[Federal Register Volume 61, Number 17 (Thursday, January 25, 1996)]
[Rules and Regulations]
[Pages 2122-2137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1073]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991-AA69


Medicare and State Health Care Programs: Fraud and Abuse; Safe 
Harbors for Protecting Health Plans

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

ACTION: Final rule.

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SUMMARY: In accordance with section 14 of the Medicare and Medicaid 
Patient and Program Protection Act of 1987, this final rule sets forth 
various standards and guidelines for safe harbor provisions designed to 
protect certain health care plans, such as health maintenance 
organizations and preferred provider organizations, under the Medicare 
and State health care programs' anti-kickback statute. These safe 
harbor provisions were originally published in the Federal Register on 
November 5, 1992 in interim final form. In response to the various 
public comments received, this final rule revises and clarifies various 
aspects of that earlier rulemaking.

Effective date: This rule is effective on January 25, 1996.

FOR FURTHER INFORMATION CONTACT:
Linda Grabel or Tom Hoffman, Office of the General Counsel, (202) 619-
0335
Joel Schaer, Office of Inspector General, (202) 619-3270.
    Please send comments regarding the paperwork reduction and 
information collection requirements discussed in section IV.B. of this 
preamble in writing to: Joel Schaer, Regulations Officer, Office of 
Inspector General, Room 5550 Cohen Building, 330 Independence Avenue 
SW., Washington, D.C. 20201.

SUPPLEMENTARY INFORMATION:

I. Background

    On November 5, 1992, we published an interim final rule with 
comment period establishing two new safe harbors, and amending one 
existing safe harbor, to provide protection for certain health care 
plans, such as health maintenance organizations (HMOs) and preferred 
provider organizations (PPOs) (57 FR 52723). The first new safe harbor 
provision, set forth in Sec. 1001.952(l), protects certain incentives 
to enrollees (including waiver of coinsurance and deductible amounts) 
paid by health care plans. The second new provision, set forth in 
Sec. 1001.952(m), protects certain negotiated price reduction 
agreements between health care plans and contract health care 
providers. In addition, the existing safe harbor addressing the waiver 
of beneficiary coinsurance and deductible amounts, codified in 
Sec. 1001.952(k), was amended to protect certain agreements entered 
into between hospitals and Medicare SELECT insurers.
    These safe harbors set forth various standards and guidelines that, 
if met, allow specific business arrangements and payment practices of 
certain health care plans not to be treated as criminal offenses under 
section 1128B(b) of the Social Security Act (the Act) and not to serve 
as a basis for a program exclusion under section 1128(b)(7) of the Act. 
As with the other safe harbor provisions codified in Sec. 1001.95 of 
the regulations, these new safe harbors placed no affirmative 
obligation on any individual or entity.
    Although the regulations were issued in final form and became 
effective on their date of publication, we indicated in the preamble of 
that November 5, 1992 document that we were allowing a 60-day public 
comment period during which time interested parties could submit 
comments and concerns regarding these safe harbors. An additional 60-
day extension to the public comment period was published in the Federal 
Register on January 7, 1993 (58 FR 2989). 

[[Page 2123]]


II. Summary of the Interim Final Rule

A. Section 1001.952(l)--Increased Coverage, Reduced Cost-Sharing 
Amounts, or Reduced Premium Amounts Offered by Health Plan

    As indicated above, a new safe harbor, set forth in 
Sec. 1001.952(l), was created to protect certain incentives to 
enrollees (including increased benefits and waiver of deductible and 
coinsurance amounts) offered by health plans. This safe harbor 
contained two parts designed to protect incentives offered by health 
care plans under contract with the Health Care Financing Administration 
(HCFA) or a State health care program.
    The first part of this safe harbor protected risk-based health 
plans, like HMOs, competitive medical plans (CMPs) and prepaid health 
plans (PHPs), under contract with HCFA or a State health care program; 
and operating (i) in accordance with section 1876(g) or 1903(m) of the 
Act, (ii) under a Federal statutory demonstration authority, or (iii) 
under other Federal statutory or regulatory authority. Under this part, 
the only standard for such health plans was that the health care plan 
could not discriminate in the offering of these incentives, but must 
offer the same incentives to all enrollees unless otherwise 
specifically approved by HCFA or a State health care program.
    The second part of this safe harbor protected incentives offered to 
enrollees by HMOs, CMPs, PHPs and health care prepaid plans (HCPPs) 
that are under contract with HCFA or a State health care program, and 
that are paid on a reasonable cost or similar basis. For these plans to 
be under the safe harbor, two standards had to be met--(1) the same 
incentives must be offered to all enrollees for all covered services, 
and (2) the health plan may not claim the cost of these incentives as 
bad debts or otherwise shift the burden of these incentives onto 
Medicare, the State health care programs, other payers or individuals.

B. Section 1001.952(m)--Price Reductions Offered to Health Plans

    The safe harbor in Sec. 1001.952(m) was created to protect certain 
negotiated price reduction agreements between health care plans and 
contract health care providers, and was set forth in three parts. The 
first two parts were designed to protect risk-based and cost-reimbursed 
health care plans that operate in accordance with a contract or 
agreement with HCFA or a State health care program; the third part 
established additional standards to protect health plans that do not 
have contracts or agreements with HCFA or State health care programs. 
In order to comply with this price reduction safe harbor, three 
fundamental prerequisites were to be met in all cases--(1) the 
protected remuneration was the contract health care provider's 
reduction of its usual charges for the services; (2) the terms of the 
agreement between the parties must be in writing; and (3) the agreement 
must be for the sole purpose of having the contract health care 
provider furnish enrollees items or services that are covered by the 
health plan, Medicare or the State health care program.
    The first part of this safe harbor (Sec. 1001.952(m)(1)(i)) 
protected risk-based HMOs, CMPs and PHPs under contract with HCFA or a 
State health care program; and operating (i) in accordance with section 
1876(g) or 1903(m) of the Act, (ii) under a Federal demonstration 
authority, or (iii) under other Federal statutory or regulatory 
authority. In addition to the three prerequisites mentioned above, in 
order to be covered under the safe harbor risk-based contract health 
plans under this part could not separately bill Medicare, Medicaid or 
another State health care program for items and services furnished 
under the agreement with the health plan (except as specifically 
authorized by HCFA or the State health care program), and could not 
otherwise shift the burden of the agreement onto Medicare, Medicaid, 
other payers or individuals.
    The second part (Sec. 1001.952(m)(1)(ii)) protected health care 
plans that have executed a contract or agreement with HCFA or a State 
health care program to have payment made on a reasonable cost or 
similar basis. In addition to the three prerequisites, price reduction 
agreements with contract health care providers under this safe harbor 
were protected if (1) the term of the agreement was not less than one 
year; (2) the agreement specified in advance the covered items and 
services that the contract health care provider will furnish to 
enrollees and the methodology for computing the payment to the contract 
health care provider; (3) the health plan fully and accurately reported 
to HCFA or the State health care program the amount it paid the 
contract health care provider in accordance with the agreement; and (4) 
the contract health care provider could not claim payment in any form 
unless specifically authorized by HCFA or the State health care 
program.
    Lastly, the third part of this safe harbor 
(Sec. 1001.952(m)(1)(iii)) protected reductions offered by contract 
health care providers to all other health plans when six standards, in 
addition to the three prerequisites, were met. The six standards set 
forth required (1) the term of the price reduction agreement not be 
less than one year; (2) the agreement specify in advance the covered 
items and services, which party is to file claims or requests for 
payment with Medicare, Medicaid and other State health care programs, 
and the schedule of fees that contract provider will be paid; (3) the 
schedule remain in effect throughout the term of the agreement (unless 
a fee update is specifically authorized by HCFA or a State health care 
program); (4) the party submitting claims for items or services under 
the agreement not claim or request payment for amounts in excess of the 
fee schedule; (5) full and accurate reporting of costs be made by the 
health plan or the contract health care provider; and (6) a prohibition 
on the party that is not responsible under the agreement for seeking 
reimbursement from Medicare, Medicaid and any other State health care 
program from claiming payment or otherwise shifting the burden of the 
price reduction onto Medicare, Medicaid, other payers or individuals.

