[Federal Register Volume 59, Number 139 (Thursday, July 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16873]


[[Page Unknown]]

[Federal Register: July 21, 1994]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991-AA74

 

Medicare and State Health Care Programs: Fraud and Abuse; 
Clarification of the OIG Safe Harbor Anti-Kickback Provisions

AGENCY: Office of Inspector General (OIG), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would clarify various aspects of safe 
harbor provisions originally published in the Federal Register on July 
29, 1991 as a final rule (56 FR 35952). The safe harbor provisions have 
been specifically designed to set forth those payment practices and 
business arrangements that will be protected from criminal prosecution 
and civil sanctions under the anti-kickback provisions of the statute. 
This proposed rule would modify the original set of final safe harbor 
provisions to give greater clarity to the rulemaking's original intent.

DATES: To assure consideration, public comments must be delivered to 
the address provided below by September 19, 1994. Comments are 
available for public inspection August 4, 1994.

ADDRESSES: Address comments to: Office of Inspector General, Department 
of Health and Human Services, Attention: LRR-35-P, room 5246, 330 
Independence Ave., SW., Washington, DC 20201.
    If you prefer, you may deliver your comments to room 5551, 330 
Independence Avenue, SW., Washington, DC. In commenting, please refer 
to file code LRR-35-P. Comments are available for public inspection in 
room 5551 330 Independence Avenue, SW., Washington, DC, on Monday 
through Friday each week from 9 a.m. to 5 p.m., (202) 619-3270.

FOR FURTHER INFORMATION CONTACT:

Sandra Sands, Office of the General Counsel, (202) 619-1306
Joel Schaer, Office of Inspector General, (202) 619-3270

SUPPLEMENTARY INFORMATION:

I. Background

    On July 29, 1991, we published in the Federal Register a final rule 
setting forth various safe harbor provisions to the Medicare and 
Medicaid anti-kickback statute (56 FR 35952). This regulation was 
authorized under section 14 of Public Law 100-93, the Medicare and 
Medicaid Patient and Program Protection Act of 1987. The final rule 
specified those payment practices that will not be subject to criminal 
prosecution under section 1128B(b) of the Social Security Act (the Act) 
(42 U.S.C. 1320a-7b(b)), and that will not provide a basis for 
exclusion from Medicare or the State health care programs under section 
1128(b)(7) of the Act (42 U.S.C. 1320a-7(b)(7)).
    Since publication of the final rule, we have become aware of a 
limited number of ambiguities that have created uncertainties for 
health care providers trying to comply with the safe harbor provisions. 
We have also become aware of certain instances where our intent, either 
to protect or preclude protection for particular business arrangements, 
is not fully reflected in the text of the regulation even though it is 
reflected in the preamble. This proposed rule would serve to modify the 
text of the July 29, 1991 final rule to conform to the rulemaking's 
original intent.
    The clarifications contained in this proposed rule do not represent 
an attempt to reevaluate the wisdom of the original safe-harbor 
decisions. Instead, the changes set forth in this proposed rule would 
serve only to protect business practices originally intended to be 
protected by removing ambiguities in the regulatory language. This 
clarity should aid the formation of legal business practices without 
establishing any new significant legal obligations on the parties 
affected by the regulations.

II. Summary of the Proposed Changes

A. Clarification to the General Comments Section of Preamble

     Several individuals have commented that the following 
sentence in the preamble has created confusion:

    ``Because the statute is broad, the payment practices described in 
these safe harbor provisions would be prohibited by the statute but for 
their inclusion here.'' (56 FR 35958)

