[Federal Register Volume 60, Number 156 (Monday, August 14, 1995)]
[Rules and Regulations]
[Pages 41914-41982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19647]
[[Page 41913]]
_______________________________________________________________________
Part II
Department of Health and Human Services
_______________________________________________________________________
Health Care Financing Administration
_______________________________________________________________________
42 CFR Part 411
Medicare Program; Physician Financial Relationships With, and Referrals
to, Health Care Entities That Furnish Clinical Laboratory Services;
Financial Relationship Reporting Requirements: Final Rule
Federal Register / Vol. 60, No. 156 / Monday, August 14, 1995 / Rules
and Regulations
[[Page 41914]]
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Part 411
[BPD-674-FC]
RIN: 0938-AF40
Medicare Program; Physician Financial Relationships With, and
Referrals to, Health Care Entities That Furnish Clinical Laboratory
Services and Financial Relationship Reporting Requirements
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Final rule with comment period.
-----------------------------------------------------------------------
SUMMARY: This final rule with comment period provides that, if a
physician or a member of a physician's immediate family has a financial
relationship with an entity, the physician may not make referrals to
the entity for the furnishing of clinical laboratory services under the
Medicare program, except under specified circumstances. It contains
revisions to our proposal of March 11, 1992, based on comments
submitted by the public. Further, it incorporates the new expansions
and exceptions created by the Omnibus Budget Reconciliation Act of 1993
and the amendments in the Social Security Act Amendments of 1994 (SSA
'94), that are related to referrals for clinical laboratory services
and have a retroactive effective date of January 1, 1992.
In addition, we are responding to comments received on the interim
final rule with comment period (published on December 3, 1991) that set
forth Medicare reporting requirements for the submission by certain
health care entities of information about their relationships with
physicians. That document implemented the reporting requirements of
section 1877(f) of the Social Security Act. This rule revises those
requirements to incorporate the amendments to section 1877(f) made by
SSA '94, to apply to any further reporting we may require.
EFFECTIVE DATES: The regulations are effective September 13, 1995.
Comment Date: Comments on the new provisions added by the Omnibus
Budget Reconciliation Act of 1993 and any changes in section 1877 that
resulted from the Social Security Act Amendments of 1994 will be
considered if we receive them at the appropriate address, as provided
below, no later than 5 p.m. on October 13, 1995.
ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: BPD-674-FC, P.O. Box 26688,
Baltimore, MD 21207.
If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses: Room 309-G, Hubert H.
Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201,
or Room C-5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code BPD-674-FC. Comments received timely will be available for
public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in Room 309-G of
the Department's offices at 200 Independence Avenue, SW., Washington,
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.
(phone: (202) 690-7890).
For comments that relate to information collection requirements,
mail a copy of the comments to: Allison Herron Eydt, HCFA Desk Officer,
Office of Information and Regulatory Affairs, Room 3001, New Executive
Office Building, Washington, DC 20503.
Copies: To order copies of the Federal Register containing this
document, send your request to the Government Printing Office, ATTN:
New Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the
date of the issue requested and enclose a check or money order payable
to the Superintendent of Documents, or enclose your Visa or Master Card
number and expiration date. Credit card orders can also be placed by
calling the order desk at (202) 512-1800 or by faxing your Visa or
Master Card number and expiration date to (202) 512-2250. The cost for
each copy is $8.00. As an alternative, you may view and photocopy the
Federal Register document at most libraries designated as U.S.
Government Depository Libraries and at many other public and academic
libraries throughout the country that receive the Federal Register.
FOR FURTHER INFORMATION CONTACT: Betty Burrier, (410) 786-0191.
SUPPLEMENTARY INFORMATION: To assist readers in referencing sections
contained in this final rule, we are providing the following table of
contents:
Table of Contents
I. Legislation and Regulations--Chronological Background
A. OBRA '89
B. OBRA '90
C. Federal Register Documents
D. OBRA '93 and SSA '94
1. General Prohibition
2. Definition of Referral
3. Definitions of Compensation Arrangement and Remuneration
4. Financial Relationships
5. General Exceptions to the Prohibition on Physician Referrals
6. Exceptions Applicable Only to Financial Relationships
Consisting of Ownership or Investment Interests
7. Exceptions Applicable Only to Financial Relationships
Consisting of Certain Compensation Arrangements
8. Sections 1877(f) and 1877(g)
9. Other Definitions
II. Published Federal Register Documents
A. Provisions of the Proposed Rule--Physician Ownership of, and
Referrals to, Health Care Entities that Furnish Clinical Laboratory
Services
1. Scope
2. Definitions
3. General Prohibition on Referrals
4. Exceptions that Apply to Specific Services
5. Exceptions for Certain Ownership or Investment Interests
6. Exceptions Related to Compensation Arrangements
B. Provisions of the Interim Final Rule with Comment Period--
Reporting Requirements for Financial Relationships between
Physicians and Health Care Entities that Furnish Selected Items and
Services
III. Principles for Developing this Final Rule with Comment Period
IV. Analysis of and Responses to Public Comments on the Proposed
Rule--Physician Ownership of, and Referrals to, Health Care Entities
that Furnish Clinical Laboratory Services
A. General
1. Purpose of Final Rule
2. Delay of Effective Date
3. Delay of Enforcement Provisions
4. Good Faith Standard
5. Physician Ownership of Health Care Facilities
6. Process for Amending Regulations
7. Evolution of Group Practices
8. Use of Diagnosis Code for Laboratory Billing
9. Referrals That Are Not Abusive
10. Contractor Implementation
B. Scope of Regulations
C. Definitions
1. Clinical Laboratory Services
2. Compensation Arrangement
3. Entity
4. Fair Market Value
5. Financial Relationship
6. Group Practice
7. Immediate Family
8. Practice
9. Referral
10. Referring Physician
11. Remuneration
D. Prohibition On Certain Referrals by Physicians and
Limitations On Billing
1. Medicare Only
2. Related Parties
3. Identical Ownership
[[Page 41915]]
4. Technical Change
5. Refunds
E. General Exceptions to Referral Prohibitions Related to
Ownership and Compensation
1. Physicians' Services
2. In-office Ancillary Services
3. Prepaid Health Plan Enrollees
F. Exceptions to Referral Prohibitions Related to Ownership or
Investment Interest
1. Publicly-traded Securities
2. Rural Laboratories
3. Hospitals Outside of Puerto Rico
G. Exceptions to Referral Prohibitions Related to Compensation
Arrangements
1. Rental of Office Space
2. Isolated Transactions
3. Service Arrangements With Nonhospital Entities
H. Additional Exceptions
1. Comments relating to an Exception for Shared Laboratories
2. Specialized Services Laboratory
3. Laboratories Shared with Hospitals
4. Rental of Laboratory Equipment
5. Group Practice Affiliated Property Companies
6. Faculty Practice Plan Exception
7. Special Exception for Group Practices
8. Ambulatory Surgical Center Exception
9. Home Care and Hospice Exception
10. Parent-subsidiary Relationships
11. Rural Laboratory Compensation Arrangements
12. Case-by-case Exemptions
13. Physician Ownership of Public Companies
14. Compensation Exception
V. Analysis of and Responses to Public Comments on the Interim Final
Rule with Comment Period--Reporting Requirements for Financial
Relationships between Physicians and Health Care Entities that
Furnish Selected Items and Services
VI. Provisions of this Final Rule
A. Proposed Rule--Physician Ownership of, and Referrals to,
Health Care Entities that Furnish Clinical Laboratory Services
B. Interim Final Rule with Comment Period--Reporting
Requirements for Financial Relationships between Physicians and
Health Care Entities that Furnish Selected Items and Services
C. Source of final regulations
VII. Collection of Information Requirements
VIII. Regulatory Impact Statement
I. Legislation and Regulations--Chronological Background
In section 6204 of the Omnibus Budget Reconciliation Act of 1989
(OBRA '89) (Public Law 101-239, enacted on December 19, 1989), the
Congress added a provision to the Social Security Act (the Act) that
governs whether physicians who have financial relationships (or who
have immediate family members with financial relationships) with a
health care entity can refer Medicare patients to that entity for
clinical laboratory services. This provision was amended by section
4207(e) of the Omnibus Budget Reconciliation Act of 1990 (OBRA '90)
(Public Law 101-508, enacted on November 5, 1990); section 13562 of the
Omnibus Budget Reconciliation Act of 1993 (OBRA '93) (Public Law 103-
66, enacted on August 10, 1993); and section 152 of the Social Security
Act Amendments of 1994 (SSA '94) (Public Law 103-432, enacted on
October 31, 1994). As discussed below, we published an interim final
rule in 1991 concerning financial relationship reporting requirements,
and we published a proposed rule in 1992 concerning physician referrals
to clinical laboratories.
A. OBRA '89
Section 6204 of OBRA '89 added section 1877, ``Limitation on
Certain Physician Referrals,'' to the Act. (Unless otherwise indicated,
all references below to various sections of the law are references to
the Act.) In general, section 1877 as added by OBRA '89 prohibits a
physician with a financial relationship with an entity that furnishes
clinical laboratory services (or a physician with an immediate family
member who has such a relationship) from making a referral to that
entity for clinical laboratory services for which Medicare would pay.
It also prohibits the entity from billing Medicare, an individual, a
third-party payor, or other entity for an item or service furnished as
a result of a prohibited referral. Additionally, it requires a refund
of any amount collected from an individual as the result of a billing
for an item or service furnished under a prohibited referral. The
statute provides for certain exceptions to the prohibition.
B. OBRA '90
Section 4207(e) of OBRA '90 amended certain provisions of section
1877 to clarify definitions and reporting requirements relating to
physician ownership and referral and to provide an additional exception
to the prohibition.
C. Federal Register Documents
On December 3, 1991, we published an interim final rule in the
Federal Register, at 56 FR 61374, that set forth reporting requirements
under the Medicare program for health care entities furnishing clinical
laboratory services (and certain other services as discussed below) to
submit information about their relationships with physicians. On March
11, 1992, we published a proposed rule in the Federal Register, at 57
FR 8588, that proposed regulations concerning the provisions of section
1877, as amended by OBRA' 90, concerning physician referrals to
clinical laboratories. Although we summarize the provisions of the
interim final rule and proposed rule in section II of this document,
readers may want to refer to the interim final rule and proposed rule
for additional information on the statutory provisions as amended by
OBRA '90 and for the specifics of our proposals.
D. OBRA '93 and SSA '94
Section 13562 of OBRA '93 included extensive revisions to section
1877. Some of the revisions simply elaborate on or amend existing law,
while others institute entirely new provisions. With regard to
referrals for clinical laboratory services, some of the provisions of
OBRA '93 have a prospective effective date of January 1, 1995, while
others have a retrospective effective date of January 1, 1992. Most
dramatically, section 13562 extends section 1877 to cover 10 additional
designated health services, beginning with referrals made after
December 31, 1994.
In addition, section 13624 added paragraph (r) to section 1903.
This section extends certain provisions of section 1877 to the Medicaid
program effective on or after December 31, 1994. That is, this section
prohibits Medicaid payments to a State for designated health services
furnished on the basis of a referral that would result in the denial of
payment under Medicare if Medicare provided for coverage of the service
to the same extent and under the same terms and conditions as under the
State plan. This section also provides that the reporting requirements
under 1877(f) and the civil money penalty provisions for failure to
report information under section 1877(g)(5) apply to entities that
furnish services covered under the Medicaid program in the same manner
as they apply to entities that furnish Medicare covered services.
SSA '94 amended the reporting requirements that entities providing
Medicare (and now Medicaid) items and services have to meet for
purposes of the referral prohibition, changed some of the designated
health services, and altered the effective date provisions in OBRA '93.
The changes in the effective date provisions have altered the dates on
which some of the provisions relating to referrals for clinical
laboratory services go into effect prior to January 1, 1995. These
changes have been reflected in this final rule.
A separate notice of proposed rulemaking will be published to
address those provisions of OBRA '93 that relate to designated health
services (including clinical laboratory services) and that become
effective January 1, 1995. In other words, the discussion in this
[[Page 41916]]
preamble and the regulations established as a result of the publication
of this final rule with comment period are in the context of referrals
for clinical laboratory services and address only those provisions of
section 1877 that are effective as of January 1, 1992.
Even though we will cover the designated health services under a
separate proposed rule, this final rule with comment will affect how we
review referrals involving any of the designated health services. The
statute groups clinical laboratory services together with all other
designated health services beginning on January 1, 1995. Generally, the
prohibition in the statute and the exceptions are drafted so that they
apply equally to situations involving referrals for any of the
designated health services, including referrals for clinical laboratory
services. As a result, we believe that a majority of our
interpretations in this final rule with comment will apply to the other
designated health services.
Until we publish a rule covering the designated health services, we
intend to rely on our language and interpretations in this final rule
when reviewing referrals for the designated health services in
appropriate cases. We believe appropriate cases are those in which our
interpretations of the statute clearly apply equally to referrals for
clinical laboratory services and other designated health services. For
example, we have defined the term ``immediate family member'' for
purposes of this final rule with comment. We will be guided by this
definition when we review referrals for the designated health services.
The following discussion covers the basic prohibition in section
1877 and fundamental concepts and definitions, while it highlights the
changes to section 1877 made by OBRA '93, as amended by SSA '94, that
relate to clinical laboratory services and that became effective on
January 1, 1992.
1. General Prohibition
The prohibition of certain referrals is contained at section
1877(a)(1) of the Act. The provisions of that section remained
unchanged by OBRA '93 until January 1, 1995. With certain exceptions,
section 1877(a)(1)(A) prohibits a physician from making a referral to
an entity for the furnishing of clinical laboratory services, for which
Medicare would otherwise pay, if the physician (or a member of the
physician's immediate family) has a financial relationship with that
entity. (``Financial relationship,'' as described by the Act, is
discussed under I.D.4, below.) Further, section 1877(a)(1)(B) prohibits
an entity from presenting or causing to be presented a Medicare claim
or bill to any individual, third party payor, or other entity for
clinical laboratory services furnished under a prohibited referral.
2. Definition of Referral
The definition of ``referral,'' as it relates to clinical
laboratory services, was not changed by OBRA '93. Section 1877(h)(5)
specifies that the following requests constitute a referral:
For physicians' services, the request by a physician for
an item or service for which payment may be made under Medicare Part B,
including the request by a physician for a consultation with another
physician (and any test or procedure ordered by, or to be performed by
(or under the supervision of) that other physician).
For other items, the request or establishment of a plan of
care by a physician that includes the furnishing of clinical laboratory
services.
Under section 1877(h)(5)(C), however, a referral does not include a
request by a pathologist for clinical diagnostic laboratory tests and
pathological examination services if the services are furnished by (or
under the supervision of) the pathologist as a result of a consultation
requested by another physician.
3. Definitions of Compensation Arrangement and Remuneration
The predecessor provision of section 1877(h)(1) (that is, section
1877(h)(1) as it read before the enactment of OBRA '93) defines a
``compensation arrangement'' as any arrangement involving any
remuneration between a physician (or an immediate family member) and an
entity. It defines ``remuneration'' to include any remuneration,
directly or indirectly, overtly or covertly, in cash or in kind. OBRA
'93 amends section 1877(h)(1) by adding paragraph (h)(1)(C) to
enumerate certain exceptions to the above definition of compensation
arrangement. Paragraph (h)(1)(C) specifies that a compensation
arrangement does not include the following types of remuneration:
The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
The provision of items, devices, or supplies that are used
solely to--
+ Collect, transport, process, or store specimens for the entity
providing the item, device, or supply; or
+ Order or communicate the results of tests or procedures for the
entity.
A payment made by an insurer or a self-insured plan to a
physician to satisfy a claim, submitted on a fee-for-service basis, for
the furnishing of health services by that physician to an individual
who is covered by a policy with the insurer or by the self-insured
plan, if--
+ The health services are not furnished, and the payment is not
made, under a contract or other arrangement between the insurer or the
plan and the physician;
+ The payment is made to the physician on behalf of the covered
individual and would otherwise be made directly to the individual;
+ The amount of the payment is set in advance, does not exceed fair
market value, and is not determined in a manner that takes into account
directly or indirectly the volume or value of any referrals; and
+ The payment meets other requirements the Secretary may impose by
regulation as needed to protect against Medicare program or patient
abuse.
4. Financial Relationships
Under OBRA '93, section 1877(a)(2) continues to describe a
financial relationship between a physician (or an immediate family
member of a physician) and an entity as being an ownership or
investment interest in the entity or a compensation arrangement between
a physician (or immediate family member) and the entity. The statute
also continues to provide that an ownership or investment interest may
be established through equity, debt, or other means. (Note that
effective for referrals made on or after January 1, 1995, OBRA '93
provides that an ownership or investment interest also includes an
interest in an entity that holds an ownership or investment interest in
any entity furnishing the clinical laboratory service or other
designated health services.)
5. General Exceptions to the Prohibition on Physician Referrals
Section 1877(b) provides for general exceptions to the prohibition
on referrals. (General exceptions are exceptions that apply to both
ownership/investment and compensation.) Because these exceptions
frequently refer to a ``group practice,'' we begin our discussion of
the exceptions by describing ``group practice'' as defined by the
statute at section 1877(h)(4).
Until January 1, 1995, OBRA '93 continued to define ``group
practice'' as a group of two or more physicians legally organized as a
partnership,
[[Page 41917]]
professional corporation, foundation, not-for-profit corporation,
faculty practice plan, or similar association, that meets the following
conditions:
Each physician member of the group furnishes substantially
the full range of services that the physician routinely furnishes,
including medical care, consultation, diagnosis, or treatment, through
the joint use of shared office space, facilities, equipment, and
personnel.
Substantially all of the services of the physician members
of the group are furnished through the group, are billed in the name of
the group, and amounts so received are treated as receipts of the
group.
The overhead expenses of and the income from the practice
are distributed in accordance with methods previously determined. (OBRA
'93 eliminates the requirement that the methods be previously
determined by members of the group.)
The group practice complies with all other standards
established by the Secretary in regulations.
In addition, OBRA '93 amended section 1877(h)(4). The predecessor
provision of section 1877(h)(4) provided that, in the case of a faculty
practice plan associated with a hospital with an approved medical
residency training program in which physician members may furnish a
variety of different specialty services and furnish professional
services both within and outside the group, as well as perform other
tasks such as research, the conditions contained in the definition of
``group practice'' apply only with respect to the services furnished
within the faculty practice plan. OBRA '93 added, as an addition to a
faculty practice plan associated with a hospital, a faculty practice
plan associated with an institution of higher education or a medical
school.
(Note that OBRA '93 makes other changes to the definition of group
practice that will become effective January 1, 1995.)
a. Exception--Physicians' Services
Section 1877(b)(1) continues to specify that the prohibition does
not apply to services furnished on a referral basis if the services are
physicians' services, as defined in section 1861(q), furnished
personally by (or under the personal supervision of) another physician
in the same group practice (as defined in section 1877(h)(4)) as the
referring physician.
b. Exception--In-Office Ancillary Services
Section 1877(b)(2) continues to specify that the prohibition does
not apply to referrals for certain in-office ancillary services. Both
the predecessor provisions and current provisions of section 1877(b)(2)
contain requirements that must be met in order for the exception to
apply. These requirements concern who may furnish the services, where
the services are furnished, and how the services must be billed.
Who May Furnish the Services
Under the predecessor provisions of section 1877(b)(2)(A)(i), the
services had to be personally furnished by the referring physician, a
physician who was a member of the same group as the referring
physician, or individuals employed by the physician or group practice
and who were personally supervised by the physician or by another
physician in the group practice. OBRA '93 amends this provision to
require that the individual performing the service be directly
supervised by the physician or by another physician in the group
practice and dropped the employment requirement.
Where the Services May Be Furnished
The predecessor provision of section 1877(b)(2)(A)(ii) required
that the services be furnished in either of the following:
A building in which the referring physician (or another
physician who is a member of the same group practice) furnishes
physicians' services unrelated to the furnishing of clinical laboratory
services.
In the case of a referring physician who is a member of a
group practice, in another building that is used by the group practice
for the centralized provision of the group's clinical laboratory
services.
OBRA '93 amended this provision to require, in the group practice
situation, that the building be used for the provision of some or all
of the group's clinical laboratory services. That is, this provision no
longer requires that the provision of laboratory services be
centralized at that site.
The statute contains an undesignated paragraph at the end of the
group practice location requirements that reads as follows: ``unless
the Secretary determines other terms and conditions under which the
provision of such services does not present a risk of program or
patient abuse, * * *''
We believe that, because of the way the paragraph is indented, how
it applies to the in-office ancillary services exception is ambiguous.
It could apply to all of paragraph (b)(2)(A)(ii) or apply to only
paragraph (b)(2)(A)(ii)(II). If it applies to all of paragraph
(b)(2)(A)(ii), it would affect both solo and group practitioners. If it
applies to only paragraph (b)(2)(A)(ii)(II), it would affect only group
practices.
The Conference Report that accompanied OBRA '93 (H. Rep. No. 213,
103rd Cong., 1st Sess. 810 (1993)) points out that the conference
agreement includes an exception for clinical laboratory services
provided by a group practice that has multiple office locations. The
Report also says that the conferees expect that the Secretary will
publish regulations specifying other terms and conditions under which
group practices may qualify for a group practice exception to the
general prohibition. Arguably, the Congress had only group practices in
mind in drafting the provision at issue. Therefore, we believe that the
undesignated paragraph applies to only paragraph (b)(2)(A)(ii)(II),
which concerns the site requirements as they relate to a group
practice.
In addition, this paragraph could be read to mean that the
Secretary is allowed to liberalize the circumstances in paragraph
(b)(2)(A)(ii)(II) (the building/location requirements) if she
determines that there are other, additional ``terms and conditions''
under which an entity can provide services without presenting a risk of
program or patient abuse. In this case, the interpretation would not
appear redundant with the undesignated paragraph that follows at the
end of section 1877(b)(2)(B), which authorizes the Secretary to impose
additional ``requirements'' for application of the in-office exception.
We could also interpret ``other terms and conditions'' as including
any different terms or conditions, whether they are more restrictive or
more liberal, that the Secretary may add to the list in paragraph
(b)(2)(A)(ii) or in (b)(2)(A)(ii)(II). However, more restrictive
conditions could make the two undesignated paragraphs redundant.
Alternatively, the paragraph following section
1877(b)(2)(A)(ii)(II)(bb) could be read to mean that the circumstances
in (b)(2)(A)(ii) must be met for the exception to apply unless the
Secretary determines other terms and conditions under which there will
be no patient or program abuse, and which should be substituted for the
list of conditions in (b)(2)(A)(ii). We do not believe that this
reading would conflict with the paragraph that follows section
1877(b)(2)(B), because the Secretary could then still add more
requirements to the list of those in paragraph (b)(2)(A)(ii) (with
(b)(2)(A)(ii) now consisting of the Secretary's substitutions).
Therefore, it is our
[[Page 41918]]
interpretation that this paragraph is intended to provide for the
possibility of a liberalization of the conditions as described in
section 1877(b)(2)(A)(ii)(II). At this time, we are not imposing any
additional terms or conditions for the application of this provision,
and we solicit comments on this issue.
Billing
Section 1877(b)(2)(B) continues to require that the ancillary
services be billed by one of the following:
The physician performing or supervising the services.
A group practice of which the performing or supervising
physician is a member.
An entity that is wholly owned by the physician or group
practice.
(Note that, effective January 1, 1995, the statutory definition of
group practice requires that a group practice bill under a billing
number assigned to the group.)
c. Exception--Certain Prepaid Health Plans
Section 1877(b)(3) continues to specify that the prohibition on
referrals does not apply to services furnished to their enrollees by
Medicare-contracting health maintenance organizations (HMOs), Medicare-
contracting competitive medical plans (CMPs), and prepaid health care
organizations under a contract or agreement with us. OBRA '93 expands
the exception to apply it to services furnished to their enrollees by
Federally-qualified HMOs. (The Federally-qualified HMOs are not
required to have a contract or agreement with us in order for the
exception to apply.)
d. Exception--Hospital Financial Relationship Unrelated to the
Provision of Clinical Laboratory Services
Before the enactment of OBRA '93, section 1877(b)(4) provided a
general exception to the prohibition in the case of a financial
relationship with a hospital if the financial relationship did not
relate to the provision of clinical laboratory services. OBRA '93
omitted this general exception, replacing it with section 1877(e)(4).
Section 1877(e)(4) provides that remuneration from a hospital to a
physician that is unrelated to the provision of clinical laboratory
services does not constitute compensation that would trigger the
prohibition on referrals. However, SSA '94 revised the effective date
provision in section 13562(b)(2)(B) of OBRA '93. This effective date
provision now states that section 1877(b)(4) continues to apply until
January 1, 1995 as it was in effect before OBRA '93.
e. Other Exceptions
Section 1877(b) (currently at (b)(4)) continues to authorize the
Secretary to provide in regulations for additional exceptions for
financial relationships, beyond those specified in the statute, if she
determines they do not pose a risk of Medicare program or patient
abuse.
6. Exceptions Applicable Only to Financial Relationships Consisting of
Ownership or Investment Interests
OBRA '93 continues to provide that certain ownership or investment
interests do not constitute a ``financial relationship'' for purposes
of the section 1877 prohibition on referrals.
a. Exception--Certain Investment Securities and Shares
Before OBRA '93, section 1877(c) contained an exception for
ownership of investment securities, provided they were purchased on
terms generally available to the public and were in a corporation that
was (1) listed for trading on various specified stock exchanges and (2)
had, at the end of the corporation's most recent fiscal year, total
assets exceeding $100 million. These provisions were reflected in the
proposed rule.
OBRA '93 has modified this provision in several ways. First,
investment securities no longer have to be those purchased on terms
generally available to the public; they must only be those which ``may
be purchased'' on terms generally available to the public. Second, the
securities can be those listed on additional exchanges, including any
regional exchange in which quotations are published on a daily basis,
or foreign securities listed on a recognized foreign, national, or
regional exchange in which quotations are published on a daily basis.
Third, the investment securities no longer have to be in a
corporation with $100 million in total assets at the end of a fiscal
year; now the holdings of the corporation must be measured in terms of
``stockholder equity,'' and the amount has been modified from $100
million to $75 million. This amount can now either be measured at the
end of the most recent fiscal year or based on the corporation's
average during the previous 3 fiscal years.
Finally, OBRA '93 extends the exception to apply to mutual funds,
exempting ownership of shares in a regulated investment company as
defined in section 851(a) of the Internal Revenue Code of 1986, if the
company had, at the end of its most recent fiscal year, or on average
during the previous 3 fiscal years, total assets exceeding $75 million.
Under the effective date provisions of OBRA '93, the amended
version of section 1877(c) was not effective until January 1, 1995. SSA
'94 revised the effective date provision to make the amended version of
section 1877(c) effective retroactively to January 1, 1992; however,
the revised effective date provision states that, prior to January 1,
1995, the amended section 1877(c) does not apply to any securities of a
corporation that meets the requirements of section 1877(c)(2) as they
appeared prior to OBRA '93. Section 1877(c)(2), prior to OBRA '93,
contained the requirement that a corporation have $100 million in total
assets. This final rule reflects the amended version of section
1877(c). It also specifies that, until January 1, 1995, ownership of
investment securities in a corporation with $100 million in total
assets can also qualify for the exception.
b. Exception--Ownership or Investment Interest in Certain Health Care
Facilities
Section 1877(d) continues to provide additional exceptions to the
prohibition on physician referrals for an ownership or investment
interest of a physician (or an immediate family member of the
physician) in three types of facilities:
A hospital located in Puerto Rico.
A laboratory located in a rural area (that is, an area
outside of a Metropolitan Statistical Area as defined in section
1886(d)(2)(D)).
A hospital outside of Puerto Rico if the referring
physician is authorized to perform services at the hospital and the
ownership or investment interest is in the hospital itself (and not
merely in a subdivision of the hospital).
(Note that OBRA '93 contains changes to the above provisions that
became effective on January 1, 1995. These extend the exceptions to
designated health services and modify the exception for rural
providers. Before OBRA '93, the exception applied if the laboratory
furnishing the services is in a rural area (as defined in section
1886(d)(2)(D). The statute now provides that the exception applies in
the case of designated health services furnished in a rural area (as
defined in section 1886(d)(2)(D)) by an entity, if substantially all of
the designated health services furnished by the entity are furnished to
individuals residing in the rural area.
7. Exceptions Applicable Only to Financial Relationships Consisting of
Certain Compensation Arrangements
Section 1877(e) continues to provide that certain compensation
arrangements are not considered a ``financial
[[Page 41919]]
relationship'' for purposes of the prohibition on physician referrals.
a. Exception--Rental of Office Space
OBRA '93 amends the exception in section 1877(e)(1) for payments
made by a lessee to a lessor for the use of office space, but delayed
the effective date of the amendments until January 1, 1995. Section
152(c) of SSA '94 amends the effective date provision for OBRA '93 to
eliminate this delay. The amended version of this exception now
contains a requirement that the rented space not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease and that the space be used exclusively by the lessee during the
lease. In addition, the exception now allows a lessee to pay for common
areas shared with other occupants. Specifically, this provision states
that payments made by a lessee to a lessor for the use of a premises do
not constitute a compensation arrangement that would trigger the
prohibition on referrals if the following conditions are met:
The lease is set out in writing, signed by the parties,
and specifies the premises covered by the lease.
The space rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee, except that the lessee may make payments for the use of
space consisting of common areas if these payments do not exceed the
lessee's pro rata share of expenses for that space based upon the ratio
of the space used exclusively by the lessee to the total amount of
space (other than common areas) occupied by all persons using the
common areas.
The lease provides for a term of rental or lease for at
least 1 year.
The rental charges over the term of the lease are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of referrals or
other business generated between the parties.
The lease would be commercially reasonable even if no
referrals were made between the parties.
The lease meets any other requirements the Secretary may
impose by regulation as needed to protect against program or patient
abuse.
b. Exception--Rental of Equipment
OBRA '93 added a new provision, section 1877(e)(1)(B), effective
January 1992, that excepts from the definition of compensation
arrangements payments made by a lessee of equipment to the lessor of
the equipment for the use of the equipment if the following conditions
are met:
The lease is set out in writing, signed by the parties,
and specifies the equipment covered by the lease.
The equipment rented or leased does not exceed that which
is reasonable and necessary for the legitimate business purposes of the
rental or lease and is used exclusively by the lessee when being used
by the lessee.
The lease provides for a term of rental or lease of at
least 1 year.
The rental charges over the term of the lease are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
The lease would be commercially reasonable even if no
referrals were made between the parties.
The lease meets any other requirements the Secretary may
impose by regulation as needed to protect against Medicare program or
patient abuse.
c. Exception--Bona Fide Employment Relationship
The predecessor provision of section 1877(e)(2) provided that an
arrangement between a hospital and a physician (or the physician's
immediate family member) for the employment of the physician (or family
member) or for the provision of administrative services would not
trigger the prohibition on referrals if certain conditions (detailed in
the March 1992 proposed rule) were met. OBRA '93 amended this exception
to make it applicable to any bona fide employment relationship with any
employer that meets the same conditions.
d. Exception--Personal Service Arrangements
The predecessor provision of section 1877(e)(3) provided that
remuneration from service arrangements with entities (other than
hospitals) does not constitute a compensation arrangement for purposes
of the prohibition on referrals if certain conditions (detailed in the
March 1992 proposed rule) are met. This exception was limited to an
arrangement for one of five specific types of services. OBRA '93
amended this provision to specify that remuneration from any entity
under any kind of personal service arrangement (including remuneration
for specific physicians' services furnished to a nonprofit blood
center) would not constitute compensation that would trigger the
prohibition on referrals if the following conditions are met:
The arrangement is set out in writing, signed by the
parties, and specifies the services covered by the arrangement.
The arrangement covers all of the services to be furnished
by the physician (or immediate family member of the physician) to the
entity.
The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement.
The term of the arrangement is for at least 1 year.
The compensation to be paid over the term of the
arrangement is set in advance, does not exceed fair market value and,
except in the case of a physician incentive plan (as described below),
is not determined in a manner that takes into account the volume or
value of any referrals or other business generated between the parties.
The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates any State or Federal law.
The arrangement meets any other requirements the Secretary
may impose by regulation as needed to protect against Medicare program
or patient abuse.
Section 1877(e)(3)(B) provides that, in the case of a physician
incentive plan between a physician and an entity, the compensation may
be determined in a manner (through a withhold, capitation, bonus, or
otherwise) that takes into account, directly or indirectly, the volume
or value of any referrals or other business generated between the
parties if the plan meets the following requirements:
No specific payment is made (directly or indirectly) under
the plan to a physician or a physician group as an inducement to reduce
or limit medically necessary services provided with respect to a
specific individual enrolled with the entity.
If the plan places a physician or a physician group at
substantial financial risk as determined by the Secretary under section
1876(i)(8)(A)(ii), the plan complies with any requirements the
Secretary may impose under that section.
In addition, section 1877(e)(3)(B)(i)(III) requires the entity,
upon request by the Secretary, to provide access to descriptive
information regarding the plan, in order to permit the Secretary to
determine whether the plan is in compliance with the requirements
listed above.
[[Page 41920]]
Section 1877(e)(3)(B)(ii) defines a ``physician incentive plan'' as
any compensation arrangement between an entity and a physician or
physician group that may directly or indirectly have the effect of
reducing or limiting services provided with respect to individuals
enrolled with the entity.
On December 14, 1992, we published, at 57 FR 59024, our proposed
rule on physician incentive plans. Because there may be entities that
were not affected by the proposed rule at the time it was published but
are now affected, we plan to publish the final rule with a 60-day
comment period so that these newly-affected entities have an
opportunity to comment.
As the result of section 152(c) of SSA '94, until January 1, 1995,
the provisions in section 1877(e)(3) do not apply to any arrangements
that meet the requirements of subsection (e)(2) or (e)(3) of section
1877 of the Act before they were amended by OBRA `93.
e. Exception--Remuneration Unrelated to Provision of Clinical
Laboratory Services
Before OBRA `93, section 1877(b)(4) provided an exception for
financial relationships (ownership/investment interests or compensation
arrangements) with a hospital unrelated to the provision of clinical
lab services. OBRA `93 omits this exception, but replaces it with
section 1877(e)(4), which excepts remuneration provided by a hospital
to a physician if it is unrelated to the provision of clinical
laboratory services. Section 152(c) of SSA '94 amends section
13562(b)(2)(B) of OBRA `93 to reinstate, until January 1, 1995, section
1877(b)(4) as it appeared before OBRA `93.
f. Exception--Physician Recruitment
OBRA `93 retains, at section 1877(e)(5), the provision previously
at section 1877(e)(4). The provision provides that remuneration from a
hospital to a physician to induce the physician to relocate to the area
serviced by the hospital in order to be a member of the hospital's
medical staff does not constitute a compensation arrangement for
purposes of the prohibition on referrals if certain conditions
(detailed in the March 1992 proposed rule) are met.
g. Exception--Isolated Transaction
OBRA `93 retains, at section 1877(e)(6), the provision previously
at section 1877(e)(5). The provision provides that an isolated
financial transaction, such as a one-time sale of property or (as added
by OBRA `93) a practice, is not considered to be a compensation
arrangement for purposes of the prohibition on referrals if certain
conditions (detailed in the March 1992 proposed rule) are met.
h. Salaried Physicians in a Group Practice
OBRA `93 removed, effective January 1, 1992, the provision
previously at section 1877(e)(6). That provision had specified that a
compensation arrangement involving payment by a group practice of the
salary of a physician member of the group practice did not constitute a
compensation arrangement that would trigger the prohibition on
referrals.
i. Exception--Certain Group Practice Arrangements With a Hospital
OBRA `93 added a new section 1877(e)(7) that provides, effective
January 1, 1992, that an arrangement between a hospital and group under
which clinical laboratory services are furnished by the group but are
billed by the hospital does not constitute a compensation arrangement
for purposes of the prohibition on referrals if the following
conditions are met:
With respect to the services furnished to a hospital
inpatient, the arrangement is in accordance with the provision of
inpatient hospital services under section 1861(b)(3).
The arrangement began before December 19, 1989, and has
continued in effect without interruption since that date.
With respect to the clinical laboratory services covered
under the arrangement, substantially all of these services furnished to
patients of the hospital are furnished by the group under the
arrangement.
The arrangement is set out in a written agreement that
specifies the services to be furnished by the parties and the amount of
compensation.
The compensation paid over the term of the agreement is
consistent with fair market value, and the compensation per unit of
services is fixed in advance and is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
The compensation is provided under an agreement that would
be commercially reasonable even if no referrals were made to the
entity.
The arrangement between the parties meets any other
requirements the Secretary may impose by regulation as needed to
protect against Medicare program or patient abuse.
j. Exception--Payments by a Physician for Items and Services
OBRA '93 added a new section 1877(e)(8), which provides that the
following do not constitute compensation arrangements for purposes of
the prohibition on referrals:
Payments made by a physician to a laboratory in exchange
for the provision of clinical laboratory services.
Payments made by a physician to an entity as compensation
for items or services other than clinical laboratory services if the
items or services are furnished at fair market value.
8. Sections 1877(f) and 1877(g)
SSA '94 amends the provisions of section 1877(f), which concern
reporting requirements. This section requires each entity providing
covered items or services for which payment may be made under Medicare
to provide the Secretary with information concerning the entity's
ownership, investment, and (as added by SSA '94) compensation
arrangements including (1) the covered items and services furnished by
the entity and (2) the names and unique physician identification
numbers of all physicians with an ownership or investment interest (as
described in section 1877(a)(2)(A)) in or a compensation arrangement
(as described in section 1877(a)(2)(B)) with the entity, or whose
immediate relatives have such an ownership or investment interest in or
who have such a compensation relationship with the entity. OBRA '93
retained the provisions of section 1877(g), which concern sanctions.
9. Other Definitions
OBRA '93 amended section 1877(h)(5) and (6) to remove the
definitions for ``investor'' and ``interested investor, disinterested
investor,'' effective January 1, 1992.
II. Published Federal Register Documents
A. Provisions of the Proposed Rule--Physician Ownership of, and
Referrals to, Health Care Entities That Furnish Clinical Laboratory
Services
As stated earlier, on March 11, 1992, we published in the Federal
Register a proposed rule that set forth our proposal for establishing
in regulations the provisions of section 1877, as amended by OBRA '90,
that relate to physician referrals to clinical laboratories. Section
1877 is very specific. For the most part, we believed the definitions
set forth in section 1877(h) were detailed and therefore did not
require extensive elaboration in regulations. Accordingly,
[[Page 41921]]
we proposed to adopt some of the statutory definitions, as well as some
other provisions of section 1877, virtually unchanged from what the
statute provided. To establish these rules in our regulations, we
proposed to create a new subpart J under 42 CFR part 411 and to make
conforming changes as discussed below.
1. Scope
We proposed to cite section 1877 as the statutory authority for the
rule.
2. Definitions
In section 411.351, we proposed to establish definitions of certain
terms based on definitions or descriptions given in section 1877:
compensation arrangement, employee, fair market value, financial
relationship, group practice, interested investor, investor, referral,
and remuneration. In addition, we proposed to add other definitions:
entity, immediate family member or a member of a physician's immediate
family, practice, and referring physician.
For purposes of identifying financial relationships that may
trigger the statutory prohibition on referrals under Medicare, we
proposed to adopt the description of ownership and investment interests
and compensation arrangements contained in sections 1877(a)(2) and
(h)(1). We also proposed to include indirect financial relationships in
the statutory prohibition on referrals under Medicare.
3. General Prohibition on Referrals
In section 411.353(a), we proposed that, unless permitted under an
exception, a physician who has a financial relationship with an entity
(or who has an immediate family member who has a financial relationship
with an entity) may not make a referral to that entity for the
furnishing of clinical laboratory services covered under Medicare
beginning January 1, 1992. (Note that we are providing a 30-day delay
of the effective date for the provisions of this final rule with
comment. However, this does not delay the effective date for any of the
provisions in the final rule that only reiterate the language in
section 1877 of the Social Security Act. These provisions are effective
according to their statutory effective dates. The effective date for
this final rule with comment is, in essence, the effective date for
those parts of the rule that interpret the statute.)
To inform the public of what entities we would consider entities
that perform clinical laboratory services and, therefore, subject to
the provisions of section 1877 and to the regulation, we referenced
existing section 493.2, which defines a ``laboratory.''
We proposed, in section 411.353(b), that an entity that furnishes
clinical laboratory services under a prohibited referral may not bill
the Medicare program or any individual, third party payer, or other
entity.
In section 411.353(c), we provided that we would not pay for a
clinical laboratory service that is furnished under a prohibited
referral, and we proposed, in section 411.353(d), to require an entity
that collects payment for a laboratory service performed under a
prohibited referral to refund all collected amounts on a timely basis.
4. Exceptions That Apply to Specific Services
In accordance with section 1877(b), we proposed, in section
411.355, that the prohibition on clinical laboratory referrals would
not apply in the following circumstances:
If a physician service is provided personally by (or under
the direct personal supervision of) another physician in the same group
practice as the referring physician.
If an in-office ancillary service is performed personally
by the referring physician, a physician who is a member of the same
group practice as the referring physician, or a nonphysician employee
of the referring physician or group practice who is personally
supervised by the referring or group practice physician and--
+ The in-office ancillary service is performed either in a building
where the referring physician (or another physician who is a member of
the same group practice) furnishes physicians' services unrelated to
the furnishing of clinical laboratory services; or in a building that
is used by the group practice for centrally furnishing the group's
clinical laboratory services; and
+ The in-office ancillary service is billed by the physician who
performed or supervised the laboratory service; by the group practice
in which the physician is a member; or by an entity that is wholly
owned by the physician or physician's group practice.
If the services are furnished to prepaid health plan
enrollees by one of the following organizations: (1) A health
maintenance organization or a competitive medical plan in accordance
with a contract with us under section 1876; (2) a health care
prepayment plan in accordance with an agreement with us to furnish the
services to Medicare beneficiaries under section 1833(a)(1)(A); or (3)
an organization that is receiving payments on a prepaid basis for the
enrollees under a demonstration project under section 402(a) of the
Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or under section
222(a) of the Social Security Amendments of 1972 (42 U.S.C. 1395b-1
note).
We also proposed, in section 411.355(a), to use an existing
definition of ``physicians' services'' but cited an incorrect cross
reference to that definition. The cross-reference should have been to
section 410.20 rather than section 411.20(a). Existing section 410.20
describes physicians' services and specifies the professionals who are
considered to be ``physicians'' if they are authorized under State law
to practice and if they act within the scope of their licenses.
5. Exceptions for Certain Ownership or Investment Interests
a. Publicly Traded Securities
We proposed, in section 411.357(a), that the prohibition on
referrals would not apply to a physician's referrals if the financial
relationship between the physician (or the physician's immediate family
member) and the entity results from the ownership of certain investment
securities. We proposed that the securities must be purchased by the
physician (or immediate family member) on terms generally available to
the public and be in a corporation that meets specific criteria.
b. Specific Providers
In section 411.357(b)(1), we proposed that the prohibition on
referrals would not apply to a laboratory that is located in a rural
area if certain criteria are met.
To supplement the statutory provision excepting services furnished
in a rural laboratory, we proposed two requirements intended to address
the possibility that this exception would be misused. First, we
proposed to require, when physician owners or investors make referrals
to a laboratory located in a rural area, that the tests be performed
directly by the laboratory on its premises. We stated that, if referral
to another laboratory is necessary, the test must be billed by the
laboratory that performs the test. Second, we proposed to require that
the majority of the tests referred to the rural laboratory be referred
by physicians who have office practices in a rural area. (For this
purpose, as indicated earlier, we proposed a definition of
``practice.'')
We proposed, in section 411.357(b)(2) and (b)(3), that the
prohibition on referrals would not apply if the ownership or investment
interest is in--
A hospital located in Puerto Rico; or
[[Page 41922]]
A hospital located outside of Puerto Rico if one of two specified
conditions is met concerning the nature of the ownership.
6. Exceptions Related to Compensation Arrangements
We proposed to add section 411.359 to specify that, for purposes of
the referral prohibition, certain compensation arrangements (as defined
in the proposed rule) would not constitute a financial relationship if
they involve--
Rental or lease of office space;
Certain employment and service arrangements with
hospitals;
Certain arrangements connected with physician recruitment;
Certain isolated financial transactions;
Certain service arrangements with entities other than
hospitals;
Salaried physicians in a group practice; and
Other arrangements with hospitals if the arrangement does
not relate to furnishing clinical laboratory services.
B. Provisions of the Interim Final Rule With Comment Period--Reporting
Requirements for Financial Relationships Between Physicians and Health
Care Entities That Furnish Selected Items and Services
The interim final rule with comment period (published December 3,
1991) listed reporting requirements under the Medicare program for the
submission by certain health care entities of information about their
financial relationships with physicians. It implemented section
1877(f), which includes the requirement that entities furnishing
Medicare covered items or services provide us with information
concerning their ownership or investment arrangements. (The rule
extended the reporting to include compensation arrangements, not just
ownership and investment interests.) The December 1991 interim final
rule also provided notice of our decision to waive the requirements of
section 1877(f) with respect to certain entities that do not furnish
clinical laboratory services.
The information submitted was to include at least the name and
unique physician identification number (UPIN) of each physician who had
a financial relationship with the entity, the name and UPIN of each
physician who had an immediate relative who had a financial
relationship with the entity and, with respect to each physician
identified, the nature of the financial relationship (including the
extent and/or value of the ownership or investment interest or the
compensation arrangement, if we requested it).
Any person who, although required to, failed to submit the required
information was subject to a civil money penalty of not more than
$10,000 for each day of the period beginning on the day following the
applicable deadline established until the information was submitted.
In addition, the interim final rule discussed our decision to waive
the reporting requirements for all entities (other than those providing
clinical laboratory services) in States other than the minimum number
of 10 specified in the statute. In the 10 States we selected, the
reporting requirements were waived for entities other than the 6 types
enumerated in the statute and section 411.361(c). The waiver
represented a balance between our need to obtain sufficient ownership
information for meaningful use in developing a statistical profile
required by the Congress in section 6204(f) of OBRA '89, as amended by
section 4207(e)(4) of OBRA '90, and in evaluating the need for future
legislative, policy, or operational actions, and the need to minimize
the administrative time and cost involved in collecting and analyzing
the information. We believe that by collecting the information from the
enumerated entities in the minimum number of 10 States, we satisfied
these congressional and administrative needs.
