedbetween the parties.

(3) The remuneration is providedunder an agreement that would becommercially reasonable even if noreferrals were made to the employer.

(4) Paragraph (c)(2)(ii) of this sectiondoes not prohibit payment ofremuneration in the form of aproductivity bonus based on servicesperformed personally by the physician(or immediate family member of thephysician) if the bonus is not directlyrelated to the volume or value of aphysician’s own referrals.

(d) Personal service arrangements—(1) General. Remuneration from anentity under an arrangement or multiplearrangements to a physician, animmediate family member of thephysician, or to a group practice,including remuneration for specificphysician services furnished to a


nonprofit blood center, if the followingconditions are met:

(i) Each arrangement is set out inwriting, is signed by the parties, andspecifies the services covered by thearrangement.

(ii) The arrangement(s) covers all ofthe services to be furnished by thephysician (or an immediate familymember of the physician) to the entity,and all separate arrangements betweenthe entity and the physician and theentity and any family membersincorporate each other by reference. Aphysician or family member can‘‘furnish’’ services through employeeswhom they have hired for the purposeof performing the services.

(iii) The aggregate services contractedfor do not exceed those that arereasonable and necessary for thelegitimate business purposes of thearrangement(s).

(iv) The term of each arrangement isfor at least 1 year.

(v) The compensation to be paid overthe term of each arrangement is set inadvance, does not exceed fair marketvalue, and, except in the case of aphysician incentive plan, is notdetermined in a manner that takes intoaccount the volume or value of anyreferrals or other business generatedbetween the parties.

(vi) The services to be furnishedunder each arrangement do not involvethe counseling or promotion of abusiness arrangement or other activitythat violates any State or Federal law.

(2) Physician incentive planexception. In the case of a physicianincentive plan between a physician andan entity, the compensation may bedetermined in a manner (through awithhold, capitation, bonus, orotherwise) that takes into accountdirectly or indirectly the volume orvalue of any referrals or other businessgenerated between the parties, if theplan meets the following requirements:

(i) No specific payment is madedirectly or indirectly under the plan toa physician or a physician group as aninducement to reduce or limit medicallynecessary services furnished withrespect to a specific individual enrolledwith the entity.

(ii) Upon request by the Secretary, theentity provides the Secretary withaccess to the information about the planspecified in 417.479(h) of this chapter.

(iii) In the case of a plan that placesa physician or a physician group atsubstantial financial risk as determinedby the Secretary under § 417.479(e) and(f) of this chapter, the entity complieswith the requirements concerningphysician incentive plans set forth at§ 417.479(g) and (i).

(e) Physician recruitment.Remuneration provided by a hospital torecruit a physician that is intended toinduce the physician to relocate to thegeographic area served by the hospitalin order to become a member of thehospital’s medical staff, if all of thefollowing conditions are met:

(1) The arrangement is set out inwriting and signed by both parties.

(2) The arrangement is notconditioned on the physician’s referralof patients to the hospital.

(3) The hospital does not determine(directly or indirectly) the amount of theremuneration to the physician based onthe volume or value of any referrals bythe physician or other businessgenerated between the parties.

(4) The physician is not precludedfrom establishing staff privileges atanother hospital or referring business toanother entity.

(f) Isolated transactions. Isolatedfinancial transactions, such as a one-time sale of property or a practice, if allof the following conditions are met:

(1) The amount of remunerationunder the transaction is—

(i) Consistent with the fair marketvalue of the transaction; and

(ii) Not determined in a manner thattakes into account (directly orindirectly) the volume or value of anyreferrals by the referring physician orother business generated between theparties.

(2) The remuneration is providedunder an agreement that would becommercially reasonable even if thephysician made no referrals.

(3) There are no additionaltransactions between the parties for 6months after the isolated transaction,except for transactions that arespecifically excepted under the otherprovisions in §§ 411.355 through411.357.

(g) Arrangements with hospitals.Remuneration provided by a hospital toa physician if the remuneration does notrelate, directly or indirectly, to thefurnishing of designated health services.To qualify as ‘‘unrelated,’’ remunerationmust not in any way reflect the volumeor value of a physician’s referrals.