    This sentence was not meant to imply that, in all instances 
irrespective of the parties intent, the government could prosecute 
conduct described in the regulation, but for its inclusion in the 
regulation. Whether a particular payment practice violates the statute 
is a question that can only be resolved by an analysis of the elements 
of the statute as applied to that set of facts. Generally speaking, 
however, the original final rule did describe payment practices that 
would be prohibited, where the unlawful intent exists, but for the safe 
harbor protection that has been granted.
     In discussing the space and equipment rental and personal 
services and management contracts, we stated that if a ``sham contract 
is entered into * * * we will look behind the contract'' to its 
substance in evaluating whether the arrangement qualifies for safe-
harbor protection (56 FR 35972). We received numerous inquiries as to 
whether we would similarly look behind the form of other arrangements 
to determine whether the substance of the arrangement fits within a 
particular safe harbor.
    In some cases, such inquiries have led us to clarify particular 
safe harbors, as is illustrated by the following discussions of the 
safe harbors for investment interests, space and equipment rental, and 
personal services and management contracts. However, because of the 
broad variety of transactions subject to the Medicare and Medicaid 
anti-kickback statute and the ability of individuals to manipulate the 
safe harbors in ways not contemplated, we believe that a general rule 
preventing sham arrangements from receiving safe harbor protection 
would be appropriate. Thus, we are proposing adding a new Sec. 1001.954 
to the regulations. Such an approach has several precedents. The 
Federal Trade Commission (FTC) with the concurrence of the Department 
of Justice promulgated Sec. 801.90 of the FTC's rules implementing the 
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (16 CFR 801.90), 
which disregards sham transactions entered into for the purpose of 
avoiding obligations under the Act. In addition, other Federal agencies 
(such as the Securities Exchange Commission and the Internal Revenue 
Service) have promulgated regulations and policies that seek to protect 
the government from making enforcement decisions based on information 
that does not accurately reflect the substance of the transaction. 
(See, for example, 17 CFR 240.12b-20; Estate of Korman versus Comm., TC 
Memo 1987-120; and Rev. Rul. 81-149, 1981-1 CB 77.) Moreover, the 
courts have historically disregarded sham arrangements when examining 
the rights and obligations of the parties in tax cases. (See, for 
example, Knetsch versus United States, 364 U.S. 361 (1960); and 
Thompson versus Commissioner of Internal Revenue, 631 F.2d 642 (9th 
Cir. 1981), cert. denied, 452 U.S. 961 (1981).)

B. Clarifications to Investment Interests Safe Harbor 
(Sec. 1001.952(a))

 Health Care Assets and Revenues

    In qualifying for the ``large entity'' or ``small entity'' 
investment interest safe harbors, the monetary value or amount of 
certain assets and revenues must be determined. Specifically, the safe 
harbors include: (1) The $50,000,000 asset threshold in 
Sec. 1001.952(a)(1); and (2) the gross revenues in the ``60-40 revenue 
rule'' in Sec. 1001.952(a)(2)(vi). In these cases, only the assets or 
revenues related to the furnishing of health care items or services 
will be counted for the purposes of qualifying for these safe harbor 
requirements. It would be an obvious sham, inconsistent with our 
original intent, if a joint venture could merge with a non-health care 
business and have those non-health care assets, and the revenues 
derived from that non-health care line of business counted for the 
purposes of qualifying for safe harbor protection. We are thus 
proposing to revise these safe harbor provisions to further clarify our 
original intent that only health care assets and revenues will be 
counted in determining these values and amounts.

 Acquisition of Investment Interests

    As set forth in Sec. 1001.952(a)(1)(ii), an ``interested'' investor 
(who is in a position to make or influence referrals to, furnish items 
or services to, or otherwise generate business for the entity) must 
obtain his or her investment interest through trading on a registered 
national securities exchange on terms equally available to the public. 
This does not mean that an interested investor may acquire his or her 
interest in any way other than the methods available to the general 
public to acquire investment interests. We believe that the investor 
must acquire his or her investment interest in the same way as members 
of the public--directly off of a registered national securities 
exchange through a broker--and it must be the same type of investment 
interest that is available to the public. For example, a transaction in 
which the interested investor receives restricted or ``lettered'' stock 
from the entity would not be considered a valid acquisition of 
investment interests under this requirement.
    The discussion above does not represent a change in this standard. 
Rather, it serves only to emphasize that the investment interest ``must 
be obtained on terms equally available to the public through trading on 
a registered national securities exchange * * *'' 
(Sec. 1001.952(a)(1)(ii)) (Emphasis added). Moreover, to obtain an 
investment interest ``on terms equally available to the public,'' there 
cannot be any side agreements that require stock to be purchased or 
that restrict in any manner the investor's ability to dispose of the 
stock. Any such agreement would constitute a sham transaction which 
would disqualify dividend payments to that investor from safe harbor 
protection.

 Loans for the Purchase of the Investment Interest

    One of the standards in the large and small entity investment 
interest safe harbors prohibits the entity from loaning an investor 
funds that are used by the investor to purchase his or her investment 
interest. (See Secs. 1001.952(a)(1)(iv) and 1001.952(a)(2)(vii).) We 
are proposing to change this standard to prohibit other investors, 
individuals or entities as well as the entity from making such loans.