C. Section 1001.952(k)--Waiver of Beneficiary Coinsurance and 
Deductible Amounts

    The existing safe harbor in Sec. 1001.952(k), the waiver of 
coinsurance and deductible amounts, was also amended to protect certain 
agreements entered into between hospitals and Medicare SELECT insurers. 
Medicare SELECT is a type of supplemental policy under which reduced 
benefits may be paid for the use of an out-of-network health care 
provider. Under this amended safe harbor, waivers or reductions of 
inpatient hospital coinsurance and deductibles by a hospital in 
accordance with an agreement with a Medicare SELECT insurer were 
protected by amending the third of the existing 3 standards set forth 
in Sec. 1001.952(k)(1). The prior standard required that the reduction 
or waiver not result from an agreement between a hospital and a third-
party payer. The amended standard exempted agreements that are part of 
a contract between a hospital and a Medicare SELECT insurer for 
furnishing items or services to Medicare SELECT beneficiaries when (1) 
the insurer issued a Medicare SELECT insurance policy under the terms 
of section 1882(t)(1) of the Act, and (2) the waiver of coinsurance or 
deductible amounts provided under the agreement were limited to 
beneficiaries covered by the insurer's Medicare SELECT policy. The 
other requirements of the existing safe 

[[Page 2124]]
harbor still apply to such waivers or reductions.

III. Response to Comments and Summary of Revisions

    As a result of our request for comments, we received a total of 42 
timely-filed public comments from various health care associations, 
health care plans and medical groups, professional and business 
organizations, and insurance companies on how best to protect HMOs, 
PPOs and other managed care plans. The comments included both general 
and broad concerns about the impact of the regulations, and specific 
comments on those areas and the safe harbor provisions about which we 
invited public input. The following is a summary of the issues raised 
through that public comment process, our response to those various 
comments, and a summary of the specific revisions and clarifications 
being made to these regulations.

A. General Comments

    Comment: Commenters generally objected that the safe harbors would 
inhibit or ``chill'' existing activities in which managed care plans 
engage and thereby jeopardize numerous arrangements. They specifically 
asserted that should HMOs and PPOs not receive safe harbor protection, 
vast networks of providers would be at risk and would therefore refuse 
to enter into discount arrangements with such entities.
    Response: The commenters have misconstrued the effect of the safe 
harbor provisions. The interim final rule did not expand the zone of 
illegal conduct under the anti-kickback statute. Legally and logically, 
the safe harbors can only make the zone of illegal conduct smaller. As 
indicated above, compliance with the safe harbors is completely 
voluntary. If a practice or arrangement does not fall within a safe 
harbor, it has precisely the same legal risk that it had before the 
safe harbor was promulgated. The safe harbors are designed to provide a 
means through which plans and providers can be assured that their 
arrangements are immune from potential criminal and administrative 
sanctions under the anti-kickback statute.
    Comment: Several commenters wrote that the regulations do not 
address numerous activities that managed care entities engage in, and 
thus imply that such activities could be considered unlawful or would 
be subject to heightened scrutiny.
    Response: Commenters should not infer that because a safe harbor 
provision does not specifically refer to a particular arrangement or 
activity, it is unlawful. Nor should they interpret that lack of a safe 
harbor to mean that these activities will be subjected to heightened 
scrutiny. Moreover, the safe harbors do not create affirmative 
obligations on individuals or entities since compliance with these safe 
harbors is purely voluntary. The failure to comply with a safe harbor 
means only that the practice or arrangement does not have the absolute 
assurance of protection from anti-kickback liability.
    Comment: Certain commenters argued that the statute does not apply 
to particular arrangements. For instance, one commenter claimed that a 
hospital's agreement with a managed care plan to forego a deductible or 
coinsurance does not violate the statute because ``payment'' is made to 
a third party payer. Other commenters contended that since the statute 
confers exempt status on health plans for all discounted transactions, 
a safe harbor for price reduction agreements is unnecessary. Some 
commenters further indicated that the statute does not apply to the 
enrollment of persons in a health plan. These commenters opined that 
the regulations erroneously indicate that HMOs, especially independent 
practitioner association models, are ``providers'' in a position to 
refer patients.
    Response: We believe that the anti-kickback statute is broad enough 
to potentially cover each of these types of arrangements. The statute 
prohibits any remuneration which is in return for, or which is designed 
to induce, the flow of Medicare and Medicaid program-related business. 
Therefore, it could cover a hospital's agreement to forego or reduce 
coinsurance or deductibles in exchange for increased program-related 
business. It does not matter that the payment is made to a third party 
rather than the beneficiary.
    The current discount statutory exception and the discount safe 
harbor are generally not applicable to the discounts involved in 
managed care plans. The statutory exception covers discounts obtained 
by buyers which are to be reported to the programs by such buyers with 
costs and charges reduced appropriately to reflect the discounts. In 
managed care plans, the provider is the ``seller'' who provides a 
discount to the plan/patient ``buyer.'' Where the provider/seller 
submits a claim to the program, the statutory requirements have not 
been met and therefore, the discount is not exempted. The discount safe 
harbor (which encompasses all conduct under the statutory discount 
exception) also requires that the discount be offered to Medicare and 
Medicaid. In the case of managed care contracts with providers, the 
discount is offered only to the managed care plan. Since the discounted 
fees are not offered to Medicare or Medicaid, the arrangement does not 
fall within the parameters of the safe harbor. An additional safe 
harbor is therefore necessary to protect discounts between managed care 
plans and providers.
    Enrollment in a health plan falls within the scope of the anti-
kickback statute where such enrollment involves Medicare or Medicaid 
beneficiaries and results from various incentives offered to these 
individuals by the managed care plan. The incentives offered to 
beneficiaries constitute remuneration with the meaning of the statute. 
Once enrolled, the plan is entitled to receive Medicare or Medicaid 
reimbursement for the services directly provided to program 
beneficiaries. Alternatively, the plan steers enrollees to certain 
providers who furnish reimbursable services. The incentives offered to 
program beneficiaries can be in return for obtaining reimbursable 
program business and, therefore, are covered by the statute.
    Moreover, one does not have to be a ``provider'' or make an actual 
``referral'' to be covered by the anti-kickback statute. The statute 
covers any persons who offer, pay, solicit, or receive any unlawful 
remuneration. The scope of prohibited conduct includes not only that 
which is intended to induce referrals, but also that which is intended 
to induce the purchasing, leasing, ordering or arranging for any good, 
facility, service or item paid for by Medicare or Medicaid. 
Accordingly, the statute covers recommendations on which providers to 
use, and would include the preferred or approved provider lists of HMOs 
or PPOs, especially where such providers have agreed to discount their 
fees in return for such designations.
    Comment: Some commenters wanted the OIG to obtain industry input 
before finalizing these safe harbor regulations.
    Response: The interim final rule originally provided for a 60-day 
public comment period. The OIG subsequently agreed to extend the 
comment period an additional 60 days. Consequently, we do not believe 
that further public comment is necessary before the regulations are 
revised to take into account the public comments received.
    Comment: One commenter requested that the OIG provide a mechanism 
by which members of the public could seek advance rulings on whether 
practices violate the anti-kickback statute or fall within the safe 
harbor regulations. 

