[Federal Register Volume 59, Number 230 (Thursday, December 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29559]

[[Page Unknown]]

[Federal Register: December 1, 1994]



Office of Inspector General

42 CFR Part 1003

RIN 0991-AA45


Health Care Programs: Fraud and Abuse; Civil Money Penalties for 
Hospital Physician Incentive Plans

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

ACTION: Proposed rule.


SUMMARY: This proposed rule would implement section 9313(c) of the 
Omnibus Budget Reconciliation Act (OBRA) of 1986, as amended by section 
6003(g)(3)(D)(i) of OBRA of 1989 and sections 4204(a)(3) and 4731(b)(1) 
of OBRA of 1990, by prohibiting a hospital (or a rural primary care 
hospital) from knowingly making incentive payments to a physician as an 
inducement to reduce or limit services provided to Medicare or Medicaid 
program beneficiaries who are under the care of that physician. Both a 
hospital who knowingly makes such payments and the physician who 
knowingly accepts such incentive payments would each be subject to 
civil money penalties (CMPs) of up to $2,000 for each individual for 
whom payments are made

DATES: To assure consideration, pubic comments mut be mailed or 
delivered to the address provided below by January 30, 1995. Comments 
are available for public inspection December 15, 1994.

ADDRESSES: Address comments in writing to: Office of Inspector General, 
Department of Health and Human Services, Attention: LRR-45-P, room 
5246, 330 Independence Avenue, 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-45-p. Comments will be available for public inspection 
in Room 5551, 330 Independence Avenue, SW., Washington, DC on Monday 
through Friday of each week from 9 a.m. to 5 p.m., (202) 619-3270.

Joel J. Schaer, Office of Inspector General, (202) 619-0089.


I. Background

A. Prospective Payment System to Hospitals

    Prior to 1984, the Medicare and Medicaid programs generally paid 
hospitals their reasonable costs of providing covered medical services 
to program beneficiaries. The general concern over this payment method 
was that the reimbursement system did not give hospitals sufficient 
incentives to provide health care in an economical and efficient 
manner. Under the system, incentives existed for hospitals to encourage 
physicians to admit more program patients for longer hospital stays, 
and to utilize more services for patients while they were there.
    Public Law 98-21, the Social Security Amendments of 1983, 
established a new hospital prospective payment system (PPS) for 
reimbursing inpatient hospital services under Medicare. The prospective 
payment system has also been embraced by many State Medicaid programs. 
Under PPS, hospitals are paid a pre-established fee for treating 
program patients based on any of 492 diagnosis related groups (DRGs) 
that address a particular diagnosis. Under PPS, a hospital generally 
receives the same fee regardless of the patient's length-of-stay or the 
amount of services furnished the individual. This change in payment 
systems substantially altered hospital incentives in the provision of 
medical care.
    With PPS permitting hospitals to profit from Medicare and Medicaid 
patients when such patients are treated at a lower cost than the 
present payment level, many hospitals have had a new range of financial 
incentives made available to them for (1) underproviding services to 
program beneficiaries, and (2) shortening their length-of-stay by 
discharging them too early.

B. Use of Physician Incentive Plans

    In recent years, hospitals have developed and employed a wide range 
of physician incentive plans that give physicians, as well as the 
hospital, financial incentives to reduce or limit services provided to 
program beneficiaries. Since it is the physician who ultimately 
controls the level, amount and duration of inpatient hospital services 
provided, many of these incentive plans have been designed to encourage 
physicians to alter their practice patterns and to reduce their 
patient's length-of-stay, as well as the quantity and medically 
necessary level of care provided these individuals, in order to 
increase the hospital's profitability.

C. General Accounting Office Report

    Because of the close link between a physician's incentive payments 
and the treatment of individual patients, certain features of physician 
incentive plans that could compromise quality of care provided to 
beneficiaries prompted a General Accounting Office (GAO) review of a 
number of plans under which hospitals make incentive payments to 
physicians for lowering the costs of treatment. In its report, 
``Physician Incentive Payments by Hospitals Could Lead to Abuse'' (HRD-
86-103), July 1986), GAO specifically set about reviewing a number of 
existing and proposed hospital physician incentive plan arrangements in 
an effort to assess their impact on the cost and care provided Medicare 
    The GAO report highlighted several general characteristics or 
aspects of physician incentive plans that, individually or 
collectively, have tended to give physicians an incentive to reduce 
quality of care to program beneficiaries. Among those characteristics 
cited by GAO as significantly affecting physicians' financial 
incentives to undertreat or provide substandard care were: (1) The 
length of the period over which the physician's cost performance is 
assessed to determine the level of incentive payment, (2) the number of 
physicians over which cost performance is calculated to determine if an 
incentive plan is paid, and (3) the use of arrangements under which the 
physician is paid a percentage of savings or profits.
    As a result of its report on physician incentive plans, GAO 
specifically recommended that:
     Such plan payments should be based on the cost performance 
of a group of physicians rather than by individual physicians.
     Payments should be based on performance over a relatively 
long period of time, e.g., over a one year period, as opposed to a 
single month or quarter.
     Incentive payments should not be based on the hospital's 
profits resulting from treating any individual patient.
     Any physician payment system of this type by a hospital 
should include a strong program of utilization and quality of care 
    The GAO recommended that physician incentive plans that do not 
include these characteristics should be prohibited. However, the GAO 
also noted that no combination of characteristics in a physician 
incentive plan could guarantee that the plan would not be abusive.