 Class of Investment Interests

    In the 60-40 investor rule in the small entity investment interest 
safe harbor (Sec. 1001.952(a)(2)(i)), we established two categories of 
investors: (1) ``untainted'' or ``disinterested'' investors are those 
who do no business with the entity, but hold the investment interest 
purely as an investment; and (2) ``tainted'' or ``interested'' 
investors are those who are in a position to make or influence 
referrals to, furnish items or services to, or otherwise generate 
business for the entity. For purposes of determining in which category 
to place an investor, we require ``each class of investments'' to meet 
the 60-40 apportionment between the two categories.
    We have become aware of the difficulty in applying the 60-40 rule 
to each class of investors in a joint venture where the general 
partners hold a separate class of stock or investment interest from the 
limited partners. In such a situation, that class of investment 
interest for the general partners consists of 100 percent ``tainted'' 
or ``interested'' investors since the general partners are providing 
services to the entity. Therefore, we believe that the entire joint 
venture does not qualify for safe harbor protection.
    While it is not always true that an active investor holds a 
different class of investment interest from a passive investor, we have 
found that it is unnecessarily restrictive to have this 60-40 investor 
rule only apply to each class of investment interest. Thus, we are 
proposing to modify this first investment interest standard to allow an 
alternative to the class-by-class analysis. The new alternative would 
allow equity investment interests to be combined together or debt 
investment interests to be combined together (separate from the equity 
investments) for purposes of apportioning investors into ``untainted'' 
and ``tainted'' pools and meeting the 60-40 test. Only equivalent 
classes of equity investment interests could be combined, and only 
equivalent classes of debt investment interests could be combined. That 
is, the classes of investment interests combined would have to be 
similar in all material respects. For example, the classes to be 
combined would have to have equivalent returns in proportion to amounts 
invested. In addition, if one class is given preferential treatment 
(e.g., in the case of disposition), such an interest could not be 
combined with subservient interests for purposes of compliance with the 
60-40 investor rule.
    If a limited partnership has a general partner who holds 20 percent 
of the value of the investment interests, referring physicians hold 20 
percent, and all the other investors have no business relationship with 
the partnerships, then the 60-40 investor rule would be met, as long as 
all other requirements are satisfied.
    The 60-40 investor rule would not be met if any of the other 
disinterested investors in the above example holds a debt instrument 
instead of an equity instrument. For example, if a joint venture raises 
one-third of its capital through a debt instrument held by 
disinterested investors, with the remaining two thirds of its capital 
derived from equity instruments held equally by interested (physicians 
and general partners) and disinterested investors, the safe harbor 
would not be met. In this example, even though interested investors 
hold only one-third of all the investment interests, they hold one-half 
of the equity investment interests, and thus no safe harbor protection 
would be available.
    We note that other standards in this small entity safe harbor 
preclude protection for abusive schemes to give referring investors 
preferential treatment in any way by creating different classes of 
investment. For example, if a joint venture creates two classes of 
stock, with one of the classes reserved for referring physicians who 
receive a higher dividend per share than non-referring investors in the 
other class, such an arrangement would not comply with at least 
sections 1001.952(a)(2) (ii), (iii) and (viii).

 Items or Services Furnished by an Investor

    As discussed above, when an investor furnishes items or services to 
the joint venture, such as management services, he or she is a tainted 
or interested investor for the purposes of complying with the 60-40 
investor rule (Sec. 1001.952(a)(2)(vi)). It was not our intent to have 
any revenues that the joint venture derives from this investor's 
services to be considered tainted for the purpose of qualifying for the 
60-40 revenue rule.
    Because of the apparent confusion caused by the language ``items or 
services furnished'' in this safe harbor standard, we are proposing 
striking it. The focus of the inquiry in this standard is where the 
business and clients are coming from. In other words, the revenues are 
tainted, and may not exceed 40 percent of total revenues, if they are 
derived ``from referrals* * * or business otherwise generated from 
investors.'' We note that the language we are proposing to strike--
``items or services furnished''--is superfluous because, if the revenue 
is ``generated'' (i.e., induced to come to the joint venture for items 
or services by an investor), it is tainted. Thus, the language we are 
proposing to delete appears not to have added anything and merely 
caused confusion.
    The following example demonstrates the confusion and our solution. 
If a radiologist holds an investment interest in an imaging center and 
reads all the films at the center, his or her reading of the film does 
not taint all the revenues from the referrals by non-investors. 
However, we have received a few questions from people who read the 60-
40 revenue rule as making such referrals tainted because the investor 
furnished services at the joint venture.
    We emphasize that if a radiologist-investor is reading the film and 
making referrals or otherwise generating business, then the revenues 
the joint venture derives from that activity would become tainted. For 
example, revenues would be tainted when a radiologist-investor takes 
part in a consultation with a non-investor internist, and during that 
consultation the radiologist recommends a procedure which is performed 
at the joint venture.