[[Page 2125]]

    Response: As we explained in the July 29, 1991 final safe 
regulations setting forth the original safe harbor provisions, we 
understand and appreciate the desire for legal security in parties' 
business relations. However, we are unable to provide a mechanism 
responding to individual requests for advisory opinions about the 
legality of a particular business arrangement under the statute for 
several reasons. The Department of Justice (DOJ) has exclusive 
authority to enforce all criminal laws of the United States such as the 
anti-kickback statute. (See 28 U.S.C. 516, 519 and 547.) Any advisory 
opinions that we would issue would not be binding on DOJ and could 
serve to impede the prosecution of a particular case. Moreover, the 
statute requires proof of knowing and willful intent, which is 
generally impossible to evaluate on the basis of written submissions 
from interested requestors.
    Comment: Certain commenters wrote that the OIG should publish a new 
safe harbor exempting managed care entities from the 60/40 investor and 
revenue provisions of the small entity safe harbor on investment 
interests.
    Response: These issues lie beyond the scope of this rulemaking and 
would require separate notice and public comment in order to be 
adopted. The OIG will consider whether circumstances warrant the future 
revision of that safe harbor for managed care entities.
    Comment: Some commenters addressed the issue of independent agents 
and brokers in the managed care arena. They asserted that the OIG 
should revise the existing safe harbor on personal or management 
services or create an additional safe harbor to protect an HMO's or 
PPO's use of independent agents and brokers. They believed that 
independent broker representatives have been the most effective 
marketing tool for Medicare coverage products. These commenters stated 
that HMOs or PPOs cannot meet the personal services safe harbor because 
they cannot establish the aggregate compensation element in advance of 
a transaction.
    Response: This issue is beyond the scope of the interim final rule 
and would require separate notice and public comment in order to be 
adopted. In addition, we disagree that the OIG should protect 
independent agents or brokers used by HMOs or PPOs. Widespread abusive 
practices have occurred in several States involving independent 
contractors who misrepresent the nature of a plan's coverage in 
attempting to enroll individuals. As discussed in the preamble to the 
July 29, 1991 final safe harbor regulations, we are unpersuaded that 
such contractors would be subject to adequate supervision or control 
unless they become employees. We recognize that various personal 
services arrangements are not covered by these regulations but 
reiterate that the OIG must reasonably protect the Medicare and State 
health care programs from abuse.
    Comment: Some commenters requested that the OIG seek to amend the 
anti-kickback statute to clarify its parameters and provide ample scope 
to managed care entities for their contracting and pricing practices.
    Response: The OIG clearly lacks authority in these regulations to 
amend the anti-kickback statute, which only Congress may do. Therefore, 
the commenters' suggestion falls outside the scope of this rulemaking. 
The OIG will, however, continue to consider from time to time whether 
additional safe harbors are appropriate or whether other specific 
managed care contracting or pricing practices should be protected.
    Comment: One commenter stated that the revised final rule should 
clearly prohibit providers from balance billing Medicare patients any 
amounts which exceed either Federal or State law. The commenter noted 
that currently Federal law permits providers generally to balance bill 
their patients up to 115 percent of the Medicare allowable amount and 
that some States do not allow any balance billing whatsoever.
    Response: The commenter raises an issue which is beyond the purview 
of these managed care safe harbor regulations. Neither the new safe 
harbors nor the amended Medicare SELECT provision addresses the balance 
billing practices of providers. As the commenter indicates, Federal law 
precludes providers from charging beneficiaries more than 15 percent 
above the fee schedule or other allowable charge. The Medicare statute 
includes a specific remedy for violations of the limitations on balance 
billing. Moreover, some States like New York absolutely ban balance 
billing and have mechanisms to enforce those requirements. Therefore, 
we believe that both Federal and State law already adequately regulate 
balance billing practices.

B. Comments Applicable to the Two New Safe Harbors

1. The Definition of ``Health Plan''
    Comment: The vast majority of commenters objected to the scope of 
the definition of health plan used in the regulations as being too 
narrow and requested that it be broadened. Commenters specifically 
requested that the definition should be expanded to include ERISA 
plans, employer self-funded plans, union welfare funds, non-premium or 
uninsured HMOs, exclusive provider organizations (EPOs), physician/
hospital organizations (PHOs), and PPOs which serve as intermediaries 
between providers and plans or between providers and employers.
    Response: We agree that the definition of health plan should be 
broadened and have revised the definition to include two additional 
categories of entities. We had not intended to exclude ERISA plans or 
other company or union sponsored health plans, and we had specifically 
mentioned these types of plans as legitimate health plans in the 
preamble to the interim final rule. As we discussed in that preamble, 
our primary concern in requiring a health plan to charge a premium and 
in requiring State regulation of that premium was to exclude phony 
insurance plans from protection. We still believe it is necessary for 
the definition to exclude such phony insurance plans because if such 
plans were not excluded, we would have lost a major tool to combat them 
and, if they were immunized from liability under the anti-kickback 
statute, we would have only limited ability to take effective action 
against these types of abusive arrangements. For example, the 
requirement is necessary to prevent entities from establishing 
``insurance plans'' that charge only minimal premiums, such as $1.00, 
that are unrelated to the cost or level of services provided. Often, 
such plans are merely an attempt to legitimize an unlawful waiver of 
coinsurance or deductibles. The requirement is also necessary to 
prevent the creation and use of ``shell'' entities, which would qualify 
as a health plan and would, in turn, subcontract all of its 
responsibilities to other entities or insurance companies. We believe 
the revisions we have made to the definition of health plan will allow 
a wide variety of legitimate managed care health plans to qualify for 
protection.
    The revised definition maintains the requirement that the entity 
furnish or arrange for the furnishing of items or services to enrollees 
of the plan through contracts or agreements with health care providers, 
or furnish insurance coverage for the provision of such items or 
services. However, we have broadened the definition to provide that the 
entity must furnish or arrange for the provision of items or services 
to enrollees in exchange for either a 