In determining the States in which a blanket waiver would not be
granted, we selected 10 States that represented approximately 42
percent of the physicians who bill the Medicare program for items and
services furnished to beneficiaries. Medicare contractors servicing all
providers and suppliers in the 10 selected States process approximately
40 percent of all Medicare claims. Services provided by the six types
of entities specified in the statute account for a significant
proportion of Medicare expenditures and represent a cross-section of
Medicare covered services. Therefore, we decided to waive the
requirements of section 1877(f) with respect to entities (other than
those providing clinical laboratory services) in all States except the
following: Arkansas, California, Connecticut, Florida, Michigan, Ohio,
Pennsylvania, South Carolina, Texas, and West Virginia. These States
were selected because they represent: A mix of rural (West Virginia),
urban (Florida), and mixed urban/rural States (Ohio, Texas); a variety
of claims/bills volume, from very small (Arkansas) to very large
(Pennsylvania); and, a geographic spread from north (Michigan) to south
(South Carolina) as well as both coasts (from California to
Connecticut).
Note that while the effect of section 1877(f) of the Act and
section 6204(f) of OBRA '89 was to require the Secretary to submit to
the Congress a statistical profile within 90 days after each calendar
quarter, section 4207(e)(4) of OBRA '90 amended OBRA '89 to require
only one statistical profile, which was due by June 30, 1992. Clinical
laboratory entities reported information about financial relationships
with physicians as part of a survey conducted in the fall of 1991, and
we used this data in the required statistical profile.
Section 1877(f) authorizes the Secretary to gather information from
any entity providing covered items or services in such form, manner,
and at such time as she specifies. Thus, the Secretary can again
require entities to report whenever she deems it appropriate for
purposes of enforcing the referral prohibition in section 1877. Section
152(a) of SSA '94 amended section 1877(f), altering the rules for
future reporting. The provision now requires entities to report not
only their ownership arrangements with physicians, but also their
investment and compensation arrangements. Section 152(a) also
eliminated the Secretary's authority to waive the reporting
requirements for certain states or services. The Secretary, however,
continues to have the right to determine that an entity is not subject
to the reporting requirements because it provides Medicare-covered
services very infrequently. In addition, the reporting requirements
still do not apply to designated health services furnished outside the
United States. The effective date of the amendments to section 1877(f)
is the date of enactment of SSA '94, that is, October 31, 1994.
III. Principles for Developing This Final Rule With Comment Period
In this final rule with comment, we are adopting the provisions of
our March 1992 proposed rule, changed as appropriate to address the
comments on the proposed rule and the new requirements relating to
clinical laboratory services contained in OBRA '93, as amended by SSA
'94, that have a retroactive effective date of January 1, 1992. OBRA
'93 provides several exceptions that were not in previous legislation.
In some cases, these new exceptions address suggestions received
through public comment on the March 1992 proposed rule. It is our
intention that this final rule with comment reflect, to the extent
possible, the comments on the proposed rule and the new, but
retroactive, requirements of OBRA '93,
[[Page 41923]]
as amended by SSA '94. This final rule with comment also revises the
provisions of the December 1991 interim final rule to incorporate the
amendments to section 1877(f) made by SSA '94, to apply to any future
reporting that we require.
To address the provisions of section 1877 that are effective on
January 1, 1995, as provided by OBRA '93, we plan to publish
regulations in addition to this one. We will publish a proposed rule to
interpret any retroactive provisions contained in OBRA '93 that we
believe allow us to exercise discretion in their implementation. In
this final rule, we have, in general, only reiterated the new, but
retroactive, statutory provisions, incorporating them into our
proposals. We have interpreted the new provisions only in the few
instances in which it was necessary to do so in order to allow the
statute to be implemented at all.
The proposed rule will also cover those provisions of section 1877
concerning physician referrals for clinical laboratory services that
became effective on January 1, 1995, as well as those covering the
other designated health services (all of which are effective for
referrals made on or after January 1, 1995). Finally, we plan to
publish a final rule that will address any comments received on this
final rule with comment and the new proposed rule.
We are including in this final rule the OBRA '93 provisions related
to the following:
The in-office ancillary services exception.
The rental of equipment exception.
The rental of office space exception.
The bona fide employment relationships exception.
The personal services and physician incentive plan
exception.
The exception concerning remuneration unrelated to the
provision of clinical laboratory services.
The change in the isolated transactions exception.
The exception concerning certain group practice
arrangements with a hospital.
The exception for payments by a physician for items and
services.
All changes in definitions in 1877(h) that have a
retroactive effective date (compensation arrangement, remuneration,
group practice).
IV. Analysis of and Responses to Public Comments on the Proposed Rule--
Physician Ownership of, and Referrals to, Health Care Entities That
Furnish Clinical Laboratory Services
In response to the publication in the Federal Register of the
proposed rule on March 11, 1992, we received 299 timely public
comments. The comments came from a wide variety of correspondents
including professional associations and societies, health care workers,
law firms, third party health insurers, hospitals, and private
individuals. We screened each commenter's letter and grouped like or
related comments. Some comments were identical, indicating that the
commenters had submitted form letters. After associating like comments,
we placed them in categories based on subject matter or based on the
portion of the regulations affected and then reviewed the comments. All
comments relating to general subjects, such as the format of the
regulations, were similarly reviewed.
This process identified areas of the proposed regulation that we
needed to review in terms of their effect on policy, consistency, or
clarity of the rules.
We have presented all comments and responses in, for the most part,
the order in which the issues appeared in the March 1992 proposed rule.
Note: We have found it necessary to change the designation of
some sections from what was proposed. We have prepared a table,
which appears at the end of this preamble, that relates the
requirements in this final rule to the correlative proposed sections
from which they evolved. If OBRA '93 provisions resulted in
significant change, we so identify OBRA '93 as the source. This
table is intended merely to assist parties who may be interested in
comparing specific provisions as proposed or as contained in OBRA
'93 to those of the final rule with comment. It does not supplant
the more detailed discussion in this preamble. Unless otherwise
indicated, citations in the responses that follow are to the
sections as they are designated by this final rule with comment.
A. General
1. Purpose of Final Rule
Comment: One commenter requested that the Secretary ensure that the
final rule is cast so that its purpose is clear; that is, the rule
should be presented so as to support the idea that the ethical delivery
of quality, medically necessary care is fundamental to preserving the
integrity of medical practice in general as well as the Medicare
program in particular.
Response: We share the commenter's view. We believe that section
1877 was enacted out of concern over the findings of various studies
that physicians who have a financial relationship with a laboratory
entity order more clinical laboratory tests for their Medicare patients
than physicians who do not have a financial relationship. There have
been at least 10 studies conducted over the past few years that
concluded that patients of physicians who have financial relationships
with health care suppliers receive a greater number of health care
services from those suppliers than do patients generally.
To the extent that section 1877 and this final rule protect against
this practice, the Medicare program and its beneficiaries are well
served. Therefore, to the extent that physicians and providers of
clinical laboratory services change their financial relationships and
behavior to comply with provisions of section 1877 and, in turn, reduce
overutilization of laboratory services, we believe that this change
will have a positive effect on other health insurance programs. One of
our prime goals is to ensure that our rules carry out the Congress'
mandate in a manner that is in the best interest of all individuals who
may be affected by the rules.
2. Delay of Effective Date
Comment: Several commenters requested that we delay the effective
date of the final rule. One commenter recommended a 60-day delay,
another recommended not less than 90 days, and yet another commenter
requested not less than 120 days from the date of publication in the
Federal Register and that application of the regulation should be
prospective only.
Response: We usually provide for a 30-day delay in the effective
date of a final rule. This delay is offered so that affected parties
have the opportunity to change their practices, if necessary, to comply
with the requirements of the final rule. While we understand that the
goal behind the commenters' suggestions is to provide sufficient time
for parties affected by this final rule to make arrangements to comply
with its requirements, we do not believe that an additional delay in
the effective date would be beneficial. This is so primarily because,
in this rule, we are establishing additional exceptions from the
prohibition on referrals based upon public comments. In addition, we
plan to publish a subsequent final regulation that will address any
comments received on this regulation.
3. Delay of Enforcement Provisions
Comment: One commenter requested that the Secretary indicate that
the enforcement of the prohibition on referrals begin no earlier than
the effective date of this rule. As a result of
[[Page 41924]]
this suggestion, any physician who is out of compliance with section
1877 before that effective date would be held harmless under the final
rule.
Another commenter requested that we postpone the implementation of
sanctions, at the very least, until 90 days after the final rule has
been issued.
Response: Section 1877(g) of the Act sets forth several enforcement
provisions that apply to prohibited referrals for clinical laboratory
services and to prohibited claims for payment for these services.
Section 1877(g)(1) provides for denial of Medicare payment
for a clinical laboratory service furnished as the result of a
prohibited referral.
Under section 1877(g)(2), if a person collects any amounts
that were billed for services furnished under a prohibited referral, a
timely refund of each amount is required.
Section 1877(g)(3) authorizes the imposition of civil
money penalties of not more than $15,000 for each such service and
possible exclusion from the Medicare and other programs for any person
that presents, or causes to be presented, a bill or a claim for a
clinical laboratory service that the person knows or should know was
unlawfully referred or for which a refund has not been made.
Under section 1877(g)(4), civil money penalties of not
more than $100,000 for each arrangement or scheme and possible
exclusion from participation in the Medicare and other programs are
authorized in cases in which a physician or an entity enters into a
circumvention arrangement or scheme (such as a cross-referral
arrangement) that the physician or entity knows or should know has a
principal purpose of ensuring referrals by the physician to a
particular entity that would be unlawful under section 1877 if made
directly. (See the final rule with comment published by the Office of
Inspector General on March 31, 1995 (60 FR 16580) for further
information. That rule addresses sections 1877(g)(3) and (g)(4).)
The first commenter appears to be suggesting that these statutory
enforcement provisions should not be applied until the effective date
of this final rule and that a physician who is not in compliance with
the provisions of the statute at the time the final rule is published
should be held harmless until the effective date of the final rule. The
second commenter suggested a 90-day delay in application of any
sanctions following publication of the final rule.
We disagree with these suggestions. First, many of the provisions
of section 1877 of the Act were effective on January 1, 1992, by
operation of law. These provisions are, for the most part, self-
implementing. This rule incorporates into regulations statutory
requirements that are already in effect, clarifying or interpreting
certain provisions, and exercising the Secretary's authority to
promulgate additional exceptions through regulations. Even though the
requirements of this final rule are effective later than the effective
date of the statute, we cannot postpone the statutory effective date.
Nonetheless, any sanctions that can be applied only as a result of the
clarification or interpretation of the statute specified in this rule
will, of course, be applied prospectively, beginning with the effective
date of this rule.
Section 1877(f) of the Act sets forth certain reporting
requirements with which entities were to comply by October 1, 1991.
Under this authority, we conducted a survey in the fall of 1991
concerning physician ownership in, and compensation arrangements with,
entities furnishing clinical laboratory services. Based on data
gathered from that survey, Medicare carriers have already been denying
some claims for laboratory services furnished by a laboratory that is
independent of a physician's office and that are furnished in violation
of the prohibition on referrals. Similarly, the Office of the Inspector
General could impose sanctions if, for example, a clinical laboratory
has failed to refund an amount that it collected for a service
furnished as the result of a referral if the laboratory knew the
referral was prohibited.
4. Good Faith Standard
Comment: One commenter suggested that the final rule have either a
good faith standard or a provision that the statute will not be
violated unless the physician or the laboratory has actual knowledge of
a prohibited referral. The commenter requested that the final rule
specify the scope of the inquiry required and define the extent of the
duty imposed upon laboratories and physicians to determine the
relationship of persons that would affect their ability to refer
laboratory work or to accept a referral.
Response: It is important to emphasize that the statute and this
rule do not prohibit financial relationships that exist or might be
established between physicians and entities providing clinical
laboratory services. What is prohibited are certain referrals for
clinical laboratory testing of Medicare patients. The statute itself,
at section 1877(a)(2), describes ``financial relationship'' for
purposes of determining whether a referral is prohibited. And, as
discussed above, section 1877(g) specifies several sanctions that may
be applied if a physician or an entity billing for a Medicare covered
clinical laboratory service violates the statute's requirements. Thus,
unless an exception applies, the statute operates automatically under
its own terms to prohibit referrals for Medicare-covered clinical
laboratory services to be performed by an entity with which the
physician or an immediate family member of the physician has a
financial relationship.
We understand that this commenter is advocating adoption of a
policy that would hold harmless a physician or laboratory if there is
no intention on the part of either to seek an advantage from an
ownership interest or compensation arrangement. The commenter is also
concerned that a physician or a laboratory may be unintentionally
involved in a relationship that would call the physician's referrals
into question. Similarly, a laboratory may be unaware that it has a
relationship with a referring physician's relatives that would cause
the prohibition to apply. However, the statutory prohibition against
referrals in such situations applies because of the existence of the
financial relationship, not because of the intent of the physician or
laboratory or because there is actual knowledge of the relationship. It
is the responsibility of physicians and laboratory entities to take
whatever steps are necessary to ensure that they do not violate Federal
law.
5. Physician Ownership of Health Care Facilities
Comment: One major national medical organization indicated that it
believed ownership of health care facilities by referring physicians is
an issue that should be addressed, and it supported the proposed rule.
It believed there is increased evidence that, when physicians have a
financial relationship with an entity, the relationship adversely
affects patient care and adds to the cost of health care in the United
States. Therefore, the organization believed that physicians should not
have a direct or indirect financial interest in diagnostic or
therapeutic facilities to which they refer patients, and it indicated
support for legislation and regulations that would eliminate this
conflict of interest by prohibiting such ownership arrangements in
health care.
[[Page 41925]]
Response: We agree with this commenter. As stated earlier, recent
studies have concluded that there is a higher level of utilization of
services when physicians refer patients to entities with which they
have a financial relationship. As mentioned in the preamble to the
proposed rule (57 FR 8589), a report from the Office of the Inspector
General to the Congress established that at least 25 percent of the
nearly 4500 independent clinical laboratories are owned in whole or in
part by referring physicians. The same report found that Medicare
patients of referring physicians who own or invest in independent
clinical laboratories received 45 percent more clinical laboratory
services than all Medicare patients. (``Financial Arrangements Between
Physicians and Health Care Businesses,'' May 1989, page 18). A study
published in ``Medical Care'' (Vol. 32, No. 2) in February 1994 found
that a review of clinical laboratory practices in Florida lends support
to the contentions of critics that physician joint ventures (health
care businesses that physicians own, but where they do not practice or
directly provide services) result in increased use of services and
higher charges to consumers. Utilization, measured as the number of
billable laboratory procedures per patient, is significantly higher in
facilities owned by referring physicians. Although the study reported
only negligible differences in charges per procedure (compared to
nonphysician-owned facilities), it found that higher utilization rates
resulted in significantly higher gross and net revenue per patient.
Furthermore, the study found that differences in average production
costs per patient in physician-owned and nonphysician-owned facilities
were not significant. The net result is that physician joint ventures
are far more profitable than comparable nonphysician joint ventures.
The study results, which included laboratory services furnished to both
private and publicly insured patients, corroborate previous evidence of
higher use of laboratory procedures among Medicare and Medicaid
patients treated by referring physician investors.
Many States have enacted or are considering regulations that would
affect physician referrals to entities with which the physicians have
financial relationships. For example, New Jersey implemented
regulations that effectively prohibit physicians from referring
patients to facilities they own. Physicians who do not comply with the
regulations are subject to sanctions under the State's physicians
practice law. Furthermore, in OBRA '93 the Congress has extended
application of the prohibition on referrals to other types of health
care services and health care entities.
6. Process for Amending Regulations
Comment: One commenter indicated that we should maintain an
expedited process for amending the regulations and issuing
clarifications. The commenter pointed out that, despite a careful
review of the proposed regulations, it is not possible to identify all
of the unintended consequences of applying the proposed regulations to
particular laboratory arrangements. The commenter believed that unless
we respond quickly to issue clarifications and correct such problems
when identified, inappropriate regulations can disrupt the delivery of,
and limit patient access to, quality clinical laboratory services.
Response: We understand and appreciate the commenter's desire to
feel secure about the requirements of the law. We make all possible
efforts to publish final rules as quickly as possible and to amend the
regulations expeditiously if clarifications or changes are needed and
can be accomplished through rulemaking. In addition, we keep our
regional offices and the Medicare contractors informed through manual
instructions of technical changes that can be made without rulemaking.
The contractors, in turn, advise the physicians and laboratory entities
in their service areas of such changes. In regard to inquiries about
particular laboratory arrangements, our regulations do not provide for
the issuance of formal advisory opinions of any kind pertaining to
section 1877 or any other section of the law for which we are
responsible. We receive a large volume of correspondence from the
public, and we do respond to general questions about the contents of
our regulations and manuals. We, however, do not have the authority and
will not attempt to interpret the applicability of these physician
self-referral provisions to situations posed in correspondence. Our
advice must, of necessity, continue to be general.
7. Evolution of Group Practices
Comment: Before the enactment of section 1877 of the Act, the
Medicare program did not have a statutory definition of ``group
practice,'' nor any detailed body of law developed through regulations
or manual instructions to define or otherwise recognize a group
practice as a provider entity. One commenter indicated that we should
recognize the significance of this rulemaking to the development and
evolution of group practices in this country.
The commenter expressed hope that regulations will recognize the
diversity of business structures within the group practice field and
accommodate nonabusive arrangements for the provision of clinical
laboratory services based on the substance of the arrangements, not
merely their form.
The commenter also indicated that we should be mindful of the
significance of this rule to the competitive ``playing field'' in
health care. It was stated that, as medical group practices evolve into
larger and more full-service providers of a wide range of physician
ancillary and other health care products and services, they are
furnishing many items and services that have traditionally been
furnished by inpatient institutions or independent suppliers. The
commenter also expressed hope that nothing in the final rule will
prohibit group practices from performing services for other physicians'
patients or other providers assuming, of course, that the referring
source does not have a prohibited financial arrangement with the group.
The commenter applauded us for proposing a rule that does not force
groups to choose between serving their own patients and those of
otherwise unrelated physicians.
Response: In publishing these final regulations, it is not our
intent to obstruct the efforts of an association of physicians to
qualify as a group practice under the definition in section 1877(h)(4)
and therefore qualify for the in-office ancillary services exception
set forth in section 1877(b)(2) of the Act and described in
Sec. 411.355(b). If a group of physicians meets the definition of a
``group practice'' under section 1877(h), it could also be eligible for
the exception for physicians' services in section 1877(b)(1) and
possibly the exception in section 1877(e)(7) for certain arrangements
between a hospital and a group practice. Further, we believe that, to
the extent possible, we have accommodated various group practice
configurations given the statutory parameters.
The point made in the last sentence of the comment, as we
understand it, endorses the adoption of a policy that would enable
group practice laboratories to continue to perform laboratory tests for
their own patients as well as to accept laboratory referrals from
physicians in the community who do not have a financial relationship
with the group practice. In the responses to various comments presented
below, we have clarified that the provisions of section 1877 prohibit
[[Page 41926]]
laboratory referrals only if a financial relationship exists between
the referring physician (or an immediate family member) and the
laboratory entity. In other words, the law does not prohibit a
laboratory from accepting referrals from a physician who does not have
a financial relationship with it. Therefore, in all situations, a group
practice will be permitted to accept referrals for laboratory services
from physicians in the community who do not have, or do not have an
immediate family member who has, a financial relationship with the
group practice or the laboratory.
8. Use of Diagnosis Code for Laboratory Billing
Comment: One commenter believed the government is being misled
about the need for certain diagnostic testing. The commenter noted that
self-referrals could be used by unscrupulous physicians as a means to
generate income. The commenter believed a major check on this practice
would be the requirement of an appropriate diagnosis code for each
service billed. The commenter believed it should be the role of the
Medicare carriers to monitor unnecessary testing and then to take
appropriate actions so that no testing is paid for if the diagnosis
code does not suggest medical need.
Response: Section 202(g) of the Medicare Catastrophic Coverage Act
of 1988 (Public Law 100-360), enacted July 1, 1988, added paragraph (p)
to section 1842 of the Act. Under the provisions of section 1842(p)(1),
each bill or request for payment for physicians' services under
Medicare Part B must include the appropriate diagnosis code ``as
established by the Secretary'' for each item or service the Medicare
beneficiary received. We fully explain the conditions and requirements
of this provision in a final rule published on March 4, 1994 (59 FR
10290).
The conference report that accompanied Public Law 100-360 explained
clearly the purpose of the requirement for physician diagnostic coding.
After rejecting a Senate provision that would have required the use of
diagnostic codes on all prescriptions, because they believed that the
requirement would have been unduly burdensome on Medicare suppliers of
services, the conferees agreed to require diagnostic coding for
physicians' services under Part B. They explained their reasons for
this requirement as follows: ``This information would be available for
immediate use for utilization review of physician services * * *.''
(H.R. Conf. Rep. No. 661, 100th Cong., 2nd Sess. 191 (1988)) The new
coding requirement does not apply to bills from laboratories, except
for physician laboratory services, which are described in section
405.556.
Claims submitted directly to the Medicare carrier by a clinical
laboratory that is not part of a physician's office are not subject to
the above requirement. The Medicare carriers, however, review claims
submitted for payment to ensure that, to the extent possible, only
services that are reasonable and necessary for the treatment of an
illness or injury or to improve the functioning of a malformed body
member are approved for payment. We agree that it would be easier for a
Medicare carrier to make a medical necessity determination if the claim
contained an appropriate diagnosis coding. It is clear, however, that
the Congress intended to limit diagnosis coding to physicians'
services. Therefore, at this time, we are unable to accept the
suggestion the commenter made.
9. Referrals That Are Not Abusive
Comment: One commenter indicated that it would appear that
relationships between a practitioner and an entity would not pose a
risk of patient or program abuse if the relationships do not result in
a return to the practitioner of monies beyond those that would be
received if the physician directly furnished such laboratory tests (or
other Medicare outpatient services).
The commenter suggested that it would be helpful if an exception
could be established for referrals, from a physician to an entity, that
are medically necessary (that is, represent legitimate claims on the
Medicare program) and are not motivated by direct or indirect financial
benefits that exceed fair market value accruing to the physician.
Response: The commenter appears to argue that the prohibition
should not apply to a referral that is made by a physician to an entity
with which he or she has a financial relationship if the service being
performed is determined to be medically necessary and the physician
does not realize an unacceptable financial gain as a result of the
laboratory referral. The financial gain could not be larger than the
fair market value of what he or she would realize if the service was
performed, for example, in his or her own office and would have
qualified for the in-office ancillary services exception.
Section 1862(a)(1) states, in part, that, notwithstanding any other
provision of title XVIII of the Act, no payment may be made under Part
A or Part B of the Medicare program for any expenses incurred for items
or services that are not reasonable and necessary for the diagnosis or
treatment of an illness or injury or to improve the functioning of a
malformed body member. In exercising their contractual
responsibilities, Medicare carriers enforce this overriding coverage
criterion through the use of claims screens, medical review, and other
procedures. The commenter appears to believe that, because these
carrier safeguards are in place, a ``reasonable and necessary''
exception could be established. The problem with this commenter's
approach is twofold. First, section 1877 prohibits certain referrals to
entities with which the referring physician or an immediate family
member has a financial relationship regardless of whether the service
furnished is found by a carrier to be medically necessary. Second,
assessing whether a physician's referrals result in a financial gain
from the relationship with a laboratory would be a very difficult and
burdensome administrative process. Carriers process approximately 4
million claims for clinical laboratory services each year. It would be
very costly to determine whether each claim called into question by
certain referrals results in a cost benefit to the referring physician.
10. Contractor Implementation
Comment: One commenter, a Medicare contractor, indicated it had
concerns with the administration of the prohibition on referrals along
with the numerous exceptions that have been granted for specific
services, certain ownership or investment interests, and certain
compensation arrangements. The commenter anticipates that the
monitoring of these various provisions will be complex and will greatly
affect post-pay and systems areas.
Response: It is not clear, at this time, how significant a workload
the provisions will create for carrier claims processing and fraud
units. However, once this rule is published, the carriers will start
performing compliance audits based on specified criteria. We do not
expect that these audits will result in much increase in the carrier's
workload. We do not believe that there will be any significant effect
on either post-pay or systems areas.
B. Scope of Regulations
Comment: One commenter indicated that the preamble section of the
proposed rule explaining what the agency believes is the regulatory
scope (57 FR 8593) should be omitted. The commenter contended that it
imparts no specific guidance and defines no
[[Page 41927]]
regulatory requirement. Furthermore, this commenter objected to the
preamble reference to violations of other Federal or State law and
stated that it is gratuitous to advise the regulated entity or person
that compliance with section 1877 of the Act, or regulations
promulgated thereunder, does not foreclose citation and adjudication
under another Federal or State statutory requirement or regulation.
Response: We disagree. Sections 411.1 and 411.350, as described in
the preamble of the proposed rule and as set forth in the proposed
regulation, conform to regulation drafting guidelines in explaining the
general content of 42 CFR part 411, subpart J. Our intent in including
this information, something that is routinely done in any new HCFA
regulation, is to provide the public with an outline of the
regulation's substantive content.
In this case it is important as well to state what the new
regulation does not provide for. Before the proposed rule was
published, we received numerous inquiries indicating that the
provisions of section 1877 were being confused with the anti-kickback
safe harbors specified in the final rule published on July 29, 1991 (56
FR 35952). In fact, the Medicare anti-kickback statute (section
1128B(b) of the Act) and section 1877, while similar in that they
address possible abuses of Medicare, are different in scope and
application and, therefore, need to be distinguished. The conference
report for OBRA '89 includes the following statement:
The conferees wish to clarify that any prohibition, exemption,
or exception authorized under this provision in no way alters (or
reflects on) the scope and application of the anti-kickback
provisions in section 1128B of the Social Security Act. The
conferees do not intend that this provision should be construed as
affecting, or in any way interfering, [sic] with the efforts of the
Inspector General to enforce current law, such as cases described in
the recent Fraud Alert issued by the Inspector General. In
particular, entities which would be eligible for a specific
exemption would be subject to all of the provisions of current law.
(H.R. Conf. Rep. No. 386, 101st Cong., 1st session 856 (1989).)
Furthermore, we believe it is our duty to inform the public that
lawful conduct under sections 1128B and 1877 of the Act may not be
lawful under other Federal statutes or State law or regulations.
Conversely, conduct that is lawful under those other authorities may be
prohibited under section 1877 and these final regulations.
C. Definitions
1. Clinical Laboratory Services
Under the proposed rule (section 411.353), ``laboratory services''
are considered to be any services provided by the entities described in
section 493.2. The preamble to the proposed rule pointed out at 57 FR
8595 that this would include anatomical laboratory services but would
not include noninvasive tests that are not considered clinical
laboratory services, such as electroencephalograms or
electrocardiograms. Nor would it include x-rays or diagnostic imaging
services, such as mammogram and computerized axial tomography scans.
Comment: A few commenters recommended that a definition of
``clinical laboratory'' be included in the regulations. They suggested
that, if the definition used for purposes of the Clinical Laboratory
Improvement Amendments of 1988 (CLIA '88) is to be adopted, that it
should be repeated in section 411.351.
One commenter indicated that the definition of clinical laboratory
should state the following:
``Clinical laboratory means a facility for the examination of
materials derived from the human body for the purpose of providing
information for the diagnosis, prevention, or treatment of any disease
or impairment of, or the assessment of the health of, human beings, as
described in section 493.2. Such examinations include screening
procedures to determine the presence or absence of various substances
or organisms in the body. Such examinations do not include noninvasive
tests, such as electroencephalograms, electrocardiograms, x-rays or
diagnostic imaging services, such as mammogram and computerized axial
tomography services.''
Response: We agree that this final regulation should contain a
definition of clinical laboratory. Thus, based on the definition at
section 493.2, which defines a laboratory for CLIA purposes, we are
including the following in section 411.351:
Laboratory means an entity furnishing biological,
microbiological, serological, chemical, immunohematological,
hematological, biophysical, cytological, pathological, or other
examination of materials derived from the human body for the purpose
of providing information for the diagnosis, prevention, or treatment
of any disease or impairment of, or the assessment of the health of,
human beings. These examinations also include procedures to
determine, measure, or otherwise describe the presence or absence of
various substances or organisms in the body. Entities only
collecting or preparing specimens (or both) or only serving as a
mailing service and not performing testing are not considered
laboratories.
Comment: One commenter urged that the definition of laboratory
services should include a statement that what are considered clinical
laboratory services for current procedural terminology (CPT) code
purposes are also considered clinical laboratory services for the
purpose of these regulations. Thus, in this commenter's opinion, there
would be no question about what constitutes clinical laboratory
services.
Response: As mentioned in the response to the previous comment, we
have defined a clinical laboratory as meaning any laboratory entity
that is required to satisfy the CLIA standards in order to perform
tests on human beings for ``* * * the purpose of providing information
for the diagnosis, prevention, or treatment of any disease or
impairment of, or the assessment of the health of, human beings.''
Therefore, for the purposes of the prohibition on physician self-
referral, we are defining ``clinical laboratory services'' at section
411.351 as follows:
Clinical laboratory services means the biological,
microbiological, serological, chemical, immunohematological,
hematological, biophysical, cytological, pathological, or other
examination of materials derived from the human body for the purpose
of providing information for the diagnosis, prevention, or treatment
of any disease or impairment of, or the assessment of the health of,
human beings. These examinations also include procedures to
determine, measure, or otherwise describe the presence or absence of
various substances or organisms in the body.
Given this position, the American Medical Association (the
organization responsible for CPT) and the CPT publication would not be
the references to define the kind of services that are regulated by the
physician referral legislation. If individuals want to know what
specific tests and test systems are subject to CLIA certification, they
may contact the Center for Disease Control and Prevention (CDC), Public
Health Service, Attention: CLIA, 1600 Clifton Road, Atlanta, GA 30333.
CDC has categorized approximately 12,000 test systems, assays, and
examinations for complexity using the criteria at 42 CFR 493.17. CDC
publishes notices periodically in the Federal Register to announce
additional test systems, assays, or examinations that have been
categorized or recategorized since the preceding publication.
For these reasons, we do not support the sole use of CPT codes to
identify
[[Page 41928]]
clinical laboratory services for physician referral purposes.
Comment: One commenter suggested that it would be helpful to define
further what type of anatomical laboratory services are covered by the
statute and which specific tests we consider to be noninvasive and not
subject to the prohibition on referrals.
Response: We agree with this commenter. As mentioned in the
preamble to the proposed rule (57 FR 8595), anatomical laboratory
services are subject to the prohibition on physician referrals.
Anatomical laboratory services (and anatomical pathology services)
involve the examination of tissue, often tissue removed during surgery.
As such, it appears to us that anatomical laboratory services are
always invasive (that is, they involve the examination of materials
derived from the human body, as described in 42 CFR 493.2). Therefore,
we believe that these tests would always be subject to CLIA and section
1877. Consequently, any physician who refers patients for these kinds
of tests to a laboratory with which he or she (or a family member) has
a financial relationship could be in violation of section 1877. In such
a case, any of the many exceptions in section 1877 might exempt that
physician's referral from the prohibition.
The commenter has also suggested that we specify which noninvasive
testing is exempt from the prohibition on referrals. As mentioned in
the response to the previous comment, we believe that the most
appropriate way for a physician or clinical laboratory to determine if
Medicare considers a diagnostic test to be a clinical laboratory test
subject to the requirements of section 1877, is to find out if the test
is subject to categorization under CLIA. The Medicare carriers are
available to provide this information to individuals and physicians if
it is not clear to a physician, other supplier, or provider of services
and if they do not have available the latest compiled list of clinical
laboratory test systems, assays, and examinations categorized by
complexity and published by the CDC. If a test does not appear on a
compiled list, a physician or laboratory should contact the CDC at the
address we mentioned in the last response in order to be certain, since
the lists are not yet complete.
2. Compensation Arrangement
Under the proposed rule (Sec. 411.351), a compensation arrangement
would be any arrangement that involves any remuneration between a
physician or a member of his or her immediate family and an entity. The
definition of compensation arrangement was amended by OBRA '93 to
exclude certain types of remuneration (identified in section I.D.1.c.
of this preamble).
Comment: One commenter indicated that the final regulations need to
give a specific definition for the phrase ``compensation arrangement,''
not simply repeat the words that the Congress has provided.
Response: The commenter did not explain why the proposed definition
was perceived as insufficient. The words of the definition are
specific, and we do not believe they are susceptible to
misinterpretation. The definition is broad, because it covers any
remuneration between a physician (or an immediate family member) and an
entity, and it may be this aspect of the definition that concerned the
commenter. We believe, however, that it was the intent of the Congress
to include all arrangements (direct and indirect) between physicians
and laboratories involving any remuneration. We believe that the
statutory definition accomplishes this purpose. In the OBRA '93
amendments, the Congress retained the broad definition of
``remuneration'' in section 1877(h)(1)(B), but did specifically except
from the term ``compensation arrangement'' a very limited list of
arrangements involving the kinds of remuneration listed in section
1877(h)(1)(C). These changes are reflected in this final regulation.
Comment: One commenter indicated that laboratories often must enter
into arrangements with physicians, who are not employed by the
laboratory, for necessary services. The commenter believed that as long
as certain safeguards, comparable to those applicable to arrangements
between physicians and hospitals, are met, these arrangements should
not be considered compensation arrangements that would prohibit the
physicians from making referrals. Examples of such arrangements are (1)
an arrangement to review abnormal test results when further medical
consultation is required, and (2) a contract with a physician to
provide various consultation services, such as reviewing anatomic
pathology specimens, interpreting holter monitors or
electrocardiograms, and reviewing Pap tests.
Another commenter indicated that, because of the breadth of the
self-referral law, any time a laboratory makes a payment to a
physician, a compensation arrangement is created. Thus, for example, if
a laboratory maintains a self-insured group medical plan and pays
physicians directly for the medical services provided to its employees,
it would, in this commenter's view, have a compensation arrangement
with those physicians and should not accept Medicare referrals from
them. The commenter suggested that these types of legitimate
arrangements should not be considered compensation arrangements as long
as safeguards are put into place to ensure nonabuse.
Response: What these commenters are asking for is an exception for
an arrangement under which a referring physician furnishes services to
a laboratory (or, alternatively, that the term compensation arrangement
be defined in a manner so as not to include that arrangement). Section
1877(e)(3), as amended by OBRA '93, provides an exception for a
compensation relationship in which a laboratory entity pays a physician
for personal services furnished under an arrangement. Such an
arrangement does not result in the physician being prohibited from
making referrals to that entity if certain specific conditions
(detailed in section I.D.6.d. of this preamble) are met.
In addition to the exception in section 1877(e)(3), section
1877(e)(2), as amended by OBRA '93, provides that, if a laboratory
makes payments to a physician as the result of a bona fide employment
relationship with the physician, that physician's referrals would not
be prohibited, providing certain criteria are met.
Comment: One commenter stated that in many situations laboratories
are required by State or Federal law to have particular arrangements
with physicians. For example, under the new CLIA regulations (42 CFR
part 493), laboratories may be required to have physicians in a number
of different positions in the laboratory. The commenter believed these
types of arrangements should not be considered compensation
arrangements that would prohibit referrals by the physicians.
Response: As mentioned in an earlier response, it is our belief
that most of these arrangements could qualify for either the exception
found in section 1877(e)(2) for bona fide employment relationships or,
when the physicians are not employed, section 1877(e)(3) for personal
service arrangements.
Accordingly, a compensation arrangement between a laboratory and a
referring physician for specific identifiable services that has all of
the elements required for the subject exceptions would not cause that
physician's referrals to be prohibited.
Comment: One commenter noted that laboratories routinely sell
services directly to physicians who then
[[Page 41929]]
reimburse the laboratory for those services before marking them up to
patients. The commenter did not believe that those payments should
constitute a compensation arrangement.
Response: As set forth in OBRA '93, section 1877(e)(8)(A) of the
Act provides a compensation-related exception for physicians who pay a
laboratory in exchange for the provision of clinical laboratory
services (see section 411.357(i)(1)).
The commenter has made the point that physicians routinely
reimburse laboratories for services and then mark them up to patients.
Under section 1833(h)(5)(A), Medicare payment for a clinical diagnostic
laboratory test may be made only to the person or entity that performed
or supervised the performance of the test. (This rule is subject to
certain exceptions involving services furnished or supervised by a
physician when payment is made to another physician in the same group
practice, services performed by a laboratory at the request of another
laboratory, and tests performed under arrangements made by a hospital.)
As a result, physicians should generally not be able to pay a
laboratory in exchange for Medicare covered laboratory services, and
then mark them up to patients.
Comment: One commenter noted that many laboratories are part of
large, diversified corporations (which themselves may be related to
other large, diversified corporations) that provide a number of
different services to physicians. These services may include
pharmaceutical, billing, and waste transport services. The commenter
believed that, so long as these services are provided at fair market
value, there is no reason that an entity should not provide these
services to physicians and also accept their Medicare referrals.
Response: As mentioned previously, if a physician is paying fair
market value to the supplier entity for whatever nonlaboratory services
he or she is purchasing, referrals by the physician to the laboratory
should not be prohibited. However, the arrangement must meet the
conditions found in new Sec. 411.357(i).
Comment: One commenter indicated that the regulations should be
clarified to expressly prohibit any arrangement under which the
referring physician bills patients for clinical laboratory or anatomic
pathology services that are not personally performed or supervised by
the billing physician or the group practice. In particular, the
commenter suggested that the prohibition should apply to arrangements
under which the referring physician requires the pathologist or
independent laboratory to bill the referring physician, rather than the
patient or third party payer, for any services provided by the
pathologist or independent laboratory on referral by the physician. The
commenter pointed out that, at the present time, the Medicare payment
rules prohibit a physician from billing for certain clinical diagnostic
laboratory tests performed by an independent laboratory for Medicare
patients (section 1833(h)(5)(A)) but, the commenter maintained, this
payment prohibition does not apply to anatomic pathology services or to
clinical laboratory services performed for non-Medicare patients. Thus,
the commenter concluded that the referring physician would not be
prohibited from marking up the costs of anatomical tests to Medicare
and for clinical laboratory and anatomical testing billed to other
third party payers.
The commenter believed that an arrangement under which the
referring physician charges payers for the services of a separate
laboratory constitutes a compensation arrangement within the meaning of
the law. The commenter added that ``compensation arrangement'' is
defined as any arrangement ``involving any remuneration.'' Further, the
term ``remuneration'' is defined broadly to include direct or indirect,
overt or covert, and in-cash or in-kind arrangements. The commenter
believed, therefore, that an arrangement under which the referring
physician can receive payment for services not personally performed or
supervised by himself or herself, including payment for services for
non-Medicare patients, should be found to be a compensation arrangement
within the broad language of the law.
Specifically, the commenter recommended that the final regulation
make clear that the definition of ``compensation arrangement''
encompasses any arrangement under which a referring physician bills and
collects for laboratory services that are not personally performed or
supervised by the physician.
Response: This commenter raised several issues: first, whether
anatomical pathology services are diagnostic laboratory tests and,
thus, subject to the billing requirements of section 1833(h)(5)(A);
second, whether the billing requirements of that section can be applied
to clinical diagnostic laboratory tests performed for non-Medicare
patients; and third, whether the definitions of compensation and
remuneration at section 1877(h)(1) can be broadly interpreted to
include payments made to the physician for any laboratory services he
or she did not personally perform or supervise, including payment for
services for non-Medicare patients. We will address each of these
issues in order.
Under Medicare, the term ``medical and other health services''
includes, under section 1861(s)(3), the broad category of ``diagnostic
laboratory tests.'' Under section 1861(s)(16), such diagnostic
laboratory tests include only those diagnostic tests performed in a
laboratory that meets CLIA requirements. Anatomical pathology services
are tests involving tissue examination, such as that done during
surgery. We believe that any anatomical pathology tests would be
diagnostic in nature and would have to be performed in a laboratory
that meets CLIA requirements. As such, the tests fall squarely within
the category of ``diagnostic laboratory tests'' and would therefore be
subject to the payment rules in section 1833(h)(5)(A).
Under section 1833(h)(5)(A), payments for clinical diagnostic
laboratory tests are subject to mandatory assignment. That is, with
certain narrow exceptions, payment may be made only to the person or
entity that performed or supervised the performance of the test.
Further, under section 1842(b)(6), a carrier generally may pay assigned
benefits only to the physician or other supplier that furnished the
service. Thus, unless physicians are billing Medicare within the
conditions found in these provisions of the law, they are billing in
error.
In regard to the second issue, the language of section
1833(h)(5)(A) applies specifically to services for which payment may be
made under Medicare Part B. Therefore, we agree with the commenter that
the billing requirements found in the Medicare statute do not extend to
non-Medicare patients.
In regard to the third issue, under section 1877(e)(8)(A), payments
by a physician to a laboratory for clinical laboratory services do not
constitute compensation that triggers the referral prohibition.
3. Entity
In the proposed rule (Sec. 411.351), we defined ``entity'' as a
sole proprietorship, trust, corporation, partnership, foundation, not-
for-profit corporation, or unincorporated association.
Comment: One commenter indicated that the statute does not define
``entity'' and the definition in the proposed regulations could
prohibit certain nonabusive arrangements because it covers trusts,
foundations, and not-for-
[[Page 41930]]
profit corporations. For example, a physician might own stock in a not-
for-profit corporation or be a trustee of a charitable trust that
operates a laboratory. The commenter suggested that this definition
either be modified to contain an exception for nonabusive business
entities or that the trust, foundation, and not-for-profit corporation
criteria be deleted.
Response: We do not agree with this commenter. Under section 1877,
unless an exception applies, any referral for clinical laboratory
services is prohibited if the referring physician or a member of the
physician's immediate family has a financial relationship with the
entity to which the referral is made. This is so because the statute
does not, in any way, limit the types of organizations covered by the
referral prohibition as long as they provide clinical laboratory
services. Therefore, our proposed definition of ``entity'' was meant to
include all possible organizations and associations that provide
laboratory testing. As was stated in the proposed rule, we believe that
we need to define the term ``entity'' to ensure that the term is
understood by all affected parties. Note, however, that if a trustee
takes no compensation from and has no ownership interest in an entity,
he or she would not have a financial relationship as defined in section
1877. Therefore, the physician would not be prohibited from referring
Medicare patients to that entity. Finally, we are not aware of any
situations in which a not-for-profit entity would issue stock.
4. Fair Market Value
Under the proposed rule (section 411.351), fair market value is
defined to mean the value in arm's-length transactions, consistent with
the general market value. With respect to rentals or leases, ``fair
market value'' means the value of rental property for general
commercial purposes (not taking into account its intended use). In the
case of a lease of space, this value may not be adjusted to reflect the
additional value the prospective lessee or lessor would attribute to
the proximity or convenience of the lessor when the lessor is a
potential source of patient referrals to the lessee. This definition is
based on the definition in the statute. (OBRA '93 did not change the
statutory definition.)
Comment: One commenter indicated that the statute makes it clear
that lease and rental values may not be adjusted to reflect proximity
to referral sources. The commenter was concerned about our statement in
the preamble to the proposed rule at 57 FR 8599 that certain rental
payments could be construed to induce referrals, even if there is no
explicit or implicit understanding regarding referrals. These
arrangements would typically involve rental payments either
substantially above or below the fair market value of the rental space.
The commenter believed that there is still no adequate means to
determine when an increase (or decrease) in value will be considered
``substantial'' and therefore viewed as suspect. The commenter agreed
that an example of an abusive arrangement occurs when a physician rents
space to a health care entity at a rate above what the market would
ordinarily bear, and the entity agrees to the high rent because of an
understanding that the physician will refer his or her patients to that
entity.
The commenter pointed out that many factors influence what may be
considered as ``fair market value'' in a normally functioning real
estate market. For example, the principle that site rents vary
inversely with increased travel time pervades the real estate industry.
Thus, the commenter concluded, a facility that is convenient to places
in which health care services are furnished, such as a laboratory
adjacent to a medical building, will command higher rents than one
across town.
The commenter suggested that the final rule should reflect some
means of differentiating between rent and lease payments that have
inherently greater values based on traditional economic factors and
those that are ``artificially'' inflated.
Response: In using the term ``substantially'' in excess of or below
fair market value, we were describing an example of how a rental or
lease agreement could be an influence on referrals. Such an agreement
could take many forms and incorporate a myriad of possible financial
incentives depending on local factors that could influence the rental
or lease price. We want to emphasize, however, that the definitions in
the statute (section 1877(h)(3)) and regulations (Sec. 411.351) state
that fair market value means that a rental or lease of property must be
consistent with the value of the property for general commercial
purposes and that a rental or lease of space may not be adjusted to
reflect any additional value a lessee or lessor would attribute to the
proximity or convenience of a potential source of referrals. Therefore,
if the economic factor to which the commenter referred, that is, that
site rents vary inversely with increased travel time, plays a part in
determining the level of rent agreed to by a physician and a laboratory
entity, the fair market value test set forth in the statue would not be
met. This would be the case even if the factor is a ``traditional
economic factor'' that ``pervades the real estate industry.'' In other
words, if rent is inflated either artificially or because of its
proximity to a referral source, the fair market standard would not be
met and the exception would not apply.
5. Financial Relationship
In the proposed rule (section 411.351), we defined a ``financial
relationship'' as either a direct or indirect relationship between a
physician (or a member of a physician's immediate family) and an entity
in which the physician or family member has--
(1) An ownership or investment interest that exists through equity,
debt, or other similar means; or
(2) A compensation arrangement.
The OBRA '93 amendments added that, in addition to equity, debt, or
other means, an ownership interest includes an interest in an entity
that holds an ownership or investment interest in any entity providing
clinical laboratory services. This expanded provision, however, is not
applicable until January 1, 1995.
Comment: One commenter expressed strong support for the proposed
policy that the prohibition would extend to physicians who are the
previous owners of a laboratory, if they are paid by the new owners
under an installment sales agreement that extends past January 1, 1992.
The commenter indicated that such arrangements can easily be abused;
that is, they raise the possibility that the previous owners would make
referrals for the purpose of ensuring that the new owners continue to
pay off their debt. Similarly, the commenter agreed with our statement
that, if an organization related to the laboratory agrees to pay the
laboratory's debt to the physician, a financial relationship is still
created.
On the other hand, another commenter indicated that we should
permit specific debt relationships if the following criterion is met:
The debt interest is manifested by a written note that has a fixed
repayment schedule unrelated in any fashion to the productivity of the
debtor or any entity owned by the debtor, and the debt-equity
relationship of the debtor does not exceed 4 to 1.
Another commenter recommended that physicians who remain interested
investors through a debt relationship in a laboratory that they once
owned not be penalized. That is, the physicians should not be
subsequently regarded as having a nonexempt financial relationship with
that laboratory.
[[Page 41931]]
Response: We agree with the first commenter. A financial
relationship may exist in the form of an ownership or investment
interest, which, according to the language in section 1877(a)(2), ``may
be through equity, debt, or other means.'' We did not propose any
exceptions addressing situations involving debt. That is because we do
not believe that there would be no risk of program or patient abuse in
such circumstances. Obviously, the continued financial viability of an
entity that is in debt to a potential referring physician could be of
great concern to that physician. Therefore, we are not providing the
exception requested.