C. Clarifications to Space and Equipment Rental and Personal Services 
and Management Contracts Safe Harbors (Secs. 1001.952 (b), (c) and (d))

     In the preamble discussing the safe harbor provisions for 
space and equipment rental and personal services and management 
contracts (56 FR 35971-74), we made clear that one of our concerns was 
that health care providers in a position to make referrals to each 
other who engaged in these business arrangements could renegotiate 
their contracts on a regular basis depending on the volume of business 
generated. It is for this reason that we require the leases or 
contracts be for a term of not less than one year. (See 
Secs. 1001.952(b)(4), 1001.952(c)(4), and 1001.952(d)(4).)
    It has come to our attention that a small number of health care 
providers believe they are complying with the literal terms of these 
safe harbor provisions, but are circumventing our intent not to protect 
agreements that are renegotiated based on the volume of business 
generated between the parties. They believe that they are protected if 
they enter into multiple agreements, each of which is for a period of 
one year, but when all the agreements are viewed together 
renegotiations are taking place more frequently (e.g., every month), 
with the terms of the additional agreements based in part on the volume 
of business being generated between the parties under existing 
agreements. For example, a one year personal services contract between 
a hospital and a high-volume referring physician is created for the 
physician to perform certain services. The next month a new one year 
contract is created for a slightly different service, with the amount 
of payment influenced by the previous months referrals.
    This scenario does not comply with the requirement in each of these 
safe harbor provisions that the compensation not take ``into account 
the volume or value of any referrals or business otherwise generated 
between the parties * * * .'' (Secs. 1001.952(b)(5), 1001.952(c)(5), 
and 1001.952(d)(5)). However, because the principal problem in this 
situation is that the parties are creating multiple overlapping 
agreements, we are proposing to revise these three safe harbor 
provisions to expressly preclude such schemes.
    In addition, it appears that some health care providers are 
attempting to pay for referrals by renting more space than they 
actually need from referral sources. Although such an arrangement would 
not fit within a safe harbor because the aggregate rental charge would 
be determined in a manner that would account for the volume or value of 
referrals or business otherwise generated between the parties, we are 
proposing to revise the safe harbor provisions in Secs. 1001.952 
(b)(5), (c)(5) and (d)(5) to expressly preclude this practice.

D. Clarifications to Referral Services Safe-Harbor (Sec. 1001.952(f))

     One of the standards in the referral services safe harbor 
provision requires that any fee the referral service charges the 
participant be ``based on the cost of operating the referral service, 
and not on the volume or value of any referrals to or business 
otherwise generated by the participants for the referral service * * * 
.'' (Emphasis added) (Sec. 1001.952(f)(2)). This language precludes 
protection where a referral service, such as one operated by a 
hospital, lowers its referral service fee to one of its staff 
physicians who participates in the service because that physician is a 
high-volume referrer.
    This language creates an ambiguity where the referral service tries 
to adjust its fee based on the volume of referrals it makes to the 
participant. Thus, we propose clarifying the second prong to preclude 
safe harbor protection for payments that are based on the volume or 
value of referrals to or business otherwise generated by either party 
for the other party.