[[Page 2126]]
premium or a fee. The fee is designed to cover those situations where a 
premium is not charged, such as where an employer negotiates directly 
with providers the fees it will pay for the provision of health care 
services. It would also cover situations where an entity establishes a 
network of providers and markets that network to an employer or an 
insurance company, in return for a fee for administering the plan. The 
fee must reflect the fair market value of administering the plan or the 
network.
    Additionally, in order to qualify as a health plan, the entity must 
fall within one of four categories. The entity must (1) operate in 
accordance with a contract, agreement, or statutory demonstration 
authority approved by HCFA or a State health care program; (2) charge a 
premium and have its premium structure regulated under a State 
insurance statute or a State enabling statute governing HMOs or PPOs; 
(3) be an employer or a union welfare fund whose enrollees are current 
or retired employees or union members, respectively; or (4) be licensed 
in the State, be under contract with an employer, a union welfare fund, 
or a health insurance company, which meets the requirements of (2) or 
(3), and be paid a fee for the administration of the plan. The first 
two categories were included in the original definition of health plan. 
The third category is designed to cover ERISA plans, or other employer 
or union plans which are self-insured or self-funded and which contract 
directly with health care providers or insurance companies. In order to 
exclude bogus or sham entities, we have required that the enrollees of 
such plans be limited to current or retired employees or current union 
members, and their families. By union welfare funds, we mean those 
funds which are operated by bona fide labor organizations. The fourth 
category is designed to cover entities such as PPOs that act as 
intermediaries between contract health care providers and employers, 
union welfare funds or insurance companies. Again, to exclude entities 
that are not bona fide intermediaries, we have required that the entity 
be furnishing or arranging for services under contract with a bona fide 
insurance company, employer, or union welfare fund.
    We elected to broaden the definition of health plan by referring to 
categories of entities based on how they operate or arrange for 
services rather than by specifically naming different types of common 
managed care entities, such as HMOs, PPOs, EPOs, or PHOs. We believe 
this is a preferable approach because there are no single or commonly 
recognized definitions of each of these types of entities. Any 
definition we might choose to use would likely be viewed as arbitrary 
and would likely exclude some otherwise legitimate arrangements. We 
believe that the majority of legitimate managed care entities will be 
able to fit into one of the four categories contained in the 
definition.
    We would also point out that the broadening of the definition of 
health plan to cover preferred provider organizations which act as 
intermediaries does not provide automatic safe harbor protection for 
the arrangement between the organization and the insurance company, 
employer, or union welfare fund. It only enables such organizations to 
qualify as a health plan for purposes of negotiating protected price 
reduction agreements with contract health care providers. In order for 
the PPO's intermediary arrangement to qualify for safe harbor 
protection, it must meet the requirements of the personal services and 
management contracts safe harbor in Sec. 1001.952(d).
    Comment: A number of commenters argued that legitimate managed care 
health plans can be identified through the accreditation process by 
AAPI or NCQA or by requiring non-accredited entities to meet the 
requirements of those bodies. They believed that the definition of 
health plan should be revised to include all managed care plans and 
that the safe harbor should require accreditation or that entities meet 
the standards for such accreditation.
    Response: We do not believe that it is appropriate to require 
health plans to seek accreditation from private companies or require 
them to comply with the standards developed by such private companies. 
We would have no way to determine compliance with those standards if an 
entity did not seek accreditation. Moreover, accreditation is not a 
widespread practice and the standards used by such companies are not 
universally recognized or accepted as minimum standards that should be 
required for all managed care plans. Finally, we are not aware of any 
evidence that health plans or entities that do not meet these 
accreditation standards are abusive or illegitimate, nor do we have any 
evidence that accredited plans are less likely than other managed care 
plan to engage in practices that may violate the anti-kickback statute. 
Therefore, we have declined to require or incorporate accreditation as 
a part of the definition of a health plan or as a requirement of a safe 
harbor.
    Comment: Some commenters believed that the OIG should pursue 
``sham'' arrangements via ``selective enforcement'' of Fraud Alert 
standards rather than through limiting the definition of a health plan.
    Response: We disagree that the OIG should allow any managed care 
entity to qualify as a health plan because the OIG can effectively 
pursue sham transactions through the selective enforcement of the Fraud 
Alert standards. First, the Fraud Alerts issued by the OIG do not 
establish standards which can be enforced. The standards that exist are 
established by the anti-kickback statute or other federal statutes and 
regulations. The Fraud Alerts only set forth practices that have been 
identified as abusive or that may be potentially abusive depending on 
the circumstances and the intent of the parties. The Fraud Alerts are 
intended to provide guidance to the public on how they can avoid 
violations of the statute. Second, the purpose of the safe harbor 
regulations is both to identify practices or arrangements that fall 
within the broad scope of the anti-kickback statute but that are not 
abusive, and to immunize those practices or arrangements from criminal 
or civil liability. Our intent in establishing these safe harbors is to 
include only those practices or arrangements that we are confident are 
not abusive. Accordingly, we believe it is appropriate to limit the 
definition of health plans to exclude sham managed care plans or phony 
insurance plans to ensure that such plans do not qualify for protection 
under a safe harbor.
2. Shifting the Burden
    Comment: The commenters universally objected to the interim final 
rule's prohibition against plans ``shifting the burden'' of increased 
coverage, reduced cost-sharing or price reductions onto other payers. 
Most commenters asserted that this standard was unclear and imposed a 
burdensome requirement on health plans that the government should not 
be imposing. They argued that without the ability to shift the revenue 
loss from incentives or discounts across their entire customer base, 
health plans would be unable to offer incentives and providers would be 
unwilling or unable to offer discounts.
    Response: We continue to believe that enrollee incentives and 
provider price reductions should be economically sensible, i.e., they 
should not be driven by a motive to shift costs to the government or 
other payers. A health plan should not be offering incentives or 
provider discounts unless they believe 

[[Page 2127]]
the cost of those incentives or discounts can be recovered through 
lower operating costs resulting from increased volume, economies of 
scale or other efficiencies. We also believe that practices should be 
protected only if they do not cause harm to the Medicare and Medicaid 
programs. Accordingly, we are only willing to protect incentives and 
price reductions that do not result in increased costs to the programs. 
In order to ensure that result, we believe it is necessary to include a 
requirement which prohibits cost shifting to the Medicare and Medicaid 
programs. We recognize that the prohibition as originally drafted went 
beyond what was necessary to protect these Federal programs. We have 
therefore narrowed the scope of the prohibition against cost shifting 
to the Medicare and State health care programs and have clarified the 
circumstances when cost shifting is considered to have occurred, i.e. 
when an arrangement or agreement results in increased payments being 
claimed from the Medicare or State health care programs.
    Comment: Some commenters requested that the OIG set standards 
establishing when cost shifting has occurred. They complained that 
plans and providers have no way to tell if they are in compliance with 
this requirement.
    Response: We do not believe it would be possible to provide a 
complete or exhaustive list of situations where cost shifting has 
occurred. We believe that plans and providers make judgments that they 
expect to forego income to maintain market share, or that they expect 
to recover lost income resulting from incentives to enrollees or 
discounts to plans. These plans and providers make judgments whether 
those means involve allocating increased costs to other customers or 
payers. Certainly, in any case where a plan or provider raises its 
costs or fees to others or reduces the services it provides to others 
as a result of an incentive or a discount, prohibited cost shifting has 
occurred. Claiming certain costs, such as waivers of coinsurance or 
deductibles, as bad debt would also constitute impermissible cost 
shifting.