(h) Group practice arrangements witha hospital. An arrangement between ahospital and a group practice underwhich designated health services arefurnished by the group but are billed bythe hospital if the following conditionsare met:

(1) With respect to services furnishedto an inpatient of the hospital, thearrangement is pursuant to theprovision of inpatient hospital servicesunder section 1861(b)(3) of the Act.

(2) The arrangement began before, andhas continued in effect withoutinterruption since, December 19, 1989.

(3) With respect to the designatedhealth services covered under thearrangement, at least 75 percent of theseservices furnished to patients of thehospital are furnished by the groupunder the arrangement.

(4) The arrangement is in accordancewith a written agreement that specifiesthe services to be furnished by theparties and the compensation forservices furnished under the agreement.

(5) The compensation paid over theterm of the agreement is consistent withfair market value, and the compensationper unit of services is fixed in advanceand is not determined in a manner thattakes into account the volume or valueof any referrals or other businessgenerated between the parties.

(6) The compensation is provided inaccordance with an agreement thatwould be commercially reasonable evenif no referrals were made to the entity.

(i) Payments by a physician. Paymentsmade by a physician—

(1) To a laboratory in exchange for theprovision of clinical laboratory services,or

(2) To an entity as compensation forany other items or services that arefurnished at a price that is consistentwith fair market value, and that are notspecifically excepted under anotherprovision in §§ 411.355 through411.357. ‘‘Services’’ in this contextmeans services of any kind (not justthose defined as ‘‘services’’ for purposesof the Medicare program in § 400.202).

(j) Discounts. Any discount made to aphysician that is passed on in full toeither the patient or the patient’sinsurers (including Medicare) and thatdoes not enure to the benefit of thereferring physician.

(k) De minimis compensation.Compensation from an entity in theform of items or services (not includingcash or cash equivalents) that does notexceed $50 per gift and an aggregate of$300 per year if—

(1) The entity providing thecompensation makes it available to allsimilarly situated individuals,regardless of whether these individualsrefer patients to the entity for services;and

(2) The compensation is notdetermined in any way that takes intoaccount the volume or value of thephysician’s referrals to the entity.

(l) Fair market value compensation.Compensation resulting from anarrangement between an entity and aphysician (or immediate familymember) or any group of physicians(regardless of whether the group meets


the definition of a group practice setforth at § 411.351) if the arrangement isset forth in an agreement that meets thefollowing conditions:

(1) It is in writing, signed by theparties, and covers only identifiableitems or services, all of which arespecified in the agreement. Theagreement covers all of the items andservices to be provided by the physicianand any immediate family member tothe entity or, alternatively, cross refersto any other agreements for items orservices between these parties.

(2) It specifies the timeframe for thearrangement, which can be for anyperiod of time and contain a terminationclause, provided the parties enter intoonly one arrangement for the same itemsor services during the course of a year.An arrangement made for less than 1year may be renewed any number oftimes if the terms of the arrangementand the compensation for the sameitems or services do not change.

(3) It specifies the compensation thatwill be provided under the arrangement.The compensation, or the method fordetermining the compensation, must beset in advance, be consistent with fairmarket value, and not be determined ina manner that takes into account thevolume or value of any referrals (asdefined in § 411.351), payment forreferrals for medical services that arenot covered under Medicare orMedicaid, or any other businessgenerated between the parties.

(4) It involves a transaction that iscommercially reasonable and furthersthe legitimate business purposes of theparties.

(5) It meets a safe harbor under theanti-kickback statute or otherwise is incompliance with the anti-kickbackprovisions in section 1128B(b) of theAct.

9. In § 411.360, paragraphs (a), (b),and (d) are revised to read as set forthbelow, and paragraphs (c) and (e) arerepublished.

§ 411.360 Group practice attestation.