E. Clarifications To Discount Safe Harbor (Sec. 1001.952(h))

     Many people requested clarification of the safe harbor for 
discounts. Because there has been some uncertainty over what 
obligations individuals or entities have to meet in order to receive 
protection under this safe harbor, we propose dividing the parties into 
three groups: buyers, sellers, and offerors of discounts. In describing 
each party's obligations, we would revise paragraphs (h)(1) and (h)(2), 
and add a new paragraph (h)(3).
    In addition, through a proposed new paragraph (h)(4), we would 
clarify that, for purposes of this regulation, a ``rebate'' is any 
discount which is not given at the time of sale. Consequently, a rebate 
transaction may be covered within the safe harbor if it involves a 
buyer under Sec. 1001.952 (h)(1)(i) or (h)(1)(ii), but it is not 
covered if it involves a buyer under Sec. 1001.952(h)(1)(iii) because, 
under that provision, all discounts must be given at the time of sale.
    We also wish to clarify what has to happen for sellers to receive 
safe harbor protection. In the safe harbor regulation itself, we state 
that discounts will be safe harbored if both the seller ``and'' the 
buyer comply with the applicable standards as described in the rule. 
Yet in the preamble we state that sellers should not be held liable for 
the omissions of buyers. If a seller has done everything that it 
reasonably could under the circumstances to ensure that the buyer 
understands its obligations to accurately report the discount, the 
seller is safe harbored irrespective of the omissions of the buyer. To 
receive such protection, however, the seller must report the discount 
to the buyer and inform the buyer of its obligation to report the 
discount. To emphasize that the seller's obligations require more than 
superficial compliance with the safe harbor, we propose to add to that 
the seller must inform the buyer ``in an effective manner'' of its 
obligations to report the discount. We also propose adding a 
requirement that the seller ``refrain from doing anything that would 
impede the buyer from meeting its obligations under this paragraph.'' 
Thus, if the seller, in good faith, meets its obligations under the 
safe harbor and the buyer does not meet its obligations due to no fault 
of the seller, the seller would receive safe harbor protection. 
However, when the seller submits a claim or request for payment on 
behalf of the buyer, the seller must fully and accurately report the 
discount to Medicare or the State health care program. Likewise, when 
an offeror of a discount meets its obligations under 
Sec. 1001.952(h)(3), and the buyer or seller does not meet its 
obligations due to no fault of the offeror, the offeror would receive 
safe harbor protection.
    In addition, we are proposing to clarify whether any reduction in 
price offered to a beneficiary could be safe harbored under this 
regulation. Congress protected ``a discount or other reduction in price 
obtained by a provider of services or other entity'' (emphasis added) 
and made no provision for such discounts obtained by a beneficiary. In 
Sec. 1001.952(h)(3)(iv) of the regulation, we removed from safe harbor 
protection a ``reduction in price offered to a beneficiary * * * .'' In 
that section, all we intended to remove from this safe harbor was 
``routine reduction or waiver of any coinsurance or deductible amount 
owed by a program beneficiary.'' Thus, to the extent that a discount is 
offered to a beneficiary and all other applicable standards in the safe 
harbor are met, such a discount would receive safe harbor protection.
    Many people have expressed confusion regarding the relationship 
between the safe harbor for discounts and the statutory exception for 
discounts. (See section 1128B(b)(3)(A) of the Act.) Specifically, we 
are asked if there are any practices involving discounts which were 
protected by Congress under the statutory exception which do not fit 
within the safe harbor for discounts. Our intention is that all the 
discounts or reductions in price that Congress intended to protect 
under the statutory exception for discounts are protected under the 
safe harbor for discounts. Moreover, as is illustrated by the 
discussion above regarding discounts to beneficiaries, we are proposing 
to expand the safe harbor for discounts to include additional practices 
that we do not consider abusive.
    In the preamble to the final regulation, we stated that when 
reporting a discount, one only need report the actual purchase price 
and note that it is a ``net discount'' (56 FR 35981). However, for 
purposes of submitting a claim or request for payment, what is 
necessary is that the value of the discount is accurately reflected in 
the actual purchase price. It is not necessary to distinguish whether 
this price is the result of a discount, or to state ``net discount.'' 
Consequently, buyers who were uncertain about how and where to report 
on a particular form the fact that the price was due to a discount need 
not be concerned with reporting that fact, as long as the actual 
purchase price accurately reflects the discount.
    Finally, we are proposing some minor editorial changes that do not 
affect the substance of the provision, but hopefully make it easier to 
understand.

F. Technical Correction

     A typographical error at 56 FR 35978 gave a citation to a 
HCFA rule on payment for intraocular lenses as ``55 FR 436.'' We would 
correct this citation to the HCFA rule to read as ``55 FR 4536.''
     We are proposing the deletion of Sec. 1001.953 which calls 
for the completion of an OIG report on compliance with the investment 
interest safe harbor at Sec. 1001.952(a)(2)(i) and 1001.952(a)(2)(vi) 
within a specified period of time after publication of the original 
safe harbor provisions. While the OIG is continuing its work on 
evaluating this safe harbor provision, we believe completion of this 
report to be an internal administrative process that need not be set 
forth in the regulations.

III. Regulatory Impact Statement

    As we indicated in the original safe harbor final rule published on 
July 29, 1991, consistent with the intent of the statute, the original 
safe harbor rulemaking and these proposed clarifications are designed 
to permit individuals and entities to freely engage in business 
practices and arrangements that encourage competition, innovation and 
economy. In doing so, the regulations impose no requirements on any 
party. Health care providers and others may voluntarily seek to comply 
with these provisions so that they have the assurance that their 
business practices are not subject to any enforcement action under the 
anti-kickback statute. We believe that the economic impact of these 
provisions would be minimal.
    In addition, we generally prepare a regulatory flexibility analysis 
that is consistent with the Regulatory Flexibility Act (5 U.S.C. 601-
612). We have determined, and the Secretary certifies, that this 
proposed regulation would not have a significant economic impact on a 
substantial number of small business entities, and we have, therefore, 
not prepared a regulatory flexibility analysis.