C. Provision-by-Provision Analysis of Safe Harbors

1. Waiver of Part A Deductible and Coinsurance Amounts in Accordance 
With an Agreement Between a Hospital and a Medicare SELECT Insurer
    Comment: Several commenters objected to the expansion of this safe 
harbor provision being limited to Medicare SELECT plans for a variety 
of different reasons. These included the fact that Medicare SELECT is 
only available in 15 States; that other Medigap plans or preferred 
provider plans provide no greater risk of abuse than do Medicare SELECT 
plans; that Medicare SELECT was not intended to be the exclusive 
mechanism for allowing new and innovative Medigap benefits; and that 
preferred provider plans that existed prior to the enactment of 
Medicare SELECT and that now have frozen enrollments due to the 
standardization of Medigap policies should be allowed to continue to 
arrange for waivers through agreements with hospitals.
    Response: We believe that it continues to be appropriate to limit 
the amendment of the safe harbor on inpatient hospital waivers of 
coinsurance and deductibles to Medicare SELECT. As we noted in the 
preamble to the interim final rule, the Medicare SELECT program is a 
demonstration project, authorized in only 15 States, and scheduled to 
operate only from January 1, 1992 until the end of 1994. In order to 
provide any protection during the demonstration period, it was 
necessary to publish the safe harbor promptly and in final form. Since 
we had not previously received comments on this issue from managed care 
entities, we did not believe a broad waiver was appropriate without 
subjecting the proposal to notice and comment. Therefore, a limited 
waiver was included in order to permit the demonstration projects to 
enter into agreements with hospitals for the waiver of inpatient 
deductibles and coinsurance amounts without fear of prosecution under 
the anti-kickback statute. We also believe that the amendment was 
appropriately limited to Medicare SELECT because the demonstration 
project included an evaluation and report that would enable the OIG to 
determine whether the amendment had any undesirable effects. We believe 
that such evaluation will also provide a factual basis for the OIG to 
decide whether the amendment should be continued or expanded to other 
similar types of arrangements.
    The demonstration project is still in progress and no final report 
has yet been issued evaluating the different Medicare SELECT plans that 
are operating in the 15 States participating in the demonstration 
project. However, we have reviewed some of the preliminary results of 
the evaluation. While the data indicate that most beneficiaries who 
purchase a Medicare SELECT policy pay a lower premium than they would 
pay for the same package of benefits under a regular supplemental 
policy, in most cases the lower premiums are the result of the waiver 
of inpatient hospital deductibles and coinsurance by hospitals rather 
than the result of reduced utilization or improved management of care. 
The amendment to the safe harbor permitting agreements between 
hospitals and Medicare SELECT insurers for the waiver of these cost 
sharing obligations seems to be the variable that enables Medicare 
SELECT insurers to reduce claims and thereby offer lower premiums to 
beneficiaries.
    The evaluation of service utilization by beneficiaries with 
Medicare SELECT policies is expected to take several months to 
complete. We expect that this part of the evaluation will provide 
information as to whether the amendment has affected costs to the 
Medicare program or other payers, or whether it promotes or helps to 
control overutilization or inappropriate utilization of inpatient 
hospital or other services. Additionally, it will provide information 
on whether the Medicare SELECT program is fulfilling the legislative 
intent of establishing a ``managed care'' Medicare supplement 
alternative. Specifically, the intent of Medicare SELECT was to give 
beneficiaries some of the benefits of a managed care plan enrollment, 
that is, case management, a primary care physician and cost effective 
care; it was not intended to be a mere discounting arrangement between 
hospitals and insurers.
    Accordingly, we believe it is appropriate to reserve the option of 
expanding, revising or rescinding the amendment until we have had an 
opportunity to consider the complete results of the Medicare SELECT 
evaluation report.
    We do not see any basis for providing safe harbor protection to 
non-SELECT plans which offer preferred provider provisions merely 
because such plans predate the enactment of the Medicare SELECT program 
or because their enrollment is frozen as the result of the new 
standardized Medigap program rules. The mere existence of a practice or 
arrangement is not a sufficient basis to exempt that practice or 
arrangement from the reach of the anti-kickback statute. Our position 
is that we will not provide safe harbor protection for any practice or 
arrangement unless we are confident the practice or arrangement is not 
abusive. We do not currently have any evidence to show that the waivers 
negotiated by these plans are not abusive or harmful to the programs. 
The fact that enrollment in these plans is frozen does not make the 
waivers any less potentially abusive or any less risky. The enactment 
of Medicare 

[[Page 2128]]
SELECT and the standardization of Medigap benefits and policies did 
nothing to affect or change the legal status of routine waivers of 
coinsurance or deductibles. Consequently, they do not provide any 
justification for an extension of the existing safe harbor.
    We believe that the Medicare SELECT demonstration project is also 
distinguishable from other preferred provider arrangements on other 
grounds. First, section 1882(t) of the Social Security Act establishes 
certain minimum standards that Medicare SELECT plans must meet. These 
standards include a provider network to provide all services with 
sufficient access, full benefits for emergency care, an ongoing quality 
assurance program, and provisions to ensure that beneficiaries are 
fully informed about the benefits and restrictions of the plan. 
Medicare SELECT plans are also subject to the imposition of civil 
monetary penalties for the failure to meet certain requirements, 
including the failure to provide medically necessary services within 
the provider network. No other Medigap plans or preferred provider 
plans are subject to these standards or penalties. Finally, the 
Medicare SELECT program is subject to ongoing evaluation and expires at 
the end of 1994. We believe the requirements imposed on Medicare SELECT 
plans and the time-limited nature of the demonstration provide 
substantially more protection and less risk to both the Medicare 
program and Medicare beneficiaries than do other plans.
    Contrary to one commenter's belief, we do not view the Medicare 
SELECT program to be the exclusive vehicle for providing new or 
innovative Medigap benefit packages. Since it is an existing program, 
we considered whether it was appropriate to provide any safe harbor 
protection. To the extent that a State approves a new or innovative 
Medigap benefit package, we would similarly consider whether any 
additional safe harbor protection was necessary or appropriate. While 
States may have the authority to approve the sale of certain non-
standardized benefit packages, they do not have the authority to exempt 
any such benefit packages from the prohibitions of the anti-kickback 
statute. As we were unwilling to provide a blanket exemption for the 
Medicare SELECT program, we are unwilling to commit in advance to a 
blanket exemption for any State-approved innovative benefit package. 
The approval of additional benefits as part of a Medigap policy would 
not necessarily implicate the anti-kickback statute and therefore no 
automatic protection would be necessary. However, the arrangements that 
insurers may enter into in order to be able to furnish those benefits 
economically or without additional premium costs could be violative of 
the anti-kickback statute.
    Comment: Some commenters believed that this safe harbor should 
allow inpatient waivers for agreements with third party payers for all 
managed care entities. Other commenters requested that safe harbor 
protection be extended to entities having risk or cost contracts with 
HCFA.
    Response: We disagree. At the present time, we do not believe there 
is sufficient evidence to demonstrate that waivers that result from 
agreements between hospitals and third party payers, such as insurers 
or health plans, are not abusive. We believe there are significant 
differences between waivers of deductibles and coinsurance offered by 
hospitals directly to beneficiaries and those negotiated between 
hospitals and health plans. When we promulgated the original safe 
harbor provision, we noted that there is a limited risk of abuse 
because of various factors. First, the Medicare program is not directly 
harmed since hospitals receive a predetermined amount under the 
prospective payment system for each admission regardless of their costs 
or charges. Second, hospital admissions are subject to peer review and 
there is a relatively fixed level of patient demand for hospital 
services. Third, physicians, rather than patients, make the decision 
whether admission is medically indicated and their practice patterns 
and admitting privileges also affect the decision as to which hospital 
will be selected. Therefore, we believed that a waiver of inpatient 
beneficiary fees would not be likely to increase utilization 
significantly, especially if hospitals could not discriminate on the 
basis of length of stay or type of diagnosis.
    These limiting factors do not exist where waivers result from 
agreements between hospitals and insurers or plans. In contrast to the 
effect of a waiver given to a beneficiary which affects only a single 
admission, health plans or insurers have the capacity to direct the 
flow of large numbers of admissions to specific hospitals by 
designating them as preferred or exclusive providers in return for an 
agreement to waive coinsurance and deductibles. Where this flow results 
from the hospital's agreement to waive inpatient beneficiary fees or to 
reduce its charges, or both, the practice can be abusive and anti-
competitive. Hospital reimbursement rates differ and the designation of 
certain hospitals as preferred or exclusive providers in a particular 
geographic area could result in a direct increase in the amounts paid 
by the Medicare program for inpatient hospital costs. Thus, while the 
plan or insurer would save money, the Medicare program would not. 
Similarly, a health plan or insurer's designation of certain hospitals 
could result in substantial decreases in the number of admissions to 
other area hospitals and might eventually result in the closure of some 
facilities, thus lessening competition. Reduced competition could lead 
to increased charges by the remaining hospitals. Additionally, the 
waiver of beneficiary fees or reduced charges that the hospital has 
agreed to in order to obtain the health plan or insurer's business may 
ultimately be passed along to the Medicare program or other payers. 
Finally, we are concerned about the possibility of overutilization or 
inappropriate use of services that may result from a waiver of 
beneficiary fees. Where Medicare is the primary payer, a hospital's 
waiver of inpatient deductible and coinsurance amounts results in the 
insurer or health plan having no financial liability. Since the plan or 
insurer has no financial stake, it may be less concerned about guarding 
against the overutilization or inappropriate utilization of services.
    We have made, however, a minor change to the regulation to clarify 
the meaning of ``third party payer.'' There has been some question as 
to whether that term would include PPOs that serve as intermediaries 
between health care providers and insurers or employers, but who are 
not responsible for the payment of claims for services provided to 
beneficiaries. We have revised the regulation to indicate that a third 
party payer includes any entity that meets the definition of a health 
plan set forth in Sec. 1001.952(l)(2) of the regulation. With the 
limited exception for Medicare SELECT, it is our intent, as discussed 
in the preamble to the July 29, 1991 final safe harbor regulations, to 
protect only those waivers that are given by hospitals directly to 
beneficiaries. We did not intend to protect any waivers that resulted 
from contractual agreements entered into by hospitals.
    Comment: A number of commenters, including some who are Medicare 
SELECT insurers, raised objections to the effect that even where 
Medicare SELECT is in place, the safe harbor does not permit waiver of 
coinsurance for a large number of services that are essential to cost-
efficient managed care networks (e.g., hospital outpatient services, 
ambulatory surgical centers, physician services) because it is limited 
to inpatient hospital services. They urged that the safe harbor be 
expanded 