Comment: Two commenters indicated that the term ``indirect
relationship,'' which is used to define financial relationships in
proposed Sec. 411.351, should be itself defined or deleted since there
is no statutory definition of indirect relationships. According to the
discussion at page 8595 of the proposed rule's preamble, ``a physician
would be considered to have an indirect financial relationship with a
laboratory entity if he or she had an ownership interest in an entity
which in turn has an ownership interest in the laboratory entity.'' The
commenter stated that, if this is the definition we adopt, that
definition should appear in Sec. 411.351 of the final regulations;
otherwise, the term should be deleted from the regulation entirely.
Response: We agree with the commenter that our interpretation of
indirect ownership or investment interest should appear in the
regulation. Therefore, we include it in section 411.351 of this final
rule. As specified at section 1877(a)(2), financial relationships that
could cause a referral to be prohibited are of two kinds. The first is
an ownership or investment interest, which may be through equity, debt,
or other means. The second is a compensation arrangement, which, as
defined at section 1877(h)(1)(A), is any arrangement involving any
remuneration (with certain narrow exceptions added by OBRA '93).
``Remuneration'' is defined in section 1877(h)(1)(B) as including any
remuneration, direct or indirect, overt or covert, in cash or in kind.
This is a broad concept that, we believe, encompasses compensation/
remuneration obtained through an indirect financial arrangement. We
further believe that an indirect relationship can occur in the
ownership/investment situation as well as under a compensation
arrangement. The term ``indirect'' appears specifically only in the
definition of remuneration in section 1877(h)(1)(B), which applies in
the context of compensation arrangements. However, an ownership or
investment interest as defined in section 1877(a)(2) may be through
equity, debt, or other means. We believe that the term ``other means''
is broad enough to encompass an infinite variety of direct and indirect
ownership or investment interests. As a result, we included the concept
of an indirect ownership or investment interest in the proposed rule.
It was also our opinion that the Congress intended to cover all
forms of financial relationships that may exist between a physician and
a laboratory. Any other reading would allow physicians to easily
circumvent the statute: they could hold ownership interests in entities
furnishing clinical laboratory services by simply establishing and
owning shares in holding companies or shell corporations that, in turn,
own the laboratories.
The Congress has demonstrated its intention to cover situations
involving indirect ownership and investment interests. As amended by
OBRA '93, the language at the end of section 1877(a)(2) provides that
``[a]n ownership or investment interest may be through equity, debt, or
other means, and includes an interest in an entity that holds an
ownership or investment interest in any entity providing the designated
health service.'' [Emphasis added.] This provision became effective
January 1, 1995. However, we believe the amended provision demonstrates
that, prior to OBRA '93, an ownership or investment held through
``other means'' could be interpreted to include indirect interests.
In addition, in proposing this amendment, the Committee on Ways and
Means explained that ``[t]he definition of financial relationship would
be modified to include explicitly that an interest in an entity (i.e.,
holding company) that holds an investment or ownership interest in
another entity is a financial relationship for purposes of the referral
prohibition.'' [Emphasis added.] (H. Rep. No. 111, 103d Cong., 1st
Sess. (1993).) In other words, we believe the intent of this amendment
was to explicitly list a concept that was already implicitly included
in the scope of the provision. The Conference Report for OBRA '93
reveals that the House Ways and Means provision was enacted without
changes. (H. Rep. No. 213, 103d Cong., 1st Sess. (1993).) For these
reasons, we decline to delete the term ``indirect'' and intend that it
be considered in determining whether particular referrals are
prohibited.
6. Group Practice
Under the proposed rule (Sec. 411.351), a group practice means a
group of two or more physicians legally organized as a partnership,
professional corporation, foundation, not-for-profit corporation,
faculty practice plan, or similar association that meets the following
conditions:
Each physician who is a member of the group furnishes
substantially the full range of patient care services that the
physician routinely furnishes including medical care, consultation,
diagnosis, and treatment through the joint use of shared office space,
facilities, equipment and personnel.
Substantially all of the patient care services of the
physicians who are members of the group (that is, at least 85 percent
of the aggregate services furnished by all physician members of the
group practice) are furnished through the group and are billed in the
name of the group and the amounts received are treated as receipts of
the group. The group practice must attest in writing that it meets this
85 percent requirement.
The practice expenses and income are distributed in
accordance with methods previously determined by members of the group.
In the case of faculty practice plans associated with hospitals
that have approved medical residency programs for which plan physicians
perform specialty and professional services, both within and outside
the faculty practice, this definition applies only to those services
that are furnished to patients of the faculty practice plan.
``Group practice'' as defined in section 1877(h)(4)(A), as it reads
under OBRA '93, is discussed in section II.D.1.c.4. of this preamble.
a. Threshold for ``Substantially All''
Comment: A few commenters suggested that the threshold for what is
``substantially all'' of the services of physician members should be
lowered from 85 percent to 75 percent because rural group practices
would have difficulty in meeting the higher percentage. The same
commenters noted that, if the threshold for group practices is not
lowered, there should be a special threshold for rural group practices
that may not be able to meet the 85 percent standard.
Response: The comments we received on the proposed rule have
identified group practices that have partners, full and part-time
physician employees, and physician contractors, who may also be either
full- or part-time. All configurations of physicians must be
[[Page 41932]]
able to show that the statutory requirements are met and, specifically,
that substantially all of the services of the members are furnished
through the group. (We discuss in a later comment which physicians
qualify as ``members'' of a group practice.) As we have mentioned
previously in this preamble, it is not our intention to unnecessarily
impede associations of physicians from qualifying as a group practice,
and we recognize that groups that have part-time physicians may have a
more difficult time qualifying than groups that have all full-time
physicians.
We agree that the 85 percent criterion should be reduced to 75
percent, and we have made that change in the definition of group
practice (Sec. 411.351). Before deciding to make this change, we
considered the implications for group practices that have part-time and
contractual physicians and the possibility of establishing separate
standards for rural and urban locations and the changes that will be
made by the OBRA '93 provision on January 1, 1995. (Beginning on
January 1, 1995, members of the group must personally conduct no less
than 75 percent of the physician-patient encounters of the group
practice.) We accept the point of view that a standard higher than 75
percent would be difficult for many rural group practices to meet. That
is because the scarcity of physicians in rural areas generally imposes
varying responsibilities that cause these physicians to devote less
time to a group practice than might be the case in other areas. In
order to be consistent and to eliminate whatever administrative
confusion might result from different standards for rural and urban
areas, we are adopting the 75 percent standard for all areas.
Comment: One commenter indicated that group practices should be
allowed to select the methodology for determining the 85 percent
threshold; that is, 85 percent of total physician time, or 85 percent
of total group income (calculated on the basis of allowed charges,
etc.), or 85 percent of all physicians' services delivered--whatever
method they prefer to use and are able to document.
Another commenter recommended that the Medicare allowed charges or
fee schedule amounts be used as the measurement criterion for the
following reasons: (1) By using such a measure, the necessary data
would be readily available to Medicare carriers in the Medicare
databases; (2) these measures would not impose any new record keeping
obligations on physicians and group practices; and (3) if alternative
measures, such as time, patients, service, or total revenue were used,
physicians and group practices would be subjected to additional
burdensome record keeping requirements.
A third commenter suggested that the following conditions indicate
that the criteria are met: All Medicare allowed charges or fee schedule
amounts for the services furnished by all physician members of the
group are furnished through the group, and billed in the name of or
under a number or numbers assigned to the group practice, and the
amounts received are treated as receipts of the group.
Finally, another commenter recommended that we consider (1)
excluding from the formula any part-time physician who does not refer
work to the laboratory for Medicare patients, and (2) revising the
current 85 percent formula to provide that, so long as 85 percent of
Medicare laboratory work is attributed to full-time physicians (a full-
time physician being a person who bills at least 85 percent of his or
her services through the group), the group practice would then be able
to meet the exception.
Response: As noted, we proposed that, to meet the ``substantially
all'' criterion, a group practice would have to be able to show that at
least 85 percent of the aggregate patient care services furnished by
all physician members of the group practice are furnished through the
group practice. In addition, as stated in section 1877(h)(4)(B), these
services must be billed in the name of the group, and receipts for the
services must be treated as receipts of the group. After carefully
considering the language of the statute and these comments, we decided
to adopt the following approach:
We are continuing to provide that to meet the ``substantially all''
criterion, in the aggregate, a specific percentage of patient care
services furnished by all physician members must be furnished through
the group practice. As we noted in an earlier response, we are changing
the percentage from 85 percent to 75 percent. The comments have
revealed that there is confusion about what constitutes ``patient care
services'' and how to measure them. To remedy this, we are clarifying
in the regulation that patient care services include any tasks
performed by a group practice member that address the medical needs of
specific patients, whether or not they involve direct patient
encounters. As a result, patient care services can involve the work of
pathologists and radiologists who do not directly treat patients or a
physician's time spent consulting with another physician when the
patient is not present or time spent reviewing laboratory tests.
We are also clarifying that a practice must measure patient care
services by calculating the total patient care time each member spends
on patient care services. We believe that this method of measuring
services is an equitable one that will capture most accurately a group
practice member's commitment to providing services through the
practice. For example, if a member furnishes only a few services
through the practice during the course of a week, but these services
are surgical procedures that consume most of the physician's time that
week, this fact will be reflected in the calculations.
As to the first comment, we do not believe that leaving this matter
entirely to the discretion of each group practice would be feasible. It
is our goal to accomplish fairness and evenhandedness across group
practices by establishing a consistent and uniform approach. Leaving
the matter to the discretion of each group practice would also put an
additional burden on the Medicare carriers. The carriers could very
well be involved in audits of group practices in the future. If we
adopted the commenter's suggestion, a carrier would, on the occasion of
each audit, first have to determine whether a particular method
employed by a group practice is appropriate before determining whether
the standard is met. Thus, we are clarifying that, to meet the
substantially all criteria, 75 percent of total patient care services
(measured as patient care time) of group practice physicians must be
provided through the group.
It is not clear to us how using a method employing Medicare allowed
charges or physician fee schedule amounts would satisfy the statutory
requirements. The carriers would have this information, as the
commenter stated, but section 1877(h)(4) does not say that only
substantially all of a group practice's Medicare business be
considered. The reference is to ``* * * substantially all the services
of the physicians who are members * * *.'' Accordingly, we believe that
all services, both Medicare and non-Medicare, must be considered.
Here is an example of how our uniform total patient care time
approach would work:
Ten physicians deliver services through a group practice. Eight
of them devote 100 per cent of their patient care time to the group
practice. One devotes 80 percent, and one 10 percent. This can be
illustrated as follows:
[[Page 41933]]
8 physicians at 100% each = 800%
1 physician at 80% = 80%
1 physician at 10% = 10%
---------
890% divided by 10 = 89%
Thus, in this example, 89 percent of the total of the time spent by
these physicians is devoted to services billable by the group practice.
The issues of group practice billing numbers and part-time physicians
are discussed below.
Comment: One commenter suggested that the calculations for
substantially all services be made, at the election of the practice
group, with respect to either the previous fiscal year of the practice
group or the previous 12-month period, which is the approach used by
the safe harbor regulations. The commenter believed that a 12-month
period is appropriate for this purpose in order to avoid short term
fluctuations that might otherwise distort the determination.
Response: We agree that a 12-month period is appropriate for use in
determining compliance with the ``substantially all'' criterion. We
will allow a group practice (as defined in section 1877(h)(4)) to elect
whether to use the calendar year, its fiscal year, or the immediately
preceding 12-month period to determine whether it complies with the
standard. Furthermore, we will allow any new group practice (one in
which the physicians have only recently begun to practice together) or
any other group practice that has been unable in the past to meet the
requirements of section 1877(h)(4) (including the ``substantially all''
criterion) to initially look forward 12-months, as described below, to
determine compliance with the standard. These groups would also be able
to elect whether to use the calendar year, fiscal year, or the next 12-
months. Finally, once any group has chosen whether to use its fiscal
year, the calendar year, or another 12-month period, the group practice
must adhere to this choice.
In new 411.360, each group practice must submit to its carrier an
initial attestation that the group has met the ``substantially all''
criterion (75 percent of patient care time) in the 12-month period it
has chosen. New group practices or other groups that wish to initially
use future months to meet the ``substantially all'' criterion must
attest that they plan to meet the criterion within whatever upcoming
12-month period they have chosen and will take measures to ensure the
standard is met. After this 12-month period is over, the group must
attest that it did meet the standard during that period.
The attestation must contain a statement that the information
furnished in the attestation is true and accurate and must be signed by
a representative for the group. It must be mailed to the carrier within
90 days after the effective date of this final rule, that is, 120 days
after the date of publication of this rule in the Federal Register. We
are requiring this initial attestation so the carriers will be able to
determine whether payment for laboratory services should be continued.
After their initial attestation (whether it is retroactive or
prospective), group practices must submit updated attestations to the
carrier each year at the end of the period they have chosen to use to
measure this standard.
If a group practice using an initial prospective period does not
meet the ``substantially all'' criterion at the end of its chosen 12-
month period, the group would not qualify as a group practice. As such,
an overpayment could exist from the beginning of the period in which
the group has claimed that it would meet the ``substantially all''
standard.
This approach does have paperwork burden implications for group
practices. However, we do not believe that the burden is significant.
It should be a relatively easy task for most group practice physicians
to assess the amount of their patient care time that is spent on
services that can be billed in the name of the group.
b. Member of a Group
Comment: Several commenters indicated that we should define more
precisely what is meant by a ``member'' of a group practice because the
``substantially all'' criteria apply to physicians who are ``members''
of a group practice. For example, one commenter suggested that for
part-time members of a group practice, only that percentage of time/
services/income devoted by the member to the group should be assigned
to the group for the purpose of calculating the total time/services/
income of the group.
Several commenters indicated that the term ``member'' of the group
practice should have a restrictive definition, such as one that is
limited to principals of the practice, for example, shareholders,
partners, or officers.
Another commenter indicated that the term ``member'' can be broadly
interpreted to include all physician employees or even independent
contractor physicians of the group practice, and that how the term is
defined can have significant impact. Yet another commenter recommended
that the term ``member'' be defined to include physician owners as well
as full- and part-time employed physicians.
One commenter recommended that the definition exclude any physician
who is not a shareholder, partner, or employee of the group, or an
independent contractor providing more than a certain number of hours of
service per week (for example, 20 hours) for the group. The commenter
stated that such a rule is supported by common sense, as it is doubtful
that physicians who furnish services on a sporadic basis would consider
themselves to be members of a group or qualify for the various benefits
associated with being a member of the group.
On the other hand, another commenter stated that, if the term
``member'' is given a restrictive definition, limited to principals of
the group practice, the practice will be able to circumvent the 85
percent aggregate services requirement simply by ensuring that no
physician who provides substantial services outside the group becomes a
principal of the group. The commenter believed that limiting the
definition, however, might restrict the numbers of physicians who may
supervise laboratory testing under the in-office ancillary services
exception because it applies to only services furnished by or
supervised by physicians who are ``members'' of the same group
practice. The commenter also suggested that it might affect where that
testing may take place. Under section 1877(b)(2)(A)(ii), testing may be
done in a building in which the referring physician (or another
physician member of the group practice) has a practice or in another
building which is used for the centralized provision of the group's
clinical laboratory services. Particularly in multi-site group
practices, the referring physicians could be physician-employees or
independent contractors who would not be ``members.'' Thus, their
laboratory tests would have to be performed in a building in which a
member personally supervises the laboratory services. This, however,
would not seriously impede the group practice, in this commenter's
view, as most group practices could readily set themselves up in a
manner that allows for at least one principal to be available for
supervision. This commenter further stated that a broader definition of
the term ``member'' that includes all physician employees and/or
[[Page 41934]]
independent contractors leads to different results. That is, it might
make it more difficult for the group practice to satisfy the 85 percent
aggregate services requirement in the definition, depending on the
number of part-time employees and contractors. However, it would allow
for almost any associated physician to make referrals and supervise the
performance of laboratory services.
Response: As evidenced by the range of comments we received
concerning this group member issue, whatever approach we select may not
address all of the concerns raised by the commenters. Essentially, we
agree that the issue of who qualifies as a ``member'' of a group
practice raises a number of complex questions. As we understand it,
group practices typically have partners, full-time physician employees,
part-time physician employees, and physician contractors.
We take the position that all of these physicians can be members of
a group for purposes of the group practice provisions of section 1877.
We consider physician partners and full-time and part-time physician
employees and contract physicians to be members during the time they
furnish services to patients of the group practice that are provided
through the group and are billed in the name of the group. Thus, their
services would be considered in determining whether the group practice
as a whole meets the requirement that substantially all of the services
of physician members be furnished through the group.
Examples are as follows:
A group practice consists of two physician partners, five
full-time physician employees, two part-time physician employees, and a
contractor physician who spends one morning a week at the group
practice delivering specialty services. The two partners and the full-
time employees practice only through the group. The two part-time
employees devote 50 percent of their time to the group, and the
contractor physician spends 10 percent of his or her time with the
group.
7 physicians at 100% =................ 700%
2 physicians at 50% =................. 100%
1 physician at 10% =.................. 10%
---------
810% divided by 10 = 81%
In another group practice, two physician partners spend
100 percent of their patient care hours through the group. Five part-
time physician employees spend 70 percent each, and two other part-time
physician employees spend 25 percent of their time at the group
practice. A contractor physician devotes 10 percent.
2 physicians at 100% =................ 200%
5 physicians at 70% =................. 350%
2 physicians at 25% =................. 50%
1 physician at 10% =.................. 10%
---------
610% divided by 10 = 61%
In these examples, using 75 percent as the threshold, the first
group practice would qualify, but the second would not.
On balance, we believe this approach is the most appropriate and is
neither overly restrictive nor overly permissive. It will eliminate
problems that might arise for many group practices that employ
physicians or contract for the services of physician specialists on a
part-time basis. Because this approach is not overly restrictive, we do
not believe it will obstruct rural group practices. On the other hand,
as demonstrated in the above example, the inclusion of part-time
physicians may cause some group practices to fail to meet the 75
percent aggregate requirement.
To clarify our position about this issue, we have included the
following definition under section 411.351 (``Definitions''):
Members of the group means physician partners and full-time and
part-time physician employees and physician contractors during the time
they furnish services to patients of the group practice that are
furnished through the group and are billed in the name of the group.
c. Individual Billing by a Group Practice Physician
Comment: A few commenters indicated that some group practices
permit the physicians of the group to bill Medicare under their unique
physician identification number. Under the proposed rule, they do not
meet the definition of a group practice because services furnished by
the group physicians are not billed in the name of the group. The
commenters requested an exception for a few group practices that
actually practice medicine as a group but do not qualify because of
this element of the new definition of group practice.
One commenter indicated that many group practices have made a
decision to have each physician bill independently and reassign
benefits to the group rather than for services to be billed under the
group's provider number. This decision is based on the desire of some
physicians within the group to be nonparticipating physicians but only
for the services billed by the group as group services. (As
nonparticipating physicians, they can bill the beneficiary directly and
charge for the part of the bill that is more than the Medicare approved
amount, with certain limitations.) According to the commenter, the
physicians would agree to bill under a group provider number except for
an informal, nonregulatory position that all physician members of a
group practice must make a joint decision to be either participating or
nonparticipating physicians. The commenter recommended that the final
rule clarify that billing in the name of the group allows for physician
members of a group to make individual choices about participating or
not participating in Medicare. It was suggested that such a decision
could be made at a ``department level'' within the group practice by
differentiating between specialty categories.
Response: The definition of a group practice set forth in section
1877(h)(4)(A) requires that substantially all of the services of
physicians who are members of the group be provided through the group
and be billed in the name of the group. (Beginning January 1, 1995,
services must be billed under a billing number assigned to the group.)
Under this language, an organization whose individual physicians bill
in their own name does not constitute a group practice. Additionally,
the services of a physician who does not bill in the group's name
cannot be counted in determining whether the group practice satisfies
the substantially all criteria.
We recognize that, under the in-office ancillary services exception
found in section 1877(b)(2)(B), the physician who performs or
supervises the performance of the services may also bill for those
services. As mentioned above, however, when a physician bills in this
manner, he or she is doing so as a solo practitioner and not as a
member of a group practice.
Finally, when a bill is submitted in the name of the group on an
assignment-related basis, it is the group that accepts assignment. A
Medicare participation agreement under section 1842(h)(1) is an
agreement to accept assignment in all cases. Therefore, any
participation agreement with respect to services
[[Page 41935]]
furnished by a group must be entered into by the group and must apply
to all services that the physicians furnish as members of the group.
d. Structure of a Group Practice
Comment: One commenter stated that the definition of ``group
practice'' applies not only to professional corporations and other
single entities but also to ``similar associations.'' The commenter
believed that, when a group practice is organized into two separate
entities that are organizationally interrelated through common
ownership, administration, or similar substantial and ongoing
connections (more than merely their joint ownership of a clinical
laboratory), the two entities together should qualify as a similar
association under the statute, thus allowing the two entities to
satisfy the group practice criteria in the aggregate.
The commenter believed that if such entities are not aggregated for
purposes of the group practice definition, then the primary care entity
that has the laboratory must qualify separately as a group practice.
Further, under the group practice definition, as set forth in the
proposed rule, this may be impossible. The commenter described a
situation involving a primary care entity and a specialty care entity.
These two entities share certain office space, facilities, equipment,
and personnel that physicians practicing in both entities jointly use.
Thus, as stated by the commenter, there are two group practices sharing
a laboratory facility. The commenter believed that each physician
member of these entities does furnish the full range of his or her
services through the joint use of space, facilities, equipment, and
personnel, and the entities allocate the costs of this use on a
formulaic basis. The commenter believed the organizational structure
described in this situation should meet the conditions in the statute.
The commenter pointed out that the preamble to the proposed rule states
that each member of the group must individually furnish substantially
the full range of services he or she routinely furnishes through the
group practice. The commenter argued that this language is
contradictory to the statute, which requires that each physician who is
a member furnish the full range of services through the joint use of
shared space, etc.--not furnish the full range through the group
practice. The commenter suggested that the final rule state the actual
requirements.
Response: It appears to us that what the commenter is describing is
a situation in which two interrelated group practices share a
laboratory. The physicians' services exception under section 1877(b)(1)
allows members of the same group practice to refer Medicare patients to
each other for clinical laboratory services, as long as one of the
physicians either personally performs the services or personally
supervises the provision of the services. Thus, section 1877(b)(1)
clearly contemplates physicians within the same group practice, but not
physicians in different group practices. The in-office ancillary
exception in section 1877(b)(2) allows members of the same group
practice to refer to each other as long as the physician providing or
supervising the services meets the tests in section 1877(b)(2) (A) and
(B) for personal performance or direct supervision, location, and
billing.
To qualify for the in-office ancillary services exception, an
organization of physicians must meet the definition of a ``group
practice'' under section 1877(h)(4). Under the definition, a group
practice ``means a group of two or more physicians legally organized as
a partnership, professional corporation, foundation, not-for-profit
corporation, faculty practice plan, or similar association.'' We agree
that, in including a ``similar association'' in the list, the Congress
has provided some flexibility for different kinds of entities to
qualify as group practices. Nonetheless, we also believe that the
statutory definition clearly contemplates only single legal entities.
We do not view two independent group practices as a single practice,
just because they are organizationally interrelated through common
ownership or other substantial and ongoing connections.
We believe that the statute would have explicitly allowed for a
``common ownership'' or ``substantial connection'' configuration as
part of the group practice definition had the Congress intended to
include it. Also, it appears to us that using the premise of common
ownership or substantial connection to combine individuals and entities
could lead to far-reaching exceptions to the referral prohibition that
we do not believe the Congress ever intended. For example, two solo
practitioners could state that they are interrelated through shared
administrative services and their common ownership of a shared
laboratory, thus qualifying them as a similar association.
As we explain throughout this preamble, we do not believe that a
clinical laboratory that is shared by associations of physicians who do
not meet the definition of a single group practice will generally
qualify for the in-office ancillary services exception. However, each
individual physician in these groups might qualify separately for the
exception by meeting the requirements in section 1877(b)(2). That is,
the physician must personally furnish the services or directly
supervise the individual(s) that are furnishing the services. Further,
the services must be furnished in a building in which the referring
physician furnishes physicians' services unrelated to clinical
laboratory services, and the services must be billed by the physician
or an entity wholly owned by the physician.
Comment: One commenter indicated that we should address the issue
of group practices that may include more than one legal entity as long
as the entities either are in parent-subsidiary relationships or are
under common ownership and control. The commenter stated that the
proposed definition of group practice requires an entity to be legally
organized, and gives multiple examples of the types of legal entities
typically used in group practices. The commenter believed the
definition is silent on the question of whether a group practice may
have more than one such legal entity under a common umbrella. For
example, a ``parent'' professional corporation or partnership might own
subsidiary entities for real estate and/or equipment ownership or for
billing or ancillary services. Alternatively, rather than having a
parent/subsidiary relationship, these same types of separate entities
might operate jointly under the common ownership and control of a core
group of physicians. These separate structures have been highly
desirable for reasons related to taxation, benefits, liability, debt
service capacity, etc.
Response: This commenter was concerned about groups of physicians
who furnish services through a ``group practice'' that is composed of
several legal entities. The commenter believed that such a group
practice should be able to take advantage of the in-office ancillary
services exception as long as the entities are in either parent-
subsidiary relationships or are under common ownership and control. The
commenter specifically mentioned examples in which a professional
corporation might own subsidiaries for providing equipment, for
billing, or for ancillary services.
The definition of ``group practice'' in section 1877(h)(4)(A) means
a group of 2 or more physicians, legally organized as a partnership,
professional corporation, foundation, not-for-profit corporation,
faculty practice plan, or similar association. As we have said
elsewhere in this preamble, we believe that the statute contemplates a
group
[[Page 41936]]
practice that is composed of one single group of physicians who are
organized into one legal entity. In short, we do not believe that a
group practice can consist of two or more groups of physicians, each
organized as separate legal entities.
However, we do not believe the statute precludes a single group
practice (that is, one single group of physicians) from owning other
legal entities for the purpose of providing services to the group
practice. Thus, a group practice could wholly own a separately
incorporated laboratory facility which provides laboratory services to
group practice or other patients. However, because the group practice
physicians have an ownership interest in the laboratory, they could be
prohibited from referring to the laboratory, unless an exception
applies.
The physicians could qualify for the in-office ancillary services
exception, provided they meet the requirements for supervision,
location, and billing. This exception does not appear to dictate any
particular ownership arrangements between group practice physicians and
the laboratory in which the services are provided. In fact, the billing
requirement in section 1877(b)(2)(B) allows the services to be billed
by the referring physician, the group practice, or an entity wholly
owned by the group practice. The exception appears to anticipate that a
``group practice,'' as defined in section 1877(h)(4), may wholly own
separate legal entities for billing or for providing ancillary
services.
e. Corporate Practice of Medicine
Comment: Two commenters indicated that there are legitimate
physician group practice structures and relationships that may not
satisfy the definition of a group practice as set forth in the proposed
rule. A specific concern is with group practice organizations
affiliated with hospitals that are organized in compliance with State
corporate practice of medicine statutes.
In States that have these statutes, according to the commenters,
only a validly-organized professional corporation or professional
association can enter into employment arrangements with physicians.
One of the commenters presented an example of a group practice that
is organized as a nonprofit hospital affiliated corporation that owns a
clinical laboratory. The nonprofit hospital-affiliated corporation will
be unable to employ the physicians; that is, a separate professional
corporation must be established to employ the physicians in accordance
with applicable State law. Typically, this commenter claimed, nonprofit
corporations will not qualify as the appropriate vehicle for a for-
profit professional corporation or association.
The commenters believed that entities such as those described above
(joint not for profit/for profit structures) that meet certain specific
standards should qualify under the ``similar association'' language of
the group practice definition. They believed that, so long as all other
requirements established by the Secretary relating to appropriate
standards for group practices (including the performance of services,
billing practices, location of facilities, and income distribution
provisions) are met, these entities do not pose a threat of abuse to
the Medicare program and, as a result, they should be considered as a
single group practice under the definition. To ensure that only
appropriate entities qualify, one commenter suggested that (1) the
separate professional corporation be organized for the sole purpose of
providing medical services to the nonprofit corporation/group practice
and be obligated to furnish those services exclusively to the nonprofit
corporation, and (2) that the nonprofit corporation perform all other
services associated with a group practice (including laboratory,
billing, etc.) and employ all nonphysician staff.
Response: We believe the commenters are asking that we regard a
joint structure, such as a nonprofit hospital-affiliated corporation
linked with a professional corporation or association, as one group
practice. This designation would allow the physicians in the
professional corporation or association to refer to the nonprofit
corporation's laboratory under the physicians' services or in-office
ancillary services exceptions in section 1877(b).
In order to meet the definition of a group practice, there must be
one identifiable legal entity. As we understand it, the clinical
laboratory is owned by a nonprofit hospital-affiliated corporation but,
because of the corporate practice of medicine requirements, that
nonprofit corporation is unable to directly employ the physicians. As a
result, the physicians are members of a separate professional
corporation or association. The hospital-affiliated corporation and the
professional corporation or association are separate legal entities
that cannot qualify as one group practice. Also, because the hospital-
affiliated corporation cannot directly employ the physicians, the
exception in section 1877(e)(2) does not apply. (This exception allows
referrals by a physician when there is a compensation arrangement
between an entity and a physician for the employment of the physician.)
We see one possible exception for a nonprofit corporation that is
affiliated with physicians who perform certain physician services.
Under section 1877(e)(3), as amended by OBRA '93, there is an exception
from the prohibition on physician referrals in the case of a personal
service arrangement involving remuneration from an entity to a
physician, or to an immediate family member of a physician, providing--
The arrangement is set out in writing, is signed by the
parties, and specifies the services covered by the arrangement;
The arrangement covers all of the services to be furnished
by the physician (or an immediate family member of the physician) to
the entity;
The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement;
The term of the arrangement is for at least 1 year;
The compensation to be paid over the term of the
arrangement is set in advance, does not exceed fair market value, and,
except in the case of a physician incentive plan, is not determined in
a manner that takes into account the volume or value of any referrals
or other business generated between the parties;
The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates any State or Federal law; and
The arrangement meets any other requirements the Secretary
imposes by regulation to protect against Medicare program or patient
abuse.
If the nonprofit corporation (that owns the laboratory) and the
professional corporation or association (that has physician investors)
have such an arrangement, the physicians would not be prohibited from
referring laboratory testing to the nonprofit corporation's laboratory.
f. Not-For-Profit Corporations
Comment: One commenter asked about the provision that permits group
practices to be legally organized as not-for-profit corporations. The
proposed rule defines a ``group practice'' as ``a group of two or more
physicians legally organized as * * * a not-for-profit corporation * *
*.'' The commenter, however, stated that not all group practices
organized as not-for-profit groups have physicians as their original
incorporators or corporate members, nor
[[Page 41937]]
is this required by State law. As an example, the commenter stated that
tax-exempt hospitals often have affiliated group practices, and the
group practice's operating entity (to which the commenter referred as a
``physician-directed clinic'') might be a not-for-profit corporation
separate from the tax-exempt hospital entity that employs the
physicians. This arrangement does not present a potential for abuse, in
the commenter's view, although it is unclear whether a not-for-profit
physician-directed clinic organization affiliated with a not-for-profit
hospital in this manner meets the definition of a group practice.
Therefore, the commenter recommended that the final regulation
recognize the arrangements.
Response: As we understand the commenter's example, a tax-exempt
hospital employs physicians who are part of an affiliated not-for-
profit physician-directed clinic that was originally organized by the
hospital. (Under Medicare, a physician-directed clinic is one in which
(1) a physician (or a number of physicians) is present to perform
medical (rather than administrative) services at all times the clinic
is open; (2) each patient is under the care of a clinic physician; and
(3) the nonphysician services are under medical supervision. (See
Medicare Carriers Manual, section 2050.4.)) Further, we understand the
commenter to be making the following suggestions:
That an entity attempting to qualify as a group practice
need not have been organized (or incorporated) by physicians; that is,
as long as the entity is one in which two or more physicians have been
brought together as a group practice, it does not matter that the
initial organizing was done by nonphysicians.
That an entity that, in fact, is a physician-directed
clinic, organized by an affiliated hospital, be permitted to qualify as
a group practice.
As to the first suggestion, the commenter referred to only the
regulations, but the definition of ``group practice'' at section
1877(h)(4) also requires that there be ``two or more physicians legally
organized'' as a not-for-profit corporation or as one of several other
specified associations. Because the statute is silent about who must
actually legally organize the association or operate or control it, we
believe that any individuals or entities can assume these tasks, as
long as the group practice meets all of the other specific requirements
in section 1877(h)(4). Thus, if a clinic (or other facility) is legally
organized to include two or more physicians and provides the services
of physicians, it is a group practice, even if it is established,
operated, and controlled by a nonphysician group or corporation. This
would be so regardless of who employs the physicians (in the scenario
presented by the commenter, the clinic physicians were employed by the
hospital that established the clinic).
g. Individual Pathology Services
Comment: One commenter suggested that the proposed regulations may
preclude arrangements under which a group practice retains the services
of an independent pathologist to direct the group's laboratory or
otherwise assist in improving the quality of laboratory services
available. The commenter wrote that the group practice may not be able
to satisfy the definition of a group practice laboratory for purposes
of section 1877(b)(2) if it retains the services of an independent
pathologist who is not considered a member of the group, but who
provides medical direction to the laboratory. Second, according to the
commenter, an independent pathologist affiliated with a reference
laboratory may be unwilling to provide consulting services to a group
practice laboratory unless the consulting arrangement is specifically
excepted by the regulations. Therefore, the commenter requested that
the final regulations provide that (1) a pathologist retained by a
group practice on a regular, part-time basis to direct, supervise, and
otherwise assist in the performance of laboratory services be
considered to be a member of the group practice; and (2) the services
of a pathologist serving as a laboratory consultant be included within
the category of exceptions set forth in proposed Section
411.359(e)(1)(i) (that is, service arrangements with nonhospital
entities).
Another commenter requested that we develop an additional exception
relating to compensation arrangements involving the provision of
consulting services, as opposed to the furnishing of actual testing
services. The commenter suggested that the arrangement would have to
be: in writing, consistent with fair market value for the consulting
services provided, and not conditioned on referral of laboratory
services from one party to the other or otherwise related to the volume
or value of referrals for laboratory services.
Response: First, part-time or contract physicians, including
independent pathologists, may be considered members of a group practice
if they meet the conditions in the ``member'' definition in
Sec. 411.351. As indicated by the commenter, a group practice can hire
a pathologist to direct, supervise, or otherwise assist in performing
laboratory tests. We agree that this is an important point because the
most significant advantage of a practice meeting the group practice
definition is that it qualifies the group for the in-office ancillary
services exception in section 1877(b)(2). This exception applies if the
referring physician or another member of the same group practice either
performs or directly supervises the performance of the laboratory
services. A group practice would not be able to use the section
1877(b)(2) in-office exception if it is a group practice member who is
referring patients to the group's laboratory, but it is a nonmember
pathologist who is performing or supervising the laboratory services.
The second concern of the first commenter involves an independent
pathologist, who is somehow ``affiliated'' with an outside laboratory,
who might be unwilling to provide consultation services to a group
practice laboratory unless the consulting arrangement is specifically
excepted from the prohibition by the regulations. Following is our
analysis of such a situation.
First, the group practice laboratory is itself a laboratory entity
that is compensating a pathologist (physician) for certain services the
physician is providing and that relate to the group's laboratory
services. We believe the pathologist could refer to the group practice
laboratory if this arrangement fits within the exception in section
1877(e)(3). Section 1877(e)(3) excepts from the term ``compensation
arrangement'' payments from an entity to a physician for personal
services provided by the physician under an arrangement. The
arrangement must meet certain criteria (for example, the arrangement
must list the specific services in writing, be signed, be reasonable
and necessary, and compensation must be for fair market value).
Section 1877(e)(3) does not appear to differentiate between
physicians receiving compensation on the basis of whether they are
independent contractors who also service other outside laboratories or
whether they are employees or owners of outside laboratories.
The group practice could also be regarded as a group of physicians
who may be purchasing services from an outside laboratory (if the
pathologist is employed by or owns the outside laboratory). If this is
the case, the compensation could instead be excepted under section
1877(e)(8). This provision excepts payments made by a physician
[[Page 41938]]
to an entity as compensation for items or services other than clinical
laboratory services if they are furnished at a price that is consistent
with fair market value.
If the pathologist is considered a member of the group practice and
makes referrals to the outside laboratory, whether the referrals would
be prohibited depends upon the nature of the pathologist's relationship
with the laboratory. The referrals might not be prohibited if the
pathologist is the employee of the outside laboratory. In that
situation, the payment the pathologist receives from the outside
laboratory would not be ``compensation'' under section 1877(e)(2),
which exempts any amount paid by an employer to a physician who has a
bona fide employment relationship with the entity for the provision of
services if certain standards are met.
If the pathologist is independent but contracts with the outside
laboratory, the compensation that flows from the outside laboratory to
the pathologist could be excepted under section 1877(e)(3). This
provision excepts remuneration from an entity under a personal service
arrangement if certain standards are met.
If the pathologist owns the outside laboratory though, his or her
referrals would be prohibited. That is because the pathologist would be
referring to a laboratory in which he or she has an ownership interest
(the section 1877(e) provisions except only compensation arrangements).
Finally, if the pathologist is a member of the group practice, none of
the group practice members can refer to the laboratory that is owned by
the pathologist. That is because, in Section 431.351 of the proposed
rule, we defined ``referring physician'' as a physician (or group
practice) who makes a referral. Thus, any referral by one group
practice member is imputed to the entire group practice.
7. Immediate Family
Under the proposed rule (Sec. 411.351) an ``immediate family
member'' of a physician means husband or wife; natural or adoptive
parent; child or sibling; stepparent, stepchild, stepbrother, or
stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law; grandparent or grandchild; and spouse
of a grandparent or grandchild.
Comment: Two commenters recommended that we adopt what they
believed to be a more manageable definition of immediate family member.
They recommended eliminating, at the very least, the references to
grandparents, grandchildren, and assorted in-laws.
One of the two commenters recommended that the definition include
``natural or adoptive parent, child or sibling'' and exclude the
remainder of the identified relatives. In this commenter's view, the
definition of immediate family reaches beyond what is intended by the
statute.
Response: As we stated in the proposed rule, our proposed
definition is a longstanding definition used (in Sec. 411.12) by the
Medicare program to implement section 1862(a)(11), which excludes from
Medicare coverage services furnished by an immediate relative. We also
explained that, in our view, the definition encompasses the range of
relatives who could be in a position to influence the pattern of a
physician's referrals. These commenters simply stated their opinion
that the definition is overreaching, without explaining why.
For these reasons, we are retaining the definition as proposed.
Comment: One commenter suggested that when an allowable clinical
laboratory service is performed as part of a medical consultation by a
family member of the referring physician, we should not prohibit that
referral solely because the consulting physician is related to the
referring physician.
Response: Under the definition of referral in section
1877(h)(5)(A), the request by a physician for an item or service
covered under Part B, including the request by a physician for a
consultation with another physician, and any test or procedure ordered
by, or to be performed by (or under the supervision of) that other
physician, constitutes a ``referral'' by a ``referring physician.'' The
first physician has, in sending his patient to the family member, made
a referral under the statute.
If the family member performs or supervises the performance of the
laboratory test, it is likely that the family member has either an
ownership interest in the entity that performed the test and/or is
compensated by the entity for supervising or performing the test. As a
result, the first physician has referred a patient for laboratory tests
to an entity with which his or her immediate family member has an
ownership or compensation relationship. If no exceptions apply, this
makes the referral a prohibited one. If the consultant family member
merely orders the laboratory test from a laboratory in which neither he
or she nor the first physician has a financial interest, the referral
would not be prohibited.
We also point out that section 1877(h)(5)(C) provides that if a
pathologist performs a laboratory test or supervises the performance of
a test that is part of a consultation requested by another physician,
the furnishing of the test by the pathologist or his or her request
that the test be completed (under the pathologist's supervision) is not
a referral. In other words, a self-referral by a pathologist as a
result of a consultation does not constitute a referral for purposes of
section 1877.
Comment: One commenter is a solo practitioner whose office is
located in a building owned by herself and six other physicians, one of
whom is her husband. In the building, there is an independent
laboratory that is owned by the group practice to which her husband
belongs. The laboratory was established by the physicians in the
building for the practices in the building. The commenter did not think
it is right that, because her husband has an ownership interest in the
laboratory, her patients should not have access to it.
Response: Unless an exception applies, it appears, on the face of
it, that the commenter is correct in stating that her referrals to the
independent clinical laboratory would be prohibited. Her relationships
with the laboratory appear to be as follows:
She may have been an investor in the laboratory, because
she was one of the ``physicians in the building'' who set the
laboratory up ``for the practices in the building.''
She is the spouse of a member of the group practice that
now owns the laboratory.
She is part owner of the building that houses not only the
laboratory, but her solo practice and her husband's group practice as
well.
It appears, therefore, that this physician, in addition to being an
immediate family member of what may be a partial owner of the
laboratory, may also be an investor in the laboratory herself
(depending on the nature of her initial involvement in setting up the
laboratory and any current financial interest) and may have a
compensation arrangement with the laboratory based on rentals she
presumably receives as a part owner of the building. We believe,
however, that her family relationship generally controls to prohibit
her referrals if her husband has an ownership or investment interest in
the group practice or its laboratory or if he receives unexcepted forms
of compensation from the group practice.
The physician's referrals would not be prohibited on the basis of
her husband's ownership interest if the laboratory qualifies as a rural
laboratory under
[[Page 41939]]
Sec. 411.356(b)(1). Note that, as discussed elsewhere in the preamble,
unless the group practice that owns the laboratory satisfies the
definitional requirements, referrals by group practice physicians to
the laboratory might also be called into question.
8. Practice
In the proposed rule (411.351), we defined a ``practice'' to mean
an office in which the physician, as a matter of routine, sees patients
for purposes of diagnosis and treatment and where patient records are
kept.
Comment: One commenter indicated that many group practices provide
medical services in satellite facilities where only limited medical
services are offered and that the medical records of the group practice
are kept in a centralized location. Thus, the commenter recommended
that we clarify in the final rule that the definition of ``practice''
is not incorporated into the definition of ``group practice.''
Another commenter stated that some physicians maintain a medical
practice without being tied to a particular location, such as certain
hospital-based physicians and those who treat nursing home patients.
These physicians use office space only to receive mail and for other
administrative support functions. Such a practice, be it group or
individual, does not have an office for purposes of diagnosis and
treatment, or even to keep substantial amounts of medical records. The
commenter believed this fact is not taken into account in the
definition.
Response: We acknowledge that the commenters have raised some
legitimate problems with the proposed approach and how difficult it is
to determine where someone has a ``practice.'' We are responding to
these comments by creating a new, more equitable standard that is not
based on the concept of a physician's ``practice'' (and thus eliminate
the definition from the rule). We are using the new standard required
by OBRA '93, which states that to qualify as a rural provider,
substantially all of the clinical laboratory services furnished by the
entity must be furnished to individuals residing in the rural area. As
part of this standard, we are defining ``substantially all'' as meaning
that 75 percent of the individuals to whom services are furnished
reside in the rural area. Although the effective date of this provision
for rural providers is January 1, 1995, we believe it is reasonable to
incorporate it into this final rule.
9. Referral
In the proposed rule (Sec. 411.351), a ``referral'' means either of
the following:
The request by a physician for, or ordering of, any item
or service for which payment may be made under Medicare Part B,
including a request for a consultation with another physician other
than a pathologist, and any test or procedure ordered by or to be
performed by (or under the supervision of) that physician; or
If a plan of care includes the performance of clinical
laboratory testing, the request or establishment of the plan of care by
a physician. When a pathologist, in responding to another physician's
request for a consultation, furnishes or supervises the furnishing of
clinical diagnostic laboratory tests and pathological examination
services, the services are not considered to have been furnished on a
referral basis.
a. Pathology Referrals
Comment: Two commenters wanted the definition of ``referral'' to be
clarified so as to exclude circumstances in which a pathologist
providing professional services to one laboratory sends specimens
ordered by the attending physician to a second laboratory in which the
pathologist has a financial interest.
One commenter indicated that the definition should also exclude
circumstances in which a pathologist recommends to an attending
physician appropriate follow-up laboratory services.
Response: Under the definition of ``referral'' in section
1877(h)(5), a request by a pathologist for clinical diagnostic
laboratory tests and pathology examination services will not be
considered a referral if such laboratory services are furnished by (or
under the supervision of) the pathologist as a result of a consultation
requested by another physician. Thus, if the pathologist described in
the first comment either performs or directly supervises the
performance of the laboratory testing in the second laboratory, the
request for services would not be considered a referral by the
pathologist. The answer is different, however, if the pathologist sends
laboratory work to a laboratory with which he or she has a financial
relationship and the services are not performed by the pathologist or
under his or her direct supervision. The services in this situation
would be considered to have been furnished as a result of a prohibited
referral, unless one of the exceptions applies. Similarly, if the
pathologist sends tests to a laboratory with which the first referring
physician has a financial relationship, the referral would be
prohibited, unless an exception applies. Because we recognize that
there are situations in which a physician's request for a consultation
with a pathologist could constitute a referral, this final rule revises
the proposed definition of ``referral'' by removing the phrase ``other
than a pathologist''.
We do not consider a pathologist's recommendation to the attending
physician for additional testing to be a referral. That is because it
is the attending physician who ultimately decides whether such testing
is necessary and whether to order the additional testing and from what
laboratory.
b. Plan of Care and End-Stage Renal Disease (ESRD) Patients
Comment: One commenter indicated that the proposed rule is
ambiguous with regard to the ``plan of care'' element within the
definition of ``referral.'' At one level, the commenter believed, the
language is simply unclear in that, with regard to ``a plan of care
that includes the performance of clinical laboratory tests,'' it is
difficult to understand what is meant by the ``request or the
establishment of the plan of care by a physician.'' According to the
commenter, this might mean that when a physician establishes a plan of
care that entails laboratory testing and the facility or other
individual implementing the plan of care orders those tests from a
laboratory, the physician shall be considered to have made the
laboratory referral. If this interpretation is correct, the commenter
believed there are some issues specific to chronic hemodialysis
facilities and referrals that require clarification.
The commenter wrote that hemodialysis patients receive three
different classes of clinical laboratory tests:
1. Tests ordered on a patient-specific basis on account of
particular clinical signs and symptoms and referred by the dialysis
facility to an independent or hospital-based clinical laboratory that
bills Medicare. These tests pose no interpretive problems, as the
physician does, in fact, order each one individually.
2. Routine monthly testing applicable to every patient and for
which payment is incorporated into the facility's dialysis composite
rate.
3. Testing integral to monitoring the patient during the dialysis
treatment itself, performed in the facility and not billed separately.