List of Subjects in 42 CFR Part 1001

    Administrative practice and procedure, Fraud, Health facilities, 
Health professions, Medicaid, Medicare.

TITLE 42--PUBLIC HEALTH

CHAPTER V--OFFICE OF INSPECTOR GENERAL--HEALTH CARE, DEPARTMENT OF 
HEALTH AND HUMAN SERVICES
    42 CFR part 1001 would be amended as set forth below:

PART 1001--PROGRAM INTEGRITY--MEDICARE AND STATE HEALTH CARE 
PROGRAMS

    1. The authority citation for part 1001 would continue to read as 
follow:

    Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7b, 1395u(j), 
1395u(k), 1395y(d), 1395y(e), 1395cc(b)(2)(D), (E) and (F), and 
1395hh, and section 14 of Public Law 100-93.

    2. Section 1001.952 would be amended by:
    a. republishing the introductory text for this section;
    b. republishing the introductory text for paragraph (a)(1), and by 
revising paragraphs (a)(1)(iv), (a)(2)(i), (a)(2)(vi) and (a)(2)(vii);
    c. revising paragraphs (b)(2) and (b)(5);
    d. adding a new paragraph (b)(6);
    c. revising paragraphs (c)(2) and (c)(5);
    f. adding a new paragraph (c)(6);
    g. revising paragraphs (d)(2), (d)(5) and (d)(6);
    h. adding a new paragraph (d)(7);
    i. revising paragraphs (f)(2); and
    j. revising paragraph (h), to read as follows--


Sec. 1001.952  Exceptions.