(a) Except as provided in paragraph(b) of this section, a group of physiciansthat wishes to qualify as a grouppractice (as defined in § 411.351) mustsubmit a written statement to its carrierannually to attest that, during the mostrecent 12-month period (calendar year,fiscal year, or immediately preceding12-month period) 75 percent of the totalpatient care services of group practicemembers was furnished through thegroup, was billed under a billingnumber assigned to the group, and theamounts so received were treated asreceipts of the group.

(b) A newly-formed group (one inwhich physicians have recently begunto practice together) or any grouppractice that has been unable in the pastto meet the requirements of section1877(h)(4) of the Act or § 411.351, thatwishes to qualify as a group practice,must—

(1) Submit a written statement toattest that, during the next 12-monthperiod (calendar year, fiscal year, ornext 12 months), it expects to meet the75 percent standard and will takemeasures to ensure that the standard ismet; and

(2) At the end of the 12-month period,submit a written statement to attest thatit met the 75 percent standard duringthat period, billed for those servicesunder a billing number assigned to thegroup, and treated amounts received forthose services as receipts of the group.If the group did not meet the standard,any Medicare payments made fordesignated health services furnished bythe group during the 12-month periodthat were conditioned upon thestandard being met are overpayments.

(c) Once any group has chosenwhether to use its fiscal year, thecalendar year, or some other 12-monthperiod, the group practice must adhereto this choice.

(d) The attestation must be signed byan authorized representative of thegroup practice who is knowledgeableabout the group, and must contain astatement that the information furnishedin the attestation is true and accurate tothe best of the representative’sknowledge and belief. Any person filinga false statement will be subject toapplicable criminal and/or civilpenalties.

(e) A group that intends to meet thedefinition of a group practice in order toqualify for an exception described in§§ 411.355 through 411.357, mustsubmit the attestation required byparagraph (a) or (b)(1) of this section, asapplicable, to its carrier no later than 60days after receipt of the attestationinstructions from its carrier.

10. In § 411.361, paragraphs (a)through (e) are revised to read as setforth below, and paragraphs (f) and (g)are republished.

§ 411.361 Reporting requirements.(a) Basic rule. Except as provided in

paragraph (b) of this section, all entitiesfurnishing services for which paymentmay be made under Medicare mustsubmit information to HCFA concerningtheir financial relationships (as definedin paragraph (d) of this section), in theform, manner, and at the times thatHCFA specifies using an HCFA-prescribed form.

(b) Exception. The requirements ofparagraph (a) of this section do notapply to entities that furnish 20 or fewerPart A and Part B services during acalendar year, or to any Medicarecovered services furnished outside theUnited States.

(c) Required information. Theinformation requested by HCFA caninclude the following:

(1) The name and unique physicianidentification number (UPIN) of eachphysician who has a financialrelationship with the entity.

(2) The name and UPIN of eachphysician who has an immediaterelative (as defined in § 411.351) whohas a financial relationship with theentity.

(3) The covered services furnished bythe entity.

(4) With respect to each physicianidentified under paragraphs (c)(1) and(c)(2) of this section, the nature of thefinancial relationship (including theextent and/or value of the ownership orinvestment interest or the compensationarrangement, if requested by HCFA).

(d) Reportable financial relationships.For purposes of this section, a financialrelationship is any ownership orinvestment interest or anycompensation arrangement, as definedin § 411.351, including thoserelationships excepted under §§ 411.355through 411.357.

(e) Form and timing of reports.Entities that are subject to therequirements of this section mustsubmit the required information on aHCFA-prescribed form within the timeperiod specified by the servicing carrieror intermediary. Entities are given atleast 30 days from the date of thecarrier’s or intermediary’s request toprovide the initial information.Thereafter, an entity must report toHCFA once a year all changes in thesubmitted information that occurred inthe previous 12 months. Entities mustretain documentation sufficient to verifythe information provided on the formsand, upon request, must make thatdocumentation available to HCFA or theOIG.

(f) Consequences of failure to report.Any person who is required, but fails,to submit information concerning his orher financial relationships inaccordance with this section is subjectto a civil money penalty of up to$10,000 for each day of the periodbeginning on the day following theapplicable deadline established underparagraph (e) of this section until theinformation is submitted. Assessment ofthese penalties will comply with theapplicable provisions of part 1003 ofthis title.