[[Page 41940]]
The commenter pointed out that every time a patient is referred to
a facility for chronic renal dialysis, clinical laboratory testing from
categories 2 and 3 is required on an ongoing basis as part of the
overall care of the patient. If the physician's plan of care for
dialysis is deemed to include these tests for purposes of this rule,
the commenter believed that the practical result would be to prohibit
physicians from making referrals for tests to dialysis facilities in
which they have an ownership interest.
A second commenter stated that the ESRD program includes in its
composite rate payment methodology most items and services related to
the treatment of patients with ESRD, including hematocrit and
hemoglobin tests, clotting time tests, routine diagnostic tests, and
routine diagnostic laboratory tests. Thus, the commenter pointed out,
the determination of whether an item or service is included under the
composite rate payment is presumptive and in no way depends on the
frequency with which a dialysis patient requires the item or service.
The commenter recommended that the final rule, or the preamble to the
final rule, explicitly exclude clinical laboratory referrals covered by
ESRD from its application.
Response: Section 1877(h)(5)(B) says that ``the request or
establishment of a plan of care by a physician which includes the
provision of [clinical laboratory services] constitutes a ``referral''
by a ``referring physician.'' The commenter has pointed out that this
provision, carried over into the proposed rule, is ambiguous and
unclear. The statute could mean (1) that there is a referral when a
physician establishes a plan of care or requests that one be
established that includes laboratory services or (2) that a request by
a physician that includes the provision of laboratory services or the
establishment of a plan of care by a physician that includes the
provision of laboratory services constitutes a referral. Because the
comments reveal that this provision has caused confusion, we have
decided to adopt the latter interpretation and have incorporated it
into the regulation.
We also agree that it is not clear what technically constitutes a
``plan of care.'' We believe that any time a physician orders any item,
service, or treatment for a patient, that order is pursuant to a plan
of care. If a plan of care entails laboratory testing and the facility
or other individual implementing the plan orders those tests from a
laboratory, the physician who established the plan of care is
considered to have made the laboratory referral. In addition, as we
mentioned in a previous response, the prohibition could also apply if
the individual implementing some or all of the plan of care is a
consulting physician. We agree, however, that, under certain
circumstances, this may cause problems when those laboratory tests are
included in the ESRD composite rate. Thus, as we discuss below, we are
including those laboratory tests that are paid under the ESRD composite
rate as part of a new exception. We agree that the application of the
composite rate constitutes a barrier to either Medicare program or
patient abuse because the Medicare program will pay only a set amount
to the facilities irrespective of the number and frequency of
laboratory tests that are ordered.
c. Consultation Referrals
Comment: A few commenters believed that it was unnecessary for us
to include in the preamble the discussion about consultations (57 FR
8595) and the responsibility of a consulting physician to not engage in
a cross-referral arrangement. They believed there is no corresponding
statutory or regulatory provision and that, except for a small number
of truly ``bad apples'' practicing medicine, physicians have not and
will not engage in the complicated and tortuous process of directing
referrals.
One commenter was concerned that the proposed rule suggests that
physicians who refer to consultants have some obligation to tie the
consultant's hands when it comes to which clinical laboratories the
consultant can use. The commenter believed such an obligation runs
afoul of the principle of medical ethics that requires a physician to
refer patients to the entity that furnishes the most efficacious
service, regardless of other considerations. The commenter indicated
that, in a managed care setting, it may be impossible for the attending
physician to even know who the consulting physician is, much less be in
a position to dictate which laboratory is selected. In sum, this
commenter believed that it will be difficult in practice for physicians
to determine where the prohibition ends.
Response: We do not agree with these commenters. In response to the
first comment, the discussion in the proposed rule was based on the
statute at section 1877(g)(4). This provision says that ``any physician
or other entity that enters into an arrangement or scheme (such as a
cross-referral arrangement) which the physician or entity knows or
should know has a principal purpose of assuring referrals by the
physician to a particular entity which, if the physician directly made
referrals to such entity, would be in violation of [section 1877],
shall be subject to a civil money penalty * * *.''
Because the provision applies to physicians who make referrals and
to ``other entities,'' we believe that it can apply to consulting
physicians who help a physician indirectly make prohibited referrals.
In the preamble of the proposed rule (57 FR 8595) we stated that, if a
consulting physician deems it necessary to order clinical laboratory
services, those services may not be ordered from a laboratory in which
the referring physician has a financial interest. We included this
explanation to give the reader an example of the kinds of referrals
that are prohibited under the statutory definition of ``referral.''
Under section 1877(h)(5)(A), a request by a physician for a
consultation with another physician (and any test or procedure ordered
by, or to be performed by or performed under the supervision of that
other physician) constitutes a referral. Thus, it is necessary for the
consulting physician to be aware of any financial relationships the
referring physician may have with a laboratory, in order for the
referral not to be prohibited. Finally, the consulting physician is
also obligated not to refer laboratory testing to an entity with which
he or she has a financial relationship, unless an exception applies.
Concerning services furnished in a managed care setting, section
1877(b)(3) provides a general exception for services provided to
patients enrolled in the prepaid health plans listed in that provision
and in the regulations at Sec. 411.355(c).
d. Statutory Authority
Comment: One commenter noted that the statutory definition of
referral encompasses requests for any item or service for which payment
may be made under Medicare Part B, but the prohibition contained in the
statute is aimed at referrals for clinical laboratory services and not
other referrals. Thus, in the commenter's view, the statute makes the
rule somewhat confusing. That is, the behavior that the statute seeks
to restrict, referrals for clinical laboratory services, is narrower in
scope than the behavior of ``referring'' itself. Therefore, the
commenter suggested that the final rule clarify that the prohibited
behavior is related to clinical laboratory services.
Response: We agree that the definition of ``referral'' under the
statute at section 1877(h)(5) is broad. In section 1877(h)(5)(A), for
physicians' services, it covers a physician's request for any item or
service covered under Part B of
[[Page 41941]]
Medicare. For other items, section 1877(h)(5)(B) covers a physician's
request or establishment of a plan of care that includes furnishing
clinical laboratory services. However, section 1877(a)(1)(A)
specifically narrows the scope of section 1877 by describing the subset
of referrals that are prohibited. Physicians were originally prohibited
from making referrals to an entity for the purpose of providing
clinical laboratory services. As of January 1, 1995, physicians are
prohibited from making a much broader range of referrals to entities
furnishing the other designated health services listed in section
1877(h)(6).
e. Hospitals and Group Practice Laboratory
Comment: One commenter believed that, if there is an ``under
arrangement'' agreement between a hospital and a group practice for the
group practice to provide laboratory services to hospital patients
under section 1861(w)(1), it is the hospital and not the group practice
physicians that is making a referral for the purposes of the section
1877 self-referral proscription. The commenter pointed out that, for
the most part, as recognized in the proposed regulation, a physician's
request for a service is tantamount to a referral to a particular
service provider. If services are being furnished to hospital
inpatients and outpatients, however, the commenter indicated that it is
the hospital's obligation to ensure that the services be performed and
to direct that the services be performed by a particular party. Thus,
in the commenter's opinion, it is the hospital that is making the
referral to the group practice laboratory. Consequently, the commenter
recommended clarification of the definition of ``referral'' and
``referring physician'' so that it is clear that a physician's ordering
of clinical laboratory services for hospital patients does not
constitute a ``referral'' within the meaning of section 1877.
Response: The commenter believed that we should revise the
definitions of ``referral'' and ``referring physician'' to make it
clear that, in the situation described in the comment, it is the
hospital that makes a referral to a group practice laboratory and not
the group practice physicians. We disagree with this interpretation.
Every referral for clinical laboratory services must originate with a
physician, and the general rule in section 1877(a)(1)(A) prohibits a
physician from making a referral to an entity with which the physician
(or an immediate family member) has a financial relationship. A
``referral'' need not even indicate a specific laboratory. Section
1877(h) defines a ``referral'' as any request by a physician for an
item or service or the establishment of a plan of care that includes
the provision of laboratory services.
We do not believe that the Congress intended to allow physicians to
circumvent the referral prohibition by imputing their referrals to an
operating entity such as a clinic, hospital, or other institution. We
believe that ``referring physicians'' and ``referrals'' involve only
individual physicians or groups of physicians who send a Medicare
patient or specimen to a laboratory for services.
Although, in our opinion, the general prohibition applies to the
situation described by the commenter, there are exceptions within the
statute that could apply to allow the group practice physicians to
continue to refer.
The commenter has described a situation in which group practice
physicians apparently provide patient care services to hospital
patients. They refer hospital patients to the group practice's
laboratory; the group practice laboratory provides laboratory services
for the hospital under arrangements; and Medicare pays the hospital.
The referring physicians in this case are referring to a laboratory
that receives compensation from the hospital (the hospital buys
laboratory services under arrangements). The hospital is also
apparently compensating the group physicians for patient care services.
The physicians, in addition, are likely to be receiving compensation
from the group practice that owns the group practice laboratory and/or
they have an ownership interest in the group practice and its
laboratory.
We believe that the exception in section 1877(e)(7) could apply to
allow referrals based on part of this scenario. This provision says
that there is no ``compensation arrangement'' that would trigger the
prohibition in section 1877, for arrangements between a hospital and a
group practice under which the group practice provides laboratory
services but the hospital bills for the services, if certain criteria
are met. If the arrangement meets the criteria, the group practice
should be able to refer to the hospital's laboratory without violating
section 1877. That is because the underlying compensation passing
between the hospital (which, in essence, is purchasing services from
the group practice laboratory) and the group does not trigger the
prohibition.
There is, however, a complicating factor in the commenter's
scenario. That is, the group practice physicians are referring to their
own group practice laboratory. It is likely that these physicians are
receiving compensation from the group practice that owns the laboratory
or that they own some portion of the group practice and the laboratory.
The compensation or ownership interests involved here would require a
separate exception in order to allow the group practice physicians to
refer. The services could, for example, be excepted under the in-office
ancillary services exception in section 1877(b)(2), which allows a
group practice to refer to its own laboratory if certain criteria are
met.
In addition, the hospital may be separately compensating the group
practice physicians for patient care services, compensation that is
independent of the compensation the hospital pays the group to purchase
laboratory services. The compensation from the hospital, however, could
be excepted under section 1877(e)(2), if there is a bona fide
employment relationship between the hospital and the physicians, or
section 1877(e)(3) if the hospital is paying the physicians for
personal services furnished to the hospital.
10. Referring Physician
We proposed, in Sec. 411.351, to define a ``referring physician''
as ``a physician (or group practice) who makes a referral as defined in
this section.''
Comment: One commenter believed that the definition of referral is
not necessary because the statute is clear as written.
Response: We incorporated this definition in the rule to make the
regulations as complete and clear as possible. Furthermore, this
definition interprets the statutory term to include referrals made by
an individual physician as well as referrals made by a group practice.
Comment: A commenter raised the issue of a physician who owns or
manages a clinic but does not function as a physician by providing care
to clinic patients. The physician also owns an interest in a clinical
laboratory to which clinic patients or samples are sometimes referred.
The commenter believed the physician-owner should not be considered a
referring physician within the meaning of the regulation when he or she
does not function as a physician. The commenter also believed that, if
a clinic owner is only incidentally a physician, that professional
degree should play no role in setting his or her legal obligations. In
the commenter's view, to include physicians who are mere owners/
managers of clinics within the definition of referring physician would
be arbitrary and prejudicial to them. The
[[Page 41942]]
commenter added that such a physician should be compared to
nonphysician clinic owners or managers who are not covered by the
statute or its implementing regulations. Clearly, according to the
commenter, clinic owners or managers with medical degrees should have
the same legal status as nonphysician owners or managers. Thus, the
commenter recommended that the final regulation, or its preamble,
explicitly exclude from the definition of referring physician,
physician-owners who neither practice medicine nor make direct
referrals to clinical laboratories.
Response: Section 1877 prohibits referrals by ``physicians'' and
does not qualify ``physicians'' to exempt any subset of these
individuals. Since section 1877 does not define who is a physician for
purposes of that section, the usual Medicare definition of that term
applies. ``Physician'' is defined in the statute, at section 1861(r),
as a doctor of medicine or osteopathy legally authorized to practice
medicine and surgery by the State in which he or she performs that
function or action (including osteopathic practitioners within the
scope of their practice as defined by State law). The definition also
includes a doctor of dental surgery or dental medicine, a doctor of
podiatric medicine, a doctor of optometry, and a chiropractor. These
additional individuals qualify as ``physicians'' only when they are
performing within the scope of their license or providing items and
services that they are legally authorized to perform within their
specialty. The Medicare regulations define ``physicians' services'' at
410.20 as those furnished by one of these individuals who is legally
authorized to practice by the State and ``who is acting within the
scope of his or her license.'' Arguably then, a physician who owns or
manages a clinic but does not provide any of the items or services
authorized within the scope of his or her license would not be a
``physician'' for purposes of section 1877. However, if such an
individual refers clinic patients to a particular laboratory or
attempts to influence a clinic physician to make such referrals, that
individual's status changes. That is, he or she has become involved in
the care of particular patients and is therefore acting in the role of
a physician. As a result, the provisions of section 1877 (including the
provision prohibiting circumvention schemes and indirect referrals)
would apply.
11. Remuneration
We proposed, in section 411.351, to define ``remuneration'' as
``any payment, discount, forgiveness of debt, or other benefit made
directly or indirectly, overtly or covertly, in cash or in kind.''
a. Discounts
Comment: Some commenters supported the concept of including
discounts in the definition of remuneration. They indicated that it is
not unusual for a physician with substantial Medicare business to
obtain a larger discount than a physician who has no Medicare business.
Discounts, in the view of these commenters, can therefore influence a
physician to use a particular laboratory and, in an extreme case, the
prospect of a deeper discount may even induce a physician to order
unnecessary tests.
One commenter offered the opinion that the intent of the
legislation is clear from the definition of ``compensation
arrangement,'' which is defined to include all forms of remuneration,
direct or indirect, overt or covert, in cash or in kind.
Another commenter indicated that the existence of a discount
arrangement has a strong potential to result in excessive laboratory
testing, which contributes to the distressing rise in health care costs
in this country.
Some commenters objected to including ``discounts'' in the
definition of remuneration because they believed the term ``discounts''
is vague, overbroad, and impossible to define. In their view, the
definition would be fraught with unintended adverse consequences. One
commenter believed that a compensation arrangement, for the purpose of
section 1877, should be created only whenever the following situation
occurs: (1) Some remuneration passes from a laboratory to a physician;
and (2) the prospect of remuneration gives the physician an incentive
to order increased testing.
One commenter indicated that, to a certain extent, physicians
receive a lower price than other payers because of the legitimate cost
savings associated with physician billing.
Two commenters stated that there is nothing inherently abusive
about discounts. One of the commenters believed that what gives the
physician an incentive to increase his or her utilization of testing is
not the discount; it is his or her ability to mark up the testing and
thereby derive a profit from the transaction. The other commenter
suggested that discounts be permitted if the laboratory can meet the
following conditions:
The discount is not tied to the referral of Medicare
specimens to the laboratory.
The discount is related to verifiable cost differences in
handling specimens that satisfy the conditions for the discount,
including cost differences due to such factors as economies of scale,
lower billing and collection costs, prompt and regular payment, or
reduced bad debt cost.
The discount is available to anyone who can satisfy the
requirements for the discount, for example, type of test or other
objective requirement; and
The discount is not provided to any referring physician.
(We assume by this that the commenter meant that discounts a laboratory
entity would make to providers of services, such as hospitals, would be
permissible under these guidelines.)
Response: As discussed earlier, section 1877(e)(8)(A), as added by
OBRA '93, provides that a physician may make payments to a clinical
laboratory in exchange for furnishing clinical laboratory services and
continue to refer Medicare patients to that laboratory. There is no
requirement that the payments meet any particular pricing standards.
However, when a laboratory provides a physician with a discount, it may
in some cases be providing that physician with a benefit (that is,
remuneration) that is separate from the payment that the physician has
made to the laboratory to purchase laboratory services. Since we are
not interpreting the OBRA '93 provisions in this rule, but merely
reiterating them, we have not yet taken a position on how this new
provision will affect discounts. We will interpret section
1877(e)(8)(A) and how it applies to discounts in the context of the
proposed rule covering all of the designated health services.
In regard to discounts for items and services other than clinical
laboratory services, a physician may purchase other things from a
clinical laboratory besides clinical laboratory services. Section
1877(e)(8)(B) allows a physician to purchase from any entity items and
services, other than laboratory services, as long as they are purchased
at fair market value. Section 1877(h)(3) defines fair market value as
the value in arm's-length transactions, consistent with the general
market value, which would not include discounts. In light of section
1877(e)(8)(B), we are keeping ``discounts'' in the definition of
``remuneration.'' As a result, discounts would remain ``compensation
arrangements'' for discounts on items or services such as supplies or
personnel or consulting services purchased by a physician from a
clinical laboratory or other entity.
Comment: One commenter indicated that providing a discount to
physicians
[[Page 41943]]
is not necessarily a means of providing them compensation. As an
example, the commenter pointed out that in New York, a State that has
long had a direct billing law and related regulations, discounts are
passed directly on to the patient or insurance carrier. It is a market
mechanism that, in the commenter's view, actually works to hold down
the cost of health care. The commenter considered discounts a goal to
be aimed for, not a practice to be precluded. The commenter indicated
that a simple way to help hold down the cost of health care is to
follow the direct billing practices established in New York or to
exempt those States that already have such laws.
Response: This commenter made a good point. Nonetheless, the
Medicare statute generally does not currently authorize us to impose
the ``direct billing'' requirement found at section 1877(h)(5)(A) for
laboratory services other than those furnished to Medicare patients. As
we noted in an earlier response, we will address the discount issue in
our proposed rule covering the designated health services.
Comment: A commenter stated that physician groups often contract
with HMOs to provide medical care for HMO members and described the
following situation: The physician group is paid a predetermined
monthly rate per enrollee as payment in full for all outpatient medical
services, including laboratory services furnished to covered enrollees.
To ensure that the physician group can furnish all necessary services
in an efficient and cost effective manner, the physician group
typically enters into discount agreements with providers not affiliated
with the group to furnish services to the HMO's patients at a
discounted rate. These arrangements include laboratory services at a
discounted rate.
In the commenter's view, this type of discount arrangement would
not pose any risk of Medicare program or patient abuse under the
following conditions:
1. The HMO does not bill the Medicare program for any Medicare
patient laboratory tests performed by an outside laboratory.
2. The physician group does bill commercial insurance for tests
performed but does not mark up the cost of the test; that is, the group
bills the exact amount charged by the outside laboratory.
3. The discount arrangement is not, in any way, influenced by the
volume of Medicare patient laboratory tests sent to the laboratory
facility.
4. The discount arrangement is based upon the volume of laboratory
services purchased for HMO patients.
5. An agreement to provide laboratory services to HMO patients at a
specified fee or discount that is not based upon volume of Medicare
referrals is revenue neutral as far as the Medicare program is
concerned. In other words, the fixed discount or specified fee is
established completely independently of the volume of Medicare
referrals and certainly independently of the Medicare program itself.
Response: We believe that the exception set forth in sections
1877(b)(3) and section 411.355(c) applies in this situation, at least
in part. Under those provisions, the prohibition on referrals does not
apply to referrals for services furnished by an organization with a
contract under section 1876 to an individual enrolled with the
organization. (Also see 42 CFR part 417, subpart C.) This exception
also applies to referrals for services furnished by organizations with
health care prepayment plans that have agreements with us under section
1833(a)(1)(A) to an individual enrolled in the plan (see 42 CFR part
417, subpart D) and by organizations receiving payments on a prepaid
basis for their enrollees in accordance with the terms of a
demonstration project authorized under section 402(a) of the Social
Security Amendments of 1967 (42 U.S.C. 1395b-1) or under section 222(a)
of the Social Security Amendments of 1972 (42 U.S.C. 1395b-1 note).
Also, as added by OBRA '93, this exception applies to referrals for
services furnished by a qualified HMO (within the meaning of section
1310(d) of the Public Health Service Act) to its enrollees. Thus, the
exception no longer requires that all HMO plans contract with Medicare
in order to qualify for the exception. The exception in section
1877(b)(3) applies to all services furnished by the organizations
listed in that provision, including those services furnished to
enrollees by outside physician groups, which have contracted with the
organizations. As we noted in earlier responses, we will address the
issue of how to treat discounts under section 1877 in the proposed rule
covering the designated health services.
b. Forgiveness of Debt; Other Benefits
Comment: One commenter indicated concerns with the inclusion of the
term ``forgiveness of debt'' in the definition of remuneration.
According to the commenter, there are a number of legitimate reasons
why a laboratory might forgive a debt owed by a physician. For example,
there might be a dispute over the correctness of a bill or over whether
the physician had in fact ordered certain tests. In such instances, a
laboratory might decide to write off the debt. In contrast, the
laboratory might decide to furnish services to a physician who had
previously owed money to the laboratory, which the laboratory had
written off. This same commenter recognized that forgiveness of debt in
such a situation might be an abuse; that is, the laboratory might
simply forgive an obligation owed in order to obtain continued
referrals. Thus, the commenter agreed that the forgiveness of debt
should be considered remuneration within the meaning of the statute,
but added that the definition should distinguish between the atypical
situation and routine types of write-offs.
One commenter believed that the inclusion of ``other benefit'' in
the definition of remuneration is very broad. The commenter believed
the definition could reach a variety of services that are integral to
the provision of laboratory services and that enhance the quality of
the services furnished. Examples of ``other benefits'' that might be
exchanged between a physician and laboratory mentioned by the commenter
are test tubes and other laboratory testing supplies,
telecommunications equipment such as stand-alone printers, courier
services, and educational or consultation services.
Another commenter recommended that the definition of remuneration
be amended to exclude from the prohibited category those items or
services that are enhancements to the quality of laboratory services
and that have no value independent of the laboratory service, such as
courier pickup of samples, increased frequency of pick up of samples,
and electronic transmission of results.
One commenter recommended that the definition of remuneration be
amended to exclude ``discount, forgiveness of debt, or other benefit''
and that we retain the statutory definition.
Response: Section 1877(h)(1) as amended by OBRA '93 specifies that
a ``compensation arrangement'' does not include arrangements involving
only the following kinds of remuneration:
The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
The provision of items, devices, or supplies that are used
solely as follows:
+ To collect, transport, process, or store specimens for the entity
providing the item, device, or supply.
[[Page 41944]]
+ To order or communicate the results of tests or procedures for
the entity.
This provision also excepts payments made by an insurer or self-
insured plan to a physician for the physician's claims under certain
circumstances.
Thus, we believe that, when a laboratory writes off a debt to
essentially correct the records between the parties, the exception
described above would apply. However, if a laboratory has a continual
pattern of disposing of the debt of its referring physicians in this
manner, we might scrutinize the situation under the circumvention
scheme provision (section 1877(g)(4).) Negotiations between parties
about the correct amount of money owed for services delivered,
resulting in a balancing of accounts, would also qualify under this
exception, as well as the exchange of certain laboratory supplies,
telecommunications equipment, and courier services.
One commenter mentioned that ``other benefits'' exchanged between a
physician and a laboratory could be educational or consultation
services. Section 1877(e)(3) provides that a physician who has a
personal services arrangement (or an immediate family member with a
personal services arrangement) with a laboratory entity (for example,
to furnish consultations or educational services) may refer patients to
that entity if certain conditions are met. Also, section 1877(e)(8)(B)
allows a physician to make payments to any entity (including a
laboratory) for items and services, other than clinical laboratory
services, if the purchase is consistent with fair market value.
Because of these facts, we are retaining the proposed definition of
remuneration but are explaining that certain day-to-day business
transactions as listed in the statute are not included in this
definition.
c. Payments
Comment: One commenter objected to including the term ``payment''
in the definition of remuneration. This commenter pointed out that
payments frequently occur between laboratories and physicians and, in
many instances, these payments do not create incentives for physicians
to order increased laboratory testing. For example, in the commenter's
opinion, the following situations do not create incentives for
physicians to increase their laboratory referrals.
The laboratory pays a physician who furnishes
interpretation or consultation services such as Pap test
interpretation, tissue pathology consultations, or EKG holter monitor
readings.
A laboratory pays a physician a refund as a result of an
overpayment or to settle a disputed claim.
A laboratory that maintains a self-insured group medical
plan for its employees pays a physician who furnished services to a
laboratory employee.
A laboratory pays a physician to be on call to come to its
blood-drawing station in case of an emergency, as required by State
law.
A physician pays the laboratory for the provision of a
nonlaboratory service that it furnishes or that is furnished by a
subsidiary or related corporation, for example, billing, management or
consultation services, or the provision of some other medical product
or service.
Response: As stated above in response to a similar comment, section
1877(h)(1)(B) provides that, for purposes of determining whether a
compensation arrangement exists, the term remuneration includes ``any
remuneration, directly or indirectly, overtly or covertly, in cash or
in kind.'' One of the definitions found in the American Heritage
Dictionary of the English Language for ``remuneration'' is ``payment.''
Therefore, we believe we are correct in concluding that, in general,
payments between a laboratory and a physician are a form of
remuneration. Arrangements involving remuneration between these parties
can, in turn, be characterized as ``compensation arrangements.'' Most,
if not all, of the examples provided by the commenter could now fall
within specific statutory exceptions. Examples one, three, and four
could be excepted under section 1877(e)(3), which excepts certain
situations in which an entity pays a physician under a personal service
arrangement. The second example could be remuneration that is excepted
from the definition of a ``compensation arrangement'' under section
1877(h)(1)(A) and (C), and the fifth example could be excepted under
section 1877(e)(8)(B), which excepts payments by a physician to an
entity in exchange for items or services other than clinical laboratory
services.
We realize that many legitimate transactions occur between
laboratories and physicians. We believe that most of these will qualify
for the exceptions listed above. But, in the case of continuing
arrangements that provide for payment between laboratories and
physicians that do not qualify for the exceptions, the prohibition
applies.
D. Prohibition on Certain Referrals by Physicians and Limitations on
Billing
1. Medicare Only
Comment: One commenter indicated that the final regulation
concerning the prohibition should include a statement that a
physician's referrals for non-Medicare patients to receive clinical
laboratory services, which are not reimbursable under Medicare, are not
affected by section 1877 or this rule.
Another commenter requested that the final rule confirm that the
statute and the proposed rule do not apply to State Medicaid programs.
Response: In the preamble to the proposed rule (57 FR 8595), we
stated that the general prohibition on referrals applies only to
referrals for clinical laboratory services that would otherwise be
covered by the Medicare program. Therefore, referrals for clinical
laboratory services to be furnished to a physician's non-Medicare
patients are not affected by section 1877. This concept is reflected in
section 411.353(a) of this rule. As a result of section 13624 of OBRA
'93, however, section 1877 will have an effect on the Medicaid program
beginning with referrals made on or after December 31, 1994. (We plan
to address this matter in a separate proposed rule.)
2. Related Parties
Comment: The preamble to the proposed rule (57 FR 8596) states that
a financial relationship between a physician and an organization
related to an entity that furnishes clinical laboratory services (for
example, a parent or subsidiary corporation of the laboratory entity)
is to be considered an indirect financial relationship with the entity.
One commenter believed that this concept needs clarification and
that it would be helpful to have some ``bright line'' rules for what
constitutes a related entity. The commenter asked several sets of
questions, which, as we understand them, are as follows:
Is the related entity concept limited to a parent/
subsidiary model or will brother/sister corporations be included?
Is the relationship between the entities to be defined in
terms of a stock ownership requirement and, if so, will a threshold
percentage of ownership be required?
In this regard, the commenter suggested that we may want to review
the control group concepts set out in sections 414(b) and 414(c) of the
Internal Revenue Code of 1986 (IRC) and to consider adopting a similar
approach.
[[Page 41945]]
Furthermore, the commenter asked questions involving the following
situations and suggested that it would be helpful to have specific
examples presented in the final rule.
Twenty-five percent of a clinical laboratory is owned by a
professional corporation (P.C.) that, in turn, is owned by five
physicians as equal shareholders. The P.C. also employs physicians who
are not owners.
--Would a referral to the laboratory by a physician employed by the
P.C. be prohibited?
--Would referrals by any of the owners of the P.C. be prohibited?
Two of the five physician-owners of the P.C. separately
own the 25 percent interest in the laboratory rather than the entire
P.C.
--Would a referral to the laboratory by a physician employed by the
P.C. be prohibited?
--Would a referral by one of the remaining three owners of the P.C. be
prohibited?
A company that is a general partner in a surgery center
limited partnership also owns a clinical laboratory. The surgery center
has as other limited partners a number of physicians. Can physicians
who are limited partners refer patients to the company's laboratory?
Response: First, we want to state that it is not possible to
provide specific answers to cover every possible variation of financial
relationship. As noted elsewhere in this preamble, we receive a large
volume of correspondence. To the extent that there is some uncertainty
or confusion concerning a particular provision of the statute or
regulation, we are ready to discuss the matter by telephone or in
writing. We can, however, only provide our views about general
questions; as mentioned previously, we cannot provide formal advisory
opinions on specific circumstances.
In regard to the first set of questions, the commenter was
concerned about indirect financial relationships with entities. As we
explained in an earlier response, we believe that the language of the
statute is intended to support indirect, as well as direct, financial
relationships, as was specified in proposed section 411.351. In the
preamble to the proposed rule, we stated that this would cover
financial relationships with an organization related to an entity that
furnishes clinical laboratory services. We gave as an example an
interest in a parent or subsidiary corporation of the laboratory
entity. The commenter's first question was whether the related entity
concept was limited to parent/subsidiary situations or whether brother/
sister corporations would also be included.
Although the preamble gave the example of a parent or subsidiary
relationship between entities, we believe that a physician can have an
indirect financial relationship with a laboratory entity under any
circumstances in which that physician owns some portion of an entity
that has an ownership interest in the laboratory entity. This would be
true regardless of whether the entities are related as parent/
subsidiary or brother/sister corporations. In other words, these
relationships are not the determining factor. For example, a
physician's ownership interest might be in a nonlaboratory subsidiary
of a parent laboratory corporation. If the physician has an ownership
interest in the subsidiary without owning any portion of the parent
laboratory, the physician will not be considered to have an ownership
interest in the laboratory. The physician would have an ownership
interest in the laboratory only if the nonlaboratory subsidiary had an
ownership interest (for example, through stock or debt instruments) in
the parent laboratory.
We believe the analysis is similar for brother/sister corporations
or entities. Subsidiary entities that are related via a common parent
may or may not have any ownership interest in each other. If a
physician has an ownership interest in a subsidiary that, in turn, has
an ownership interest in a brother laboratory, the physician could be
regarded as having an indirect ownership interest in the laboratory.
However, this would not be the case if the brother/sister corporations
have no ownership relationship.
The commenter also asked whether the relationship between entities
depends upon stock ownership and, if so, what threshold percentage of
ownership is required. The statute in section 1877(a)(2) defines as a
financial relationship any ownership interest, regardless of the manner
in which the interest is held or the amount of the interest. We believe
this rule applies to all ownership interests, whether they are direct
or indirect.
Our analysis of corporate relationships would also involve any
compensation aspects of the relationships. As we said in the preamble
to the proposed rule, any financial relationship between a physician
and an organization related through ownership to a laboratory entity
could be covered as an indirect financial relationship with the
laboratory entity. In addition, even if a physician has an ownership
interest in a corporation that has no ownership interest in a
laboratory entity, the physician may gain certain financial advantages
from the relationship between the nonlaboratory entity and a laboratory
that could constitute compensation to the physician from the
laboratory. For example, if corporations file as one affiliated
company, they may pool their gains and losses for tax purposes. As a
result, a physician owner could receive some benefits from the
affiliation.
The commenter recommended that we adopt an approach for related
entities that is similar to that of the control group concept under the
IRC. Generally, under section 414(b) of the IRC, employees of all
corporations that are members of a controlled group of corporations
(within the meaning of section 1563(a) of the IRC) are treated as
employed by a single employer. Under 414(c) of the IRC, all employees
of trades or businesses (whether or not incorporated) that are under
common control are treated as employed by a single employer.
Furthermore, under section 1563(a) of the IRC, a controlled group of
corporations generally means the following:
A parent-subsidiary controlled group is one in which one
or more chains of corporations are connected through stock ownership
with a common parent corporation.
A brother-sister controlled group is one in which two or
more corporations have five or fewer persons (individuals, estates, or
trusts) owning certain levels of stock and controlling certain levels
of voting power of all classes of stock entitled to vote.
Since we believe that the statutory language is very broad and
encompasses both direct and indirect financial relationships, we cannot
accept the commenter's suggestions to use the concept of a control
group. Such a concept would narrow the scope of the provisions and
would, thus, be inconsistent with the statute.
The commenter raised questions about several specific scenarios. In
the first, a P.C. that is owned by five physicians owns 25 percent of a
clinical laboratory. The P.C. also employs physicians. Referrals by
physician-owners of the P.C. to the laboratory that is owned, in part,
by the P.C. would be prohibited, unless an exception applies. Clearly,
these five physicians have an ownership interest in the laboratory,
even though it is indirectly held through their ownership of the P.C.
We also believe that referrals by physician-employees of the P.C. may
be prohibited depending upon the following facts. If the P.C. is not a
group practice and
[[Page 41946]]
employee-physicians are receiving remuneration from the owner
physicians for their services as bona fide employees of the P.C., then,
under section 1877(e)(2), the remuneration would not constitute a
``compensation arrangement'' if the (e)(2) requirements are met. The
remuneration, therefore, would not subject the employee-physicians to
the prohibition.
If the P.C. is a group practice, the employee physicians could be
considered ``members of the group.'' If so, the referrals of any one
member of the group are imputed to the entire group. Because members
who are owner physicians in the example may not be able to refer, then
neither can the employees, unless an exception applies. If the P.C. is
a group practice, the arrangement would need to be evaluated under the
in-office ancillary services exception in section 1877(b)(2). That
exception does not appear to dictate any particular ownership
arrangements between group practice physicians and the laboratory in
which the services are furnished. A group practice can take advantage
of this exception, and members can refer to each other in the
laboratory provided that the group meets the definition of a group
practice under section 1877(h)(4). Under the exception in section
1877(b)(2), the services must be furnished by the referring physician
or a group member or must be directly supervised by a group practice
member. In addition, the services must be billed by the referring
physician, the group practice, or an entity wholly owned by the group
practice.
In the second scenario involving a P.C., the facts are different.
Here two of the five physician-owners of the P.C. have an ownership
interest in the laboratory, and this laboratory interest is separate
from their ownership of the P.C. Obviously, referrals by those two
physicians to the laboratory are prohibited, unless an exception
applies. While additional facts surrounding this situation might lead
to a different conclusion, it appears that referrals by the remaining
three physician-owners of the P.C. and by physician-employees of the
P.C. would probably not be prohibited. This is so because, in this
case, the P.C. has no ownership interest in the laboratory and the
other physicians have no ownership interest. Although the employees are
perhaps indirectly compensated by the two owners, their referrals would
not be prohibited if their employment arrangement meets the
requirements in section 1877(e)(2). If the P.C. is a group practice,
however, referrals of any member of a group practice (including owners
and employees of the practice) would be precluded, unless an exception
applies, such as that in section 1877(b)(2). We stress that this
conclusion is based on a minimal amount of information; the conclusion
could change if it became apparent that any of the three physician
owners or physician employees were receiving any income or
compensation, directly or indirectly, from the laboratory. We also
stress that sanctions could apply if this turns out to be a
circumvention scheme.
Concerning the last question, our analysis of this situation
indicates that referrals by limited partner physicians would not be
prohibited as long as these physicians do not have a financial
relationship with the laboratory or with the company that is a partner
in the surgery center. That is, the physicians cannot have an ownership
or investment interest in the laboratory itself or the company that
owns the laboratory. In addition, there can be no compensation passing
between the physicians and the laboratory or between the physicians and
the company. When physicians and a company are partners in an
enterprise such as a surgery center, their joint ownership does not
necessarily mean that there is compensation or payment passing between
them; they may simply both be investors. If the arrangement, however,
is structured so that there is any compensation passing between the
physicians and the company or the physicians and the laboratory, the
physician's referrals to the laboratory would be prohibited, provided
no exception applies.
Finally, we again remind the commenter that section 1877(g) sets
forth sanctions that may be imposed if certain requirements of section
1877 are not met. For example, any physician who enters into an
arrangement or scheme that the physician knows or should know has the
principle purpose of ensuring referrals by the physician to a
particular entity that, if they were made directly, would be in
violation of the prohibition, would be subject to the sanctions imposed
by section 1877(g).
3. Identical Ownership
Comment: One commenter suggested that group practices may own and
operate a laboratory that has been set up as a separate entity. The
commenter believed that this arrangement did not appear to be addressed
in the proposed regulation. The commenter pointed out that often a
group practice will own and operate a clinical laboratory as a separate
entity for various financial, liability, and other legal reasons. This
commenter believed that there does not appear to be any potential for
abuse with these arrangements as long as the separate entity is wholly
owned by the group practice or as long as there is identical overlap in
ownership. Consequently, the commenter requested that the final rule
clarify this point.
Response: As mentioned throughout this preamble, section 1877(a)
prohibits a physician who has (or whose immediate family member has) a
financial relationship with an entity furnishing clinical laboratory
services from referring Medicare patients to that entity unless an
exception applies. The statute does not contain a specific exception
for wholly-owned entities. The commenter has not provided any evidence
to convince us that any entity wholly owned by a group practice is free
from program or patient abuse. Thus, we disagree with the conclusion
reached by this commenter.
Concerning the commenter's reference to an identical overlap in
ownership, we assume the commenter means that the same physicians who
own the group practice also own the laboratory. As mentioned above, we
do not believe that the Congress intended to except entities that are
either wholly-owned or that have an identical overlap in ownership from
the referral prohibition. Therefore, unless an exception applies, the
physician or group practice owners would be prohibited from referring
to a laboratory in which they have an ownership interest.
We believe that in many cases the in-office ancillary services
exception in section 1877(b)(2) would apply. For example, physicians in
a group practice, as defined in section 1877(h)(4), can refer to a
laboratory as long as the laboratory services are furnished personally
by the referring physician or by another physician in the same group
practice, or under the direct supervision of a physician in the same
group practice; in a building that is used by the practice to furnish
some or all of the group's laboratory services; and that are billed by
the group practice or by an entity that is wholly owned by the group.
We believe that this exception applies to any group practice that meets
these requirements, regardless of who owns the laboratory, or the
manner in which it is owned. Also, services furnished by a rural
laboratory would be exempted, regardless of the circumstances of
ownership.
4. Technical Change
Comment: One commenter recommended that the phrase ``under that
referral'' at the end of proposed Sec. 411.353(b) be changed to ``under
that
[[Page 41947]]
referral that is prohibited by paragraph (a).''
Response: We do not agree that this change is necessary, since
``that referral'' refers back to the earlier part of the sentence,
which says ``that is prohibited by paragraph (a) * * *.''
5. Refunds
Comment: One commenter indicated that it is not unreasonable for an
``entity that collects payment'' to be required to make refunds in
accordance with these regulations. The commenter believed, however,
that the regulations provide no ability for the ``entity that collects
payment'' to obtain the information needed to determine whether it is
required to make a refund. The commenter suggested that the regulations
either explicitly provide the means for the entity that collects
payment to obtain the requisite referral information from the physician
ordering the service or hold it harmless for refunds it does not make
because it does not have the needed information.
Response: We do not agree with this comment. A laboratory is
responsible for knowing with whom it has a financial relationship.
Under section 1877(f) and our rule at Sec. 411.361, laboratory entities
are required, as specified by us, to provide us with information
concerning their financial relationships, including ownership and
compensation arrangements and including the names and unique
identification numbers of all physicians with financial relationships
or whose immediate relatives have financial relationships.
Additionally, under the CLIA rules at Sec. 493.634, laboratories are
required to provide and update ownership information.
E. General Exceptions to Referral Prohibitions Related to Ownership and
Compensation
1. Physicians' Services
We proposed that the prohibition on referrals does not apply to
physicians' services that are furnished personally by (or under the
direct personal supervision of) another physician in the same group
practice as the referring physician.
Comment: One commenter indicated that the proposed rule states that
exempt physicians' services would have to be performed in the group
practice's office. The commenter questioned whether the exception
should be so limited. The commenter believed that if physicians'
services, as that term is defined in the proposed rule, are performed
in another entity furnishing clinical laboratory services for a group
practice, the exception should apply as long as the physician
performing the physicians' services and the referring physician are
members of the same group practice. In other words, in the commenter's
opinion, the physicians' services exception should apply regardless of
whether the clinical laboratory is a group practice laboratory or a
laboratory owned by another entity with which the group practice has a
financial arrangement.
Response: We agree, in part, with this commenter. This exception
applies to a limited number of services, that is, clinical laboratory
services that are treated as physicians' services for Medicare purposes
in the context of a group practice. We believe that the services can be
performed anywhere and under any circumstances as long as they qualify
as ``physicians' services'' and are personally performed or personally
supervised by another group practice member and do not otherwise result
in a prohibited referral. Thus, physicians' services furnished by group
practice physicians do not need to be furnished in group practice
offices, provided they meet the other requirements in the statute.
2. In-Office Ancillary Services
Based on the provisions of OBRA '89, we explained in the proposed
rule that the prohibition on referrals would not apply to in-office
ancillary services if the following conditions are met:
The services are furnished personally by one of the
following:
+ The referring physician.
+ A physician who is a member of the same group practice as the
referring physician.
+ Nonphysician employees of the referring physician or group
practice who are personally supervised by the referring physician or by
another physician in the group practice.
The services are furnished in one of the following
locations:
+ In a building in which the referring physician (or another
physician who is a member of the same group practice) furnishes
physicians' services unrelated to the furnishing of clinical laboratory
services.
+ In the case of a referring physician who is a member of a group
practice, in another building that is used by the group practice for
centrally furnishing the group's clinical laboratory services.
The services are billed by one of the following:
+ The physician performing or supervising the services.
+ The group practice of which the referring physician is a member.
+ An entity that is wholly owned by the physician or the
physician's group practice.
(As discussed later in this preamble, OBRA '93 made significant
changes to the in-office ancillary services exception (section
1877(b)(2).)
a. Referrals From Physicians Who Do Not Have a Financial Relationship
With the Physician or Group Practice
Comment: One commenter suggested that a significant loophole is
created in the proposal by exempting from the referral prohibition
certain services provided by the referring physician, under his or her
direction, or under the direction of others in the same group practice.
The commenter suggested that, under this proposal, a group practice
could establish a laboratory in its own office and accept referrals
from outside physicians not associated with the group practice. The
commenter believed that the acceptance of such referrals from
physicians outside the group should result in that laboratory being
considered an independent clinical laboratory owned by the physicians
in the group. Therefore, the commenter believed that, under the terms
of section 1877, the laboratory should no longer be permitted to accept
referrals from the outside.
Some other commenters believed that the exemption for in-office
ancillary services was adopted with the understanding that clinical
laboratory services would be limited to the physicians' or group
practices' own patients. According to these commenters, the regulations
implementing the legislation should reflect this intent and
specifically require that the exception apply only to physician office
laboratories that do not accept referrals from physicians outside of
the practice.
Another commenter believed that exempted group practice
laboratories should meet the following two conditions:
First, the group practice laboratory should be fully financially
integrated with the group practice, such that all group members and
only group members share in laboratory expenses and income, and those
expenses and income are distributed among group members in precisely
the same manner and proportion as professional fees and expenses.
Second, the group practice laboratory should not be allowed to
accept referrals of any tests from nongroup members.
This commenter believed that these restrictions would guarantee
that the laboratory is in fact an extension of the group practice and
not a distinct
[[Page 41948]]
business operating under the protection of the group practice.
On the other hand, another commenter recommended that we
definitively state in the final rule that furnishing laboratory
services on referral from outside sources will not disqualify a group
practice laboratory from the in-office ancillary services exception if
the laboratory meets all of the performance standards set forth in the
definition of ``group practice'' in the statute and the proposed rule.
Response: There are two distinct issues that need to be addressed
in responding to these comments. The in-office ancillary services
exception in section 1877(b)(2) provides that the prohibition on
referrals will not apply to those services that are furnished
personally by the referring physician, a physician in the same group
practice as the referring physician, or by individuals who are (as
amended by OBRA '93 and effective on January 1, 1992) directly
supervised by the physician or another physician in the same group
practice. This exception further contains location and billing
criteria. It is our belief that this exception was provided for those
clinical laboratory services that are performed as an adjunct to the
patient care services of the attending physician. As such, the solo
physician, the group practice, or an entity that is wholly owned by the
physician or group practice must bill for the services.
On the other hand, the general prohibition on referrals applies
only to referrals for clinical laboratory services made by a physician
to an entity with which he or she or an immediate family member has a
financial relationship. Section 1877 does not prohibit either a solo
practitioner's laboratory or group practice laboratory from accepting
referrals from outside physicians who do not have a financial
relationship with the laboratory. When the solo practitioner or group
practice, however, accepts referrals from sources outside of its office
practice, the office laboratory is also acting as an independent
laboratory because these services are not performed as an adjunct to
the patient care services of the attending physician. As a result, the
laboratory must have a billing number from the Medicare carrier and
directly bill for the services that are performed on referral.
A physician or group practice cannot bill for the laboratory
services furnished to the patients of another physician as if they were
the physician's or group's own patients, under the physician's or
group's provider number.
To summarize, we do not find anything in section 1877 that would
prohibit a physician or group practice office laboratory from accepting
referrals from physicians who do not have a financial relationship with
the laboratory, physician, or group. However, if such referrals are
accepted, they cannot be billed by the physician or group practice.
Rather, billing must be done under a billing number that is assigned by
the Medicare carrier to the laboratory itself.
We would also like to point out that, if a member of the group is
either performing or supervising the laboratory services, the quantity
of outside tests could affect the group's ability to qualify as a
``group practice'' under the definition in section 1877(h)(4). Under
(h)(4)(A)(ii), substantially all of the services of physician members
(who now include any physicians during the time they work for the
group) must be provided through the group and be billed in the name of
the group (beginning January 1, 1995, these services must be billed
under a billing number assigned to the group). If group practice
members spend too much time supervising laboratory tests that are
billed under the laboratory's separate number, the group practice could
fail to meet the ``substantially all'' test.
b. Independent Group Practice Laboratories
Comment: One commenter indicated that, while the point was not
addressed in the proposed rule, we issued guidance to the carriers to
deal with situations in which a group practice laboratory is also
certified as an independent laboratory. The commenter wrote that we
stated that the services must be billed differently depending on
whether the test was referred for a patient of the group, or the test
was referred from outside the group. The commenter suggested that it
would be simpler for the groups and the government to have all services
(physician, laboratory, and otherwise) billed to Medicare under one
group billing number, regardless of the origin of the patient.