II. Provisions of the Proposed Rule

A. The Omnibus Budget Reconciliation Act of 1986

    The passage of Public Law 99-509, the Omnibus Budget Reconciliation 
Act (OBRA) of 1986, provided new authority (section 1128A(b) of the 
Social Security Act) to the Secretary to impose civil money penalties 
for certain incentive payments made to physicians by hospitals, risk-
sharing health maintenance organizations (HMOs) and competitive medical 
plans. Specifically, section 9313(c) of OBRA 1986 prohibited the making 
of direct or indirect payments by a hospital or an eligible risk-
sharing organization ``to a physician as an inducement to reduce or 
limit services provided'' to individuals entitled to Medicare or 
Medicaid program benefits ``under the direct care of the physician.'' 
Under this provision, hospitals and risk-sharing entities that 
knowingly made such payments, and physicians who knowingly received 
such payments, would be subject to civil money penalties of up to 
$2,000 for each individual for whom payments were made. Section 
6003(g)(3)(D)(i) of Public Law 101-239, OBRA of 1989, amended this 
authority by including the term ``rural primary care hospitals'' under 
this provision.
    Sections 4204(a)(3) and 4731(b)(1) of Public Law 101-508, OBRA of 
1990, repealed the prohibition of physician incentive plans in HMOs and 
other risk-sharing organizations and enacted requirements for 
regulating plans by these organizations. The statutory provisions 
regarding physician incentive plans in HMOs and other risk-sharing 
organizations are now set forth in section 1876(i) of the Social 
Security Act. The Department, through the OIG and the Health Care 
Financing Administration, has published in the Federal Register 
proposed regulations implementing the statutory provision regarding 
HMOs and other risk-sharing organizations (57 FR 59024, December 14, 
1992). That rule is currently being finalized.
    These proposed regulations only address physician incentive plans 
by hospitals (and rural primary care hospitals), reflecting the present 
scope of section 1128A(b) of the Act.

B. Civil Money Penalties for Hospital Physician Incentive Plans

    These proposed regulations would amend 43 CFR part 1003, Civil 
Money Penalties, Assessments and Exclusions, by codifying the OIG's 
authority to levy CMPs against any hospital (including a rural primary 
care hospital as defined in section 1861(mm(1) of the Act) and 
physician who knowingly violates the prohibition on the use of 
physician incentive plans.
1. Structure and Nature of Incentive Plans to be Prohibited
    The precise structure and application of a physician incentive plan 
will ultimately determine whether CMPs would be assessed against a 
hospital or physician under this provision. There are certain incentive 
payments to physicians, based on cost savings, that are specifically 
designed to limit or reduce services normally provided by a hospital to 
a patient. Such incentive plans, tied to the overall costs of patient 
treatment or on a patient's length-of-stay without regard to how 
specific reductions are made, could be viewed as inducements to reduce 
patient services, and thus may be subject to CMPs under these 
regulations. Most DRG incentive plans, for example, under which payment 
to individual physicians is tied to DRG reimbursement, appear to be 
based on payments designed as inducements to reduce or limit services 
provided once a patient has been admitted. This type of incentive plan 
might also serve to influence the type of patient admitted to a 
particular hospital, thereby encouraging the physician to admit 
patients with less complicated conditions to a hospital offering 
incentives and directing patients with more complicated conditions 
elsewhere. These types of incentive plans offered by hospitals to 
individual physicians related to the cost of services provided would be 
prohibited under this provision and subject to CMPs.
2. Incentive Plans Not Relating to Direct Patient Care
    These regulations would generally apply only to those physicians 
having direct care responsibilities. In the legislative history 
accompanying this provision, Congress stated its intention that the 
statutory prohibition ``not apply to hospital incentive arrangements 
with physicians who function in a management or supervisory capacity 
with respect to the operation of a hospital department (such as 
radiology or clinical laboratory services) insofar as the purpose of 
the arrangement is limited to encouraging efficiency in the operation 
of the department'' (House Report No. 99-727; page 445). Congress 
believed that incentive plan payments aimed at this group of physicians 
should be exempted as long as such arrangements encourage efficiency in 
the operation of a specific department and do not affect direct patient 
care responsibilities.
    We believe, for example, there may be certain types of hospital 
incentive plans to physicians, such as those designated to reward the 
timely review and completion of medical records which do not impact on 
direct patient care responsibilities or do not affect patient referral 
patterns, that may be acceptable and therefore not be subject to civil 
money penalties under this provision.
    We believe, however, that it is impossible and impractical for the 
OIG to specifically indicate in regulations what specific criteria may 
make up an acceptable hospital physician incentive plan. In setting 
forth these proposed regulations, we are adopting a similar approach to 
that which we have used for other existing CMP authorities of closely 
following the statutory language. As with all CMP cases, the OIG will 
review and assess the nature and scope of each suspect incentive plan 
on a case-by-case basis to determine its specific intent and 
acceptability. An alternative approach would be to specify those kinds 
of incentive plans that may be exempt from CMP liability. We welcome 
comments on identifying those types of incentive plans that may not 
specifically affect direct patient care responsibilities, and thus 
would not be implicated by the statute.