    The following payment practices shall not be treated as a criminal 
offense under section 1128B of the Act and shall not serve as the basis 
for an exclusion:
    (a) Investment interests. * * *
    (1) If, within the previous fiscal year or previous 12 month 
period, the entity possesses more than $50,000,000 in undepreciated net 
tangible assets (based on the net acquisition cost of purchasing such 
assets from an unrelated entity) related to the furnishing of health 
care items and services, all of the following five applicable standards 
must be met--
* * * * *
    (iv) The entity or any investor (or other individual or entity 
acting on behalf of the entity or any investor in the entity) must not 
loan funds to or guarantee a loan for an investor who is in a position 
to make or influence referrals to, furnish items or services to, or 
otherwise generate business for the entity if the investor uses any 
part of such loan to obtain the investment interest.
* * * * *
    (2) * * *
    (i) No more than 40 percent of the value of the investment 
interests of each class of investment interests may be held in the 
previous fiscal year or previous 12 month period by investors who are 
in a position to make or influence referrals to, furnish items or 
services to, or otherwise generate business for the entity. (For 
purposes of Sec. 1001.952(a)(2)(i), equivalent classes of equity 
investments may be combined, and equivalent classes of debt instruments 
may be combined.)
* * * * *
    (vi) No more than 40 percent of the entity's gross revenue related 
to the furnishing of health care items and services in the previous 
fiscal year or previous 12 month period may come from referrals, or 
business otherwise generated from investors.
    (vii) The entity or any investor must not loan funds to or 
guarantee a loan for an investor who is in a position to make or 
influence referrals to, furnish items or services to, or otherwise 
generate business for the entity if the investor uses any part of such 
loan to obtain the investment interest.
* * * * *
    (b) Space rental. * * *
    (2) The lease covers all of the premises leased between the parties 
for the period of the lease and specifies the premises covered by the 
lease.
* * * * *
    (5) The aggregate space rented does not exceed that which is 
reasonably necessary to accomplish the legitimate business purpose of 
the rental.
    (6) The aggregate rental charge is set in advance, is consistent 
with fair market value in arms-length transactions and is not 
determined in a manner that takes into account the volume or value of 
any referrals or business otherwise generated between the parties for 
which payment may be made in whole or in part under Medicare or a State 
health care program.
* * * * *
    (c) Equipment rental.
* * * * *
    (2) The lease covers all of the equipment leased between the 
parties for the period of the lease and specifies the equipment covered 
by the lease.
* * * * *
    (5) The aggregate equipment rental does not exceed that which is 
reasonably necessary to accomplish the legitimate business purpose of 
the rental.
    (6) The aggregate rental charge is set in advance, is consistent 
with fair market value in arms-length transactions and is not 
determined in a manner that takes into account the volume or value of 
any referrals or business otherwise generated between the parties for 
which payment may be made in whole or in part under Medicare or a State 
health care program.
* * * * *
    (d) Personal services and management contracts.
* * * * *
    (2) The agency agreement covers all of the services the agent 
provides to the principal for the period of the agreement and specifies 
the services to be provided by the agent.
* * * * *
    (5) The aggregate services contracted for do not exceed those which 
are reasonably necessary to accomplish the legitimate business purpose 
of the services.
    (6) The aggregate compensation paid to the agent over the term of 
the agreement is set in advance, is consistent with fair market value 
in arms-length transactions and is not determined in a manner that 
takes into account the volume or value of any referrals or business 
otherwise generated between the parties for which payment may be made 
in whole or in part under Medicare or a State health care program.
    (7) The services performed under the agreement do not involve the 
counseling or promotion of a business arrangement or other activity 
that violates any State or Federal law.
* * * * *
    (f) Referral services. * * *
    (2) Any payment the participant makes to the referral service is 
assessed equally against and collected equally from all participants, 
and is only based on the cost of operating the referral service, and 
not on the volume or value of any referrals to or business otherwise 
generated by either party for the other party for which payment may be 
made in whole or in part under Medicare or a State health care program.
* * * * *
    (h) Discounts. As used in section 1128B of the Act, 
``remuneration'' does not include a discount, as defined in paragraph 
(h)(5) of this section, on an item or service for which payment may be 
made, in whole or in part, under Medicare or a State health care 
program for a buyer as long as the buyer complies with the applicable 
standards of paragraph (h)(1) of this section; a seller as long as the 
seller complies with the applicable standards of paragraph (h)(2) of 
this section; and an offeror of a discount who is not a seller under 
paragraph (h)(2) of this section so long as such offeror complies with 
the applicable standards of paragraph (h)(3) of this section:
    (1) With respect to the following three categories of buyers, the 
buyer must comply with all of the applicable standards within one of 
the three following categories--
    (i) If the buyer is an entity which is a health maintenance 
organization or a competitive medical plan acting in accordance with a 
risk contract under section 1876(g) or 1903(m) of the Act, or under 
another State health care program, it need not report the discount 
except as otherwise may be required under the risk contract.
    (ii) If the buyer is an entity which reports its costs on a cost 
report required by the Department or a State health care program, it 
must comply with all of the following four standards--
    (A) the discount must be earned based on purchases of that same 
good or service bought within a single fiscal year of the buyer.
    (B) the buyer must claim the benefit of the discount in the fiscal 
year in which the discount is earned or the following year.
    (C) the buyer must fully and accurately report the discount in the 
applicable cost report; and
    (D) the buyer must provide, upon request by the Secretary or a 
State agency, information provided by the seller as specified in 
paragraph (h)(2)(ii) of this section, or information provided by the 
offeror as specified in paragraph (h)(3)(ii) of this section.
    (iii) If the buyer is an individual or entity in whose name a claim 
or request for payment is submitted for an item or service for which 
payment may be made, in whole or in part, under Medicare or a State 
health care program (not including individuals or entities receiving 
items or services from entities defined as buyers in paragraph 
(h)(1)(i) or (h)(1)(ii) of this section), the buyer must comply with 