[[Page 2129]]
to cover services reimbursed under Part B of Medicare.
    Response: We do not believe that safe harbor protection is 
appropriate for routine waivers of coinsurance and deductibles for 
outpatient services covered under the Medicare Part B program. We also 
do not believe that such waivers are necessary or essential to the 
efficient or cost-effective operation of managed care plans. Managed 
care plans are free to seek discounts or price reductions from 
providers that lower the costs of providing services, as long as those 
reductions are reflected as a lowering of the provider's total charge 
for the service. We have expressly provided protection for this type of 
discount in the safe harbor on price reductions offered to health 
plans.
    As we indicated in the preamble to the interim final rule, routine 
waivers of coinsurance and deductibles are an area of significant abuse 
in the Medicare program. Such waivers result in the submission of false 
claims to the Medicare program because providers misstate their charges 
on claims submitted to the program. For example, if a provider's usual 
charge is $100 and he or she routinely waives the 20 percent 
coinsurance, then the provider's actual charge for providing the 
service is really only $80, the amount he or she expects to receive as 
payment for the service. If the provider submits a claim to the 
Medicare program for $100, he or she has misrepresented the actual 
charge and the Medicare program will reimburse the provider a higher 
than appropriate amount. If the Medicare program reimburses the 
provider $80, then the program will have paid for the entire cost of 
providing the service, rather than the 80 percent authorized by law. In 
this single instance, the program would have overpaid the provider by 
$16 (the difference between $80 and $64, which is 80 percent of the 
provider's actual fee of $80). Thus, the waiver of coinsurance results 
in substantially higher costs to the Medicare program. Similar problems 
may arise with cost-based health care providers. We would also note 
that the Secretary's authority to grant safe harbor protection extends 
only to violations of the anti-kickback statute. The Secretary has no 
authority to provide protection from criminal, civil, or administrative 
liability arising from the submission of false claims to the Medicare 
program.
    We also believe that the routine waiver of coinsurance and 
deductibles may result in overutilization or inappropriate utilization 
of services. Cost sharing is an essential element of the Medicare 
program. To the extent that beneficiaries have a financial stake in the 
cost of services, they have a direct interest in seeking the most 
efficient and economical providers and are deterred from seeking 
unnecessary services. As a result, Medicare program expenditures are 
lower. Where Medicare beneficiaries have no financial stake because a 
provider has waived their coinsurance amount, they are less likely to 
be concerned over whether the charge for the service is $10 or $100, 
and are less likely to question the medical necessity of the item or 
service provided or ordered. Similarly, where a health plan (or 
insurer) is responsible for paying a Medicare beneficiary's coinsurance 
or deductible amounts, it is concerned about the cost or necessity of 
the services provided to their enrollees. However, where a health plan 
negotiates a waiver of Medicare coinsurance or deductible amounts with 
providers, it no longer has a financial stake because there are no 
costs it incurs for the services provided by that provider to Medicare 
beneficiaries. Once again, the Medicare program ends up paying for the 
full cost of care.
    We have no evidence to indicate that Medicare SELECT plans are 
significantly different from other Medigap plans or other types of 
managed care health plans in this respect, or that they will adequately 
protect the Medicare program from higher costs or inappropriate 
expenditures. Section 1882(t) of the Act does not provide any specific 
safeguards against the abuses that occur from the waiver of Medicare 
Part B coinsurance or deductibles. Thus, we continue to decline to 
provide any expanded protection for Medicare SELECT plans.
    Comment: One commenter indicated that the False Claims Act and 
other laws, but not this rule, should address situations where waivers 
of coinsurance and deductibles might result in inaccurate charges 
billed to Medicare program.
    Response: We disagree that abuses arising from the waiver of 
coinsurance and deductibles should be addressed through the use of the 
False Claims Act and other laws and regulations. One of the primary 
purposes of the anti-kickback statute is to protect the Medicare 
program from higher costs and overutilization that occur when financial 
incentives are offered or given in order to obtain Medicare program 
business. Thus, the anti-kickback statute is an appropriate mechanism 
to deal with higher program costs resulting from inaccurate charges and 
claims submitted to the Medicare program.
    Moreover, the purpose of the safe harbor regulations is to exempt 
from criminal or civil liability those practices which, although they 
violate the anti-kickback statute, are not harmful to the Medicare or 
State health care programs. As discussed above, routine waivers of 
Medicare Part B coinsurance and deductible amounts are harmful and 
abusive because they regularly lead to false claims and increased costs 
and because they encourage overutilization or inappropriate utilization 
of services. Thus, safe harbor protection is unwarranted and 
inappropriate.
    Finally, another purpose of the safe harbor regulations is to 
provide standards which providers and other persons or entities can 
comply with and be assured that they will not be subject to criminal or 
civil prosecution or exclusion from program participation. We actively 
encourage providers to come into compliance with applicable safe harbor 
provisions. It would be unfair and misleading, if not an abuse of 
discretion, for us to provide an exception under the anti-kickback 
statute for certain behavior when compliance with that exception would 
subject providers and plans or insurers to the very same criminal, 
civil, and administrative sanctions under the False Claims Act or other 
provisions. The mission of the OIG is to prevent fraud and abuse, not 
to encourage it.
    Comment: One commenter indicated that the OIG should, at a minimum, 
publish a new Federal Register notice that lists examples of 
coinsurance waiver arrangements that may not qualify for safe harbor 
protection, but ``probably would not be pursued criminally or civilly 
by the OIG.''
    Response: We do not believe that there are any specific types of 
situations involving a routine waiver of coinsurance or deductibles 
that we would decline to pursue as a general rule. Thus, we believe 
that publication of a new Federal Register notice is not necessary. In 
the OIG Fraud Alert on this subject, we have indicated that waivers 
were only appropriate on a case-by-case basis in consideration of a 
patient's financial hardship or where a good faith effort to collect 
has been made. We have not changed our position.
2. Incentives to All Enrollees
    Comment: Some commenters maintained that a literal reading of the 
enrollee incentive safe harbor would necessitate uniformity among all 
products, thereby eliminating any incentive. The commenters encouraged 
the OIG to eliminate the provision or restrict it to all enrollees of a 
particular product. 