III. Additional Information

A. Regulatory Impact Statement

    The Office of Management and Budget has reviewed this proposed rule 
in accordance with the provisions of Executive Order 12866. As 
indicated above, these proposed regulations serve to promulgate the 
statutory requirement of establishing new CMP authorities against 
hospitals and physicians who engage in certain types of financial 
incentive plans that may increase program expenditures or reduce the 
quality of care provided to program beneficiaries. As indicated above, 
this proposed rule closely tracks the language and scope of the 
underlying statutory provision, and would serve primarily to clarify 
departmental policy with respect to the OIG's CMP and assessment 
authorities. The rulemaking would not substantially affect the scope of 
activity subject to CMPs by the statute.
    Specifically, the rule sets forth the penalties established by 
statute to be imposed against hospitals providing financial incentives 
to limit medical care to Medicare and Medicaid patients, and against 
physicians receiving such payments. Such payments place Medicare and 
Medicaid patients at risk due to the physicians' potential financial 
interest in limiting necessary medical care. This rule is not designed 
to curtail or jeopardize a hospital's legitimate cost-savings or 
competitive activities which do not provide financial incentives to 
limit services. We believe that the great majority of providers and 
practitioners do not engage in those types of prohibited practices 
addressed in these proposed regulations and the underlying statute. 
Therefore, we believe that the aggregate economic impact of these 
provisions should be minimal, and should only affect those who have 
engaged in behavior that violates the currently effective statute. As 
such, this proposed rule such have no direct effect on the economy or 
on Federal or State expenditures.
    In addition, we generally prepare a regulatory flexibility analysis 
that is consistent with the Regulatory Flexibility Act (5 U.S.C. 601 
through 612), unless the Secretary certifies that a proposed regulation 
would not have a significant economic impact on a substantial number of 
small entities. We have determined, and the Secretary certifies, that 
this proposed rule would not have a significant economic impact on a 
number of small business entities, and therefore, we have not prepared 
a regulatory flexibility analysis.

B. Response to Comments

    Because of the large number of comments we normally receive on 
proposed regulations, we cannot acknowledge or respond to such comments 
individually. However, in preparing the final rule, we will consider 
all comments received timely and respond to the major issues in the 
preamble of that rule.

List of Subjects in 42 CFR Part 1003

    Administrative practice and procedure, Fraud, Grant programs--
health, Health facilities, Health professions, Maternal and child 
health, Medicaid, and Medicare, Penalties.


    42 CFR Chapter V, part 1003 would be amended as forth below:


    1. The authority citation for part 1003 would continue to read as 

    Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7a, 1320b-10, 
1395u(j), 1395u(k), 1395dd(d)(1), 1395mm, 1395ss(d), 1396b(m), 
11131(c) and 11137(b)(2).

    2. Section 1003.100 would be amended by republishing paragraph 
(b)(1) introductory text; by adding and reserving paragraphs 
(b)(1)(viii) through (b)(1)(xi); and by adding new paragraph 
(b)(1)(xii) to read as follows:

Sec. 1003.100  Basis and purpose.

    (b) Purpose. * * *
    (1) Provides for the imposition of civil money penalties and, as 
applicable, assessments against persons who--
* * * * *
    (viii)-(xi) [Reserved]
    (xii) Have participated in a prohibited hospital physician 
incentive plan as set forth in section 1128A(b) of the Act.
    3. Section 1003.101 would be amended by adding a definition for the 
terms hospital and prohibited arrangement alphabetically to read as 

Sec. 1003.101  Definitions.