(g) Public disclosure. Informationfurnished to HCFA under this section issubject to public disclosure inaccordance with the provisions of part401 of this chapter.

PART 424—CONDITIONS FORMEDICARE PAYMENT

B. Part 424 is amended as follows:1. The authority citation for part 424

continues to read as follows:Authority: Secs. 1102 and 1871 of the

Social Security Act (42 U.S.C. 1302 and1395hh).

2. In § 424.22, paragraph (d) is revisedto read as set forth below, andparagraphs (e), (f), and (g) are removed.

§ 424.22 Requirements for home healthservices.

* * * * *(d) Limitation on the performance of

certification and plan of treatmentfunctions. The need for home healthservices to be provided by an HHA maynot be certified or recertified, and a planof treatment may not be established andreviewed, by any physician who has afinancial relationship, as defined in§ 411.351 of this chapter, with thatHHA, unless the physician’srelationship meets one of the exceptionsin §§ 411.355 through 411.357 of thischapter.

PART 435—ELIGIBILITY IN THESTATES, DISTRICT OF COLUMBIA,THE NORTHERN MARIANA ISLANDS,AND AMERICAN SAMOA

C. Part 435 is amended as follows:1. The authority citation for part 435

continues to read as follows:Authority: Sec. 1102 of the Social Security

Act (42 U.S.C. 1302).

2. In § 435.1002, paragraph (a) isrevised to read as follows:

§ 435.1002 FFP for services.(a) Except for the limitations and

conditions specified in §§ 435.1007,435.1008, and 435.1012, FFP isavailable in expenditures for Medicaidservices for all recipients whosecoverage is required or allowed underthis part.* * * * *

3. Section 435.1012 is added tosubpart K, under an undesignatedcentered heading, to read as follows:

Limitation on FFP Related to ProhibitedReferrals

§ 435.1012 Limitation on FFP related toprohibited referrals.

(a) Basic rule. Except as specified inparagraph (b) of this section, no FFP inthe State’s expenditures for services is

available for expenditures fordesignated health services (as defined in§ 411.351 of this chapter) furnishedunder the State plan to an individual onthe basis of a physician referral thatwould, if Medicare provided forcoverage of the services to the sameextent and under the same terms andconditions as under the State plan,result in the denial of Medicarepayment for the services under§§ 411.351 through 411.360 of thischapter. (Section 411.353 provides thatif a physician (or an immediate familymember) has a financial relationshipwith an entity, the physician may notmake a referral to that entity for thefurnishing of designated health servicesfor which payment otherwise may bemade under Medicare and deniespayment for any service furnishedunder a prohibited referral. Section411.351 contains definitions, and§§ 411.355 through 411.357 provideexceptions to the prohibition onreferrals.) The provisions of this sectionare based on section 1903(s) of the Act,which applies to Medicaid aspects ofthe Medicare rules limiting physicianreferrals.

(b) Exception for services furnished toenrollees on a predetermined, capitatedbasis. The limitation on FFP inparagraph (a) does not apply to servicesfurnished to, or arranged for, an enrolleeby an entity with an HMO contract witha State under section 1903(m); a prepaidhealth plan (PHP) contract with a Stateunder part 434, subpart C; or a healthinsuring organization (HIO) contractunder part 434, subpart D.

(c) Advisory opinions relating tophysician referrals. Sections 411.370through 411.389 cover the proceduresfor obtaining an advisory opinion fromHCFA on whether a physician’s referralsrelating to designated health services(other than clinical laboratory services)are prohibited under section 1877.

PART 455—PROGRAM INTEGRITY:MEDICAID

D. Part 455 is amended as follows:1. The authority citation for part 455

continues to read as follows:Authority: Sec. 1102 of the Social Security

Act (42 U.S.C. 1302).


§ 455.100 Basis and Purpose.

(a) Basis. This subpart implementssections 1124, 1126, 1902(a)(38),1903(i)(2), 1903(n), and 1903(s) of theAct.