[[Page 2130]]

    Response: The purpose of the requirement that incentives be 
provided to all enrollees was to restrict the ability of health plans 
to target particular Medicare or Medicaid beneficiaries or groups of 
such beneficiaries and induce them to enroll in the plan by providing 
incentives. We were concerned that plans would target healthy 
beneficiaries by offering them increased services or reductions in cost 
sharing and attempt to avoid older or sicker beneficiaries or those 
with expensive or chronic health conditions requiring a high 
utilization of services by offering only the same services available 
through a fee-for-service plan. Accordingly, we are reluctant to 
eliminate this requirement from the safe harbor. We are also reluctant 
to limit the regulation to a product-specific approach because we are 
concerned that the same type of abuses could occur where health plans 
offered several different products.
    Comment: A number of commenters urged the OIG to restrict the scope 
of ``enrollee'' only to members of the Medicare or State health care 
programs. They believed that the inclusion of all enrollees was 
unwarranted and exceeded the scope of the Medicare and Medicaid Patient 
Program Protection Act (MMPPPA) of 1987.
    Response: Although we do not agree that the scope of the provision 
exceeded our authority under MMPPPA, we believe that these concerns can 
be adequately addressed by limiting the provision to all enrollees who 
are also beneficiaries of the Medicare and State health care programs. 
Accordingly, we have revised the safe harbor on incentives to enrollees 
to require that incentives offered by health plans be offered to all 
Medicare or State health care program enrollees of the plan. We believe 
that this limitation will adequately safeguard against the possibility 
that health plans may improperly favor certain healthy beneficiaries or 
use incentives to improperly encourage utilization when the item or 
service is furnished.
3. Incentives by Non-Contract Health Plans
    Comment: Several commenters believed that safe harbor protection 
should be given to any managed care plan that offers a higher level of 
benefits or services obtained from a contract provider. They believed 
that protection should be given for all incentives by managed care 
plans, including those providing Medicare supplemental coverage. Other 
commenters indicated that coinsurance waivers and other financial 
incentives to encourage the use of a preferred provider panel were 
historically legitimate managed care incentives that do not cause harm 
to Medicare or Medicaid and should therefore be recognized.
    Response: We remain unpersuaded at this time that safe harbor 
protection is appropriate for health plans that are not under contract 
with HCFA or a Medicaid State agency. Unlike contract plans that are 
limited to a few types of arrangements, non-contract plans consist of 
widely varying arrangements and widely differing scopes of benefits. 
These plans are subject to little oversight. Most of the commenters who 
requested a broadening of the safe harbor failed to provide any 
discussion of precisely how the Medicare and Medicaid programs would or 
could be protected against abuses if all managed care plans were 
permitted to offer any kind of incentives free of anti-kickback 
liability. Nor did they provide any substantive evidence that the 
majority of the existing managed care plans have effective mechanisms 
and controls that would adequately protect the Medicare and Medicaid 
programs against higher costs or overutilization. Finally, the 
commenters did not suggest any standards we could impose which would 
eliminate plans that do not have in effect adequate mechanisms to 
protect the Medicare or Medicaid programs from abuse.
    Moreover, we believe that the fact that the Medicare and Medicaid 
programs reimburse services provided to enrollees of non-contract plans 
on a fee-for-service basis makes these situations subject to the same 
potential abuses and risks as exist with incentives offered by non-
managed care plans or providers. Where a health care provider who is 
part of a preferred provider network treats a beneficiary and will be 
paid for each service that he or she provides on a fee-for-service 
basis by Medicare or Medicaid, that provider has no built-in incentive 
not to overutilize. To the extent that the provider has agreed to 
accept reduced fees for the treatment of plan enrollees, he or she may 
have a direct incentive to increase the number of services to make up 
for the reduction in fees. Similarly, if the beneficiary has reduced or 
no cost sharing obligations, the beneficiary faces no disincentive to 
overutilization. The plan does not prevent reimbursement for these 
unnecessary services because the claims are directly submitted to and 
paid by Medicare or Medicaid. Finally, where managed care providers 
agree to accept Medicare payment as payment in full, the burden of the 
reduced cost sharing incentives offered to beneficiaries comes at the 
expense of the Medicare program, because the program will end up paying 
100 percent of the provider's fee. Thus, these incentives can cause 
harm to the Medicare and Medicaid programs.
    Comment: Some commenters argued that incentives by non-contract 
plans should be allowed because most managed care plans adequately 
monitor for overutilization, and that many non-contract plans are 
monitored either as Federally-qualified HMOs or as a result of 
accreditation by independent organizations. They also argued that 
Medicare and Medicaid patients cannot be carved out of a managed care 
plan's incentive programs, and that a loss of administrative 
efficiencies could result if plans need to handle program beneficiaries 
differently than others covered under group plans.
    Response: We do not believe that existing utilization review 
mechanisms are sufficient to protect the Medicare and Medicaid programs 
against abuses associated with self-referral. One major problem is that 
there are no widely accepted definitions or standards governing 
utilization review. This presents a major barrier to drafting a safe 
harbor with clear, well-defined standards. Additionally, most 
utilization review activity is focused on expensive procedures or on 
patterns of care, and therefore does not address individual physician 
decisions on diagnostic or other treatment services, where many self-
referral abuses occur. Utilization review is also designed to identify 
and address medical care that falls outside of accepted medical 
parameters or norms. Most of the problems we have observed in the area 
of self-referral involve physician treatment decisions that are within 
the range of accepted parameters or norms, but where financial 
incentives may improperly influence or affect physician judgments. 
Accordingly, we are not at all confident that utilization review will 
cure or prevent self-referral problems that the anti-kickback statute 
was intended to address. Therefore, it would be unwise to adopt 
utilization review mechanisms as an appropriate standard for safe 
harbor protection.
    Where Medicare or Medicaid are responsible for paying for a portion 
of the care rendered to enrollees of a managed care plan, the plan must 
already have some procedures that are different from those used where 
the plan is solely responsible for the cost of care. For example, 
separate claims must be submitted to those programs either before or 
after claims are submitted to the managed care health plan. We believe 
that managed care plans can handle potential differences between 
Medicare's and the plan's coinsurance amounts in ways that are 
efficient and 

