[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]




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Part II





Department of Health and Human Services





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Health Care Financing Administration



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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