(b) Purpose. This subpart does thefollowing:

(1) Sets forth State plan requirementsregarding—

(i) Disclosure by providers and fiscalagents of information concerningownership and control, investmentarrangements, and compensationarrangements; and

(ii) Disclosure of information on aprovider’s owners and other personsconvicted of criminal offenses againstMedicare, Medicaid, or the title XXservices program.

(2) Specifies conditions under whichthe Administrator will deny Federalfinancial participation for servicesfurnished by providers or fiscal agentsthat fail to comply with the disclosurerequirements.

(3) Provides for a civil money penaltyfor failure to meet certain reportingrequirements.


§ 455.103 State plan requirement.A State plan must provide that the

requirements of §§ 445.104 through455.109 are met.

4. A new subpart C, consisting ofsection §§ 455.108 and 455.109, isadded to read as follows:

Subpart C—Disclosure of Informationby Providers for Purposes of theProhibition on Certain PhysicianReferrals

§ 455.108 Basis.This subpart is based on section

1903(s) of the Act, which, in part,applies the reporting requirements ofsection 1877(f) and (g) of the Act toMedicaid providers of designated healthservices (as these services are defined in§ 411.351).

§ 455.109 Disclosure of ownership,investment, and compensationarrangements.

(a) The Medicaid agency must requirethat each provider of services thatfurnishes designated health servicescovered by the State plan submitinformation to the Medicaid agencyconcerning its financial relationships (asdefined in paragraph (d) of this section),in the form, manner, and at the timesthe agency specifies. The term‘‘designated health services,’’ forpurposes of this section, refers to theservices listed in § 411.351 of thischapter, as they are defined in thatsection, or as those services areotherwise defined under the State plan.

(b) Exception. The requirements ofparagraph (a) of this section do notapply to providers of services thatprovide 20 or fewer designated healthservices covered under the State planduring a calendar year, or to designated


health services furnished outside theUnited States.

(c) Required information. Theinformation requested by the Medicaidagency can include the following:

(1) The name and Medicaid StateSpecific Identifier (MSSI) of eachphysician who has a financialrelationship with the provider ofservices.

(2) The name and MSSI of eachphysician who has an immediaterelative (as defined in § 411.351 of thischapter) who has a financialrelationship with the provider ofservices.

(3) The covered items and servicesfurnished by the provider of services.

(4) With respect to each physicianidentified under paragraphs (c)(1) and(c)(2) of this section, the nature of thefinancial relationship (including theextent and/or value of the ownership orinvestment interest or the compensationarrangement, if requested by theMedicaid agency).

(d) Reportable financial relationships.For purposes of this section, a financialrelationship is any ownership orinvestment interest or anycompensation arrangement, as definedin § 411.351, including thoserelationships excepted under §§ 411.355through 411.357.

(e) Form and timing of reports.Providers of services that are subject tothe requirements of this section mustsubmit the required information on aprescribed form within the time periodspecified by the Medicaid agency.Thereafter, a provider must report to theMedicaid agency all changes in thesubmitted information within atimeframe specified by the Medicaidagency. Providers of services mustretain documentation sufficient to verifythe information provided on the formsand, upon request, must make thatdocumentation available to theMedicaid State agency, HCFA, or theOIG.

(f) Consequences of failure to report.Any provider of services that is

required, but failed, to meet thereporting requirements of paragraph (a)of this section is subject to a civil moneypenalty of not more than $10,000 foreach day of the period beginning on theday following the applicable deadlineuntil the information is submitted.Assessment of the penalty will complywith the applicable provisions of part1003 of this title.

(Catalog of Federal Domestic AssistanceProgram No. 93.773, Medicare—HospitalInsurance; Program No. 93.774, Medicare—Supplementary Medical Insurance Program;and Federal Domestic Assistance ProgramNo. 93.778, Medical Assistance Program)

Dated: November 10, 1997.Nancy-Ann Min DeParle,Administrator, Health Care FinancingAdministration.

Dated: December 17, 1997.Donna E. Shalala,Secretary.[FR Doc. 98–282 Filed 1–5–98; 8:45 am]BILLING CODE 4120–03–P