all of the following three standards--
    (A) the discount must be made at the time of the sale of the good 
or service (rebates are therefore not allowable);
    (B) where an item or service is separately claimed for payment with 
the Medicare program or a State health care program, the buyer (if 
submitting the claim) must fully and accurately report the discount on 
that item or service; and
    (C) the buyer (if submitting the claim) must provide, upon request 
by the Secretary or a State agency, information provided by the seller 
as specified in paragraph (h)(2)(iii)(B) of this section, or 
information provided by the offeror as specified in paragraph 
(h)(3)(iii)(A) of this section.
    (2) The seller is an individual or entity that furnishes an item or 
service for which payment may be made, in whole or in part, under 
Medicare or a State health care program to the buyer and who permits a 
discount to be taken off the buyer's purchase price. The seller must 
comply with all of the applicable standards within the following three 
categories--
    (i) If the buyer is an entity which is a health maintenance 
organization or a competitive medical plan acting in accordance with a 
risk contract under section 1876(g) or 1903(m) of the Act, or under 
another State health care program, the seller need not report the 
discount to the buyer for purposes of this provision.
    (ii) If the buyer, is an entity that reports its costs on a cost 
report required by the Department or a State agency, the seller must 
comply with either of the following two standards--
    (A) where a discount is required to be reported to Medicare or a 
State health care program under paragraph (h)(1) of this section, the 
seller must fully and accurately report such discount on the invoice, 
coupon or statement submitted to the buyer, inform the buyer in an 
effective manner of its obligations to report such discount, and 
refrain from doing anything which would impede the buyer from meeting 
its obligations under this paragraph; or
    (B) where the value of the discount is not known at the time of 
sale, the seller must fully and accurately report the existence of a 
discount program on the invoice, coupon or statement submitted to the 
buyer, inform the buyer in an effective manner of its obligations to 
report such discount under paragraph (h)(1) of this section and, when 
the value of the discount becomes known, provide the buyer with 
documentation of the calculation of the discount identifying the 
specific goods or services purchased to which the discount will be 
applied, and refrain from doing anything which would impede the buyer 
from meeting its obligations under this paragraph.
    (iii) If the buyer is an individual or entity not included in 
paragraph (h)(2)(i) or (h)(2)(ii) of this section, the seller must 
comply with either of the following two standards--
    (A) where the seller submits a claim or request for payment on 
behalf of the buyer and the item or service is separately claimed, the 
seller must fully and accurately report the discount on the claim or 
request for payment to Medicare or a State health care program and the 
seller must provide, upon request by the Secretary or a State agency, 
information provided by the offeror as specified in paragraph 
(h)(3)(iii)(A) of this section; or
    (B) where the buyer submits a claim, the seller must fully and 
accurately report such discount on the invoice, coupon or statement 
submitted to the buyer; inform the buyer in an effective manner of its 
obligations to report such discount; and refrain from doing anything 
that would impede the buyer from meeting its obligations under this 
paragraph.
    (3) The offeror of a discount is an individual or entity who is not 
a seller under paragraph (h)(2) of this section, but promotes the 
purchase of an item or service by a buyer under paragraph (h)(1) of 
this section at a reduced price for which payment may be made, in whole 
or in part, under Medicare or a State health care program. The offeror 
must comply with all of the applicable standards within the following 
three categories--
    (i) If the buyer is an entity which is a health maintenance 
organization or a competitive medical plan acting in accordance with a 
risk contract under section 1876(g) or 1903(m) of the Act, or under 
another State health care program, the offeror need not report the 
discount to the buyer for purposes of this provision.
    (ii) If the buyer is an entity that reports its costs on a cost 
report required by the Department or a State agency, the offeror must 
comply with the following two standards--
    (A) the offeror must inform the buyer in an effective manner of its 
obligation to report such a discount; and
    (B) the offeror of the discount must refrain from doing anything 
that would impede the buyer's ability to meet its obligations under 
this paragraph.
    (iii) If the buyer is an individual or entity in whose name a 
request for payment is submitted for an item or service for which 
payment may be made, in whole or in part, under Medicare or a State 
health care program (not including individuals or entities defined as 
buyers in paragraph (h)(1)(i) or (h)(1)(ii) of this section), the 
offeror must comply with the following two standards--
    (A) the offeror must inform the individual or entity submitting the 
claim or request for payment in an effective manner of their 
obligations to report such a discount; and
    (B) the offeror of the discount must refrain from doing anything 
that would impede the buyer's or seller's ability to meet its 
obligations under this paragraph.
    (4) For purposes of this paragraph (a), a rebate is any discount 
which is not given at the time of sale.
    (5) For purposes of this paragraph (a), the term discount means a 
reduction in the amount a buyer (who buys either directly or through a 
wholesaler or a group purchasing organization) is charged for an item 
or service based on an arms-length transaction. The term discount does 
not include--
    (i) Cash payment;
    (ii) Furnishing one good or service without charge or at a reduced 
charge to include the purchase of a different good or service;
    (iii) A reduction in price applicable to one payer but not to 
Medicare or a State health care program;
    (iv) A routine reduction or waiver of any coinsurance or deductible 
amount owned by a program beneficiary;
    (v) Warranties;
    (vi) Services provided in accordance with a personal or management 
services contract; or
    (vii) Other remuneration, in cash or in kind, not explicitly 
described in this paragraph (a)(5).
* * * * *


Sec. 1001.953  [Removed]

    3. Section 1001.953 would be removed.
    4. Section 1001.954 would be added to read as follows:


Sec. 1001.954  Sham Transactions or Devices.

    Any transaction or other device entered into or employed for the 
purpose of appearing to fit within a safe harbor when the substance of 
the transaction or device is not accurately reflected by the form will 
be disregarded, and whether the arrangement receives the protection of 
a safe harbor will be determined by the substance of the transaction or 
device.

    Dated: March 14, 1994.
June Gibbs Brown,
Inspector General.
    Approved: April 22, 1994.
Donna E. Shalala,
Secretary, Department of Health and Human Services.
[FR Doc. 94-16873 Filed 7-20-94; 8:45 am]
BILLING CODE 4150-04-M