Response: We do not agree with this commenter. It has been an
established Medicare policy that a laboratory a physician or group
practice maintains solely for performing diagnostic tests for its own
patients is not considered an ``independent'' laboratory. This means
that the solo practicing physician or group practice can bill for in-
office laboratory testing using the physician's or group practice's own
billing number. Conversely, a physician providing clinical laboratory
services to patients of other physicians is considered not to be
furnishing ``in-office ancillary'' services and is, therefore, doing
business as an independent laboratory. Since this policy has been in
effect for over a decade, we believe that physicians or group practices
that have been accepting referrals from outside physicians have already
established that the laboratory is a separate entity for those tests
and they are familiar with the billing rules.
Furthermore, as previously explained, section 1833(h)(5)(A)
indicates that payment may be made only to the person or entity that
performed or supervised the performance of the tests. There are several
exceptions to this rule, including one in which, if a physician
performed or supervised the performance of the test, payment may be
made to another physician with whom he or she shares a practice. This
would apply, for example, if the two members are members of a group
practice. Taking these factors into consideration, we affirm that
physicians and group practices can bill, under their provider number,
for clinical laboratory services performed only for their own patients.
If the physicians' or group practices' in-office laboratory also
provides reference work for patients of other physicians, that
laboratory entity must bill for the services directly under its own
number.
c. Furnishing of Tests
Comment: One commenter indicated that the final regulations should
provide further guidance regarding the scope of the term ``furnished.''
For instance, the commenter understood that we take the position that
consulting services designed to assist a physician in interpreting test
results are not considered a part of the furnishing of the clinical
laboratory test; rather, these services are considered to be
physicians' services. The commenter further understood that we take
this position even though interpretation services are included in the
Medicare payment for the laboratory service and Medicare makes no other
payment for the physician's interpretation services.
Response: At Sec. 411.353(a) in the proposed rule, we defined
clinical laboratory services for purposes of section 1877 as those
services described in the CLIA regulations at Sec. 439.2. Thus, a
service would be covered under section 1877 as a ``clinical laboratory
service'' only if the service is considered a clinical laboratory
service under CLIA.
Some services may be billed as, for example, physician's services
but they would still be subject to CLIA (and, as a result, to section
1877) if they fall within the scope of services described in
Sec. 493.2. This is so regardless of how they are billed. Under
Sec. 493.2, a laboratory means a facility for ``the
[[Page 41949]]
biological, microbiological, serological, chemical,
immunohematological, hematological, biophysical, cytological,
pathological, or other examination of materials derived from the human
body for the purpose of providing diagnosis, prevention, or treatment
of any disease or impairment of, or assessment of the health of, human
beings.'' In short, the services covered under CLIA and section 1877
are those conducted by these facilities and involving the examination
of materials derived from the human body.
The commenter has asked specifically about consulting services
designed to assist a physician in interpreting test results. We believe
that CLIA covers the actual examination of materials, their analysis,
and any interpretation and reporting of the results which are performed
by a facility that qualifies as a laboratory, as defined in Sec. 493.2.
If a laboratory interprets certain test results or hires a consultant
who takes the responsibility to interpret them in lieu of laboratory
personnel, we believe the interpretation would qualify as a clinical
laboratory service. (If a consultant only offers input or information
which the laboratory will use in making its own interpretation, the
input would not qualify as a clinical laboratory service.)
However, if a laboratory sends test results to an independent
physician, any interpretation performed by the physician would not be
performed by the laboratory facility. As a result, the services would
not constitute part of the clinical laboratory test. If a physician
hires a consultant to help interpret the results, the same rule would
apply: the consultant's services would not constitute clinical
laboratory services if the consultant is performing outside the
auspices of a laboratory facility. The services would not be subject to
CLIA or section 1877.
If, on the other hand, a physician or group practice hires a
consultant to perform, analyze or interpret test results that are
performed in the physician's or group's own laboratory, the
interpretation would qualify as part of the services performed by a
laboratory. These interpretive services would be subject to CLIA and,
as a result, to section 1877. If the physician or group practice wishes
to qualify under the in-office ancillary services exception, the
physician or member of the group practice must supervise any non-
physician consultant when he or she performs clinical laboratory
services. In addition, the tests must meet the section 1877(b)(2)
location and billing requirements.
d. Services an Outside Laboratory May Provide to a Physician's Office
Laboratory
Comment: One commenter had concerns about services a laboratory
outside the physician's office may provide a physician's office
laboratory. The commenter wrote that the final CLIA regulations contain
personnel standards that require laboratories performing moderately
complex testing to have a laboratory director, a technical consultant,
a clinical consultant, and testing personnel who meet certain
standards. (See 42 CFR part 493.) In physician office laboratories, for
the most part, one of the practice's physicians will function as the
laboratory director and also may function in one or more other roles.
In some circumstances, however, physicians have asked an independent
laboratory entity to serve in, or assist the physician in carrying out
the duties of, one of the required positions to the extent permitted
under CLIA. For example, an independent entity might serve as the
clinical consultant for a number of its physician customers as well as
assist a physician in carrying out the duties of the technical
consultant. The commenter requested a clarification in the final
regulations that such services would not defeat a physician office
laboratory's qualification for the in-office ancillary services
exception, since the independent contractors will not be employees of
the physician.
The commenter believed that, since all laboratories, including
physicians' office laboratories, must meet the CLIA standards, the
laboratory testing performed in these laboratories is covered under the
provisions found in section 1861(s)(3). Since section 1861(s)(3) does
not have an employment requirement, the commenter concluded that the
physician does not have to employ the personnel as he or she would if
the laboratory services were billed and covered as services performed
incident to the professional services of the physician under section
1861(s)(2)(A).
Response: Regardless of the setting in which it is performed, if a
service involves laboratory tests on human specimens by a laboratory as
defined in Sec. 493.2, the CLIA provisions apply. So we agree that the
CLIA requirements apply to in-office laboratories of solo-practicing
physicians and of group practices. It appears that the commenter is
concerned about the requirement in the predecessor provision at section
1877(b)(2) that, in order for the in-office ancillary services
exception to apply, services, when not furnished by a member physician,
must be performed by individuals who are employed by the physician or
the group practice. The employment requirement was eliminated by OBRA
'93 retroactively to January 1, 1992. Therefore, under amended section
1877(b)(2), referrals for services to be furnished by any individuals
who are directly supervised by the referring physician or, in the case
of group practices, by another physician in the same group practice,
are excepted. In other words, the in-office ancillary services
exception applies to a physician or group practice that has outside
contractors furnishing laboratory services, as long as the physician or
group practice physicians directly supervise these individuals. In
addition, as mentioned previously, a contracting physician may be
considered a ``member'' of a group practice. As a member, the
contractor could perform the services without supervision or directly
supervise other individuals who perform clinical laboratory services.
Also, in this regard, we have taken the position in the past that
clinical laboratory testing performed in physicians' offices is covered
only if furnished by the physicians or if the requirements are met for
coverage of services incident to the professional services of the
physicians under section 1861(s)(2)(A) (see section 2070 of the
Medicare Carriers Manual (MCM)). One of the requirements has been that
persons performing services incident to the services of a physician
must be employed by the physician. However, section 1861(s)(3) states,
in pertinent part, that ``medical and other health services'' covered
by Medicare include ``diagnostic laboratory test[s].'' Section
1861(s)(3) does not exclude diagnostic tests performed in physicians'
offices or clinics. The only restriction on coverage under section
1861(s)(3) is set forth in the language following section 1861(s)(14),
which states that ``[n]o diagnostic tests performed in any laboratory *
* * shall be included within paragraph (3) unless such laboratory''
meets the CLIA certification requirements or has a certificate of
waiver. Because section 1861(s)(3) relates more specifically to
laboratory testing than section 1861(s)(2)(A), and because most
laboratory testing performed in a physician's office is subject to
CLIA, we now take the position that it would be appropriate to provide
coverage of these services under section 1861(s)(3). (We are in the
process of changing the MCM to reflect this position.) This means that
the employment requirement does not have
[[Page 41950]]
to be met for purposes of coverage or for purposes of application of
the in-office ancillary services exception.
Furthermore, we note that section 1877(e)(8)(B) provides an
exception for physicians who contract with an entity outside of their
office for items or services, providing the items or services are
furnished at a price that is consistent with fair market value. Fair
market value is defined in section 1877(h)(3) as meaning the value in
arm's-length transactions, consistent with the general market value.
We believe this exception permits a physician to contract with a
laboratory outside of his or her office for certain services and to
continue to refer testing to that laboratory, providing the services
meet the requirements for fair market value. Therefore, an independent
laboratory entity will be able to provide personnel to assist a
physician in carrying out the CLIA requirements.
Accordingly, from the circumstances described by the commenter, the
following conclusions emerge:
In order to comply with the CLIA requirements, a physician
or group practice may contract with a laboratory for the services of
various physicians or other personnel. In these cases, as long as the
direct supervision requirement is met, application of the in-office
ancillary services exception is not jeopardized by the fact that the
personnel performing the CLIA-related activities are not employed by
the physician or group practice.
Physicians' referrals to the laboratory with which they
contract for the performance of CLIA-related activities will not be
prohibited if the contract meets the ``fair market value'' requirement
of the exception found in section 1877(e)(8)(B).
e. Location
Comment: One commenter believed the location requirements of the
in-office ancillary services exception arbitrarily distinguish between
group practices and solo practitioners. The commenter stated that a
referring solo physician, as well as a group practice, should be able
to qualify under this exception if the laboratory is located in a
building used for centrally furnishing clinical laboratory services.
The commenter believed there is no remedial purpose served by requiring
that a laboratory with which a solo practitioner has a financial
relationship be in the same building as his practice, while permitting
a laboratory with which a group practice has a financial relationship
to situate the laboratory in a separate building.
Response: We believe that, in creating the exception in section
1877(b)(2) and entitling it ``in-office ancillary services,'' the
Congress meant to except situations in which a physician refers
patients to the practice's own laboratory located in the physician's
practice office, or nearby. As a result, the statute requires that the
services be furnished in a building in which the referring physician
furnishes physician's services unrelated to clinical laboratory
services.
Congress, however, has apparently always regarded the same building
requirement as too restrictive for a group practice. Before the
enactment of OBRA '93, section 1877(b)(2)(A)(ii)(II) allowed a group
practice to refer to a laboratory in another building that was used by
the group practice for the centralized provision of the group's
clinical laboratory services. OBRA '93 liberalized this provision even
more, amending it to allow a group practice to refer to another
building that is used for some or all of the group's clinical
laboratory services, no longer requiring that the services be performed
in a ``centralized'' laboratory. This provision is effective
retroactively to January 1, 1992.
Because group practices can have practice offices in many
locations, the Congress appears to believe that it could be difficult
to locate the group's laboratory close to all of them. The legislative
history for the OBRA '93 amendment points out that a number of group
practices own and operate satellite facilities in communities other
than the community in which the main clinic facility is located. (H.R.
Rep. No. 111, 103d Cong., 1st Sess. 545 (1993))
We have not created an exception under section 1877(b)(4) for solo
practitioners who refer to laboratories that are located in buildings
other than the ones in which they practice. That is so because we
believe the services would cease to be in-office ancillary services if
they are referred to an outside location and the solo practitioner
might be less likely to directly supervise the services. Also, we have
seen no evidence that such an exception would be free from any risk of
patient or program abuse.
3. Prepaid Health Plan Enrollees
Under Sec. 411.355(c) of the proposed rule, the prohibition on
referrals does not apply to services furnished by one of the following
organizations to its enrollees:
An HMO or a CMP that has a contract with us under section
1876 and 42 CFR part 417, subpart C.
A health care prepayment plan that has an agreement with
us under section 1833(a)(1)(A) and 42 CFR part 417, subpart D.
An organization that is receiving payments on a prepaid
basis for enrollees through a demonstration project under section
402(a) of the Social Security Amendments of 1967 (42 U.S.C 1395b-1) or
under section 222(a) of the Social Security Amendments of 1972 (42
U.S.C. 1395b-1 note).
OBRA '93 amended section 1877(b)(3) to also include services
furnished by a qualified HMO (within the meaning of section 1310(d) of
the Public Health Service Act) to an individual enrolled with the
organization.
Comment: One commenter indicated that the HMO exemption appears to
be available only for a narrowly defined group of HMOs. The commenter
recommended broadening this exemption because HMOs employ utilization
review criteria and these criteria serve as a disincentive to
overutilize services.
Response: As mentioned above, OBRA '93 provided an exception for
referrals to qualified HMOs for the provision of services to enrollees
of the HMO. This exception would apply to referrals for Medicare
beneficiaries to Federally-qualified health maintenance organizations
(FQHMOs) without requiring the FQHMO to enter into a contract under
section 1833 or 1876.
Comment: One commenter indicated that the final regulation should
permit staff physicians of a Medicare-contracting HMO or competitive
medical plan (CMP), or a health care prepayment plan (HCPP) operated
under an agreement with HCFA, to refer Medicare beneficiaries to their
affiliated clinical laboratories, regardless of whether the beneficiary
is enrolled as a member of the HMO/CMP/HCPP.
This commenter presents the case of an entity that contracts with
us to furnish covered services to Medicare beneficiaries as an HCPP
under section 1833(a)(1)(A). Medical services furnished by the HCPP are
predominantly provided at clinic locations by employee and independent
contractor physicians. The commenter believed that the proposed
regulation would require the clinics to establish two different
protocols for their laboratory services: one for their HCPP enrollees
and one for Medicare eligible patients who are not enrolled as members
of the HCPP, and on whose behalf Medicare pays on a fee-for-service
basis (``fee-for-service patients''). The commenter believed this
distinction is artificial and could result in different levels of care
for certain classes of Medicare beneficiaries. The distinction
[[Page 41951]]
should, in the commenter's opinion, be eliminated.
Additionally, the commenter believed that providing a broader
exception for referrals by HMO, CMP, or HCPP staff physicians is
consistent with the statutory exemptions for services furnished by
these organizations. The HMO, CMP, or HCPP exception recognizes that
managed care plans may properly organize and operate their own clinical
laboratories in the interest of serving their patients efficiently and
economically. Those organizations may require their physicians to refer
certain clinical laboratory services for both enrolled members and fee-
for-service patients to their affiliated laboratories.
Even HMOs, CMPs, and HCPPs that engage physicians to practice in
facilities owned and operated by the HMO, CMP, or HCPP may furnish
services to Medicare beneficiaries who are not enrolled as members.
Often this occurs when a patient ``walks in'' to the HMO, CMP, or HCPP
clinic or when a relative accompanies a person who is enrolled in the
plan.
The commenter believed that no purpose would be served by requiring
physicians in HMOs, CMPs, or HCPPs that operate clinical laboratories
to refer services for Medicare beneficiaries who are not enrollees to
another laboratory. The commenter stated that these nonenrollee
patients should be entitled to expect the same level of care as
enrollees.
Response: As we have noted earlier, OBRA '93 added to the list of
prepaid plans in the section 1877(b)(3) exception an organization that
is a qualified HMO (within the meaning of section 1310(d) of the Public
Health Service Act). The statute specifically excepts from the
physician referral prohibition only services furnished by the listed
organizations to their enrollees. Our proposed and final regulation
reflect this statutory limitation. We decline to add services furnished
to non-enrollees as an additional exception under section 1877(b)(4).
When HMOs, CMPs, and HCPPs are reimbursed by Medicare on a fee-for-
service basis, we believe that there still exists an incentive for
these organizations to overutilize services. The Secretary cannot
create an additional exception unless she determines that there is no
risk of patient or program abuse.
However, physicians who are employed by HMOs, CMPs, and HCPPs may
still be able to refer non-enrolled patients to the laboratories that
are affiliated with these organizations under other exceptions in the
statute. For example, if the physicians only receive compensation from
these organizations under an employment agreement or personal services
contract, they can refer to the organizations' laboratory if they meet
the requirements in section 1877(e)(2) or (e)(3).
F. Exceptions to Referral Prohibitions Related to Ownership or
Investment Interest
1. Publicly-Traded Securities
In proposed Sec. 411.357(a), we provided that physicians who hold
an ownership or investment interest in certain entities may make
referrals to those entities if the following requirements are met:
The physician purchased ownership of the entity in the
form of investment securities (including shares or bonds, debentures,
notes or other debt instruments) on terms generally available to the
public.
The ownership or investment interest is in a corporation
that meets the following conditions:
+ It is either listed for trading on the New York Stock Exchange or
the American Stock Exchange or is a national market system security
traded under an automated interdealer quotation system operated by the
National Association of Securities Dealers.
+ It had, at the end of its most recent fiscal year, total assets
exceeding $100 million. These assets must have been obtained in the
normal course of business and not for the primary purpose of qualifying
for this exception.
As we have discussed elsewhere, OBRA '93 modified section 1877(c)
in several ways. First, investment securities no longer have to be
those purchased on terms generally available to the public; they must
only be those which ``may be purchased'' on terms generally available
to the public. Second, the securities can be those listed on additional
exchanges. Third, the investment securities no longer have to be in a
corporation with $100 million in total assets at the end of a fiscal
year; now the holdings of the corporation must be measured in terms of
``stockholder equity,'' and the amount has been modified from $100
million to $75 million. This amount can now either be measured at the
end of the most recent fiscal year or be based on the corporation's
average during the previous 3 fiscal years. Finally, OBRA '93 extends
the exception to apply to certain mutual funds.
Under the effective date provisions of OBRA '93, the amended
version of section 1877(c) was not effective until January 1, 1995. SSA
'94 revised this effective date provision to make the amended version
of section 1877(c) effective retroactively to January 1, 1992; however,
the revised effective date provision states that, prior to January 1,
1995, the amended Sec. 1877(c) does not apply to any securities of a
corporation that meets the requirements of Sec. 1877(c)(2) as they
appeared prior to OBRA '93. Section 1877(c)(2), prior to OBRA '93,
contained the requirement that a corporation have $100 million in total
assets.
Comment: One commenter supported our proposed requirements. The
commenter believed that the additional requirement concerning the
purpose in obtaining assets will help eliminate certain obvious sham
transactions that followed the passage of section 1877. The commenter
suggested the inclusion of additional language requiring that these
entities have $50 million in shareholder equity. Such a threshold,
according to the commenter, could help to ensure that the company has
actual, hard assets, rather than simply ``phantom'' assets that are
offset by significant liabilities.
Response: After consideration of the comments we received on this
issue (see below), we have decided that it would be extremely difficult
to prove exactly what a corporation intended when it decided to acquire
assets; that is, to sort through a corporation's financial records to
try to separate business purposes from nonbusiness purposes. We further
believe that it would be difficult to define what is meant by
``acquiring assets during the normal course of business.'' Therefore
this final rule does not specify that the assets must have been
obtained in the normal course of business and not for the primary
purpose of qualifying for the exception.
We agree that the commenter's suggestion for ``shareholder equity''
is a good one, but we do not believe that the Congress meant to refer
to this concept when it included the term ``total assets'' in the
statute. That is so because the OBRA '93 amendments specifically
replaced the concept of ``total assets'' with ``stockholder equity,'' a
change the legislative history describes as a modification of the law
and not a clarification or explicit expression of what was already
implicitly present in the law. Also, the fact that SSA '94 appears to
make the $100 million-total- asset-standard and the $75 million-
stockholder-equity- standard apply simultaneously until January 1, 1995
suggests that they are two different concepts. Beginning on January 1,
1995, the ``stockholder equity'' standard will prevail.
[[Page 41952]]
Comment: Another commenter wished to emphasize the requirement
that, in order to qualify for the exception, the general public must
have the same opportunity to buy and sell the entity's stock as
physician-investors. As noted in the proposed rule, physician-partners
in a laboratory should not be permitted to exchange their partnership
shares for stock in a new corporation, which is then publicly traded at
some later date. The commenter was aware of one entity that has
purchased physician-owned laboratories in just this manner. Therefore,
the commenter believed that we should emphasize that such conduct is a
clear violation of the regulation.
Response: The requirement at issue in the regulation was derived
from section 1877(c), as it appeared prior to OBRA '93. Section 1877(c)
used to require that investment securities be those which were
purchased on terms generally available to the public. OBRA '93 amended
this provision (the amendment is now retroactively effective as a
result of SSA '94) to say that the investment securities are those
which may be purchased on terms generally available to the public. We
will interpret the amended provision and other provisions in OBRA '93
in a proposed rule covering all of the designated health services.
Comment: A few commenters indicated that they disagree with the
proposed requirement that the $100 million in assets must have been
obtained in the normal course of business and not for the primary
purpose of qualifying for this exception. The commenters believed there
is no evidence that the Congress intended to deny protection to
entities that meet the $100 million asset test in part or in whole by
acquiring assets for the purpose of qualifying for the exception
spelled out explicitly in section 1877(c). The commenters suggested
that the purchase of an independent clinical laboratory by a
corporation intending to include the purchase in the total assets
needed to qualify for this exception is not clearly an example of a
corporation trying to circumvent the law through a sham transaction.
One commenter went on to state that any corporation and physician
involved in a good faith purchase and sale of a clinical laboratory in
order to comply with the law would be unfairly penalized by the
proposed language.
A few commenters urged that we eliminate the statement in the
preamble advising the OIG to treat as a circumvention scheme any effort
by an entity to obtain $100 million principally for the purpose of
meeting the ``$100 million in total assets'' test.
Response: As mentioned in a previous response, we are withdrawing
this interpretation and requiring that the corporation meet one of the
following criteria: (1) it has, at the end of its most recent fiscal
year or, on average during the previous 3 fiscal years, stockholder
equity exceeding $75 million or (2) until January 1, 1995, it had, at
the end of its most recent fiscal year, total assets exceeding $100
million, irrespective of how those assets were obtained.
The statement that the commenters have asked us to eliminate
appears in the preamble to the proposed rule at 57 FR 8600 in the
discussion on OIG regulations. Since we are not including a requirement
about how the assets are obtained, we are not including language
related to this issue in the final rule.
Comment: One commenter indicated that a major ambiguity appears in
this exception when one considers how to treat physician investors who
have acquired shares prior to the time the laboratory was publicly
traded. As written, the statutory exemption might be interpreted not to
protect such previously acquired shares since, by definition, they were
not acquired in a transaction involving the general public.
The commenter requested that the final regulations specify that,
once the laboratory meets both of the exemption's tests (that is, the
stock exchange listing and the level of assets criteria), physicians
who acquired their shares before this time be permitted to refer
patients under certain conditions. That is, physicians can refer
provided they own only shares with rights identical to those generally
available to the public through trading on one of the specified
exchanges.
Response: As we have pointed out in earlier responses, the
requirement in the proposed regulation has been modified to reflect the
statute, as amended by OBRA '93. OBRA '93 amended this provision (the
amendment is now retroactively effective as the result of SSA '94) to
say that the investment securities are those which may be purchased on
terms generally available to the public.
Comment: One commenter requested that we use the same definition of
public company that it believes is used by the Securities and Exchange
Commission (SEC); that is, the definition used under General Accepted
Accounting Principles. The commenter believed that use of this commonly
accepted definition is in accord with the ``public company'' intent of
the legislation and will maintain the ``bright line'' between referrals
that can and cannot be influenced by ownership position.
Response: The American Institute of Certified Public Accountants,
Inc., defines a public enterprise as a business enterprise--
Whose debt or equity securities are traded in a public
market on a domestic stock exchange or in the domestic over-the-counter
market (including securities quoted only locally or regionally); or
That is required to file financial statements with the
SEC.
An enterprise is considered to be a public enterprise as soon as
its financial statements are issued in preparation for the sale of any
class of securities in a domestic market. (Commerce Clearing House,
Professional Standards, AC Section 1072, 024(h).)
We do not believe that this definition adds any clarity to the very
specific requirements found in the law; that is, for purposes of
section 1877(c), a corporation is an entity that is listed for trading
on the New York Stock Exchange or on the American Stock Exchange, or
any regional exchange in which quotations are published on a daily
basis, or foreign securities listed on a recognized foreign, national,
or regional exchange in which quotations are published on a daily
basis, or is a national market system security traded under an
automated interdealer quotation system operated by the National
Association of Securities Dealers.
Comment: One commenter suggested we allow the use of a consolidated
balance sheet to show that the $100 million asset test is met.
Response: A consolidated balance sheet is used for financial
reports for a group of affiliated corporations, eliminating
intercorporation debts and profits and showing minority stockholders
interest. It also is used when, under certain circumstances, multiple
related entities must report balances in a combined fashion instead of
separately.
Since the statute excepts investment interests in a corporation
with a minimum amount of assets (or, under OBRA '93, stockholder
equity), we do not believe it is appropriate to aggregate the assets of
multiple corporations on a consolidated balance sheet.
In the preamble to the proposed rule (57 FR 8597), we stated that
the $100 million in assets requirement applies only to the corporate
entity that furnished the clinical laboratory services, and it does not
include assets of any related corporations. This statement is
misleading in that it applies only when the stock ownership giving rise
to the financial relationship is held in the corporate entity that
furnishes clinical laboratory services; it is
[[Page 41953]]
incorrect when applied to stock ownership in a corporation that does
not itself furnish clinical laboratory services. In the latter case,
the assets requirement would apply to the parent corporation (the
corporate entity in which the stock is held), not to the subsidiary
laboratory corporation.
Therefore, we are clarifying that only the assets of the
corporation in which the physician or immediate family member's stock
is held may be counted to determine whether the $100 million asset
requirement (or $75 million in stockholder equity requirement) is met
under section 1877(c)(1).
Comment: One commenter indicated that we should permit the
grandfathering of financial transactions that were entered into to meet
the intent of the legislation with regard to the $100 million asset
test if they were entered into before the effective date of the
regulations. The commenter believed that such grandfathering would ease
accounting and reporting requirements. Further, the commenter suggested
that the final regulations should apply to an organization's fiscal
year beginning after the effective date of the rule.
Response: As discussed earlier in this preamble, we are withdrawing
our interpretation concerning how a corporation had to have obtained
its assets.
In regard to the commenter's suggestion that the final regulations
should apply to an organization's fiscal year beginning after the
effective date of the rule, we disagree. Section 1877(c)(2), prior to
its amendment by OBRA '93, required that a corporation have, at the end
of the corporation's most recent fiscal year, total assets exceeding
$100 million. The amended version of this provision requires that a
corporation have, at the end of the corporations' most recent fiscal
year, or on average during the previous 3 fiscal years, stockholder
equity exceeding $75 million. These statutory provisions require an
assessment of a corporation's assets or equity based upon a past year
or years. These provisions were effective retroactively to January 1,
1992. We do not believe they can be interpreted to require compliance
in the fiscal year occurring subsequent to the publication of this
final regulation.
2. Rural Laboratories
In proposed section 411.357(b), we stated that an ownership or
investment interest in a laboratory that is located in a rural area
will not prohibit the physician owners from making referrals if the
following criteria are met:
The laboratory testing that is referred by a physician who
has an ownership or investment interest in the rural laboratory must
either--
+ Be performed on the premises of the rural laboratory; or
+ If not performed on the premises, the laboratory performing the
testing must bill the Medicare program directly for the testing.
The majority of tests referred to the rural laboratory
must be referred by physicians who have office practices located in a
rural area.
As mentioned in response to a previous comment, we have amended
the standards for this exception by eliminating the requirement that a
majority of tests referred to the rural laboratory must be referred by
physicians who have office practices located in a rural area. Instead,
we are adopting the standard required by OBRA '93 that substantially
all of the clinical laboratory services furnished by the entity are
furnished to individuals residing in such a rural area.
a. General
Comment: One commenter indicated support for our formulation of the
exception applicable to laboratories located in a rural area. The
commenter was aware of a number of laboratories that were established
in rural areas but that serve physician-owners and patients located in
large metropolitan areas.
Another commenter stated that this exception protects against
abuses by laboratories in rural areas, such as the setting up of a
``shell'' laboratory with a rural address. This commenter also
supported the proposed rule's mandate that at least 51 percent of the
tests referred to a rural laboratory be referred by rural doctors. The
commenter believed this requirement should help to ensure that the
laboratory is in fact serving rural beneficiaries.
On the other hand, a third commenter proposed that the final rule
adopt an expanded definition of rural area that would include towns or
similar State governmental subdivisions if the population is below
10,000 people and a laboratory located in the area meets the 2
additional requirements set out in the proposed rule. As an additional
criterion, the commenter suggested that governmental subdivisions
meeting this population standard could be defined as ``rural'' only if
the number of outpatient laboratories in the area was no more than two.
The commenter believed that this additional criterion would identify
those laboratories that are clearly essential to serving the patient
needs of the community.
Response: We agree with the first two commenters and believe that
the OBRA '93 amendment imposing the requirement that ``substantially
all'' of a rural laboratory's services be performed for residents of
the rural community indicates that the Congress is aware of and is
concerned about the potential for abuse in this area.
What the third commenter urges is recognition of a laboratory
entity as a rural provider, despite the fact that the entity is located
within a metropolitan statistical area (MSA), if the suggested
conditions are met. While we recognize that there may be some
laboratory entities located in MSAs that, by virtue of being located in
small towns within an MSA, have experiences similar to laboratories
located in rural areas, we believe that it would be difficult in any
given case to prove that the laboratory's situation actually parallels
the situation in a rural area. In addition, it would be difficult and
burdensome to make these determinations on a case-by-case basis.
Further, at this time, we have no evidence that opening this exception
to ``nonrural'' laboratories would be free of any risk of program or
patient abuse, the standard that must be met under section 1877(b)(4).
b. Percentage of Tests and Direct Billing
Comment: One commenter argued that the exception for clinical
laboratories in rural areas is too stringent. The commenter was
concerned that the proposed requirement that more than 50 percent of
the tests performed be referred by physicians whose practices are
located in rural areas may present an undue burden on already existing
rural laboratories. Those rural laboratories may be forced to close
because their viability comes from nonrural business. Thus, the
commenter recommended grandfathering existing rural laboratory
practices.
Response: Although we have changed the proposed rule, the rule
still requires that ``substantially all'' of a laboratory's services be
furnished as rural business. As we explained previously, we believe to
meet this standard that at least 75 percent of the clinical laboratory
services must be furnished to individuals who reside in a rural area.
Section 1877 does not contain an overall ``grandfather'' clause which
would allow laboratory facilities that existed prior to its effective
date to continue to accept prohibited referrals just because the
laboratories predate the statutory provision. In addition, the statute
does not routinely excuse certain referrals because it would be a
burden for a facility to alter its business practices in order to fit
within an exception. We believe that, instead, the specific
[[Page 41954]]
purpose of the statute is to require laboratory facilities to alter
their practices in order to avoid abusive or potentially abusive
financial relationships. Our approach in the proposed and final
regulation for this provision reflects that purpose.
Furthermore, we do not believe that we can specifically except from
the prohibition rural laboratories whose viability depends on non-rural
business. We do not know at this time how many rural laboratories would
have extreme difficulty meeting the requirements in the proposed
regulation. Also, as described in previous comments, the situation
described by the commenter can result in ``shell'' laboratory
arrangements or otherwise be subject to patient and program abuse.
Comment: One commenter recognized the need to prohibit
circumvention schemes by urban laboratories through the rural
exemption, but thought that the proposed criteria may have a negative
impact on a legitimate rural laboratory as follows: The criteria
require laboratory testing referred by an investor physician to be
performed on the premises or, if referred to another laboratory, that
the testing be billed to Medicare directly by the laboratory performing
the tests. This provision would prohibit rural laboratories from
referring a limited number of tests to other laboratories and billing
for the tests, in accordance with present statutory and regulatory
requirements concerning shell laboratories.
One commenter indicated that, if a rural laboratory is not able to
bill for reference work, it will be forced to collect patient
information and forward it to the reference laboratory. This is
necessary to enable the reference laboratory to bill Medicare. The
rural laboratory will still be collecting the specimens for forwarding
to the reference laboratory, but without compensation. The commenter
also maintained that the rule will threaten the ability of small rural
laboratories to maintain investment and employment while, on the other
hand, the rule rewards large laboratories that already have the
advantage of lobbying strength that can affect legislation. Also, the
rule will not save the taxpayer any money, as good diagnostics for both
treatment and preventive medicine are not a function of who bills
Medicare for the tests.
This commenter suggested the following alternatives:
Eliminate the condition that rural laboratories must
perform in-house laboratory testing in order to bill Medicare directly.
Revise the conditions to read: ``if all tests are not
performed on the premises, 80 percent of referrals must be made by
physicians who have office practices in rural areas and 67 percent of
all tests must be performed on the premises, otherwise the laboratory
performing the testing must bill the Medicare program directly.''
Response: We agree that the requirements we proposed for ownership
in a rural laboratory are different from those found in the so called
``shell laboratory'' provision (section 1833(h)(5)(A)). Under the shell
laboratory provision, payment may be made to a referring laboratory for
the services of a reference laboratory in any of the following
circumstances: the referring laboratory is located in, or is part of, a
rural hospital; the referring laboratory is wholly owned by the
reference laboratory; the referring laboratory wholly owns the
reference laboratory; both the referring laboratory and the reference
laboratory are wholly owned by the same entity; or not more than 30
percent of the clinical diagnostic laboratory tests for which the
referring laboratory (other than a laboratory described in the ``wholly
owned'' provision) receives requests for testing during the year in
which the test is performed are performed by another laboratory. These
provisions apply to the payment of Medicare-covered clinical diagnostic
laboratory services generally. Section 1877 and these regulations
contain additional specific requirements that apply to referrals for
clinical laboratory services by physicians who have a financial
relationship with the laboratory.
In the proposed rule, we stated that laboratory testing that is
referred by a physician who has an ownership or investment interest in
the rural laboratory must either be performed on the premises of the
rural laboratory or, if not performed on the premises, the laboratory
performing the testing must bill the Medicare program directly for the
testing. Section 1877(d)(2) specifically provides the exception for
referrals for clinical laboratory services if the laboratory furnishing
the service is in a rural area. We do not believe the exception is
satisfied if the rural laboratory in turn refers the work to a
laboratory in a nonrural area.
In addition, we do not see this requirement as conflicting with the
more general shell laboratory provision, because our requirement
applies specifically to the testing ordered by a physician who has a
financial relationship with the laboratory. Thus, all other testing
referred to the rural laboratory would be subject to the more lenient
provisions of section 1833(h)(5)(A) mentioned above. We continue to
support this position. It is our firm belief that the Congress provided
the rural provider exception in order that beneficiaries living in
rural areas would have access to clinical laboratory services that
might not be available without the financial investments of local
physicians. Without the safeguards included in this regulation, we
believe it would be possible to defeat the purpose of the exception.
c. Future Reclassification of Rural Areas
Comment: One commenter indicated that the final rule should provide
that laboratories that currently qualify under the rural exception will
not be disqualified in the future based on metropolitan statistical
area (MSA) reclassification. This clarification will provide stability
to legitimate rural laboratories and avoid future uncertainty and
future ``fireside'' sales.
Response: We do not believe the language in section 1877(d)(2) is
susceptible to the suggested ``clarification.'' The statute
specifically requires that a rural provider be located in a rural area
as defined in section 1886(d)(2)(D).
Thus, a provider must be located in such an area, even if the MSAs
are at some point reclassified for prospective payment purposes. In
addition, we do not believe we should provide an additional exception
for a rural provider whose area has ceased to be rural, since we have
no evidence that the exception would be free from all risk of program
or patient abuse.
3. Hospitals Outside of Puerto Rico
The OBRA '93 amendments to section 1877 substantially changed the
provisions that directly concern physician/hospital relationships.
Listed below is a table explaining the provisions prior to OBRA '93 and
after OBRA '93, as they are in effect until January 1995; the table
also reflects amendments made by SSA '94.
[[Page 41955]]
------------------------------------------------------------------------
Before OBRA '93 OBRA '93
------------------------------------------------------------------------
Exceptions for Ownership/Investment and Compensation
------------------------------------------------------------------------
1877(b)(4) exception relating to OBRA '93 omitted, but SSA '94
hospital financial relationships reinstated until 1/95. But see
(ownership/investment and 1877(e)(4) below.
compensation) unrelated to
provision of laboratory services.
1877(d)(3) exception for hospital 1877(d)(3) unchanged.
ownership.
------------------------------------------------------------------------
Exceptions for Compensation Arrangements
------------------------------------------------------------------------
1877(e)(2) exception for employment Omitted by OBRA '93; SSA '94
and service arrangements with reinstated until 1/1/95
hospitals.
1877(e)(2) exception for bona fide
employment only, with any employer
1877(e)(3) exception for personal
service arrangements with
remuneration from any entity.
1877(e)(4) exception for
remuneration from a hospital to a
physician if not related to
provision of clinical laboratory
services.
1877(e)(4) exception for physician Still present, as 1877(e)(5).
recruitment by a hospital. 1877(e)(7) exception for
compensation between a group
practice and a hospital for
services furnished under an
arrangement.
------------------------------------------------------------------------
Generally, the prohibition in section 1877(a)(1) on physician
referrals excepts physicians who furnish services in certain situations
or settings described in section 1877(b) (for example, in-office or HMO
settings). In addition, under section 1877(a)(2), a financial
relationship with an entity is defined as an ownership or investment
interest in the entity except for such interests described in sections
1877(c) and (d). A financial relationship is also defined as a
compensation arrangement between a physician (or immediate family
member) and an entity, except for the arrangements described in section
1877(e). Of these provisions, the following exceptions directly concern
physician/hospital relationships if the hospital either is not located
in Puerto Rico or is not a rural provider.
Under section 1877(d)(3), an exception is provided for
referrals for clinical laboratory services to be furnished by a
hospital located outside of Puerto Rico, even if the referring
physician (or immediate relative) has an ownership or investment
interest in the hospital, provided the referring physician is
authorized to perform services at the hospital and the ownership or
investment interest is in the hospital itself and not merely in a
subdivision of the hospital.
Under section 1877(e)(2), a physician who receives payment
from any employer, including a hospital (or who has an immediate
relative who receives such payment) will not be prohibited from making
referrals to the hospital for clinical laboratory services on the basis
of this payment if the employment of the physician or family member is
bona fide and for identifiable services. In addition, the terms of the
employment must be for fair market value with no ties to the volume or
value of referrals, and be commercially reasonable. Finally, the
arrangement must meet any additional requirements imposed by the
Secretary.
Under section 1877(e)(3), a physician who receives (or
whose immediate family member receives) remuneration from any entity,
including a hospital, under a personal service arrangement will not be
prohibited, on the basis of this remuneration, from making referrals to
the entity for clinical laboratory services if the arrangement meets
the following conditions:
+ The arrangement is for at least 1 year, set out in writing,
signed by the parties, and specifies the services covered.
+ The arrangement covers all of the services to be furnished by the
physician (or immediate family member) to the entity.
+ The aggregate services contracted for do not exceed those that
are reasonable and necessary for the legitimate business purposes of
the arrangement and the compensation to be paid over the term of the
arrangement is set in advance, does not exceed fair market value and,
except in the case of certain physician incentive plans, is not
determined in a manner that takes into account the volume or value of
any referrals or other business generated between the parties.
+ The services to be performed under the arrangement do not involve
the counseling or promotion of a business arrangement or other activity
that violates any State or Federal law.
+ The arrangement meets any other requirements imposed by the
Secretary.
Under section 1877(e)(4), a physician who receives
remuneration from a hospital will not be prohibited from making
referrals to the hospital on the basis of that remuneration if the
remuneration does not relate to the provision of clinical laboratory
services.
Under section 1877(e)(5), a physician who receives
remuneration from a hospital that is intended to induce the physician
to relocate to the geographic area served by the hospital in order to
be a member of the medical staff of the hospital will not be prohibited
from making referrals to the hospital if the following conditions are
met:
+ The physician is not required to refer patients to the hospital.
+ The amount of remuneration under the arrangement is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any referrals by the referring physician.
+ The arrangement meets any other requirements imposed by the
Secretary by regulation.
Under section 1877(e)(7), certain group practices may have
an arrangement with a hospital to furnish clinical laboratory services
that are billed by the hospital. The physicians may make referrals to
the hospital for the furnishing of clinical laboratory services, as
long as the following conditions are met:
+ Services provided to a hospital inpatient are furnished under an
arrangement under section 1861(b)(3).
+ The arrangement began before December 19, 1989, and has continued
in effect without interruption since that date.
+ With respect to the clinical laboratory services covered under
the arrangement, substantially all of these services furnished to
patients of the
[[Page 41956]]
hospital are furnished by the group under the arrangement.
+ The arrangement is set out in writing, specifies the services to
be provided, and the compensation for the services under the agreement.
+ The compensation paid over the term of the agreement is
consistent with fair market value and the compensation per unit of
services is fixed in advance and is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
+ The compensation provided is under an agreement that would be
commercially reasonable even if no referrals were made to the entity.
+ The arrangement meets any other requirements imposed by the
Secretary by regulation.
a. Joint Ventures Not Related to the Hospital Laboratory
Comment: One commenter suggested that the condition found in
proposed Sec. 411.357(b)(3)(ii) concerning ``ownership or investment in
* * * a hospital that * * * does not relate (directly or indirectly) to
the furnishing of clinical laboratory services'' could be construed as
precluding a physician who has a financial interest in another
hospital/physician joint venture that is unrelated to the clinical
laboratory from referring to the hospital laboratory. This commenter
recommended that the final rule clarify that physicians with financial
interests in other hospital-physician joint ventures will not be
precluded from making referrals to the hospital laboratory.
Response: The proposed provision that the commenter asked us to
clarify was based on the predecessor provision of section 1877(b)(4),
which excepted a physician's financial relationship (ownership/
investment interest or compensation arrangement) with a hospital if the
relationship did not relate to furnishing clinical laboratory services.
This provision was eliminated from the statute by section 13562 of OBRA
'93, but was reinstated until January 1, 1995 by section 152(c) of SSA
'94. The amended section 1877 also contains, in paragraph (e)(4), a new
provision which excepts remuneration from a hospital to a physician if
the remuneration does not relate to the provision of clinical
laboratory services. Section 1877(e)(4) is retroactively effective
beginning January 1, 1992, and remains in effect after January 1, 1995.
As for joint ventures, an exception for an ownership or investment
interest held with a hospital may not be necessary. That is because
section 1877(a)(2) defines a prohibited financial relationship of a
physician with an entity as an ownership or investment interest in the
entity. In the case of a joint venture held with a hospital, if the
physician has no ownership or investment interest in the hospital, a
prohibition based on ownership would not apply at all. That is, even
though a physician may own a venture with a hospital, as separate
partners, that does not mean that the physician actually owns any part
of the hospital.
To determine whether a physician has an ownership interest in a
hospital, we must define what constitutes a ``hospital'' for purposes
of section 1877. Under the Medicare statute, section 1861(e) defines a
``hospital'' as an institution, but we have never specifically defined
what constitutes an ``institution.'' Although section 1861 dictates
what services and functions a ``hospital'' must provide to qualify as
one, it does not appear to mandate any requirements relating to a
hospital's corporate structure.
Hospitals often are structured in complex configurations as the
result of tax laws and in response to a variety of business concerns.
These configurations make defining a ``hospital'' almost impossible to
do on a case-by-case basis. As a result, we are establishing a test
that we believe will be relatively easy to apply. For purposes of
section 1877, we are defining a ``hospital'' as any separate legally-
organized operating entity plus any subsidiary, related, or other
entities that perform services for the hospital's patients and for
which the hospital bills. A ``hospital'' does not include entities that
perform services for hospital patients ``under arrangements'' with the
hospital. We believe these arrangements, by their very nature, involve
situations in which hospitals contract with outside entities because
they cannot or do not wish to provide the services themselves.
For example, a hospital might be a parent corporation that provides
administrative services but that furnishes patient care primarily
through a variety of subsidiaries such as a home health agency, a
laboratory, or a radiology unit, each of which is independently
incorporated. If the hospital bills Medicare for services provided by a
subsidiary, then we regard the subsidiary as part of the hospital. A
physician, as a result of this structure, could own a part of the
hospital if he or she owns some of the remaining interest in the
laboratory or other subsidiary, even if the physician does not own any
of the parent corporation.
If a physician owns part of the hospital by virtue of owning some
portion of a separately incorporated subsidiary, then the physician's
referrals to the hospital's laboratory could be prohibited (absent some
exception). However, if the physician owns part of the hospital by
virtue of owning some portion of a separate corporation that provides
services other than clinical laboratory services, the exception in
section 1877(b)(4) could apply until January 1, 1995. That is, the
physician would have a financial relationship with the hospital (an
ownership interest in the hospital) that does not relate to the
provision of clinical laboratory services.
If, in contrast, a physician has an ownership interest in the
hospital as a whole, we believe that this interest is indirectly
related to the provision of clinical laboratory services. That is
because, in most cases, a hospital's revenues will reflect the revenues
earned by its clinical laboratory. It is for this reason that we
included in proposed Sec. 411.357(b)(3)(ii) the concept of ownership or
investment interests that relate ``directly or indirectly'' to the
furnishing of laboratory services.
Even if a physician has no ownership interest in the hospital
(either in its operating entity or in a subsidiary), referrals to the
hospital laboratory might still be prohibited, however, if the joint
venture is structured so that there is some compensation passing
between the hospital and the physician. If the hospital provides
remuneration to the physician, that remuneration will result in
prohibited referrals, unless an exception applies. Referrals would not
be prohibited under section 1877(e)(4) and Sec. 411.357(g) of this
final rule if the remuneration is unrelated to the provision of
clinical laboratory services; for example, the hospital and the
physician might jointly own a free-standing CAT scanning facility. Any
remuneration that flows from the hospital to the physician would be
excepted if the remuneration relates only to the CAT scanning
operation. This result, however, will change when the prohibition on
referrals is extended to other designated health services beginning on
January 1, 1995.
Comment: There were several other comments relating to the
exceptions that apply to financial relationships between physicians and
hospitals. Some commenters maintained that there is a conflict between
the exception set forth in section 1877(b)(4) and the proposed
regulatory exceptions. The argument is that this section of the law
establishes a general exception for financial relationships with a
hospital if the relationship does not relate to the provision of
clinical laboratory services
[[Page 41957]]
but that a parallel exception was not included in Sec. 411.355, the
title of which is ``General exceptions to referral prohibitions related
to ownership and compensation.'' Instead, the commenters pointed out,
the proposed rule contains separate exceptions, one for ``ownership or
investment interests'' and one for ``compensation arrangements.'' In
the view of these commenters, these regulatory provisions are not
consistent with section 1877(b)(4), and they recommended that the
regulations be revised so that Sec. 411.355 reflects the content of
section 1877(b)(4).
Another commenter had several questions about proposed
Sec. 411.357(b)(3)(i) and what is meant by an ownership interest in a
distinct part or department of a hospital. The commenter stated that
most hospitals are incorporated entities, being either a for-profit or
not-for-profit corporation and that parts or departments are assets of
the incorporated entity and cannot be owned separately. This being the
case, the commenter asked the following:
How can a physician own an interest in a distinct part of
a corporation or was the intention to refer to ownership of entities
related to a hospital?