* * * * *
    Hospital means a hospital as defined in section 1861(e) of the Act, 
or a rural primary care hospital as defined in section 1861(mm)(1) of 
the Act.
* * * * *
    Prohibited arrangement means the making of payments, directly or 
indirectly, overtly or covertly, in cash or in kind, to a physician--or 
the acceptance of such payments by the physician--as an inducement to 
reduce or limit services provided to individuals entitled to Medicare 
or Medicaid benefits who are under the direct care of the physician.
* * * * *
    4. Section 1003.102 would be amended by republishing paragraph (b) 
introductory text; by adding and reserving paragraphs (b)(9) through 
(b)(10); by adding new paragraphs (b)(11) and (b)(12); and by revising 
paragraph (c)(2) to read as follows:

Sec. 1003.102  Basis for civil money penalties and assessments.

* * * * *
    (b) The OIG may impose a penalty, and where authorized, an 
assessment against any person (including an insurance company in the 
case of paragraphs (b)(5) and (b)(6) of this section) whom it 
determines in accordance with this part--
* * * * *
    (9)-(10) [Reserved]
    (11) Is a hospital who knowingly makes a payment, directly or 
indirectly, overtly or covertly, in cash or in kind, to a physician as 
an inducement to reduce or limit services provided to an individual who 
is eligible for Medicare or Medicaid benefits and who is under the 
direct care of the physician that knowingly accepts receipt of such 
    (12) Is a physician who knowingly receives a payment as described 
in paragraph (b)(11) of this section.
    (c) * * *
    (2) In any case in which it is determined that more than one person 
was responsible for:
    (i) Presenting, or causing to be presented, a request for payment;
    (ii) Participating in a prohibited arrangement; or
    (iii) Giving false or misleading information as described in 
paragraph (b) of this section, each such person may be held liable for 
the penalty prescribed in this part.
* * * * *
    5. Section 1003.103 would be amended by revising paragraph (a) to 
read as follows:

Sec. 1003.103  Amount of penalty.

    (a) Except as provided in paragraphs (b) through (f) of this 
section, the OIG may impose a penalty of not more than $2,000 for each 
item or service, or for each individual for whom payment under a 
prohibited arrangement was made, that is subject to a determination 
under Sec. 1003.102.
* * * * *
    6. Section 1003.106 would be amended by adding a new paragraph 
(a)(6); and by revising paragraph (b) introductory text; paragraph 
(b)(2) introductory text; and paragraph (b)(2)(ii) to read as follows:

Sec. 1003.106  Determinations regarding the amount of the penalty and 

    (a) * * *
    (6) In determining the amount of any penalty in 
Sec. 1003.102(b)(11) or (b)(12), the Department will take into 
    (i) The nature of the payment designed to reduce or limit services 
and the circumstances under which it was made;
    (ii) The extent to which the payment encouraged the limiting of 
medical care or the premature discharge of the patient;
    (iii) The extent to which the prohibited arrangement caused actual 
or potential harm to program beneficiaries;
    (iv) The number of program beneficiaries affected by such incentive 
    (v) The extent and prior history of offenses by the hospital and 
the physician(s) making or accepting such payment;
    (vi) The financial condition of the hospital (or physician) 
involved in the offering (or acceptance) of such prohibited incentive 
payments; and
    (vii) Such other matters as justice may require.
    (b) Determining the amount of the penalty or assessment. In taking 
into account the factors listed in paragraphs (a)(1) and (a)(5) of this 
section, the following circumstances are to be considered--
* * * * *
    (2) Degree of culpability. It should be considered a mitigating 
circumstance if the claim or request for payment for the item or 
service or incident was the result of an unintentional and unrecognized 
error in the process the respondent followed in presenting claims or 
requesting payment, and corrective steps were taken promptly after the 
error was discovered. It should be considered an aggravating 
circumstance if--
* * * * *
    (ii) The respondent knew that the items or services were furnished 
during a period that he or she had been excluded from participation and 
that no payment could be made as specified in Sec. 1003.102(a)(3), 
because payment would violate the terms of an assignment or an 
arrangement with a State agency or other agreement or limitation on 
payment under Sec. 1003.102(b), or the prohibited arrangement as set 
forth in Sec. 1001.102(b)(11) caused harm to program beneficiaries or 
actually limited services.
* * * * *
    Dated: August 5, 1994.
June Gibbs Brown,
Inspector General.
    Approved: August 17, 1994.
Donna E. Shalala,
[FR Doc. 94-29559 Filed 11-30-94; 8:45 am]