Why should ownership in an entity related to a hospital
cause referrals from a physician to be prohibited if the related entity
is not a clinical laboratory (for example, a hospital owns 60 percent
of a subsidiary that is not a clinical laboratory and the physician
owns 40 percent).
Why should the facts of this example result in a situation
that is any more subject to abuse than one in which a physician has
general ownership in the hospital and is authorized to perform patient
care services at the hospital?
Response: The first set of commenters maintained that there was a
conflict between the exception set forth in section 1877(b)(4) and the
proposed regulatory exceptions. We believed that the combination of the
provisions at Sec. 411.357(b)(3)(ii) of the proposed rule and
Sec. 411.359(g) of the proposed rule effectively incorporated the
section 1877(b)(4) provision. We had considered including the content
of these two regulatory provisions under one provision in Sec. 411.355,
as was suggested in the comment, but that section of the regulation
addresses services that can qualify for an exception, whereas section
1877(b)(4) addresses financial relationships that can qualify. Since
under section 1877(a) all financial relationships are either ownership/
investment interests or compensation arrangements, we included the
section 1877(b)(4) exception under both Sec. 411.357 (which applies to
ownership/investment exceptions, and is now Sec. 411.356) and
Sec. 411.359 (which applies to exceptions for compensation
arrangements, and is now Sec. 411.357).
We believe the commenters' dissatisfaction with our method for
incorporating section 1877(b)(4) may stem from the way we drafted the
provision in Sec. 411.359(g). We now believe that this proposal
deviates from the statute. We discuss this issue and our solution for
it in our response to the next comment.
As a result of OBRA '93, as amended by SSA '94, the ownership/
investment aspect of section 1877(b)(4) applies only until January 1,
1995. Some aspects of the compensation exception continue in effect,
since OBRA '93 incorporated them into section 1877(e)(4).
The second comment asked, in regard to proposed
Sec. 411.357(b)(3)(i) and section 1877(d)(3), how a physician can own
an interest in a distinct part of a corporation when hospitals are one
incorporated entity. As we explained in an earlier response, we believe
that a ``hospital'' can consist of any separate legally-organized
operating entity plus a variety of subsidiary, related, or other
entities if the hospital bills for the services furnished to its
patients by those entities. In drafting section 1877(d)(3), Congress
itself perceived that a hospital can consist of separately owned,
subdivided parts and that a physician could own an interest in either
the hospital itself or only in a subdivision. We are defining
``hospital'' for purposes of this regulation, to reflect this concept.
The commenter has also asked whether the intention of the exception
in section 1877(d)(3) was to refer to ownership of entities related to
a hospital. Although the statute does not explicitly say this, it does
say that the exception will not apply if a physician's ownership
interest is merely in a subdivision of the hospital, rather than in the
hospital itself. We believe that a subdivision can be a related entity.
We have interpreted such entities, in response to other comments, as
parts of a hospital if the hospital bills for services furnished by
these entities to hospital patients (excluding situations in which
services are furnished for a hospital ``under arrangements''). A
physician with an interest in a joint or related entity would not have
an ownership interest in the hospital at all if the hospital did not
bill for the services furnished by the joint or related entity.
The commenter has also asked why ownership in a related entity
should cause referrals from a physician to be prohibited if the entity
is not a clinical laboratory (for example, if the hospital owns 60
percent of a non-laboratory entity and the physician owns 40 percent).
If the entity in this situation is part of the hospital, any referrals
by the physician to the hospital laboratory would not qualify for the
exception in section 1877(d)(3). To qualify for this exception, the
physician's ownership interest must be in the hospital itself and not
in a subdivision. However, the physician's referrals could qualify for
the exception in section 1877(b)(4) which, until January 1, 1995,
excludes any ownership interest in a hospital, provided the ownership
interest does not relate to the provision of clinical laboratory
services.
Finally, the commenter has asked why the facts in the example
should be more subject to abuse than one in which a physician has a
general ownership in the hospital and is authorized to perform patient
care services there. Section 1877(d)(3) specifically requires that, to
take advantage of this exception, a physician must have an ownership
interest in the hospital itself, and not in a subdivision. We must
reflect this requirement in the regulation, and have incorporated it
into the final rule at Sec. 411.356(b)(3). We have not broadened this
exception to apply to any other ownership interest in a hospital
because we have seen no evidence that such an expanded exception would
be free of the risk of program or patient abuse.
Comment: There were two comments relating specifically to proposed
Sec. 411.359, which contains exceptions for certain compensation
arrangements. One commenter asked under what authority we had limited
the broad exception in section 1877(b)(4). Under that exception, the
commenter pointed out, any financial relationship with a hospital is
excepted (ownership/investment interest or compensation arrangement),
as long as the relationship does not relate to the furnishing of
clinical laboratory services. As such, the commenter questioned why
this exception was not included under proposed Sec. 411.355, which
covers general exceptions that apply to both ownership/investment and
compensation relationships. The commenter believed that, in covering
section 1877(b)(4) under Sec. 411.359(g), we had limited the exception
so that it no longer constitutes the broad exception, for all financial
relationships, included in the statute.
The commenter referred to the fact that the exception in
Sec. 411.359(g) is
[[Page 41958]]
entitled ``other arrangements with hospitals'' and indicated that the
provision is drafted so that this exception applies to compensation
arrangements between a hospital and a physician (or family member)
other than those arrangements described in Secs. 411.359 (a) through
(d). (These arrangements in paragraphs (a) through (d) include rental
of office space, employment and services arrangements with hospitals,
physician recruitment, and isolated transactions. To qualify for these
exceptions, physicians and entities must meet a variety of conditions.)
The commenter pointed out that, under section 1877(b)(4), the only
condition is that a financial relationship cannot be related to the
furnishing of clinical laboratory services.
The commenter has read the proposed rule to mean that the exception
in Sec. 411.359(g) applies only if the compensation arrangement is not
one of the ones described under paragraphs (a) through (d). Thus, for
example, a hospital may have one or a variety of arrangements with a
physician who is performing outpatient surgery on a patient at the
hospital. These arrangements could include the rental of office space,
employment or service arrangements, physician recruitment arrangements,
or isolated transactions. The commenter believed that if a physician
had one or more of these arrangements but could not meet the conditions
to qualify for an exception, the exception in Sec. 411.359(g) would
automatically be foreclosed. That is, if the physician's financial
arrangement was one already described in Sec. 411.359 in paragraphs (a)
through (d), then it could not be covered by paragraph (g), which
applies only to financial arrangements other than those in paragraphs
(a) through (d).
The commenter feared that the proposed rule could result in
situations in which the hospital's laboratory would refuse to accept
the physician's Medicare patient for laboratory work, with the result
that the patient could not receive needed medical care at the hospital.
The commenter questioned our authority to limit the statutory exception
in section 1877(b)(4) and asked that we, at a minimum, add an exception
for emergency laboratory work that would apply whenever, in the
judgement of the physician, laboratory tests are needed quickly.
Another commenter recommended that the exception addressed in
proposed Sec. 411.359(g) be broadened to permit a direct or indirect
financial relationship between a physician and a hospital or hospital
affiliated organization or entity.
Response: In drafting Sec. 411.359(g), we intended to cover any
compensation arrangements that were not described in Secs. 411.359 (a)
through (d), including those that were the kinds of arrangements
described in those provisions but that did not meet the conditions
specified in them. We agree with the first commenter that the way we
drafted Sec. 411.359(g) is ambiguous and can cause confusion. As a
result, we have made Sec. 411.359(g) an independent exception, as it is
in the statute.
We have also made several other changes to this provision to
reflect amendments to the statute. As we have discussed in other
responses, OBRA '93 eliminated section 1877(b)(4), which excepted any
ownership/investment interest or compensation arrangement with a
hospital that does not relate to the provision of laboratory services.
The relationship could be between a physician and a hospital or an
immediate family member and a hospital. SSA '94 reinstated section
1877(b)(4) until January 1, 1995. OBRA '93 also added paragraph (e)(4)
to section 1877, retroactive to January 1, 1992. This new provision
differs somewhat from paragraph (b)(4) in the sense that it retains
only the compensation aspect of the exception. In addition, it applies
only to remuneration from a hospital to a physician (not to a family
member) if the remuneration does not relate to the furnishing of
laboratory services.
The commenter also believed that we should provide an exception for
referrals by physicians whenever, in the judgment of the referring
physician, laboratory tests are needed quickly to treat a patient whose
condition will worsen or be put at risk absent prompt laboratory
results. We believe that section 1877 and this final regulation provide
sufficient exceptions to ensure, in almost all cases, that patients
should not be in the position of having their health threatened because
of the general referral prohibition. In addition, the commenter's
recommendation would give physicians total discretion that could be
subject to abuse.
We do not agree with the suggestion that relates to broadening the
exception in proposed Sec. 411.359(g) so that it would apply to permit
a direct or indirect financial relationship between a physician and a
hospital affiliated organization or entity. The current authority in
section 1877(e)(4) limits the exception to remuneration provided by a
hospital, and not some other entity. We have interpreted the term
``hospital'' to include related or affiliated organizations or entities
in situations in which the hospital bills for services provided to
hospital patients by the organizations or entities (except when the
services are provided ``under arrangements''). However, we do not
believe that expanding the exception to other, non-hospital
organizations or entities would necessarily be free of the risk of
patient or program abuse.
Comment: One commenter asked that we explain what is meant by the
phrase ``does not relate to the furnishing of clinical laboratory
services,'' as used in proposed Sec. 411.357(b)(3)(ii) and
Sec. 411.359(g). The commenter wanted to know whether a physician who
is not authorized to perform patient care services at a for-profit
hospital but who has an ownership interest in the hospital is
considered to have a financial relationship that is related to the
provision of laboratory services. The physician receives dividends
based on the business profits earned by the hospital. These dividends
may in part depend on the provision of laboratory services.
Response: The commenter has asked about a physician with an
ownership interest in a hospital. The commenter has apparently
correctly perceived that, because the physician is not authorized to
provide patient care services in the hospital, the exception in section
1877(d)(3) and in proposed Sec. 411.357(b)(3)(i) would not apply.
For purposes of the exception in section 1877(b)(4) and proposed
Sec. 411.357(b)(3)(ii), the commenter has asked whether the physician's
ownership interest in the hospital relates (either directly or
indirectly) to the furnishing of clinical laboratory services. We would
consider the physician's ownership interest as related to the provision
of clinical laboratory services. We base this conclusion on the fact
that general ownership in a hospital includes an interest in the
hospital laboratory. This exception could apply if the physician had an
ownership interest in a subdivision of the hospital which did not
provide clinical laboratory services. We would like to point out that,
as the result of OBRA '93 (as amended by SSA '94), the exception in
section 1877(b)(4) relating to ownership and investment interests is no
longer in effect, beginning on January 1, 1995.
b. Ownership and Compensation
Comment: One commenter requested that the final rule clarify that a
physician who meets the exception relating to an ownership or
investment interest in Sec. 411.357(b)(3) of the proposed rule not also
be required to meet the exception relating to compensation arrangements
in proposed
[[Page 41959]]
Sec. 411.359(g) in regard to arrangements that are incident to the
physician's ownership. Examples of such arrangements are the initial
offer to allow the physician to acquire the ownership interest,
dividends paid to the physician as an owner, or the opportunity to
enter into a stockholders agreement that would provide for the buyout
of the physician's ownership on death, disability, retirement, etc., or
that provides the hospital with a right of first refusal to buy the
physician's ownership interest in a hospital.
Response: We believe that the commenter has asked about
compensation arrangements that are inherent in certain ownership/
investment situations for which there are exceptions under the proposed
regulation. We believe that a return on equity (for example, dividends)
that a physician gets as a consequence of being an owner is not
considered a compensation arrangement.
We take this position because section 1877 is designed to prohibit
referrals to an entity whenever a physician has a financial
relationship with that entity. The purpose is to prevent physicians
from realizing a financial gain or some other benefit from making those
referrals. The Congress specifically defined ``financial relationship''
to include two distinct components: an ownership/investment interest
and a compensation arrangement. By this, we believe the Congress meant
to encompass two mutually exclusive concepts: (1) Investment/ownership
interest and whatever potential compensation or value they have or may
bring to the owner, and (2) all other arrangements that result in some
compensation.
Since we believe that potential compensation from an ownership/
investment interest is already factored into the investment/ownership
exceptions, it would make little sense to review the resulting
compensation against the exceptions for compensation arrangements. For
example, it would make little sense to say that a physician can invest
in publicly traded securities under the ownership/investment exception
in section 1877(c), yet preclude the physician's referrals because the
compensation he or she receives from these investments does not fall
within any of the compensation exceptions. As a result, the prohibition
on referrals should apply only when a physician has a compensation
arrangement that results from something other than an excepted
ownership or investment interest. It is to these compensation
arrangements, which do not stem from an ownership or investment
interest, that the compensation exceptions apply. Thus, we agree that a
physician would not be required to qualify for both exceptions in order
to refer laboratory tests to the laboratory in which he or she has an
ownership interest.
G. Exceptions to the Referral Prohibition Related to Compensation
Arrangements
1. Rental of Office Space
Section 411.359(a) of the proposed rule describes the exception
under which the rental of office space does not constitute a financial
relationship subject to the prohibition on referrals. The exception
applies as long as payment made by a lessee to a lessor is made under
the following conditions:
There is a rental or lease agreement that meets the
following requirements:
+ The agreement is set out in writing and is signed by the parties.
+ The agreement identifies the premises covered by the agreement
and specifies the space dedicated for the use of the lessee.
+ The term of the agreement is at least 1 year.
+ If the agreement is intended to provide the lessee with access to
the premises for periodic intervals of time, rather than on a full-time
basis for the term of the agreement, the agreement specifies exactly
the schedule of the intervals, their precise length, and the exact rent
for the intervals.
+ The agreement provides for payment on a periodic basis of an
amount that is consistent with the fair market value of the rented or
leased premises in arm's-length transactions.
+ The agreement provides for an amount of aggregate payments that
does not vary (directly or indirectly) on the basis of the volume or
value of any referrals generated between the parties.
+ The terms of the agreement would be considered to be commercially
reasonable even if no referrals were made between the lessee and the
lessor.
If an interested investor (either a physician or immediate
family member) has an ownership or investment interest in the rented or
leased office space, the arrangement meets the following conditions:
+ The rented or leased office space is in the same building in
which the physician's practice or the physician's group practice is
located.
+ All of the requirements described in paragraphs (a)(1)(i)
through (a)(1)(vii) of Sec. 411.359 are met.
Section 1877(e)(1) as enacted by OBRA `89 was significantly changed
by OBRA `93. Section 152(c) of SSA `94 amended the effective date
provision for OBRA `93 so that the amendments to the rental exception
are effective retroactively to January 1, 1992. The OBRA `93 provisions
for the rental of office space provide that payments made by a lessee
to a lessor for the use of a premises shall not be considered a
compensation arrangement if--
The lease is set out in writing, signed by the parties,
and specifies the premises covered by the lease.
The space rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee, except that the lessee may make payments for the use of
space consisting of common areas if such payments do not exceed the
lessee's pro rata share of expenses for such space based upon the ratio
of the space used exclusively by the lessee to the total amount of
space (other than common areas) occupied by all persons using such
common areas.
The lease provides for a term of rental or lease for at
least 1 year.
The rental charges over the term of the lease are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
The lease would be commercially reasonable even if no
referrals were made between the parties, and
The lease meets such other requirements as the Secretary
may impose by regulation as needed to protect against program or
patient abuse.
Comment: A number of commenters raised questions about the meaning
of the ``same building'' requirement in section 1877(e)(1)(B). Prior to
OBRA `93, section 1877(e)(1)(B) stated that, ``in the case of rental or
lease of office space in which a physician who is an interested
investor (or an interested investor who is an immediate family member
of the physician) has an ownership or investment interest, the office
space is in the same building as the building in which the physician
(or group practice of which the physician is a member) has a
practice.'' Several commenters also questioned the meaning of the terms
``investor,'' ``interested investor,'' and ``disinterested investor''
in section 1877(h) (5) and (6).
Response: OBRA `93 amended section 1877(h) to eliminate the terms
``investor,'' ``interested investor,'' and ``disinterested investor.''
In addition, OBRA `93 eliminated the ``same building'' requirement in
section 1877(e)(1)(B), effective January 1, 1995.
[[Page 41960]]
SSA `94 amended the OBRA `93 effective date provision so that the
revised version of section 1877(e)(1) is retroactively effective to
January 1, 1992. As a result, these terms are not reflected in this
final rule.
2. Isolated Transactions
Under Sec. 411.359(d) of the proposed rule, referrals by physicians
involved in isolated financial transactions, such as the one-time sale
of property, qualify for an exception if certain conditions are met and
there is no other financial relationship between the entity and the
physician for 1 year before and 1 year after the transaction.
Comment: Many commenters believed that the 1 year requirement
creates substantial and unnecessary problems.
If a laboratory were to purchase assets from a physician on a one-
time basis, it would not be able to accept future Medicare referrals
from this physician if there were any previous relationship between the
laboratory and the physician.
Response: We attempted in the proposed regulation to quantify and
define an ``isolated transaction'' by adding the 1-year requirement.
However, because commenters felt that this requirement creates
substantial problems, we have decided to replace it with what we
believe is a simpler and clearer standard. To define ``isolated,'' we
have eliminated the requirement that there can be no financial
relationship between the parties for 1 year before the transaction, and
we have shortened the period after the transaction. We have replaced
this with the requirement that there can be no other unexcepted
financial relationship between the parties for 6 months after the
``isolated transaction.'' That is, if the two parties enter into a
compensation arrangement within the 6-month period that qualifies for
another exception, such as the employment or personal services
exception, or if one of the parties qualifies for one of the ownership
exceptions, the original transaction can still qualify as an
``isolated'' one.
We have also added a definition of ``transaction'' to make it clear
that we regard an isolated transaction as one involving a single
payment. If a financial relationship involves long term or installment
payments (such as a mortgage), each payment constitutes a separate
transaction, and would result in an ongoing financial relationship.
(Individual payments between parties generally characterize a
compensation arrangement. However, debt, as described in the statute in
section 1877(a)(2), can constitute an ownership interest that continues
to exist until the debt is paid off.)
3. Service Arrangements With Nonhospital Entities
Under proposed Sec. 411.359(e), which reflects section 1877(e)(3)
before it was amended by OBRA `93, referrals by a physician who has an
arrangement to provide specific identifiable services to an entity
other than a hospital would not be prohibited if the services are
furnished--
By the physician acting as the medical director or as a
member of a medical advisory board of the entity in accordance with a
Medicare requirement;
As physicians' services to an individual receiving hospice
care for which Medicare payment may only be made as hospice care; or
As physicians' services to a nonprofit blood center.
The arrangement must satisfy certain requirements that also apply
to employment and service arrangements with hospitals.
As discussed in section I.D.6.d. of this preamble, section
1877(e)(3) was amended by OBRA `93 and now provides that certain
personal service arrangements with any entity will not be considered
compensation arrangements for purposes of section 1877(a)(2)(B). This
provision applies to remuneration paid by any entity to a physician, or
to an immediate family member, for furnishing personal services. The
exception applies if certain conditions are met. Finally, section
152(c) of SSA `94 amended section 13562(b)(2) of OBRA `93 (the
effective date provision for OBRA `93) to create a new paragraph (D).
This new effective date provision says that section 1877(e)(3), as
amended by OBRA `93, is in effect beginning on January 1, 1992;
however, until January 1, 1995, it does not apply to any arrangement
that meets the requirements of section 1877(e)(2) or (e)(3) as they
were in effect prior to the OBRA `93 amendments.
Comment: One commenter indicated that under the CLIA regulations
(42 CFR part 493) laboratories must have physicians who act as
laboratory directors, rather than medical directors. Thus, the
commenter believed the regulations should be modified so that it is
clear that a laboratory does not have a compensation arrangement if it
pays a physician to act as the laboratory director of the entity.
Response: Under the revised provision in section 1877(e)(3),
remuneration from an entity to a physician for the provision of the
physician's personal services will not prohibit the physician from
referring clinical laboratory services to the entity providing the
following conditions are met:
The arrangement is set out in writing, signed by the
parties, and specifies the services covered by the arrangement.
The arrangement covers all of the services to be furnished
by the physician (or an immediate family member of the physician) to
the entity.
The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement.
The term of the arrangement is for at least 1 year.
The compensation to be paid over the term of the
arrangement is set in advance, does not exceed fair market value, and
except in the case of a physician incentive plan described in section
1877(e)(3)(B), is not determined in a manner that takes into account
the volume or value of any referrals or other business generated
between the parties.
The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates any State or Federal law.
The arrangement meets any other requirements the Secretary
imposes by regulations as needed to protect against Medicare program or
patient abuse.
Comment: One commenter indicated that there appear to be a number
of relationships between clinical laboratories and physicians that are
not specifically covered by proposed Sec. 411.359 but would be
protected by the fraud and abuse safe harbors. The commenter suggested
that the final rule be expanded to specifically state that an
arrangement would not violate the physician referral rule if it fits
within a safe harbor under the fraud and abuse regulations.
Response: As mentioned in the preamble of the proposed rule and in
the response to other comments, the anti-kickback and safe harbor
provisions of the law and the section 1877 prohibition are intended to
serve different purposes. 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.
Conversely, section 1877 prohibits a physician's Medicare referrals for
clinical laboratory services to entities with which the physician (or a
family member) has a financial relationship when those referrals are
not
[[Page 41961]]
specifically excepted under section 1877. Because of these
distinctions, the provisions of the regulations implementing these laws
will not exactly correspond. Additionally, we note that, under the
amendments created by OBRA `93 (particularly in the new sections
1877(e)(2) and (e)(3)), many more relationships between physicians and
laboratories are now excepted from the effects of the prohibition on
referrals.
Comment: One commenter indicated that a justifiable distinction
cannot be drawn between the employment of a physician (or family
member) by a hospital, which in some cases would be excepted under
Sec. 411.359(b) of the proposed rule, and employment of a physician (or
family member) by a nonhospital laboratory, which could not be excepted
under proposed Sec. 411.359.
Response: Section 1877(e)(2), as amended by OBRA `93, recognizes
bona fide employment relationships without drawing a distinction
between a hospital laboratory and nonhospital laboratories. Under the
new provision, for purposes of section 1877, any amount paid by an
employer to a physician (or an immediate family member of the
physician) who has a bona fide employment relationship with the
employer for the provision of services does not constitute
compensation, providing the following conditions, set forth in
Sec. 411.357(c), are met:
The employment is for identifiable services.
The amount of the remuneration under the employment--
+ Is consistent with the fair market value of the services;
+ Is not determined in a manner that takes into account (directly
or indirectly) the volume or value of any referrals by the referring
physician (although certain productivity bonuses are allowed); and
+ The remuneration is provided under an agreement that would be
commercially reasonable even if no referrals were made to the employer.
H. Additional Exceptions
Under section 1877(b)(4), the Secretary is given the authority to
define financial relationships beyond those specified in the law that
could be exempt from the prohibition on referrals if the Secretary
determines, and specifies in regulations, that they do not pose ``a
risk of program or patient abuse.'' (Section 152(c) of SSA '94 amended
the effective date provision for OBRA '93 to reinstate section
1877(b)(4), as it appeared prior to the enactment of OBRA '93, until
January 1, 1995. The original version of (b)(4) provided an exception
for financial relationships with a hospital which are unrelated to the
provision of clinical laboratory services. As a result, we believe that
there are two versions of section 1877(b)(4) in effect until January 1,
1995.) In the proposed rule, we requested recommendations about
financial relationships that do not pose a risk of program or patient
abuse. We received suggestions for additional exceptions, all of which
are discussed below. In particular, the issue of shared laboratories
was raised in the context of various business and practice
arrangements, most often with respect to such shared arrangements
between physicians.
1. Comments Relating to an Exception for Shared Laboratories
Comment: A few commenters strongly objected to the formulation of
any special exception for shared laboratories. The commenters
maintained that these arrangements could easily be used as a sham to
circumvent the purposes of the law. They believed that a group of
physician investors could set up a single laboratory to which they all
refer testing. Each physician could then obtain his or her own CLIA
number for the laboratory and bill separately for these services, thus
making the detection of these schemes extremely difficult. Moreover,
the commenters wrote that outside practitioners would also be allowed
to refer their testing to any one of these physicians. Such an
arrangement, in these commenters' view, is little more than a
continuation of the physician-owned laboratory under a different name
and is a way for physician-owners to circumvent the terms of section
1877.
Response: We share the concerns raised by these commenters, and we
agree that a separate exception cannot be justified. CLIA certifies
each laboratory by location. It does not certify individuals.
Therefore, a laboratory that registers for CLIA will register once and
receive one CLIA registration number. Each shared laboratory location
is to have one CLIA certificate regardless of the number of physicians
conducting or supervising testing in that laboratory, and only one
registration and compliance fee and proficiency testing enrollment and
survey is required. Testing performed in the physician's office that
contains the shared laboratory may be included under the shared
laboratory certificate. Physicians who perform laboratory testing in
their own offices, in addition to performing tests in a shared
laboratory, must have a separate certificate for their office
laboratory.
As we understand it, there are a variety of circumstances that
involve shared office space in general and shared laboratories in
particular. Examples of shared laboratories range from laboratories
shared by two or more solo practicing physicians to larger laboratories
that are shared by hospitals, other health care facilities, and group
practices. In effect, these commenters believed that to establish an
exception for practicing physicians who share a laboratory would thwart
the intent of the statute to end potential and actual overutilization
of laboratory services.
In the example presented by the commenters, several physicians set
up a laboratory separate from any of their practices, share in the
costs of its operation, and bill individually for services furnished to
their own patients. (The commenters also stated that physicians who are
not owners refer patients for tests.) Since the physicians each appear
to have an ownership or investment interest in the laboratory, they
would be precluded from referring to the laboratory, unless they
qualify for an exception.
It is not clear from the example, but if each physician does not
have a practice in the same building as the laboratory and does not
directly supervise the laboratory personnel who are performing the
services for the physician's patients, the supervision and location
requirements of the in-office ancillary services exception in section
1877(b)(2) would not be met. Furthermore, as discussed in greater
detail in response to the next comment, we do not believe that it would
be possible to develop an exception to accommodate these circumstances
that would meet the statutory test contained in section 1877(b)(4);
that is, that there be no risk of program or patient abuse.
Nonetheless, we want to clarify that the in-office ancillary
exception could apply if each of the individual physicians involved
separately met the supervision, location, and billing requirements of
section 1877(b)(2). For example, physicians A, B, and C each have their
own offices in the same building. Each physician directly supervises
the laboratory technician when the technician is performing services
for the physician. In addition, each physician bills for services
furnished to his or her own patients. We also want to provide an
example of a situation that would not qualify for the in-office
exception. For example, ten individual physicians each have their own
office on different floors in a building and the laboratory they share
is
[[Page 41962]]
located in the basement of the building. The physicians do not directly
supervise the laboratory technician when the technician is performing
services for the physicians. In addition, the laboratory bills for
services furnished to the patients of the physicians.
In the first example, as long as the requirements of section
1877(b)(2) and Sec. 411.355(b) are met, it would not matter if the
physicians pooled resources to cover the costs of the space occupied by
the laboratory or for the cost of the equipment or overhead. We
emphasize that the in-office ancillary services exception has been
amended by OBRA '93, effective retroactively to January 1, 1992. Before
this amendment, the services under this exception had to be furnished
by the referring physician or by another physician in the same group
practice. Alternatively, services could be furnished by employees of
the referring physician or of the physician's group practice, provided
the employees were ``personally supervised'' by the referring physician
or another physician in the group practice. This requirement has been
changed by OBRA '93 to eliminate the requirement that only a
physician's or group practice's employees can furnish services. Also,
the term ``personally supervised'' has been changed to require that a
technician's or other individual's services be ``directly supervised''
by the referring physician or by another physician in the group
practice.
For purposes of this exception, we are explicitly defining ``direct
supervision'' using the longstanding Medicare definition of this term.
Under this definition, the physician must be present in the office
suite and be immediately available to provide assistance and direction
throughout the time a technician is performing services. We believe it
is appropriate for us to define this term in this final rule with
comment period, rather than in a new proposed rule. We have several
bases for this conclusion.
First, we believe that the Secretary's definition for this term is
interpretive. Interpretive, nonsubstantive agency promulgations fall
into the Administrative Procedure Act (APA) exception to notice and
comment rulemaking. See 5 U.S.C. 553(b)(A).
In defining ``direct supervision,'' we are merely explicating the
Congress' desires rather than adding substantive content of our own.
That is, the definition is a clarification of what is implicitly in the
statute. A rule that clarifies a statutory term is the classic example
of an interpretive rule. Interpretive rules are those that merely
clarify or explain existing law or regulations. They serve an advisory
function, explaining the meaning given by the agency to a particular
word or phrase in a statute or rule it administers.
The term ``direct supervision'' is a longstanding term of art with
a very particular meaning in the Medicare program. It appears in
section 2050.2 of the Medicare Carriers Manual, Part 3--Claims
Processing, which describes services that are ``incident to'' a
physician's professional services. This definition has appeared in the
manual since the 1970's. It has, over the years, affected the many
physicians who bill for services or supplies that are furnished as an
integral, although incidental, part of a physician's personal
professional services in the course of diagnosis or treatment of an
injury or illness. The same definition appears in the regulations at
Sec. 410.32(a), which states that, in general, diagnostic x-ray tests
are covered only if performed under the ``direct supervision'' of
certain physicians or by certain radiology departments. Congress, in
using this term of art, has adopted and ratified the Secretary's
definition.
We believe that in changing ``personally supervised'' to the
familiar ``directly supervised,'' Congress was intending to make clear
that it wished to incorporate a concept that the agency and the
provider community have long understood. For example, physicians are
quite familiar with this term because they can only bill for
nonphysician services that are ``incident to'' their own services if
the nonphysician services are performed under ``direct supervision.''
As such, we have reiterated in this regulation our long-standing
definition for this term. The definition is a clarification of what the
Secretary believes ``direct supervision'' means and has always meant;
it does not add to the statute any additional substantive requirements.
We are aware of only one paragraph of legislative history for OBRA
'93 that attempts to explain the meaning of the term ``direct
supervision.'' The Conference Report for OBRA '93 states that--
[T]he conferees intend that the requirement for direct
supervision by a physician would be met if the lab is in a
physician's office which is personally supervised by a lab director,
or a physician, even if the physician is not always on site.
[Emphasis added.] H.R. Rep. No. 213, 103d Cong., 1st Sess. 810
(1993).
We believe that this explanation provides no insight into the
Congress' purpose in using the term ``direct supervision.'' That is, it
purports to explain what constitutes direct supervision, yet defines it
by allowing a physician to ``directly supervise'' without even being
present. This appears to us to be at total variance with the Medicare
program's longstanding requirements for ``direct supervision,'' and
with the statute, which specifically requires that the referring
physician or another physician in the same group practice have direct
involvement with individuals performing laboratory tests. In addition,
the statute is very specific about who must directly supervise; it does
not say that a laboratory director who is not a group member can
provide this supervision instead of a solo or group practice physician.
Also, it appears to us that the legislative history is
inconsistent. If ``direct supervision'' is interpreted to allow a
laboratory director to supervise individuals who are furnishing
services, this could have the effect of creating an exception for
shared laboratories. The very same conference report points out that
the House Energy and Commerce Committee introduced a provision that
would have added an exception for shared laboratories. The conference
agreement, however, specifically rejected this amendment. H.R. Rep. No.
213, 103d Cong., 1st Sess. 810 (1993).
Even without the ``interpretive'' exception, we believe that there
would be good cause to waive notice and comment for this particular
term. Title 5 U.S.C. 553(b)(B) authorizes agencies to dispense with
certain procedures for rules when they find ``good cause'' to do so.
Under section 553(b)(B), the requirements of notice and comment do not
apply when the agency for good cause finds that those procedures are
``impracticable, unnecessary, or contrary to the public interest.''
We believe that waiting to define ``direct supervision'' in a
future notice of proposed rulemaking would be both impracticable and
contrary to the public interest. To begin with, some of the amendments
added by OBRA '93 relating to clinical laboratories have a retroactive
effective date. The provision containing the ``direct supervision''
requirement is effective retroactively back to January 1992. The
retroactive effective date for some provisions relating to clinical
laboratory services, but not others, demonstrates the Congress' desire
to expedite their implementation. Although an expedited timeframe alone
may not justify a ``good cause'' exception, we believe it is a crucial
factor when considered in conjunction with the entire set of
circumstances.
The in-office ancillary services provision establishes an exception
to the referral prohibition that is critical to
[[Page 41963]]
the many solo and group practice physicians who wish to be excepted for
referrals for their own in-office ancillary services. These physicians
have had no way to be certain, from January 1992 until the publication
date of this interim final rule, whether they qualify for the in-office
ancillary services exception. They cannot know if they do until it is
clear that they are ``directly supervising'' any individuals who
perform laboratory tests. In short, a portion of the statute cannot be
implemented without interpretation, although some form of
``supervision'' has been required since January 1992.
Defining ``direct supervision'' in this interim final rule avoids
piecemeal promulgation of the statute for critical provisions such as
this one. The in-office ancillary services exception is an important
one that affects many physicians in a variety of situations, including
those involved in shared laboratories. We have received a tremendous
number of inquiries on how shared laboratories fit within the statutory
scheme. We cannot provide a definitive answer to many of these
inquiries until we define ``direct supervision.'' Without certainty,
physicians and entities affected by this provision will continue to be
confused about how to handle their highly complicated financial
relationships. They may divest themselves unnecessarily of interests
that we believe the Congress meant to excuse when it created the in-
office ancillary exception.
Any uncertainty over the meaning of ``direct supervision'' could
also damage our ability to enforce section 1877. If we take no action
and delay enforcement of the referral prohibition because of
uncertainty about the ``direct supervision'' requirement, we could be
allowing over-utilization of services by physicians who have financial
relationships with an entity and who continue to make prohibited
referrals to that entity.
Finally, we are providing a comment period following publication of
this interim final rule. We will carefully consider all comments we
receive on the definition of ``direct supervision'' and publish our
responses to these comments in a final rule.
The long-standing definition of ``direct supervision'' makes the
proximity of the laboratory to each physician's office important. That
is, in the first example, the laboratory must be situated in a way that
each of the three physicians would be able to directly supervise the
services of the individual performing the testing when the testing is
being performed for the physician's own patients. This means that it is
possible for a physician to have his or her office practice in a
location separate from the laboratory as long as the laboratory is in
the same building in which the physician practices and he or she
fulfills the direct supervision requirement by being in the office
suite when the tests are performed.
Finally, the exception in section 1877(d)(2) and Sec. 411.356(b)(1)
for clinical laboratory services furnished in a laboratory located in a
rural area applies to shared laboratories. This exception, however,
applies to referrals that would otherwise be prohibited only because of
ownership or investment interests. The exception does not apply if the
referring physician has a compensation arrangement with the rural
laboratory. Therefore, if physicians share ownership in a laboratory
located in a rural area but have no compensation arrangements with the
laboratory (for example, remuneration between the physicians and
laboratories other than return on investment), referrals by the
physicians to the rural laboratory would not be prohibited provided the
criteria mentioned above are met.
Comment: A majority of commenters regard the absence of a ``shared
laboratory'' exception to be a serious oversight. These commenters
indicated that shared clinical laboratories are very common, especially
among younger physicians still building their solo practices and among
providers in rural or medically underserved areas, whose populations
could not otherwise support an independent laboratory testing facility.
Other commenters indicated that an exception to permit physicians to
make Medicare referrals to their shared laboratories would eliminate
the discrimination that exists in the proposed regulations in favor of
group practices and individually practicing physicians who can afford
to purchase their own laboratory equipment solely for their own use.
The commenters suggested that an exception could be added to permit
referrals when all of the following factors are present:
The shared arrangement involves a fixed and limited number
of physician practices. The maximum may be specified by the Secretary.
The arrangement involves only physicians who occupy the
same office space or who practice in contiguous offices in the same
building.
The physicians in the arrangement refer only their own
patients to their shared laboratory, which would not accept Medicare
referrals from other physicians.
The tests are done by the physicians' employees and are
directly supervised by the physicians, or the physician personally
performs the laboratory test for his or her own Medicare patients.
No physician in the arrangement may be required to
maintain a specific level or volume of laboratory referrals.
The services are billed by one of the following:
+ The physician performing or supervising the service.
+ An entity that is wholly owned by the physicians who are parties
to the shared office laboratory agreement.
The shared-office must not loan funds or guarantee a loan
for any physicians who share in the costs of the laboratory and who are
in a position to refer to the laboratory.
The agreement under which the shared-office laboratory
operates does not contain ``noncompetition clauses'' that prevent
physicians who share in the costs of the laboratory from investing in
other laboratories.
The shared-office laboratory must not furnish its items or
services to referring physicians who have an ownership interest in the
shared-office laboratory or share in the costs of the laboratory
differently from other physicians. (By this, we believe the commenter
meant that tests referred by owner physicians are not given priority.)
Physicians who share in the costs of the shared-office
laboratory must disclose their interest to their patients when ordering
tests from the laboratory.
Operation of the laboratory must be the joint
responsibility of the physicians and/or practice groups with actual
costs shared on a per test basis.
Shared physician office laboratories must demonstrate that
the laboratory simply passes actual costs through to the participating
physicians and group practices with no accumulation or distributions of
net earnings.
Response: As evidenced by the number of comments concerning this
issue and the detail contained in suggestions for an exception, it is
clear that there is great concern about this matter. Nonetheless, the
Congress, while it was deliberating over the changes it would make in
section 1877 by enacting OBRA '93, considered an exception for shared
laboratory facilities but chose not to enact it. (See H.R. Rep. No.
213, 103d Cong., 1st Sess. 809-810 (1993)). The Secretary does have the
authority to establish a shared laboratory exception if she determines
that there would not be a risk of program or patient abuse.
Unfortunately, notwithstanding the arguments for establishing such
an
[[Page 41964]]
exception, there is not sufficient basis in the rulemaking record to
support an exception that meets the statutory standard. For that
reason, we believe that Congress should provide further clarification
or specific statutory authority in this area.
The first suggestion made by the commenters was that a
shared laboratory be limited to a fixed number of physicians. In our
view, however, any attempt to select a number (three, five, ten, and so
on) would be arbitrary. That is because we do not currently have data
that would support making a distinction based on the number of
physicians involved. We see no rational basis on which to establish or
impose a limit.
The second suggestion is to limit the exception to
physicians who occupy the same office space or whose offices are
contiguous in the same building. As explained in the response to the
last comment, depending on how the physician's office space and the
shared laboratory space are physically arranged, the in-office
ancillary services exception provided in Sec. 411.355(b) could apply.
But we emphasize that the direct supervision and billing requirements
must also be met.
With respect to the remaining points, even if considered
cumulatively, they do not clearly describe a situation in which there
could be no program or patient abuse. Physicians could still have the
opportunity to overutilize services with the possibility of profit that
is inherent in any ownership arrangement. We are not suggesting that
all physicians who might wish to participate in shared laboratory
arrangements would overutilize laboratory tests. We do not believe,
however, that there is a basis for concluding that the arrangements
pose no risk of patient or program abuse.
Comment: One commenter indicated that, if the Secretary establishes
an exception for shared laboratories, physicians involved in shared
laboratory arrangements could be required to attest in writing that
they meet the criteria required by the Secretary. This requirement
would be like the one in the proposed regulation requiring that
physicians attest in writing to their Medicare carrier that they meet
the group practice exception.
Response: To clarify one point, we required only one attestation in
the proposed rule; that is, that a group practice attest in writing, to
the appropriate Medicare carrier, that the group complied with the
standard we proposed to use to determine whether substantially all of
the patient care services of group member physicians are furnished
through the group as was required by section 1877(h)(4)(B) (now section
1877(h)(4)(A)(ii)). There are other standards that a group practice has
to meet in order to qualify, but we did not propose that they be the
subject of an attestation procedure.
In any case, as explained above, we do not believe that a separate
exception for shared laboratories is justifiable.
Comment: One commenter suggested that multiple group practices
within the same building be allowed to refer patients to one central
laboratory that was created for the patients of the group practices.
Response: What is described here may be a laboratory owned by
several group practices that does testing for patients of each group.
In effect, the laboratory would be an independent entity that is shared
by several group practices in the sense that it does business with each
of its group practice owners. (A second possibility is that the
laboratory is owned by one group to perform testing for its own
patients but also accepts referrals from other groups or other outside
sources. This latter situation is discussed elsewhere in this
preamble.)
As we have explained in earlier responses to comments, we are not
providing a general exception for shared laboratories such as the one
described by the commenter. The physicians in the multiple group
practices could refer to the laboratory, provided that each referral
meets the requirements of the in-office ancillary services exception in
section 1877(b)(2). This means that the services must be personally
performed by or directly supervised by the referring physician or
another member of that physician's own group practice and the services
must be billed by the referring physician, the group practice, or an
entity wholly owned by the group practice or referring physician.
There is no evidence from the commenter's description that the
group physicians personally perform or directly supervise the
laboratory services. Also, if this is the case, the group practices
cannot individually bill for the services under section 1833(h)(5)(A),
which generally allows payment only to the person or entity that
performs or supervises the performance of clinical diagnostic
laboratory tests. If the laboratory bills, the services will not meet
the billing requirement in section 1877(b)(2).
2. Specialized Services Laboratory
Comment: One commenter requested an exception for referrals for
``specialized services.'' This exception would permit the establishment
of laboratories by groups of individual practitioners within a common
area of expertise.
The exception would apply when there is a public health need for
specialized clinical services not readily available in a geographic
region.
According to the commenter, general laboratories may lack the
equipment or the expertise to meaningfully analyze samples from
patients suffering from particular diseases. The commenter stated that
the cost of specialized services could be lowered by making them
readily available to patients who would otherwise incur unnecessary
costs and delays because samples have to be shipped to laboratories not
reasonably close to them. The commenter stated, as an example, that
laboratories that usually handle normal blood specimens typically fail
to calibrate their laboratory equipment for renal patients who express
blood values that depart significantly from the norm. In the
commenter's view, the technicians at general laboratories tend to be
inexpert at processing these abnormal samples. In turn, this causes
dialysis patients to incur unnecessary expense and endure needless
delays and incorrect test results. The commenter also stated that
laboratories that are not expert in evaluating renal blood samples tend
not to report patient values, including cumulative historical
laboratory results, to dialysis clinics in the same detailed manner as
laboratories that specialize in renal patients.
Response: As mentioned previously, a physician's Medicare referrals
to a laboratory owned by that physician will not be prohibited if the
laboratory is located in a rural area (as defined in new
Sec. 411.356(b)(1)). Therefore, physicians with an ownership interest
in a specialized laboratory that is located in a rural area are not
prohibited because of that investment from referring Medicare patients
to the laboratory. We believe that it is likely to be in rural areas
that specialized equipment or technical expertise would be in short
supply.
Furthermore, we believe the CLIA certification that is now required
for any laboratory that performs tests on human specimens will tend to
induce those laboratories that fail to calibrate their equipment or
operate in other ineffectual ways to improve their performance or risk
going out of business. For example, under CLIA, laboratories are
subject to proficiency testing and personnel requirements. Failure to
comply with accepted standards can result in serious sanctions. Thus,
we do not agree that a special exception is warranted because
[[Page 41965]]
some laboratories may not properly conduct tests.
3. Laboratories Shared With Hospitals
Comment: One commenter requested that we create an exception for a
shared laboratory facility owned by an organization or hospital that is
exempt from taxation under section 501(c)(3) of the Internal Revenue
Code if the laboratory is used in common under a written agreement with
a group practice and if the group practice constitutes all or
substantially all of the staff of the organization or hospital. The
commenter stated that the requirement that the entity that owns the
laboratory be tax exempt under section 501(c)(3) of the Internal
Revenue Code provides significant protection against patient and
program abuse. (To qualify for and maintain tax-exempt status, an
organization must be a corporation, or a community chest, fund, or
foundation, organized and operated exclusively for a community purpose
such as for religious, charitable, scientific, public safety, literary,
or educational purposes. No part of the net earnings of the
organization can inure to the benefit of any private shareholder or
other individual. Failure to meet these requirements, or failure to
continuously maintain them, results in the denial or loss of tax-exempt
status.)
The commenter believed that the conditions associated with tax-
exempt status would prevent physicians from having an ownership
interest in the laboratory from which they could receive financial
benefits in the form of dividends or other distribution of earnings, as
a result of their referrals. Consequently, there would be no incentive
to order an excessive number of clinical laboratory tests. The
commenter pointed out that payment for unreasonable or excessive
compensation would also be prohibited by the restriction on private
inurement.
Response: It is not clear from this comment exactly what the
financial relationship is between the tax-exempt hospital/organization
and the group practice physicians. We will first assume that it is the
hospital or organization only that owns the laboratory and the
physicians receive compensation from the hospital/organization for
providing staff services. This relationship will not prohibit referrals
to the hospital's laboratory provided the compensation meets the
requirements of one of the exceptions in section 1877. For example,
section 1877(e)(2) (for bona fide employment relationships with an
entity) or (e)(3) (for personal service arrangements with an entity)
could apply. An additional exception appears in section 1877(e)(7),
which exempts certain group practice arrangements with a hospital when
a group practice provides services for which the hospital bills.
If, on the other hand, the group practice physicians have an
ownership interest in the laboratory, they would be referring to a
laboratory in which they have a financial interest under section
1877(a)(2), even if they do not receive dividends or earnings. The
physicians could refer to their own laboratory, provided they meet the
in-office ancillary services exception in section 1877(b)(2) and
Sec. 411.355(b) of this regulation. If the laboratory is rural, then
the ownership relationship would be exempt under section 1877(d)(2). If
the physicians have an ownership interest in a tax-exempt hospital
itself, their relationship could be exempt under several hospital-
specific exceptions.
Because there are a number of exceptions available for situations
involving compensation between a hospital or other organization and a
physician, or for ownership in a hospital, we believe that a specific
blanket exception for laboratory facilities associated with a tax-
exempt organization or hospital would be unnecessary. Also, we are not
convinced that such an exception would be free from any risk of patient
or program abuse. For example, a non-profit or tax-exempt organization
can own a for-profit laboratory entity. Without further details and
evidence, we would not grant such an exception.
Comment: One commenter indicated that an exception should be added
for referrals to a laboratory facility that is shared by a hospital and
a clinic. The commenter provided the following information. The clinic
is a group practice. The shared laboratory is located on hospital
premises, and the hospital owns the laboratory space. The clinic leases
space from the hospital in an amount proportional to testing on the
clinic's patients. Clinic staff manage the laboratory, and the clinic
employs all the laboratory personnel. The clinic and hospital each own
some of the laboratory equipment. As such, each entity essentially
leases from the other entity the equipment needed to perform testing on
its own patients. The laboratory is not a separate legal entity, but
simply an arrangement that permits the clinic and hospital to work
together. The parties entered into this arrangement in 1973 and it has
been in effect since that time. Each party is responsible for billing
and collecting fees related to laboratory services provided to its
respective patients. The agreement provides that the clinic and
hospital would coordinate management, planning, budgeting, and
accounting for the laboratory services. The commenter indicated that an
exception should be allowed for referrals to a laboratory facility that
is shared by a hospital and a clinic (group practice) where the parties
divide expenses on a basis that reasonably approximates the costs
associated with the tests performed for each party's patients and each
party bills for and retains revenues associated with the testing of its
own patients.
Response: The commenter has asked for a specific exception for
arrangements in which a laboratory facility is shared by a hospital and
a group practice clinic. The commenter has described an arrangement
which involves a variety of ownership and compensation arrangements,
each of which could cause the group practice physicians' referrals to
be prohibited. However, as a result of the additional exceptions
included in section 1877 by OBRA '93, we believe that most of the
relationships described by the commenter could be excepted. As such, a
separate exception would be unnecessary.
The commenter first describes several compensation arrangements
between the hospital and the group practice. The group practice rents
the laboratory space and some equipment from the hospital. (The
laboratory is not a separate legal entity and is located on the
hospital's premises, so we assume it is part of the hospital.) The
hospital, in turn, rents some of the equipment from the group practice.
These arrangements should not preclude the physicians' referrals if
they meet the exceptions in section 1877(e)(1) (A) and (B), which
exempt rental arrangements provided certain conditions are met.
The group practice also provides certain services to the hospital
by managing the laboratory and employing the staff. We assume that the
group practice is receiving some compensation, in some form, from the
hospital for these services. This compensation would not trigger the
referral prohibition if the arrangement meets the requirements in the
bona fide employment exception in section 1877(e)(2) or qualifies for
the exception for personal services arrangements in (e)(3).
Alternatively, the relationship might be exempted under the exception
in section 1877(e)(7) for certain group practice arrangements with a
hospital under which the group provides clinical laboratory services
which are billed by the hospital. In this case, the group practice
appears to provide most, if not all, of the actual laboratory services
while the hospital apparently bills for
[[Page 41966]]
its own patients. To qualify for this exception, the group must meet
the definition of a group practice in section 1877(h)(4) and meet the
requirements under section 1877(e)(7).
Finally, there are certain indications that the group practice may
have some form of ownership interest in the laboratory entity (although
it may not be a separate legal entity). The group pays rent for the
space, manages the laboratory, employs all of the laboratory staff,
owns some of the equipment, bills for its own patients, and retains the
revenues associated with the testing of its own patients. In order for
the group practice to refer to its own laboratory, it must qualify as a
group practice under the definition in section 1877(h)(4), and meet the
requirements of the in-office ancillary services exception in section
1877(b)(2).
Comment: Several commenters indicated that a number of group
practices and the hospitals with which they are affiliated have for
many years operated a laboratory facility that serves both hospital
patients and the group practice's office patients. Under the terms of
the agreement between the group and the hospital, the laboratory is
operated under a shared services agreement, rather than as a true joint
venture or under an ``under arrangement'' contract. The revenues,
costs, profits, and losses resulting from services to hospital patients
are attributed to the hospital and the revenues, costs, profits, and
losses resulting from services provided to the group practice's office
patients are attributed to the group practice. The commenters
recommended a new exception that would be limited to teaching hospitals
and would apply to clinical laboratory services furnished by a
laboratory that is--
Owned or operated by an organization or hospital that
participates in an approved medical training program; and
Used in common under a written arrangement with a group
practice whose physician members constitute all or substantially all of
the active medical and teaching staff of the organization or hospital.
Response: This comment is very similar to the previous comment.
That is, it involves an arrangement between a hospital or organization
and a group practice to share a laboratory facility. The commenters,
however, do not address the specifics of the arrangement, so we cannot
tell exactly how the situation will be affected by section 1877. In
addition, it is not clear why the commenters limited their
recommendation for a new exception to just arrangements between
teaching hospitals and group practices. However, as we pointed out in
our response to the last comment, we believe that a new exception is
unnecessary after OBRA '93 for most situations in which hospitals and
other organizations share their laboratories with physicians.
In the commenter's example, for instance, the group practice
physicians constitute all or substantially all of the active medical
and teaching staff of the hospital or organization. The compensation
that these physicians receive from the hospital or organization for
their services should not prevent the physicians from referring to the
hospital's laboratory, provided the arrangement meets the requirements
under section 1877(e)(2) (for bona fide employment relationships) or
(e)(3) (for personal services arrangements). The group practice
physicians also appear to have some ownership interest in the
laboratory, since they refer their own office patients there and the
revenues, costs, profits, and losses of the group's office patients are
attributed to the group. The group practice physicians can refer their
own patients to each other, provided they meet the requirements of the
in-office ancillary services exception in section 1877(b)(2).
Comment: One commenter indicated that there are large multi-
specialty group practices that own clinics located adjacent to
inpatient hospitals and the clinics share certain ancillary facilities,
including laboratories, with the hospitals. In some cases, the
ancillary services building literally becomes the bridge between the
clinic and the hospital, so that a hospital patient enters the
ancillary facility from the hospital, and a clinic patient enters the
same facility from the clinic. Such a facility would be under the
common control of both the clinic and the hospital, and both entities
would share in the cost of personnel, space, equipment, supplies, and
other operating expenses. The commenter questioned whether the
physician group is entitled to treat such a shared facility as ``in-
office.'' The commenter believed that if the services furnished at the
facility do not qualify for the in-office ancillary exception, the
physician group's referrals for those services would be prohibited
since the cost sharing agreement between the hospital and clinic would
constitute a compensation arrangement under the statute. The commenter
requested that we provide an additional exception to accommodate
arrangements of this nature that meet all of the following conditions:
The shared laboratory facility, the group practice, and
hospital (or other entity) are part of the same medical center campus.
The costs of operation of the shared facility are shared
on the basis of utilization originating from each part, so that each
party pays only its own costs, and does not subsidize the provision of
laboratory services to the other.
The creation or continuation of such a shared facility
arrangement is not conditional or otherwise related to the volume or
value of referrals of patients between the clinic and hospital (or
other entity) for other, nonlaboratory, covered Medicare services.
Response: The comments we have received on the issue of hospitals
or similar organizations which share laboratories with group practices
have revealed to us the complexity of many of the financial
relationships involved in these arrangements. In some situations, one
or both parties actually own the physical facility and/or its
equipment, one party may pay rent to the other, and each party may
provide the other with certain services both in the laboratory and in a
practice context. It is impossible for us to analyze each and every
configuration. However, as we pointed out in earlier responses on this
issue, OBRA '93 has created additional exceptions which should address
many of the interrelationships involved in these situations. We
encourage hospitals and other organizations to analyze their own
particular circumstances in light of these exceptions.
In regard to the particular situation raised by this commenter, the
commenter describes a situation in which a laboratory is under the
common control of both a group practice clinic and a hospital, each of
which share in the cost of personnel, space, equipment, supplies, and
other operating expenses. The commenter appeared to be concerned,
primarily, about whether the in-office ancillary services exception
would apply to services furnished in the laboratory for the patients of
the group practice. The commenter provided few other details about
ownership of the hospital or laboratory or whether there is any
compensation passing between these parties.
The in-office ancillary services exception in section 1877(b)(2)
does not appear to dictate any particular ownership arrangements
between group practice physicians and the laboratory in which the
services are provided. We believe that the group practice can take
advantage of this exception and that members can refer to each other in
the laboratory provided that the group meets the definition of a
``group practice'' under section 1877(h)(4) and
[[Page 41967]]
meets the requirements in section 1877(b)(2). Under section 1877(b)(2),
the services must be furnished by the referring physician or a group
member or must be directly supervised by a group practice member. In
addition, the services must be billed by the referring physician, the
group practice, or an entity wholly owned by the group practice.
Comment: One other commenter indicated that, if an exception is
provided for contracts for services provided ``under arrangements'' as
described in section 1861(w), the language should be broad and not
limited only to those circumstances in which the arrangement between
the parties meets the safe harbor for personal services and management
contracts provided for in the anti-kickback rules (42 CFR part 1001).
According to this commenter, this limitation would pose several
problems. First, the personal services and management contracts safe
harbor would require that the aggregate amount of compensation be set
in advance and not vary based on the volume or value of tests
performed. This would mean that the parties would have to establish in
advance a flat yearly fee for laboratory services. Even a fee schedule
would not qualify for the safe harbor. A flat aggregate fee arrangement
would be of concern to the hospital because it would place the group
practice physicians at risk for the provision of clinical laboratory
services that are the hospital's obligation. Under this arrangement,
the physicians would have a financial incentive to order too few
laboratory services for hospital inpatients and outpatients in order to
make the arrangement as profitable as possible. To ensure that hospital
patients receive optimum quality health care services, the hospital
would not want the physicians to have a financial disincentive to order
medically necessary laboratory services. The hospital would also be
concerned that this contractual disincentive may have liability
implications for the hospital in the event of a misdiagnosis of a
hospitalized patient allegedly because the appropriate diagnostic
testing was not ordered.
The safe harbor for personal services and management contracts also
requires that contracts for less than full-time services be specific
about the frequency and timing of the services being furnished. This
commenter believed that a hospital in this situation must clearly
expect that the group practice laboratory will furnish services for the
hospital on an as needed basis when the patient and the patient's
attending physician require the laboratory service for appropriate
diagnosis. Thus, the commenter concluded that this safe harbor
criterion also could not be met.
Response: The commenter has described a situation in which group
practice physicians both order and provide laboratory services to
hospital inpatients and outpatients under an arrangement. We believe
the commenter is correct in concluding that the section 1877
prohibition applies to both Part A inpatient hospital services as well
as to Part B services.
The definition of ``referral'' found in section 1877(h)(5)(A)
applies, by its terms, to items or services for which payment may be
made under Part B of the program. Section 1877(h)(5)(A) is entitled
``Physicians' Services,'' which are separate from inpatient hospital
services and are always covered under Part B. Section 1877(h)(5)(B), on
the other hand, covers ``Other Items,'' and is not limited to Part B
items and services. This provision states that, except for specific
exceptions listed in (h)(5)(C), ``the request or establishment of a
plan of care by a physician'' that includes clinical laboratory
services constitutes a ``referral'' by a ``referring physician.'' We
believe this provision is difficult to decipher. Nonetheless, it
appears to contemplate that physicians have made a ``referral'' in
either a Part A or Part B context if they establish a plan of care for
an individual that includes clinical laboratory services.
In the ``inpatient hospital'' context, we believe that most
patients will receive clinical laboratory services as part of their
``plan of care.'' We consider that anytime a physician orders anything,
it is ``pursuant to a plan of care'' on the physician's part, even if
not formally called that. In addition, we believe that the Congress
fully intended to encompass Part A inpatient hospital services within
the section 1877 referral prohibition. One of the designated health
services that has been added to the prohibition effective January 1,
1995 (by section 1877(h)(6)(K)) is ``inpatient and outpatient hospital
services.''
The commenter has asked about a specific exception for services
furnished under arrangements. OBRA '93 amended section 1877 to
establish such an exception in new paragraph (e)(7). This provision
creates a limited exception for compensation that derives from an
arrangement between a hospital and a group under which services are
furnished by the group but are billed by the hospital. The provision
specifies, in (e)(7)(A)(i) that, with respect to services furnished to
an inpatient of a hospital, the arrangement is pursuant to the
provision of inpatient hospital services under section 1861(b)(3).
Section 1861(b)(3) defines what constitutes ``inpatient hospital
services,'' and specifically includes certain services furnished to
inpatients ``under arrangements.'' Among other requirements in section
1877(e)(7), the arrangement must have begun before December 19, 1989,
and have continued in effect without interruption since that date.
Also, the compensation paid over the term of the agreement must be
consistent with fair market value and the compensation per unit of
services must be fixed in advance and not take into account the volume
or value of referrals. Therefore, this exception does not present the
``aggregate compensation'' problem discussed in the comment. Also,
there are no additional requirements for details about the frequency or
timing of services furnished under a less than full-time service
arrangement.
In response to the commenter's concern about the safe harbor for
personal services and management contracts, we caution that the anti-
kickback safe harbor regulations implement different provisions of the
Act than are implemented by these regulations. Therefore, physicians
and laboratory entities are obligated to consider the safe harbor
requirements separately from the requirements of this rule.
4. Rental of Laboratory Equipment
Comment: One commenter stated that laboratories often rent a
variety of equipment to physicians that they need in connection with
their practices. For example, a physician may want to rent a blood
analyzer in order to perform simple laboratory tests in his or her
office. Since laboratories often have extra equipment they rent, the
laboratory that the physician uses for his or her reference work will
likely be the laboratory from which the physician rents equipment.
Laboratories typically charge some rental fee for this equipment if the
equipment is not an integral part of the laboratory services furnished.
These arrangements could, however, be considered a compensation
arrangement that could jeopardize the physician's referrals to the
laboratory. The commenter believed that, if the equipment is leased at
fair market value and meets other requirements comparable to those set
out in the provision related to the lease of office space, there is
little risk of patient or program abuse. Thus, this commenter
recommended that an additional exception be created for referrals by a
physician who has a compensation arrangement with a laboratory through
[[Page 41968]]
an agreement under which the physician leases or has a role in leasing
equipment from or to a laboratory.
Response: We agree with the commenter that, if a physician who is
leasing equipment from a laboratory under controlled circumstances
refers to that laboratory, this should not lead to program or patient
abuse. Section 1877(e)(1)(B), which was added by OBRA '93 retroactive
to January 1, 1992, excepts from ``compensation arrangements'' payments
made by a lessee of equipment to the lessor for the use of the
equipment if certain conditions (discussed earlier in this preamble at
section I.D.7.b.) are met. These conditions are specified in
Sec. 411.357(b) of this rule.
5. Group Practice Affiliated Property Companies
In the impact analysis of the proposed rule (57 FR 8601), we
discussed group practices with affiliated property companies that are
owned by members of the group practice and that lease facilities or
equipment to the group. We stated that the group practice would need to
restructure if it wanted to continue to make Medicare referrals for
clinical laboratory services. Technically, we regarded the lease of
equipment by the property company to the group practice that operates a
clinical laboratory as a compensation arrangement for which an
exception was not provided in the proposed rule. In these cases, it was
indicated that the prohibition on referrals would apply, which would
require the group physicians to either purchase the equipment from the
property company or divest their interests in the laboratory if they
intended to continue to make Medicare referrals for clinical laboratory
services.
Comment: According to one commenter, in some group practices,
affiliated property companies serve as the vehicle for the retirement
system for the equity partners in the group practice; that is, as
vehicles for creating retirement income. This commenter recommended
that we provide an exception for group practices that have affiliated
property companies under circumstances in which there is no potential
or incentive for program or patient abuse.
Response: What this commenter is concerned about is that the
compensation arrangement between the affiliated property company and
the group practice might prohibit referrals by the physicians of the
group practice to their own in-office laboratory. In this situation,
one or more of the group practice physicians who own the property
company receive remuneration from the group practice. In the impact
analysis of the proposed rule (57 FR 8601), we indicated that a group
practice probably would have to divest its interest in an affiliated
property company if it intended to refer Medicare patients to its in-
office laboratory. After reconsidering the matter, however, we do not
believe that our initial interpretation was correct.
Section 1877(a)(1) of the Act prohibits a physician from making
referrals to an entity that furnishes clinical laboratory services if
the physician or immediate family member has a financial relationship
with that entity. In the situation described by the commenter, the
group practice physicians appear to have a financial relationship with
the affiliated property company which rents equipment to their
laboratory, in the form of an ownership interest. We also regarded as a
compensation arrangement the payments which the group practice makes to
the affiliated property company for renting the equipment. However, the
physicians in this case do not have these financial relationships with
an entity that furnishes clinical laboratory services; their
relationships are with an entity that only rents equipment to the group
practice. As a result, these relationships with the affiliated property
company should not affect the physicians' ability to refer to their own
laboratory.
Instead, the group practice physicians' referrals could be
prohibited because they are referring to a laboratory that they own.
Section 1877(b)(2) provides an exception for group practices which
refer Medicare patients to their own laboratory for in-office ancillary
services. These services must be furnished personally by a member of
the group practice or an individual who is directly supervised by a
member of the group practice, provided these services are furnished in
the building where the group practice has its office or a building that
is used by the group practice for furnishing some or all of the group's
clinical laboratory services. This provision also has certain billing
requirements. The conditions in this exception do not place limitations
on the origin of the laboratory equipment that is used by the group
practice.
Thus, we have determined that, if the in-office laboratory services
are furnished in the manner described by section 1877(b)(2) and
Sec. 411.355(b), the nature of the physician's financial relationship
with the in-office laboratory is irrelevant. As a result, we do not
believe that an additional exception is necessary.
6. Faculty Practice Plan Exception
Comment: Several commenters suggested that a separate exception be
developed to treat faculty practice plans associated with accredited
medical schools as a separate and distinct type of group practice.
These commenters indicated that it is not uncommon in a faculty
practice plan environment for the physicians to receive their
compensation from one entity (the medical school, for example).
However, they may conduct their practice through a separate entity that
might be a professional corporation, partnership, or simply a
contractually organized billing service. In addition they may order
their laboratory work from one or more related entities (for example,
the teaching hospital, the university's research laboratory for highly
specialized testing, in-office laboratories within faculty departments
that may or may not be incorporated as professional corporations,
etc.). Since there is no consistent organizational arrangement that
characterizes a faculty practice plan, these commenters requested that
we develop a separate provision that would treat faculty practice plans
associated with accredited medical schools as a separate and distinct
type of group practice. They have suggested that the definition of a
group practice and the separate requirements of the in-office ancillary
exception be applied at the level of the umbrella organization. That
is, they believed each legal entity within the same academic setting
should not be required to satisfy these provisions. In this manner, any
physician who is a staff member of the umbrella organization would be
permitted to refer Medicare patients to laboratories that are owned or
operated by the umbrella organization.
Response: We believe that the amendments made by OBRA '93 make an
additional exception unnecessary. We acknowledge that faculty practice
plan physicians may be associated with many organizations in an
academic setting, in terms of receiving compensation, furnishing
patient care, teaching, and doing research. For example, the medical
school may pay the plan to teach residents or care for patients. Even
though faculty practice plans may operate in a variety of arrangements,
the common theme appears to involve physicians or groups of physicians
who are compensated by some part of an academic center for providing a
variety of services, and who are concerned about whether they can refer
patients to laboratories that belong to the academic center.
[[Page 41969]]
If the physicians in the plan are directly employed by the academic
center, then their referrals should not be prohibited if the employment
meets the standards in section 1877(e)(2) and Sec. 411.357(c). If,
alternatively, the physicians or group practice members provide
services to the academic center under contract, the personal services
provided by these physicians would not be compensation if the
arrangement meets the requirements in section 1877(e)(3) and
Sec. 411.357(d). In short, we cannot see why a separate exception would
be necessary.
Comment: One commenter indicated that, in general, faculty practice
plans fall under one of three organizational structures, as explained
below:
A single entity: Many faculty practice plans are organized
as a single legal entity that submits a single bill for all physician
services across specialties using one common Medicare provider number
and, thus, clearly meeting the statutory billing requirement for a
group practice.
Multiple entities by specialty, each billing by its own
group provider number: Other faculty practice plans within medical
schools and teaching hospitals are organized as multiple legal
entities, usually professional corporations established by specialty,
that submit multiple bills using a provider number for the respective
specialty group.
Multiple entities by specialty, billing by individual
physician provider numbers: Still other faculty practice plans are
organized by groups but will submit multiple bills for service by
specialty, using individual physician provider numbers.
The commenter recommended, therefore, that the final regulations
recognize that a variety of faculty practice plan structures associated
with a medical school or teaching hospital exist and should be able to
qualify for the in-office ancillary services exception at the level of
the umbrella organization. The commenter recommended that we not apply
the criteria separately to each legal entity within the same academic
setting.
Within an academic setting, according to another commenter,
physicians may receive compensation from a variety of entities. They
may order their laboratory work from one or more of these entities,
such as a teaching hospital, a research laboratory for highly
specialized testing, or in-office laboratories within faculty
departments. Since there are often indirect financial relationships
between and among the various entities within an academic setting, the
law appears to prohibit referrals by faculty physicians between and
among these entities. The research laboratory may provide a unique
situation because, as the commenter pointed out, it generally performs
a highly specialized range of laboratory tests that are not available
elsewhere. Therefore, the commenter urged us to craft an exception in
the final rule that allows these and similar nonabusive arrangements to
continue in the academic setting.
Response: We believe that as long as the faculty practice
physicians receive remuneration from the academic institution for their
bona fide employment or under personal service arrangements that meet
the criteria in sections 1877(e)(2) and (e)(3), the physicians should
not be prohibited from making referrals to laboratories that are owned
by the academic institution.
7. Special Exception for Group Practices
Comment: We stated in our proposed rule that within the definition
of ``group practice'' substantially all (at least 85 percent) of the
patient care services of group practice physicians must be furnished
through the group and be billed in the name of the group. Further,
amounts received for those services must be treated as receipts of the
group. One commenter stated that there are situations in which group
practices will be unable to meet the ``substantially all'' requirements
of section 1877(h)(4), or whatever percentage of patient care services
is adopted in the final regulations. The commenter offered the example
of 15 independently practicing physicians who have primary offices in
one part of a city and establish a group practice clinic in a medically
underserved area in the same city. Each physician spends 1 day a week
at the clinic. In this case, only 20 percent of the services of the
physicians in the group would be furnished through the group. This
would be insufficient to meet the requirement of proposed Sec. 411.351
that at least 85 percent of the aggregate services furnished by all
physician members be furnished through the group practice.
The commenter recommended that an exception be added to the
regulations that would allow group practices in medically underserved
urban areas to furnish clinical laboratory services without being
required to meet the ``substantially all'' requirement. In this
commenter's view, this exception would tend to increase the
availability of medical care in those urban areas currently deprived of
adequate medical services without creating patient or program abuse.
Response: We note that the Congress has determined that there is a
shortage of adequate medical care in locations designated as health
professional shortage areas (HPSAs) under section 332(a)(1)(A) of the
Public Health Service Act. In order to avoid discouraging group
practice physicians from providing services in HPSAs, we are redefining
the ``substantially all'' criteria in the definition of a group
practice in Sec. 411.351 in two ways. First, we are excluding from the
``substantially all'' test group practices that are located only in
certain HPSAs. We have defined the term HPSA in reference to the
definition of the term under the Public Health Service Act. Section
332(a)(1)(A) of the Public Health Service Act defines the term HPSA to
include so-called ``geographic HPSAs,'' that is, ``an area in an urban
or rural area (which need not conform to the geographic boundaries of a
political subdivision and which is a rational area for the delivery of
health services) which the Secretary determines has a health manpower
shortage and which is not reasonably accessible to an adequately served
area.''
The Secretary has established criteria for designating areas having
shortages of a number of types of health professionals, including
primary medical care (which includes general or family practice,
general internal medicine, pediatrics and OB/GYN), dental, mental
health, vision care, podiatric, and pharmacy professionals. For
purposes of this regulation, if an area is a primary care HPSA, any
group practice located solely in that HPSA (regardless of whether it
provides services of the type classified as primary medical care) will
be exempt from the ``substantially all'' test. Since HPSAs do not exist
for a number of specialty areas (for example, oncology, dermatology,
neurology), if an area is a primary medical care HPSA, we believe that
it is likely that there is a shortage of other types of professionals.
Therefore, any group practices that are located solely in such an area
and provide services of any type will be exempt from the
``substantially all'' calculation.
In addition, if an area has been designated an HPSA for one of the
other types of professional services, such as vision care, any group
practice located solely in the HPSA and providing services that are of
the type related to the HPSA designation, such as ophthalmology
services, will be exempt from the ``substantially all'' calculation. On
the other hand, if an area is an HPSA for vision care professionals
(and for no other type of professional services), group practices
providing services
[[Page 41970]]
unrelated to vision care in that area will not be exempt from the
``substantially all'' calculation. There appears to be no justification
to exempt such group practices from the ``substantially all''
calculation in these cases, since there may not be a shortage for such
services.
Our second change to the ``substantially all'' criteria involves
group practices located outside an HPSA, but whose members provide
services in an HPSA. These outside group practices must continue to
meet the ``substantially all'' test, even if their members provide
services in an HPSA. However, we are excluding from the ``substantially
all'' calculation for those groups outside an HPSA any time spent by
group members providing the appropriate services in a particular type
of HPSA (as described above), whether that time in the HPSA is spent in
a group practice, clinic, or an office setting. We have amended
Sec. 411.351 (``Definitions'') to reflect these concepts. We have also
included a definition of ``HPSA'' in that section.
8. Ambulatory Surgical Center Exception
Comment: One commenter indicated that the Secretary should provide
an exception for laboratory services performed in an ambulatory
surgical center (ASC). Specifically, the exception should be provided
if--
Any ownership interest of the physician is in the ASC as a
whole; and
Any compensation relationship of the physician with the
ASC does not relate to the provision of clinical laboratory services.
Response: We do not entirely agree with this comment. ASC facility
services are services that are furnished by an ASC in connection with a
covered surgical procedure and that would otherwise be covered if
furnished on an inpatient or outpatient basis in a hospital in
connection with that procedure. Medicare regulations at Sec. 416.61
describe the scope of facility services. Generally, clinical laboratory
services are not considered to be facility services. That is because,
under Sec. 416.61(b), ASC facility services do not include items and
services for which payment may be made under other provisions in 42 CFR
part 405, such as physicians' services, laboratory services, and x-ray
or diagnostic procedures (other than those directly related to
performance of the surgical procedure). As a result, there are a
limited number of diagnostic laboratory tests that are considered ASC
facility services and which are included in the ASC rate. We agree with
the commenter that referrals for laboratory tests that are performed in
an ASC and included in the ASC rate should be excepted because there is
no incentive to overutilize these services.
On the other hand, some ASC's have onsite laboratories that perform
and bill for other laboratory testing furnished to ASC patients. Before
enactment of CLIA, these laboratories were certified as ``independent
laboratories'' and billed Medicare directly for their services. These
laboratory facilities are now required to be certified under CLIA and
continue to bill the Medicare program for the laboratory testing
performed on the ASC premises, since general laboratory testing is not
considered to be part of the ASC facility rate. We believe that, if the
onsite laboratory facility is owned or operated by the ASC, referrals
to the laboratory for general laboratory testing by a physician who has
a financial relationship with the ASC should be prohibited, unless
another statutory exception applies.
9. Home Care and Hospice Exception
Comment: One commenter indicated that home health agencies (HHAs)
and hospices receive referrals from physicians to provide an array of
services in the home. Currently, HHAs and hospices do not bill the
Medicare program separately for laboratory services; instead, they bill
for a home visit or the per diem hospice charge. The commenter made the
following two recommendations:
The regulations should clearly state that the prohibition
does not apply to referrals to entities that do not bill Medicare
separately for laboratory testing.
Another exception should be developed to specify that the
Medicare rules governing physician interest in HHAs would also apply to
those entities in relation to laboratory services ordered by
physicians. Thus, a physician's interest in a clinical laboratory would
be permitted if the interest is less than 5 percent.
Response: As discussed earlier, OBRA '93 expanded the list of
services subject to the prohibition to include 10 additional services.
Because the list of services subject to the prohibition includes home
health services, we do not believe an exception for laboratory services
provided by home health agencies is warranted.
We agree with the commenter that referrals for laboratory tests
that are performed by a hospice and are included in the per diem
hospice charge should be excepted because a per diem amount does not
reflect the number of tests performed. As a result, we are providing an
exception in Sec. 411.355 for laboratory services that are provided by
a hospice and billed as part of the per diem rate.
We disagree with the commenter's second recommendation. Section
1877 prohibits referrals to an entity by a physician who has a
financial relationship with that entity. A financial relationship
consists of an ownership or investment interest in the entity,
regardless of the extent or degree of that ownership interest.
Therefore, if a physician owns 5 percent or 95 percent of an entity, he
or she is prohibited from making referrals to that entity, unless some
exception applies. We will not grant an extra exception for ownership
interests that are less than a particular percentage or that involve
HHAs. That is because we do not have any evidence upon which to base a
percentage or to ensure that the exception would be free from any risk
of program or patient abuse.
10. Rural Laboratory Compensation Arrangements
Section 1877(d)(2) provides that ownership or investment by a
physician in a rural provider of clinical laboratory services will not
prohibit referrals by the physician to that rural provider.
Comment: One commenter stated that the statutory exception for
rural laboratories is of little value since it provides only an
exception to the ownership or investment interest test and still leaves
the rural laboratory subject to the compensation arrangement test.
Thus, the commenter recommended that the final rule contain an
exception for compensation arrangements between a rural laboratory and
a referring physician.
Response: Because of the OBRA '93 amendments to section 1877, we do
not believe the exception recommended by the commenter is necessary.
Section 1877 now contains exceptions that we believe will cover many
compensation arrangements between physicians and laboratories. In
addition to the section 1877(d)(2) ownership exception for rural
laboratories, section 1877(e)(2) provides an exception if a laboratory
compensates a physician as the result of a bona fide employment
relationship, and section 1877(e)(3) provides an exception for
remuneration from an entity to a physician under a personal services
arrangement between the physician and entity. Finally, there are other
additional exceptions relating to various other compensation
relationships that a physician might have with a laboratory. For
example, under section 1877(e)(8), a physician can purchase clinical
laboratory services from a laboratory, or other items and services from
a laboratory at fair market
[[Page 41971]]
value, without triggering the prohibition. These exceptions apply to
relationships with all laboratory entities, including those located in
rural areas, provided the conditions set forth in the statute and this
final regulation are met.
11. Case-by-Case Exemptions
Comment: One commenter indicated that we should institute a process
by which a laboratory may request an exemption from the law on an
individual basis, based upon a determination by the Secretary that
enforcement of the prohibition against the laboratory would not be in
the public interest. The commenter suggested that narrow guidelines
should be established for the types of laboratories that would be
eligible to apply for this exemption. Thus, in the commenter's view,
the administrative burden would not be prohibitive. The commenter
proposed that, in order to be eligible for review, that any one of the
following criteria be met:
The laboratory is wholly owned by one referring physician
or one group practice. This requirement would exclude the physician
joint venture type laboratories, which this commenter believed are the
entities intended to be regulated by the law.
Referrals to a laboratory by physicians who have financial
relationships with the laboratory do not exceed a specified percentage
of the total laboratory volume. The commenter suggested that the
referrals be limited to 40 percent of the laboratory's total volume,
consistent with the Medicare anti-kickback investment safe harbor
volume criterion. (See 42 CFR part 1001.)
A laboratory located in a town or similar-type population
center with a population of 10,000 or under should be eligible for
exemption review if it is the sole outpatient provider of certain
laboratory services within that locality. This would recognize that
localities that are within an MSA may, in fact, be small towns lacking
adequate outpatient laboratory services.
Response: We do not agree that we should implement such a process.
Section 1877(b)(4) specifies that, in addition to the exceptions
described in the statute, the section 1877(a)(1) prohibition will not
apply with respect to any other financial relationship which the
Secretary determines, and specifies in regulations, does not pose a
risk of program or patient abuse (emphasis added). The statute speaks
in terms of excepting particular financial relationships according to
rules that would apply to any person or entity that has such a
relationship. It does not authorize ``case by case'' exceptions.
In addition, we do not believe that the guidelines suggested by the
commenter to single out those who are eligible for case-by-case review
would provide a guarantee against patient or program abuse. It is not
clear to us why the review should only be available when a laboratory
is wholly owned by one referring physician or one group practice. The
commenter's second guideline would allow a laboratory entity to derive
40 percent of its business from referrals by physicians with whom the
entity has a financial relationship. We do not believe that this
standard would, in any way, satisfy the requirement under section
1877(b)(4) that exceptions beyond those specified in the law pose no
risk of program or patient abuse. We simply do not see how a standard
excusing any percentage of referrals would guarantee no risk of abuse.
Finally, we understand that it might be possible that a laboratory
located within an MSA could have its existence threatened if it cannot
accept referrals from physicians with whom it has financial
relationships. The commenter did not, however, identify any specific
localities, so we cannot tell how likely it is for this to occur. In
any case, any such exception must be shown to comply with the ``no
abuse'' criterion, and the commenter has provided us with no evidence
that such an exception would be free of abuse. For these reasons, we
are not adopting this suggestion.
12. Physician Ownership of Public Companies
Section 411.357(a)(2) of the proposed regulation provided an
exception for a physician's or family member's ownership in a publicly
owned corporation, provided that the ownership interest met certain
requirements. Among these were the requirement that the corporation
have, at the end of its most recent fiscal year, total assets exceeding
$100 million. This requirement reflected section 1877(c)(2) of the
statute. OBRA '93 amended the statute to require, instead, stockholder
equity exceeding $75 million at the end of the corporation's most
recent fiscal year or on average during the previous 3 fiscal years.
SSA '94 made this amendment effective retroactive to January 1, 1992.
However, it also provided that, until January 1, 1995, a corporation
could still meet the requirement in the exception if it qualified under
the pre-OBRA '93 standard.
Comment: One commenter suggested that we create an exception
allowing physicians to own shares in clinical laboratories that satisfy
the first test of the statutory public-company exception (having
publicly-traded securities on the specified national securities
exchanges) whether or not the company has $100 million in assets (as
required in proposed Sec. 411.357(a)(2)), under certain conditions.
The conditions suggested were that: (1) The total physician
ownership of each class of securities of the entity is less than 20
percent, and (2) no one physician's ownership of any class of
securities of the entity represents more than 5 percent of the class.
The commenter believed that such ownership would not pose a risk of
abuse under Medicare. For example, the stock of Laboratory Corporation
A, which has assets of $50 million, is owned by the following
individuals. Laboratory Corporation A has only one class of stock.
------------------------------------------------------------------------
Individual Percentage
------------------------------------------------------------------------
Dr. Abe..................................................... 5
Mr. Brown................................................... 17
Dr. Car..................................................... 5
Mr. Dorr.................................................... 17
Dr. Else.................................................... 5
Mr. Frank................................................... 17
Mr. Green................................................... 12
Mr. Hann.................................................... 12
-----------
100
------------------------------------------------------------------------
In this example, no one physician owns more than 5 percent of the
stock of Laboratory Corporation A and the total physician ownership is
15 percent. The commenter stated that these facts should allow the
owner-physicians to refer to Laboratory Corporation A because, in the
commenter's view, since the majority of stockholders are nonphysicians,
the physicians have no incentive to overutilize laboratory testing to
increase the value of their investments. The commenter concluded,
therefore, that there would not be the risk of patient or program
abuse.
Another commenter suggested that we create an exception for public
companies similar to that of the safe harbor for investment interest
under the anti-kickback statute. Generally, the commenter suggested
that the exception should follow all of the requirements found in 42
CFR 1001.952(a), ``Investment interests safe harbor.''
Response: The second comment is related to the first, in that one
of the requirements found in Sec. 1001.952(a)
[[Page 41972]]
also establishes a percentage limit on the amount of the investment.
That is, Sec. 1001.952(a)(2)(i) specifies that, in order to qualify for
the safe harbor exception, ``[n]o more than 40 percent of the value of
the investment interests of each class of investments may be held * * *
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.''
While each commenter has made a good suggestion, we do not have any
data supporting the first commenter's assumption that a limit of 5
percent ownership of a class of securities by individual physicians and
a limit of up to 20 percent ownership of a class of securities by all
physicians poses no risk of abuse. We believe that the Congress was
very deliberate in establishing the requirements for the exception
based on ownership or investment in publicly traded securities that is
found in section 1877(c). Further, as pointed out in an earlier
response, in order to establish additional exceptions, we must
determine that the financial relationship does not pose a risk of
program or patient abuse. To adopt the suggested approaches, we would,
for example, be required to justify why a total of 20 percent physician
ownership in a company would be abusive while a total of less than 20
percent physician ownership in a company would not be abusive. We do
not have data to justify such a distinction.
13. Compensation Exception
Comment: One commenter proposed that an additional exception to the
prohibition on referrals be added to address certain compensation
arrangements between clinical laboratories and physicians. This
commenter stated that, under a typical contractual arrangement between
a clinical laboratory and a physician, the physician pays a reasonable
fee to a laboratory to provide a service in an area in which the
physician or his or her office personnel lack expertise. Some examples
would be assisting the physician to establish a billing service,
providing management services, and hosting educational seminars. The
commenter suggested that this exception could contain the following
elements:
The agreement must be in writing and be signed by all of
the parties.
The agreement must be for identifiable services, which
must be clearly set forth in the agreement.
Compensation must be consistent with fair market value for
these services.
The compensation must be considered commercially
reasonable even if no referrals were made.
The amount of compensation for the services must not vary
based on the volume or value of any referrals of business by the
physician.
The services must be offered by the clinical laboratory to
all physicians.
There must be no requirement on the part of the physician
to refer patients.
As described, this situation involves a payment by the physician to
the laboratory under the terms of a contract.
Response: We agree that physicians incur a legitimate cost when
they must provide certain services, such as continuing medical
education for themselves and their staff members. In addition, the
physicians should be able to determine where they can best get these
services. The commenter has asked that we add a new exception to the
prohibition on referrals to address certain compensation arrangements
in which a physician pays a reasonable fee to a laboratory to provide a
service in an area in which the physician or his or her office
personnel lack expertise. We believe that an additional exception under
the authority of section 1877(b)(4) is not necessary. Section
1877(e)(8), as added by OBRA '93, provides an exception for payments
made by a physician to any entity as compensation for items and
services (other than clinical laboratory services) if the items or
services are priced at fair market value. This provision is effective
retroactively to January 1, 1992, and is included at Sec. 411.357(i) of
this rule.
Comment: A few commenters noted that a laboratory encounters a
problem, for the following reasons, if it has an employee who is
related to a physician who refers work to the laboratory. The referral
prohibition is triggered not only by physicians who themselves have
financial relationships with a laboratory entity but also by a
physician's immediate relatives who have financial relationships. As a
result, the laboratory's payment to an employee can constitute a
compensation arrangement and, under the proposed rule, the laboratory
would not be permitted to accept referrals from that physician. The
commenters suggested that, as long as the employer has a bona fide
employment relationship with the employee, there is no reason to
question these employment arrangements. The commenters suggested that,
with an added exception, the laboratory would be able to avoid the
burdensome process of polling its employees to determine if they have a
relative who is a referring physician.
Response: Section 1877(e)(2), as amended by OBRA '93, establishes a
new exception for bona fide employment situations between an entity and
a physician or an immediate family member of a physician. The
conditions for the exception are as follows:
The employment arrangement is for identifiable services.
The amount of the remuneration under the employment--
+ Is consistent with the fair market value of the services, and
+ Is not determined in a manner that takes into account (directly
or indirectly) the volume or value of any referrals by the referring
physician.
The remuneration is provided under an agreement that would
be commercially reasonable even if no referrals were made to the
employer.
+ The employment meets such other requirements as the Secretary may
impose by regulations as needed to protect against program or patient
abuse.
Finally, the employees may be paid a productivity bonus based on
services they personally performed.
V. Analysis of and Responses to Public Comments on the Interim Final
Rule With Comment Period--Reporting Requirements for Financial
Relationships Between Physicians and Health Care Entities That Furnish
Selected Items and Services
Section 152(a) of SSA '94 amended the reporting requirements in
section 1877(f) of the Act. As amended, section 1877(f) specifically
applies to not only physicians with an ownership or investment interest
in an entity, but to physicians who have a compensation arrangement
with an entity as well. SSA '94 also eliminated the Secretary's
authority to waive the reporting requirements for certain States or
services, although the Secretary continues to have the right to
determine that an entity is not subject to the reporting requirements
because it provides services covered under Medicare very infrequently.
In addition, the reporting requirements continue to not apply to
designated health services furnished outside of the United States.
The SSA '94 amendments apply to referrals made on or after January
1, 1995. However, section 1877(f) does not apply to referrals at all,
but instead requires providers of Medicare covered items and services
to report certain information about their financial relationships with
physicians at such times as the Secretary specifies. As such, section
152(d), the effective date provision for the SSA '94 amendments,
[[Page 41973]]
is silent on when the amendments would apply to a provision that has no
nexus with referrals. If section 152 is silent on this issue, we
believe that the effective date is the date of enactment of the
amendments, which is October 31, 1994. We have incorporated the
amendments to section 1877(f) into Sec. 411.361, to apply to any future
reporting that we require.
Below we summarize and respond to comments we received in response
to the interim final rule with comment period that was published in the
Federal Register on December 3, 1991 (56 FR 61374). We received timely
comments from five organizations.
Near the end of calendar year 1991, we developed a questionnaire
titled ``Survey of Financial Relationships Between Physicians and
Selected Health Care Entities'' (form HCFA-95) and forwarded it to
selected hospitals, ESRD facilities, suppliers of ambulance services,
entities furnishing diagnostic imaging (including magnetic resonance
imaging, computerized axial tomography scans, ultrasound, and other
diagnostic imaging services), parenteral and enteral suppliers, and
entities furnishing physical therapy services. (This survey was also
known as the ``Ten State Survey.'') This process was a collection of
information concerning the financial interest arrangements of any
entity that furnishes selected items and services for which payment may
be made under Medicare. The survey was to be completed by all entities
furnishing the above listed covered items and services to Medicare
beneficiaries. The scope of the survey was limited to entities in the
following 10 States: Connecticut, Pennsylvania, West Virginia, South
Carolina, Florida, Michigan, Ohio, Texas, Arkansas, and California.
Surveys were sent to those entities that submitted claims to the
Medicare intermediary or carrier for more than 20 items or services in
any of the selected categories during calendar year 1990. Originally,
an entity was required to return the survey not more than 30 days after
the entity received it. Shortly after December 3, 1991, the date
contractors were instructed to send the surveys via overnight,
certified mail, the response time was extended from 30 days from the
date of receipt to 60 days from the date of receipt.
Two commenters applauded our citing the need for the survey because
of the potential for abusive behavior in situations where the referring
physician has an ownership interest in the facility to which he or she
refers patients. A discussion of other comments and our responses to
them follow.
Comment: One commenter suggested that requiring the completed
survey to be submitted before or at the same time that the comments on
the interim final rule were due made the opportunity to comment
meaningless.
Response: We agree that the timing of the deadlines for the
completed survey and the comments on the interim final rule could be
regarded as having had the effect of reducing a commenter's ability to
have an impact on that particular survey. As we pointed out in the
preamble to the interim final rule, however, section 4207(k) of OBRA
'90 authorized the Secretary to issue interim final regulations for the
amendments to the Medicare statute. In the preamble, we explained the
pressing need for the interim final rule in order for us to fulfill
several legislative requirements within their prescribed deadlines.
These included carrying out the survey requirements of section 1877(f),
as amended by OBRA '90, obtaining adequate information from health care
entities in time to apply the payment provisions in section 1877, as
amended by OBRA '90, and preparing the statistical profile required by
OBRA '89, as amended by OBRA '90.
The purpose of the interim final rule was primarily to notify the
public of the decisions the Secretary had made on the few items of
discretion left to the Secretary under OBRA '90, such as the selection
of the States in which the survey would be administered (the
legislation prescribed a minimum of 10 States). In addition, we do not
regard the opportunity that was provided to comment on the interim
final rule as meaningless. Section 1877 allows the Secretary to collect
the survey information in such form, manner, and at such times as she
specifies, as long as it is first collected no later than October 1,
1991. The Secretary will take the comments into account if she decides
to survey the entities again.
Comment: One commenter suggested that we extend the time for
responding to the survey by 60 days and announce the extension
publicly.
Response: As noted, we did provide for an automatic extension of 30
days, allowing a total of 60 days for response. We provided 19
representative specialty societies, for example, the American Medical
Association, the American Hospital Association, and the American
College of Radiology, with this information to alert their members. In
addition, we alerted Medicare contractors who, in turn, alerted
providers via updates in their routinely distributed bulletins and
newsletters.
Comment: One medical specialty association had received several
complaints from its members concerning the question of who must report
the ownership interest and what information must be reported. The
association stated that the definition of ``entity'' (physicians,
suppliers, or providers) in the instructions was too broad.
Response: The statute at section 1877(f) required, prior to SSA
'94, that ``[e]ach entity providing covered items or services for which
payment may be made under [Medicare] shall provide the Secretary with
the information concerning the entity's ownership arrangements, * *
*.'' (Emphasis added.) The statute does not define an ``entity.'' Thus,
we could include within this concept any individuals or groups that
provided Medicare covered items or services. We surveyed every entity,
regardless of type, that provided more than 20 services in 1990 from
the minimum set of services (hospital services, ambulance services,
etc.) covered by the statutory requirement for this study. The use of
the terms ``physicians, suppliers, or providers'' in our survey
instructions was meant to cover all types of entities that had provided
more than 20 services during 1990 of the types listed in the
legislation.
Comment: One commenter wrote that there was no question on the
survey that distinguished between those physicians who have an
ownership interest in a facility and those who do not, like hospital-
based radiologists. The commenter recommended that information relative
to hospital-based practices be extracted and excluded from the study as
it could produce a flawed database.
Response: We are not certain of the point this commenter wanted to
make. Our survey form clearly distinguished between physicians with an
ownership interest in an entity and physicians compensated by an
entity, such as hospital-based radiologists. After receiving these
survey forms, we matched data from the forms to Medicare claims data to
determine referral patterns to entities that had submitted these survey
forms. Since we also had information for each entity billing the
program relating to whether the patient was referred to the entity by a
physician with an ownership interest or by a physician compensated by
the entity, the study was able to determine the referral patterns to
that entity in a totally objective manner.
Comment: Two commenters wrote that the regulations would result in
unreasonably burdensome reporting obligations for certain health care
entities. The commenters believed that
[[Page 41974]]
the collection of useless information will thwart, rather than support,
legitimate monitoring efforts. Examples of information that the
commenters believed was unnecessary was identifying all physicians in a
teaching hospital, considering the size of the facility, the number of
salaried staff and faculty, and the time and effort required to
collect, organize, check, and report the required data.
Response: The scope of the data collection activity was expansive
in order to ensure that the Congress had sufficient information on
utilization rates by physician owned and non-owned entities to consider
in its legislative activities. While this may have appeared to be more
data than could be effectively used, we believed a more narrow data
collection effort would have resulted in the Congress having
insufficient facts when considering legislative alternatives. Surveyed
entities were expected to make good faith efforts to complete the
surveys accurately, completely, and timely. In addition, we granted
extensions to the 60-day response period on a case-by-case basis.
Comment: One commenter opposed the requirement that hospitals
report compensation/remuneration arrangements, because the requirement
exceeds the scope of section 1877(f) of the Act.
Response: Prior to SSA '94, section 1877(f) did not specifically
provide us with the authority to require that hospitals report
compensation/remuneration arrangements. Section 1877(f) required that
entities report only the ownership or investment interests of
physicians. As we pointed out in the preamble to the interim final
rule, however, we believed that other parts of section 1877, the
payment provisions of the Medicare statute, and section 6204(f) of OBRA
'89, as amended by OBRA '90, implicitly required us to collect this
information.
As we pointed out at 56 FR 61376, we need the information on
compensation/remuneration arrangements in order to enforce the general
prohibition, in section 1877, against physicians referring to
laboratories with which they have a financial relationship, including a
relationship based on a compensation arrangement. Without the reporting
requirement, we would not have sufficient information to make payment
determinations. Also, we would not have had the data we needed to
prepare the statistical profile required by section 6204(f) of OBRA
'89, as amended by section 4207(e)(4) of OBRA '90. This provision
required us to produce a profile that covered all of a physician's
direct or indirect financial interests. As we explained earlier,
beginning October 31, 1994, Sec. 152(a) of SSA '94 amended Sec. 1877(f)
to explicitly require that a reporting entity provide information
concerning the entity's ownership, investment, and compensation
arrangements.
Comment: One commenter suggested that the imposition of civil
monetary penalties on reporting entities that fail to report
compensation/remuneration arrangements in a timely manner exceeds our
statutory authority.
Response: Section 1877(g)(5) provides a civil money penalty when a
person fails to meet the reporting requirements of section 1877(f).
Section 1877(f), prior to OBRA '93, concerned information related to
ownership interests only. However, as the result of the changes made in
Sec. 1877(f) by Sec. 152(a) of SSA '94, entities are now required to
provide information about ownership, investment, and compensation
arrangements. As a result, we now have the authority to impose a civil
money penalty when an entity fails to provide any of these kinds of
information.
Comment: One commenter from California suggested that reporting
employee information would place a hospital in jeopardy of violating
certain State laws and State regulations.
Response: As we stated in an earlier comment, we have interpreted
section 1877, the payment provisions of the Medicare statute, and
section 6204(f) of OBRA '89 as requiring that reporting entities
provide us with information about all of their financial relationships
with a physician or a physician's family member. The statute at
Sec. 1877(f) now requires this information for all ownership,
investment, and compensation arrangements. If this explicit Federal
requirement conflicts with State law or State regulations, the Federal
law and Federal regulations prevail.
VI. Provisions of This Final Rule
We have extensively rearranged the regulations from what we
proposed and have added numerous OBRA '93 provisions as amended by SSA
'94. Because of these many changes, we are including, in section VI.C.,
a list identifying whether the requirements in this final rule derive
from OBRA '93, SSA '94, the proposed rule, or comments on the proposed
rule. In addition, we identify below the changes from the December 1991
interim final rule and the March 1992 proposed rule.
A. Proposed Rule--Physician Ownership of, and Referrals to, Health Care
Entities That Furnish Clinical Laboratory Services
Based on our analysis of the comments, we are adopting the
provisions as set forth in the March 1992 proposed rule, with the
following changes. The reason for a change either has been discussed in
section IV of this preamble, the change is a result of the provisions
of OBRA '93 or SSA '94, or the change merely conforms the regulations
to the statute.
In Sec. 411.1 (``Basis and scope''), we added that section
1877 of the Act sets forth limitations on referrals and payment for
clinical laboratory services furnished by entities with which an
immediate family member of the referring physician has a financial
relationship. This change was made to conform the regulation to the
statute.
As a result of the comments we received, we revised the
definition of ``compensation arrangement'' at Sec. 411.351
(``Definitions'') to clarify that it applies to direct and indirect
arrangements.
We revised the definition of ``group practice'' at
Sec. 411.351 as follows:
+ Revised the ``substantially all'' threshold to 75 percent of the
total patient care services of group practice members, measured as
``patient care time.''
+ Expanded and moved, to a new Sec. 411.360, the requirements
related to the group practice attestation statement.
+ Provided an exception to the ``substantially all'' requirement
for those services furnished through a group practice located solely in
certain areas designated as HPSAs under Sec. 411.351. Also specified in
this section that when members of a group practice that is located
outside an HPSA spend time providing services in certain HPSAs, that
time is not used to calculate the outside group's ``substantially all''
standard.
We removed the definitions of ``interested investor'' and
``investor'' from Sec. 411.351.
We revised the definition of ``remuneration'' at
Sec. 411.351 to provide that forgiveness of debts, certain payments,
and the furnishing of certain items, devices, and supplies are not
considered remuneration if they meet specified conditions.
We added a definition of ``clinical laboratory services,''
``direct supervision,'' ``hospital,'' ``HPSA,'' ``laboratory,''
``members of the group,'' ``patient care services,'' ``physician
incentive plan,'' ``plan of care,'' and ``transaction'' to
Sec. 411.351.
[[Page 41975]]
We revised Sec. 411.355 (``General exceptions to referral
prohibitions related to both ownership/investment and compensation'')
to do the following:
+ For purposes of the in-office ancillary services exception in
Sec. 411.355(b), require that individuals furnishing services be
``directly'' supervised by the referring physician or by another
physician in the same group practice. (The proposed rule had required
that services be provided by an employee who was ``personally''
supervised by these physicians.)
+ Include among the locations where the service may be furnished a
building that is used by the group practice for the provision of some
or all of the group's clinical laboratory services. (The proposed rule
had required that the building be used by the group practice for
centrally furnishing the group's clinical laboratory services.)
We added the following services to the general exceptions
listed under Sec. 411.355 (``General exceptions to referral
prohibitions related to both ownership/investment and compensation''):
+ Services furnished by a qualified HMO (within the meaning of
section 1310(d) of the Public Health Service Act) to individuals
enrolled in the organization (new Sec. 411.355(c)(4)).
+ Services furnished in an ASC or ESRD facility or by a hospice and
included in the ASC rate, ESRD composite rate, or per diem hospice
charge, respectively (new Sec. 411.355(d)).
We revised proposed Sec. 411.357, now designated as
Sec. 411.356, (``Exceptions to referral prohibitions related to
ownership or investment interests'') to--
+ Revise the requirements relating to publicly-traded securities,
as specified in section 1877(c) of the Act (as amended by OBRA '93 and
SSA '94), to include securities which ``may be purchased'' on terms
generally available to the public, which can be those traded on
additional stock markets, and which can be in corporations that had the
following:
--Until January 1, 1995, total assets at the end of the corporation's
most recent fiscal year exceeding $100 million, or
--Stockholder equity exceeding $75 million at the end of the
corporation's most recent fiscal year, or on average during the
previous 3 fiscal years
+ No longer specify, with regard to the corporation's assets, that
these assets must have been obtained in the normal course of business
and not for the primary purpose of qualifying for the exception;
+ Expand the exception to include mutual funds that constitute
ownership in shares in certain regulated investment companies, if the
companies had, at the end of their most recent fiscal year, or on
average during the previous 3 fiscal years, total assets exceeding $75
million.
+ Until January 1, 1995, retained the exception for a hospital
located outside of Puerto Rico based on the condition that the
referring physician's ownership or investment interest does not relate
to the furnishing of clinical laboratory services.
+ Revise the requirements relating to rural providers, as specified
in the proposed rule, to delete paragraph (ii), which added the
requirement that the majority of tests referred to the rural laboratory
are referred by physicians who have office practices located in a rural
area.
+ Revise the requirements relating to rural providers, as specified
in the proposed rule, to include the requirement that substantially all
of the tests furnished by the entity are furnished to individuals
residing in a rural area.
We revised proposed Sec. 411.359, now designated as
Sec. 411.357, (``Exceptions to referral prohibitions related to
compensation arrangements'') to do the following:.
+ Revise (a)(1) to reflect new requirements specified by OBRA '93
for the rental of space.
+ Remove proposed paragraph (a)(2), which contained requirements
related to a physician who has an ownership or investment interest in a
laboratory and who also rents or leases space to the laboratory.
+ Add an exception for rental of equipment under certain conditions
(new Sec. 411.357(b)).
+ Add an exception for certain group practice arrangements with a
hospital (new Sec. 411.357(h).
+ Add an exception for payments by a physician to a laboratory or
other entity in exchange for certain items and services (new
Sec. 411.357(i)).
+ Replace proposed Sec. 411.359(b) (``Employment and service
arrangements with hospitals'') and proposed Sec. 411.359(f) (``Salaried
physicians in a group practice'') with a new Sec. 411.357(c) (``Bona
fide employment relationships''). New Sec. 411.357(c) is based on the
exception at section 1877(e)(2) of the Act.
+ Replace proposed Sec. 411.359(e) (``Service arrangements with
non-hospital entities'') with a new Sec. 411.357(d) (``Personal service
arrangements''). New Sec. 411.357(d) is based on the exception at
section 1877(e)(3) of the Act.
We added a new Sec. 411.360 that requires that a group
practice submit annually a statement attesting that it met the
``substantially all'' test set forth, under the definition of ``group
practice,'' in Sec. 411.351 of this rule. This section also specifies
how a newly-formed group practice meets the ``substantially all''
criterion.
In addition to the above changes, we have made technical changes.
For example, in proposed Sec. 411.355(c)(1), we cross-referenced part
417, subpart C. Subpart C has been redesignated by a new rule. The
applicable provisions being cross-referenced are now under subparts J
through M. We have also made editorial changes that do not affect the
substance of the provisions.
B. Interim Final Rule With Comment Period--Reporting Requirements for
Financial Relationships Between Physicians and Health Care Entities
That Furnish Selected Items and Services.
The interim final rule with comment published on December 3, 1991,
is revised to incorporate the amendments to section 1877(f) made by SSA
'94, to apply to any future reporting that we require. However,
providers will not be held to the reporting requirements under section
1877(f) until we develop and issue the proper form and accompanying
instructions booklet. Until that time, we will use audits and
investigations as the primary tools to evaluate compliance with these
provisions.
C. Source of Final Regulations.
----------------------------------------------------------------------------------------------------------------
Final regulations Source
----------------------------------------------------------------------------------------------------------------
Sec. 411.1 Basis and scope........................... Proposed Sec. 411.1.
Sec. 411.350 Scope of subpart........................ Proposed Sec. 411.350, SSA '94.
Sec. 411.351 Definitions............................. Sec. 411.351.
Clinical laboratory services...................... Comments.
Compensation arrangement.......................... Proposed Sec. 411.352 and comments.
Direct supervision................................ Comments and OBRA '93.
[[Page 41976]]
Employee.......................................... Proposed Sec. 411.351.
Entity............................................ Proposed Sec. 411.351.
Fair market value................................. Proposed Sec. 411.351.
Financial relationship............................ Proposed Sec. 411.351.
Group practice.................................... Proposed Sec. 411.351, OBRA '93, and Comments.
HPSA.............................................. Comments.
Immediate family member........................... Proposed Sec. 411.351.
Laboratory........................................ Comments.
Members of a group................................ Comments.
Patient care services............................. Comments.
Physician incentive plan.......................... OBRA '93.
Plan of care...................................... Comments.
Referral.......................................... Proposed Sec. 411.351 and Comments.
Referring physician............................... Proposed Sec. 411.351.
Remuneration...................................... Proposed Sec. 411.351 and OBRA '93.
Transaction....................................... Comments.
Sec. 411.353 Prohibition on certain referrals by Proposed Sec. 411.353.
physicians and limitations on billing.
(a) Prohibition on referrals...................... Proposed Sec. 411.353(a).
(b) Limitations on billing........................ Proposed Sec. 411.353(b).
(c) Denial of Payment............................. Proposed Sec. 411.353(c).
(d) Refunds....................................... Proposed Sec. 411.353(d).
Sec. 411.355 General exceptions to referral Proposed Sec. 411.355.
prohibitions related to ownership and compensation.
(a) Physicians' services.......................... Proposed Sec. 411.355(a).
(b) In-office ancillary services.................. Proposed Sec. 411.355(b) and services OBRA '93.
(c) Services furnished to prepaid health plan Proposed Sec. 411.355(c).
enrollees.
(c)(1) HMO or CMP under section 1876.............. Proposed Sec. 411.355(c)(1).
(c)(2) Prepaid plan under section 1833(a)(1)(A)... Proposed Sec. 411.355(c)(2).
(c)(3) An organization receiving payments through Proposed Sec. 411.355(c)(3).
a demonstration project.
(c)(4) A qualified HMO within the meaning of OBRA '93.
section 1310(d) of the Public Health Service Act.
(d) Services furnished in an ASC or ESRD facility. Comments.
Sec. 411.356 Exceptions to referral prohibitions Proposed Sec. 411.357.
related to ownership or investment interests.
(a) Publicly-traded securities.................... Proposed Sec. 411.357(a) and OBRA '93.
(b) Mutual funds.................................. OBRA '93.
(c) Specific providers............................ Proposed Sec. 411.357(b).
(c)(1) Rural laboratories......................... Proposed Sec. 411.357(b)(1) and Comments.
(c)(2) Hospitals in Puerto Rico................... Proposed Sec. 411.357(b)(2).
(c)(3) Hospitals outside of Puerto Rico........... Proposed Sec. 411.357(b)(3), OBRA '93, SSA '94.
Sec. 411.357 Exceptions to referral prohibitions Proposed Sec. 411.359.
related to compensation arrangements.
(a) Rental of office space........................ OBRA '93.
(b) Rental of equipment........................... OBRA '93.
(c) Bona fide employment.......................... OBRA '93.
(d) Personal service arrangements................. ........................................................
(d)(1) General.................................... OBRA '93.
(d)(2) Physician incentive plan exception......... OBRA '93.
(e) Physician recruitment......................... Proposed Sec. 411.359(c).
(f) Isolated transactions......................... Proposed Sec. 411.359(d), Comments, OBRA '93.
(g) Arrangements with hospitals................... OBRA '93.
(h) Group practice arrangements with a hospital... OBRA '93.
(i) Payments by a physician....................... OBRA '93.
Sec. 411.360 Group practice attestation.............. Comments.
Sec. 411.361 Reporting requirements.................. Existing Sec. 411.361 and SSA '94.
----------------------------------------------------------------------------------------------------------------
VII. Collection of Information Requirements
Regulations at Sec. 411.360 contain information collection or
recordkeeping requirements or both that are subject to review by the
Office of Management and Budget under the Paperwork Reduction Act of
1980 (44 U.S.C. 3501 et seq.). The information collection requirements
concern those group practices attempting to meet the definition found
in section 1877(h)(4) and require them to attest that, in the
aggregate, at least 75 percent of the total patient care services
furnished by all physician members are furnished through the group and
are billed under a billing number assigned to the group. Public
reporting burden for this collection of information is estimated to be
1 hour per response. A document will be published in the Federal
Register after approval is obtained. Organizations and individuals
desiring to submit comments on the information collection and
recordkeeping requirements should direct them to the OMB official whose
name appears in the ADDRESSES section of this preamble.
VIII. Regulatory Impact Statement
A. Introduction
The provisions of this final rule with comment period implement
section 6204 of OBRA '89 and section 4207(e) of OBRA '90, which concern
a limitation on certain physician referrals. In addition, the rule
contains revisions to our March 1992 proposal, based on comments
submitted by the public. This final rule also incorporates the new
expansions and exceptions created by OBRA '93, as amended by SSA '94,
that are related to referrals for clinical laboratory services and have
a
[[Page 41977]]
retroactive effective date of January 1, 1992. This final rule with
comment, by prohibiting physician referrals for clinical laboratory
services by physicians who have certain ownership, investment, or
compensation arrangements with the entity furnishing the service, is
meant to eliminate the ordering of unnecessary laboratory tests.
According to the OIG report cited in the March 1992 proposed rule
(57 FR 8589), at least 25 percent of the nearly 4500 independent
clinical laboratories, at the time of the report, were owned in whole
or in part by referring physicians. The same OIG report revealed that
Medicare patients of referring physicians who own or invest in these
laboratories received 45 percent more clinical laboratory services than
all Medicare patients. The OIG estimated in its report that the
``increased utilization of clinical laboratory services by patients of
physician-owners cost the Medicare program $28 million nationally in
1987.'' (Financial Arrangements Between Physicians and Health Care
Businesses, (May 1989))
We believe the majority of physicians and clinical laboratories do
not currently make referrals that are prohibited by this rule. In
addition, we believe that, in response to the statutory provisions,
many physicians and laboratories took necessary steps, before January
1, 1992, to ensure that their investment and employment activities did
not restrict their ability to make referrals. Therefore, any estimate
of the aggregate economic impact of this rule will be purely
speculative. We believe the statute itself will have a continuing
deterrent effect on physicians' aberrant referral patterns and
investment interests.
B. Regulatory Flexibility Act
Consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
through 612), we prepare a regulatory flexibility analysis unless the
Secretary certifies that a rule will not have a significant economic
impact on a substantial number of small entities. For purposes of the
RFA, we consider all hospitals, physicians, and clinical laboratories
to be small entities.
In addition, section 1102(b) requires the Secretary to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b), we define a small rural hospital as a
hospital that is located outside of a Metropolitan Statistical Area and
has fewer than 50 beds.
We expect that a few entities may be affected to varying degrees by
this final rule. Relative to the potential impact on these entities,
the following discussion is provided.
1. Impact on Physicians and Physician Groups
Physicians reportedly find it inefficient and inconvenient to split
their laboratory referral business among multiple laboratories; the
physician who uses one laboratory for private-pay patients is likely to
use that same laboratory for all of his or her patients. Therefore, it
is conceivable that, absent this rule, a physician could seek an
ownership or investment interest in a laboratory, or a compensation
arrangement with a laboratory, in order for the physician to share in
the profits of the laboratory to which he or she makes referrals. In
these cases, the prohibition on referrals might apply, which will
require the physician to either dispose of his or her interest in the
laboratory or stop referring Medicare patients to that laboratory.
As discussed at length earlier in this preamble, some physicians
who have independent practices maintain a physician office laboratory
with other physicians in shared premises, with shared equipment, shared
employees, a shared administrator who has the power to hire and
terminate employees on behalf of the physicians, and shared overhead
costs. For the most part, these shared office space arrangements are
not eligible for the in-office ancillary exception found in section
1877(b)(2) and, therefore, the prohibition on referrals does apply.
Thus, the physicians must each separately meet the in-office ancillary
services requirements, form a group practice meeting the definition of
section 1877(h)(4) of the Act, dispose of their interest in the shared
laboratory facility, or stop referring Medicare patients to that
laboratory facility.
Also as discussed earlier, in response to OBRA '93 changes, we have
added exceptions to the prohibition on referrals that we believe
recognize existing medical practice, are reasonable, and will not
result in program abuse.
As a result of public comments we received in response to the
proposed rule, we are revising the definition of ``group practice''
(Sec. 411.351) by lowering the ``substantially all'' threshold from 85
percent to 75 percent of the total patient care services of group
practice members. This change will allow groups of physicians
additional flexibility in hiring part-time and temporary physicians,
without the group jeopardizing its standing as a group practice.
2. Impact on Laboratories
As mentioned earlier in this impact statement, the report from the
OIG to the Congress indicated that at least 25 percent of the nearly
4500 independent clinical laboratories were owned in whole or in part
by referring physicians. The same report found that Medicare ``patients
of referring physicians who own or invest in these laboratories
received 45 percent more clinical laboratory services than all Medicare
patients * * *.'' Other studies found equivalent correlations involving
physician self-referrals. However, we are unable to estimate with any
degree of accuracy how existing physician laboratory owners will react
to the provisions of the law and this rule or how the utilization of
laboratory services will change. Nevertheless, given the extensive
reach of section 1877 of the Act and these final regulations and the
substantial penalties that are provided for violations of the
prohibition on referrals, we believe that laboratories and physicians
have been restructuring their relationships to ensure compliance with
the statute and will continue to do so.
3. Impact on Hospitals
Sections 411.356 (b)(2) and (b)(3) include exceptions related to
the prohibition on referrals for ownership or investment interests in
certain hospitals. Sections 411.357 (c), (d), (e), (g), and (h) include
exceptions related to the prohibition on referrals for compensation for
services performed or supervised by physicians. Because we believe that
a large number of the financial relationships between physicians and
hospitals are covered by these exceptions, we do not believe hospitals
will be significantly affected by this rule. In addition, hospitals in
Puerto Rico and many hospitals in rural areas are excluded from this
rule under Sec. 411.356(c).
For the reasons stated above, we have determined, and the Secretary
certifies, that this final rule with comment will not result in a
significant economic impact on a substantial number of small entities
or on the operations of a substantial number of small rural hospitals.
We are, therefore, not preparing analyses for either the RFA or section
1102(b) of the Act.
In accordance with the provisions of E.O. 12866, this regulation
was reviewed by the Office of Management and Budget.
[[Page 41978]]
List of Subjects in 42 CFR Part 411
Kidney diseases, Medicare, Physician referral, Reporting and
recordkeeping requirements.
42 CFR part 411 is amended as set forth below:
PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE
PAYMENT
1. The authority citation for part 411 is revised to read as
follows:
Authority: Secs. 1102, 1834, 1842(l), 1861, 1862, 1871, 1877,
and 1879 of the Social Security Act (42 U.S.C. 1302, 1395m,
1395u(l), 1395x, 1395y, 1395hh, 1395nn, and 1395pp).
2. In Sec. 411.1, paragraph (a) is revised to read as follows:
Sec. 411.1 Basis and scope.
(a) Statutory basis. Sections 1814(c), 1835(d), and 1862 of the Act
exclude from Medicare payment certain specified services. The Act
provides special rules for payment of services furnished by Federal
providers or agencies (sections 1814(c) and 1835(d)), by hospitals and
physicians outside the United States (sections 1814(f) and 1862(a)(4)),
and by hospitals and SNFs of the Indian Health Service (section 1880).
Section 1877 sets forth limitations on referrals and payment for
clinical laboratory services furnished by entities with which the
referring physician (or an immediate family member of the referring
physician) has a financial relationship.
* * * *
3. Section 411.350 is revised to read as follows:
Sec. 411.350 Scope of subpart.
(a) This subpart implements section 1877 of the Act, which
generally prohibits a physician from making a referral under Medicare
for clinical laboratory services to an entity with which the physician
or a member of the physician's immediate family has a financial
relationship.
(b) This subpart does not provide for exceptions or immunity from
civil or criminal prosecution or other sanctions applicable under any
State laws or under Federal law other than section 1877 of the Act. For
example, although a particular arrangement involving a physician's
financial relationship with an entity may not prohibit the physician
from making referrals to the entity under this subpart, the arrangement
may nevertheless violate another provision of the Act or other laws
administered by HHS, the Federal Trade Commission, the Securities and
Exchange Commission, the Internal Revenue Service, or any other Federal
or State agency.
(c) This subpart requires, with some exceptions, that certain
entities furnishing covered items or services under Part A or Part B
report information concerning their ownership, investment, or
compensation arrangements in the form, manner, and at the times
specified by HCFA.
4. New Secs. 411.351, 411.353, 411.355 through 411.357, and 411.360
are added to read as follows:
Sec. 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 of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings. These examinations also
include procedures to determine, measure, or otherwise describe the
presence or absence of various substances or organisms in the body.
Compensation arrangement means any arrangement involving any
remuneration, direct or indirect, between a physician (or a member of a
physician's immediate family) and an entity.
Direct supervision means supervision by a physician who is present
in the office suite and immediately available to provide assistance and
direction throughout the time services are being performed.
Employee means any individual who, under the usual common law rules
that apply in determining the employer-employee relationship (as
applied for purposes of section 3121(d)(2) of the Internal Revenue Code
of 1986), is considered to be employed by, or an employee of, an
entity. (Application of these common law rules is discussed at 20 CFR
404.1007 and 26 CFR 31.3121(d)-1(c).)
Entity means a sole proprietorship, trust, corporation,
partnership, foundation, not-for-profit corporation, or unincorporated
association.
Fair market value means the value in arm's-length transactions,
consistent with the general market value. With respect to rentals or
leases, fair market value means the value of rental property for
general commercial purposes (not taking into account its intended use).
In the case of a lease of space, this value may not be adjusted to
reflect the additional value the prospective lessee or lessor would
attribute to the proximity or convenience to the lessor when the lessor
is a potential source of patient referrals to the lessee.
Financial relationship refers to a direct or indirect relationship
between a physician (or a member of a physician's immediate family) and
an entity in which the physician or family member has--
(1) An ownership or investment interest that exists in the entity
through equity, debt, or other means and includes an interest in an
entity that holds an ownership or investment interest in any entity
providing laboratory services; or
(2) A compensation arrangement with the entity.
Group practice means a group of two or more physicians, legally
organized as a partnership, professional corporation, foundation, not-
for-profit corporation, faculty practice plan, or similar association,
that meets the following conditions:
(1) Each physician who is a member of the group, as defined in this
section, furnishes substantially the full range of patient care
services that the physician routinely furnishes including medical care,
consultation, diagnosis, and treatment through the joint use of shared
office space, facilities, equipment, and personnel.
(2) Except as provided in paragraphs (2)(i) and (2)(ii) of this
definition, substantially all of the patient care services of the
physicians who are members of the group (that is, at least 75 percent
of the total patient care services of the group practice members) are
furnished through the group and billed in the name of the group and the
amounts received are treated as receipts of the group. ``Patient care
services'' are measured by the total patient care time each member
spends on these services. For example, if a physician practices 40
hours a week and spends 30 hours on patient care services for a group
practice, the physician has spent 75 percent of his or her time
providing countable patient care services.
(i) The ``substantially all'' test does not apply to any group
practice that is located solely in an HPSA, as defined in this section,
and
(ii) For group practices located outside of an HPSA (as defined in
this section) any time spent by group practice members providing
services in an HPSA should not be used to calculate whether the group
practice located outside the HPSA has met the ``substantially all''
test, regardless of whether the members' time in the HPSA
[[Page 41979]]
is spent in a group practice, clinic, or office setting.
(3) The practice expenses and income are distributed in accordance
with methods previously determined.
In the case of faculty practice plans associated with a hospital,
institution of higher education, or medical school that has an approved
medical residency training program in which faculty practice plan
physicians perform specialty and professional services, both within and
outside the faculty practice, as well as perform other tasks such as
research, this definition applies only to those services that are
furnished within the faculty practice plan.
Hospital means any separate legally organized operating entity plus
any subsidiary, related, or other entities that perform services for
the hospital's patients and for which the hospital bills. A
``hospital'' does not include entities that perform services for
hospital patients ``under arrangements'' with the hospital.
HPSA means, for purposes of this regulation, an area designated as
a health professional shortage area under section 332(a)(1)(A) of the
Public Health Service Act for primary medical care professionals (in
accordance with the criteria specified in 42 CFR part 5, appendix A,
part I--Geographic Areas). In addition, with respect to dental, mental
health, vision care, podiatric, and pharmacy services, an HPSA means an
area designated as a health professional shortage area under section
332(a)(1)(A) of the Public Health Service Act for dental professionals,
mental health professionals, vision care professionals, podiatric
professionals, and pharmacy professionals, respectively.
Immediate family member or member of a physician's immediate family
means husband or wife; natural or adoptive parent, child, or sibling;
stepparent, stepchild, stepbrother, or stepsister; father-in-law,
mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-
in-law; grandparent or grandchild; and spouse of a grandparent or
grandchild.
Laboratory means an entity furnishing biological, microbiological,
serological, chemical, immunohematological, hematological, biophysical,
cytological, pathological, or other examination of materials derived
from the human body for the purpose of providing information for the
diagnosis, prevention, or treatment of any disease or impairment of, or
the assessment of the health of, human beings. These examinations also
include procedures to determine, measure, or otherwise describe the
presence or absence of various substances or organisms in the body.
Entities only collecting or preparing specimens (or both) or only
serving as a mailing service and not performing testing are not
considered laboratories.
Members of the group means physician partners and full-time and
part-time physician contractors and employees during the time they
furnish services to patients of the group practice that are furnished
through the group and are billed in the name of the group.
Patient care services means any tasks performed by a group practice
member that address the medical needs of specific patients, regardless
of whether they involve direct patient encounters. They can include,
for example, the services of physicians who do not directly treat
patients, time spent by a physician consulting with other physicians,
or time spent reviewing laboratory tests.
Physician incentive plan means any compensation arrangement between
an entity and a physician or physician group that may directly or
indirectly have the effect of reducing or limiting services furnished
with respect to individuals enrolled with the entity.
Plan of care means the establishment by a physician of a course of
diagnosis or treatment (or both) for a particular patient, including
the ordering of items or services.
Referral--
(1) Means either of the following:
(i) Except as provided in paragraph (2) of this definition, the
request by a physician for, or ordering of, any item or service for
which payment may be made under Medicare Part B, including a request
for a consultation with another physician and any test or procedure
ordered by or to be performed by (or under the supervision of) that
other physician.
(ii) Except as provided in paragraph (2) of this definition, a
request by a physician that includes the provision of laboratory
services or the establishment of a plan of care by a physician that
includes the provision of laboratory services.
(2) Does not include a request by a pathologist for clinical
diagnostic laboratory tests and pathological examination services if--
(i) The request is part of a consultation initiated by another
physician; and
(ii) The tests or services are furnished by or under the
supervision of the pathologist.
Referring physician means a physician (or group practice) who makes
a referral as defined in this section.
Remuneration means any payment, discount, forgiveness of debt, or
other benefit made directly or indirectly, overtly or covertly, in cash
or in kind, except that the following are not considered remuneration:
(1) The forgiveness of amounts owed for inaccurate tests or
procedures, mistakenly performed tests or procedures, or the correction
of minor billing errors.
(2) The furnishing of items, devices, or supplies that are used
solely to collect, transport, process, or store specimens for the
entity furnishing the items, devices, or supplies or are used solely to
order or communicate the results of tests or procedures for the entity.
(3) A payment made by an insurer or a self-insured plan to a
physician to satisfy a claim, submitted on a fee-for-service basis, for
the furnishing of health services by that physician to an individual
who is covered by a policy with the insurer or by the self-insured
plan, if--
(i) The health services are not furnished, and the payment is not
made, under a contract or other arrangement between the insurer or the
plan and the physician;
(ii) The payment is made to the physician on behalf of the covered
individual and would otherwise be made directly to the individual; and
(iii) The amount of the payment is set in advance, does not exceed
fair market value, and is not determined in a manner that takes into
account directly or indirectly the volume or value of any referrals.
Transaction means an instance or process of two or more persons
doing business. An isolated transaction is one involving a single
payment between two or more persons. A transaction that involves long-
term or installment payments is not considered an isolated transaction.
Sec. 411.353 Prohibition on certain referrals by physicians and
limitations on billing.
(a) Prohibition on referrals. Except as provided in this subpart, a
physician who has a financial relationship with an entity, or who has
an immediate family member who has a financial relationship with the
entity, may not make a referral to that entity for the furnishing of
clinical laboratory services for which payment otherwise may be made
under Medicare.
(b) Limitations on billing. An entity that furnishes clinical
laboratory services under a referral that is prohibited by paragraph
(a) of this section may not present or cause to be presented a claim or
bill to the Medicare
[[Page 41980]]
program or to any individual, third party payer, or other entity for
the clinical laboratory services performed under that referral.
(c) Denial of payment. No Medicare payment may be made for a
clinical laboratory service that is furnished under a prohibited
referral.
(d) Refunds. An entity that collects payment for a laboratory
service that was performed under a prohibited referral must refund all
collected amounts on a timely basis.
Sec. 411.355 General exceptions to referral prohibitions related to
both ownership/investment and compensation.
The prohibition on referrals set forth in Sec. 411.353 does not
apply to the following types of services:
(a) Physicians' services, as defined in Sec. 410.20(a), that are
furnished personally by (or under the personal supervision of) another
physician in the same group practice as the referring physician.
(b) In-office ancillary services. Services that meet the following
conditions:
(1) They are furnished personally by one of the following
individuals:
(i) The referring physician.
(ii) A physician who is a member of the same group practice as the
referring physician.
(iii) Individuals who are directly supervised by the referring
physician or, in the case of group practices, by another physician in
the same group practice as the referring physician.
(2) They are furnished in one of the following locations:
(i) A building in which the referring physician (or another
physician who is a member of the same group practice) furnishes
physicians' services unrelated to the furnishing of clinical laboratory
services.
(ii) A building that is used by the group practice for the
provision of some or all of the group's clinical laboratory services.
(3) They are billed by one of the following:
(i) The physician performing or supervising the service.
(ii) The group practice of which the performing or supervising
physician is a member.
(iii) An entity that is wholly owned by the physician or the
physician's group practice.
(c) Services furnished to prepaid health plan enrollees by one of
the following organizations:
(1) An HMO or a CMP in accordance with a contract with HCFA under
section 1876 of the Act and part 417, subparts J through M, of this
chapter.
(2) A health care prepayment plan in accordance with an agreement
with HCFA under section 1833(a)(1)(A) of the Act and part 417, subpart
U, of this chapter.
(3) An organization that is receiving payments on a prepaid basis
for the enrollees through a demonstration project under section 402(a)
of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1) or under
section 222(a) of the Social Security Amendments of 1972 (42 U.S.C.
1395b-1 note).
(4) A qualified health maintenance organization (within the meaning
of section 1310(d) of the Public Health Service Act).
(d) Services furnished in an ambulatory surgical center (ASC) or
end stage renal disease (ESRD) facility, or by a hospice if payment for
those services is included in the ASC rate, the ESRD composite rate, or
as part of the per diem hospice charge, respectively.
Sec. 411.356 Exceptions to referral prohibitions related to ownership
or investment interests.
For purposes of Sec. 411.353, the following ownership or investment
interests do not constitute a financial relationship:
(a) Publicly traded securities. Ownership of investment securities
(including shares or bonds, debentures, notes, or other debt
instruments) that may be purchased on terms generally available to the
public and that meet the requirements of paragraphs (a)(1) and (a)(2)
of this section.
(1) They are either--
(i) Listed for trading on the New York Stock Exchange, the American
Stock Exchange, or any regional exchange in which quotations are
published on a daily basis, or foreign securities listed on a
recognized foreign, national, or regional exchange in which quotations
are published on a daily basis; or
(ii) Traded under an automated interdealer quotation system
operated by the National Association of Securities Dealers.
(2) In a corporation that had--
(i) Until January 1, 1995, total assets at the end of the
corporation's most recent fiscal year exceeding $100 million; or
(ii) Stockholder equity exceeding $75 million at the end of the
corporation's most recent fiscal year or on average during the previous
3 fiscal years.
(b) Mutual funds. Ownership of shares in a regulated investment
company as defined in section 851(a) of the Internal Revenue Code of
1986, if the company had, at the end of its most recent fiscal year, or
on average during the previous 3 fiscal years, total assets exceeding
$75 million.
(c) Specific providers. Ownership or investment interest in the
following entities:
(1) A laboratory that is located in a rural area (that is, a
laboratory that is not located in an urban area as defined in
Sec. 412.62(f)(1)(ii) of this chapter) and that meets the following
criteria:
(i) The laboratory testing that is referred by a physician who has
(or whose immediate family member has) an ownership or investment
interest in the rural laboratory is either--
(A) Performed on the premises of the rural laboratory; or
(B) If not performed on the premises, the laboratory performing the
testing bills the Medicare program directly for the testing.
(ii) Substantially all of the laboratory tests furnished by the
entity are furnished to individuals who reside in a rural area.
Substantially all means no less than 75 percent.
(2) A hospital that is located in Puerto Rico.
(3) A hospital that is located outside of Puerto Rico if one of the
following conditions is met:
(i) The referring physician is authorized to perform services at
the hospital, and the physician's ownership or investment interest is
in the entire hospital and not merely in a distinct part or department
of the hospital.
(ii) Until January 1, 1995, the referring physician's ownership or
investment interest does not relate (directly or indirectly) to the
furnishing of clinical laboratory services.
Sec. 411.357 Exceptions to referral prohibitions related to
compensation arrangements.
For purposes of Sec. 411.353, the following compensation
arrangements do not constitute a financial relationship:
(a) Rental of office space. Payments for the use of office space
made by a lessee to a lessor if there is a rental or lease agreement
that meets the following requirements:
(1) The agreement is set out in writing and is signed by the
parties and specifies the premises covered by the lease.
(2) The term of the agreement is at least 1 year.
(3) The space rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee, except that the lessee may make payments for the use of
space consisting of common areas if
[[Page 41981]]
the payments do not exceed the lessee's pro rata share of expenses for
the space based upon the ratio of the space used exclusively by the
lessee to the total amount of space (other than common areas) occupied
by all persons using the common areas.
(4) The rental charges over the term of the lease are set in
advance and are consistent with fair market value.
(5) The charges are not determined in a manner that takes into
account the volume or value of any referrals or other business
generated between the parties.
(6) The agreement would be commercially reasonable even if no
referrals were made between the lessee and the lessor.
(b) Rental of equipment. Payments made by a lessee to a lessor for
the use of equipment under the following conditions:
(1) A rental or lease agreement is set out in writing and signed by
the parties and specifies the equipment covered by the lease.
(2) The equipment rented or leased does not exceed that which is
reasonable and necessary for the legitimate business purposes of the
lease or rental and is used exclusively by the lessee when being used
by the lessee.
(3) The lease provides for a term of rental or lease of at least 1
year.
(4) The rental charges over the term of the lease are set in
advance, are consistent with fair market value, and are not determined
in a manner that takes into account the volume or value of any
referrals or other business generated between the parties.
(5) The lease would be commercially reasonable even if no referrals
were made between the parties.
(c) Bona fide employment relationships. Any amount paid by an
employer to a physician (or immediate family member) who has a bona
fide employment relationship with the employer for the provision of
services if the following conditions are met:
(1) The employment is for identifiable services.
(2) The amount of the remuneration under the employment is--
(i) Consistent with the fair market value of the services; and
(ii) Except as provided in paragraph (c)(4) of this section, is not
determined in a manner that takes into account (directly or indirectly)
the volume or value of any referrals by the referring physician.
(3) The remuneration is provided under an agreement that would be
commercially reasonable even if no referrals were made to the employer.
(4) Paragraph (c)(2)(ii) of this section does not prohibit payment
of remuneration in the form of a productivity bonus based on services
performed personally by the physician (or immediate family member of
the physician).
(d) Personal service arrangements--(1) General. Remuneration from
an entity under an arrangement to a physician or immediate family
member of the physician, including remuneration for specific
physicians' services furnished to a nonprofit blood center, if the
following conditions are met:
(i) The arrangement is set out in writing, is signed by the
parties, and specifies the services covered by the arrangement.
(ii) The arrangement covers all of the services to be furnished by
the physician (or an immediate family member of the physician) to the
entity.
(iii) The aggregate services contracted for do not exceed those
that are reasonable and necessary for the legitimate business purposes
of the arrangement.
(iv) The term of the arrangement is for at least 1 year.
(v) The compensation to be paid over the term of the arrangement is
set in advance, does not exceed fair market value, and, except in the
case of a physician incentive plan, is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
(vi) The services to be furnished under the arrangement do not
involve the counseling or promotion of a business arrangement or other
activity that violates any State or Federal law.
(2) Physician incentive plan exception. In the case of a physician
incentive plan between a physician and an entity, the compensation may
be determined in a manner (through a withhold, capitation, bonus, or
otherwise) that takes into account directly or indirectly the volume or
value of any referrals or other business generated between the parties,
if the plan meets the following requirements:
(i) No specific payment is made directly or indirectly under the
plan to a physician or a physician group as an inducement to reduce or
limit medically necessary services furnished with respect to a specific
individual enrolled in the entity.
(ii) In the case of a plan that places a physician or a physician
group at substantial financial risk as determined by the Secretary
under section 1876(i)(8)(A)(ii) of the Act, the plan complies with any
requirements the Secretary has imposed under that section.
(iii) Upon request by the Secretary, the entity provides the
Secretary with access to descriptive information regarding the plan, in
order to permit the Secretary to determine whether the plan is in
compliance with the requirements of paragraph (d)(2) of this section.
(3) Until January 1, 1995, the provisions in paragraph (d) (1) and
(2) of this section do not apply to any arrangements that meet the
requirements of section 1877(e)(2) or section 1877(e)(3) of the Act as
they read before they were amended by the Omnibus Budget Reconciliation
Act of 1993 (Public Law 103-66).
(e) Physician recruitment. Remuneration provided by a hospital to
recruit a physician that is intended to induce the physician to
relocate to the geographic area served by the hospital in order to
become a member of the hospital's medical staff, if all of the
following conditions are met:
(1) The arrangement and its terms are in writing and signed by both
parties.
(2) The arrangement is not conditioned on the physician's referral
of patients to the hospital.
(3) The hospital does not determine (directly or indirectly) the
amount or value of the remuneration to the physician based on the
volume or value of any referrals the physician generates for the
hospital.
(4) The physician is not precluded from establishing staff
privileges at another hospital or referring business to another entity.
(f) Isolated transactions. Isolated financial transactions, such as
a one-time sale of property or a practice, if all of the conditions set
forth in paragraphs (c)(2) and (c)(3) of this section are met with
respect to an entity in the same manner as they apply to an employer.
There can be no additional transactions between the parties for 6
months after the isolated transaction, except for transactions which
are specifically excepted under the other provisions in Secs. 411.355
through 411.357.
(g) Arrangements with hospitals. (1) Until January 1, 1995, any
compensation arrangement between a hospital and a physician or a member
of a physician's immediate family if the arrangement does not relate to
the furnishing of clinical laboratory services; or
(2) Remuneration provided by a hospital to a physician if the
remuneration does not relate to the furnishing of clinical laboratory
services.
(h) Group practice arrangements with a hospital. An arrangement
between a hospital and a group practice under
[[Page 41982]]
which clinical laboratory services are provided by the group but are
billed by the hospital if the following conditions are met:
(1) With respect to services provided to an inpatient of the
hospital, the arrangement is pursuant to the provision of inpatient
hospital services under section 1861(b)(3) of the Act.
(2) The arrangement began before December 19, 1989, and has
continued in effect without interruption since then.
(3) With respect to the clinical laboratory services covered under
the arrangement, substantially all of these services furnished to
patients of the hospital are furnished by the group under the
arrangement.
(4) The arrangement is in accordance with an agreement that is set
out in writing and that specifies the services to be furnished by the
parties and the compensation for services furnished under the
agreement.
(5) The compensation paid over the term of the agreement is
consistent with fair market value, and the compensation per unit of
services is fixed in advance and is not determined in a manner that
takes into account the volume or value of any referrals or other
business generated between the parties.
(6) The compensation is provided in accordance with an agreement
that would be commercially reasonable even if no referrals were made to
the entity.
(i) Payments by a physician. Payments made by a physician--
(1) To a laboratory in exchange for the provision of clinical
laboratory services; or
(2) To an entity as compensation for other items or services that
are furnished at a price that is consistent with fair market value.
Sec. 411.360 Group practice attestation.
(a) Except as provided in paragraph (b) of this section, a group
practice (as defined in section 1877(h)(4) of the Act and Sec. 411.351)
must submit a written statement to its carrier annually to attest that,
during the most recent 12-month period (calendar year, fiscal year, or
immediately preceding 12-month period) 75 percent of the total patient
care services of group practice members was furnished through the
group, was billed under a billing number assigned to the group, and the
amounts so received were treated as receipts of the group.
(b) A newly-formed group practice (one in which physicians have
recently begun to practice together) or any group practice that has
been unable in the past to meet the requirements of section 1877(h)(4)
of the Act must--
(1) Submit a written statement to attest that, during the next 12-
month period (calendar year, fiscal year, or next 12 months), it
expects to meet the 75-percent standard and will take measures to
ensure the standard is met; and
(2) At the end of the 12-month period, submit a written statement
to attest that it met the 75-percent standard during that period,
billed for those services under a billing number assigned to the group,
and treated amounts received for those services as receipts of the
group. If the group did not meet the standard, any Medicare payments
made for clinical laboratory services furnished by the group during the
12-month period that were conditioned upon the standard being met are
overpayments.
(c) Once any group has chosen whether to use its fiscal year, the
calendar year, or some other 12-month period, the group practice must
adhere to this choice.
(d) The attestation must contain a statement that the information
furnished in the attestation is true and accurate and must be signed by
a group representative.
(e) A group that intends to meet the definition of a group practice
in order to qualify for an exception described in Secs. 411.355 through
411.357, must submit the attestation required by paragraph (a) or
paragraph (b)(1) of this section, as applicable, to its carrier by
December 12, 1995.
5. Section 411.361 is revised to read as follows:
Sec. 411.361 Reporting requirements.
(a) Basic rule. Except as provided in paragraph (b) of this
section, all entities furnishing items or services for which payment
may be made under Medicare must submit information to HCFA concerning
their financial relationships (as defined in paragraph (d) of this
section), in such form, manner, and at such times as HCFA specifies.
(b) Exception. The requirements of paragraph (a) of this section do
not apply to entities that provide 20 or fewer Part A and Part B items
and services during a calendar year, or to designated health services
provided outside the United States.
(c) Required information. The information submitted to HCFA under
paragraph (a) of this section must include at least the following:
(1) The name and unique physician identification number (UPIN) of
each physician who has a financial relationship with the entity;
(2) The name and UPIN of each physician who has an immediate
relative (as defined in Sec. 411.351) who has a financial relationship
with the entity;
(3) The covered items and services provided by the entity; and
(4) With respect to each physician identified under paragraphs
(c)(1) and (c)(2) of this section, the nature of the financial
relationship (including the extent and/or value of the ownership or
investment interest or the compensation arrangement, if requested by
HCFA).
(d) Reportable financial relationships. For purposes of this
section, a financial relationship is any ownership or investment
interest or any compensation arrangement, as described in section 1877
of the Act.
(e) Form and timing of reports. Entities that are subject to the
requirements of this section must submit the required information on a
HCFA-prescribed form within the time period specified by the servicing
carrier or intermediary. Entities are given at least 30 days from the
date of the carrier's or intermediary's request to provide the initial
information. Thereafter, an entity must provide updated information
within 60 days from the date of any change in the submitted
information. Entities must retain documentation sufficient to verify
the information provided on the forms and, upon request, must make that
documentation available to HCFA or the OIG.
(f) Consequences of failure to report. Any person who is required,
but fails, to submit information concerning his or her financial
relationships in accordance with this section is subject to a civil
money penalty of up to $10,000 for each day of the period beginning on
the day following the applicable deadline established under paragraph
(e) of this section until the information is submitted. Assessment of
these penalties will comply with the applicable provisions of part 1003
of this title.
(g) Public disclosure. Information furnished to HCFA under this
section is subject to public disclosure in accordance with the
provisions of part 401 of this chapter.
(Catalog of Federal Domestic Assistance Program No. 93.774,
Medicare--Supplementary Medical Insurance Program)
Dated: January 16, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
Dated: May 10, 1995.
Donna E. Shalala,
Secretary.
[FR Doc. 95-19647 Filed 8-11-95; 8:45 am]
BILLING CODE 4120-01-P