[[Page 2131]]
economical as well as in compliance with the requirements of Federal 
law.
    Comment: One commenter specifically urged that safe harbor 
protection should be limited to plans under contract with HCFA or a 
State agency, arguing that if it is broadened it will result in unfair 
competitive practices and illegal waivers of coinsurance and 
deductibles. A second commenter agreed, but believed an exception 
should be made for situations where dual coverage exists and the second 
plan adopts a non-duplication of benefits or preservation of 
deductibles and coinsurance posture.
    Response: We share the concerns of the commenters that expansion of 
the safe harbor provision could result in abusive or illegal practices. 
As we indicated in an earlier response, we remain concerned that 
because services provided to enrollees of non-contract plans are 
reimbursed on a fee-for-service basis, the plans would pose the same 
risks to the Medicare and Medicaid programs as typical fee-for-service 
plans. In the case of contract plans, the reimbursement formulae take 
into account the cost sharing obligations of beneficiaries that the 
Medicare or Medicaid programs may require, so there is no problem with 
illegal waivers of coinsurance or deductibles. We also believe that the 
rules applicable to contract plans and the oversight provided by HCFA 
or a State Medicaid agency should be sufficient to prevent anti-
competitive or other abusive practices from occurring in contract 
plans.
    We do not believe that a special safe harbor provision is necessary 
or warranted at this time to deal with dual coverage situations. Dual 
coverage is where a person is covered by more than one health insurance 
policy. An example would be where a husband and wife are both employed 
and each is covered by an employer policy that includes family members. 
We do not believe that dual coverage (to be distinguished from Medicare 
supplemental or Medigap coverage) is a problem that affects significant 
numbers of Medicare or Medicaid beneficiaries. Companies are expressly 
prohibited by law from selling Medicare beneficiaries health insurance 
coverage that duplicates any existing coverage that they may have. 
Medicaid is a payer of last resort and will not pay for services 
covered by other health insurance or plans.
4. Price Reduction Agreements
    Comment: One commenter questioned why the price reduction safe 
harbor applicable to plans not under contract with HCFA or a Medicaid 
State agency was drafted on a fee-for-service concept.
    Response: The safe harbor was drafted in this manner because that 
is how the Medicare and Medicaid programs almost exclusively pay for 
services furnished to program beneficiaries by non-contract managed 
care health plans or by providers who are affiliated with non-contract 
plans. Such plans and providers are reimbursed for each separate 
covered service provided to Medicare or Medicaid beneficiaries on the 
basis of fee schedules or allowable charges. Capitated payment 
arrangements and reasonable cost-related reimbursement are only 
directly allowed in plans which are under contract. We have dealt with 
those types of arrangements in the first two parts of the price 
reduction safe harbor dealing with plans under contract with HCFA or a 
Medicaid State agency. Therefore, we did not believe it was necessary 
or appropriate to provide for safe harbor protection for other types of 
payment mechanisms in the price reduction safe harbor for non-contract 
plans.
    Comment: Many commenters objected to the fact that this safe harbor 
exempted only remuneration in the form of a reduction in the provider's 
usual charge for the service, thereby not protecting capitation 
agreements, bonuses, and withhold arrangements. These commenters 
believed that the safe harbor should protect all HMO or PPO 
compensation arrangements, including risk incentive pools and volume 
rebates, so long as they were not linked to referrals of Medicare or 
Medicaid patients.
    Response: We have reconsidered our position that we did not need to 
address capitated arrangements in the safe harbor for price reductions 
in non-contract health plans. Although the Medicare and Medicaid 
programs may pay for services on a fee-for-service basis, some health 
plans contract with individual health care providers for the provision 
of services using a variety of different mechanisms, including 
capitation. Since the amount paid to a provider under a capitated 
arrangement may represent a reduction in the amount he or she would 
otherwise receive for treating a particular patient and the provider 
agrees to accept such payment amount in return for an agreed upon or 
anticipated flow of patients, the anti-kickback statute may be 
implicated. Therefore, we believe that some protection for these 
arrangements may be warranted.
    Our experience has indicated that the most common risks that the 
anti-kickback statute is directed toward preventing are not present in 
the case of at-risk, capitated payment mechanisms. Where a provider is 
paid a fixed amount for all the services provided to a patient, there 
is no incentive for overutilization. If anything, there is an incentive 
to underutilize. Accordingly, the Medicare and Medicaid programs face 
little risk of overutilization or the increased costs that accompany 
such overutilization where services are provided by a provider who is 
paid solely on an at-risk or capitated basis. For these reasons, we 
believe it would be appropriate for us to provide safe harbor 
protection for such arrangements.
    Accordingly, we have revised the price reduction safe harbor to add 
a new category of price reduction agreement applicable to capitated 
payment arrangements to providers. In order to qualify for safe harbor 
protection, both the health plan and the contract health care provider 
must comply with five standards. First, the term of the agreement must 
be for not less than one year. Second, the agreement must specify the 
covered items or services that will be furnished to enrollees of the 
plan and the total amount per enrollee that the provider will be paid 
for such covered items or services, including any copayments to be paid 
by enrollees. The amount the provider will be paid per enrollee may be 
expressed in a per month or other time period basis. Third, the payment 
amount set forth in the agreement must remain in effect throughout the 
term of the agreement. Fourth, the health plan and the provider must 
fully and accurately report to the Medicare and State health care 
programs upon request, the terms of the agreement and the amounts paid 
in accordance with the agreement. Finally, the provider must not claim 
or request payment in any form from the Department, a State health care 
program or an enrollee (other than specified copayment amounts) for 
covered items or services. Similarly, the health plan must not pay the 
provider in excess of the amounts provided by the agreement for the 
provision of covered items or services.
    For the most part, the conditions applicable to this new category 
of price reduction agreement are the same or comparable to those 
applicable to fee-for-service arrangements. We believe these conditions 
are necessary to prevent plans or providers from manipulating the terms 
of the agreed upon arrangement and adjusting the level of reimbursement 
or the scope of covered services for improper or illegal purposes. We 
believe that providers and plans should take steps to ensure that they 
have sufficient information concerning the costs of providing 

[[Page 2132]]
services and the frequency and types of services that will be required 
for the plan's enrollees before they enter into these types of 
arrangements. We believe that the restrictions on seeking or paying 
additional amounts for covered services and the requirements for 
disclosure are necessary to ensure that the Medicare and Medicaid 
programs are not being charged excessive or inappropriate amounts.
    We have declined to provide specific safe harbor protection to 
withhold pools, risk incentive pools, or other types of incentive 
programs offered by non-contract managed care plans. One problem we 
have with these types of arrangements is that there are no uniform 
standards or definitions applicable to each of these different types of 
mechanisms. Each health plan sets its own standards or risk pools and 
determines the amounts that will be paid or withheld. Because these 
types of arrangements vary so widely in amounts and scope, and because 
there are no commonly accepted minimum standards as to what criteria an 
incentive plan should include, we do not believe that it would be 
feasible for us to set adequate or appropriate minimum standards for a 
safe harbor. Moreover, because these types of payment mechanisms offer 
additional remuneration to providers that is related to the volume or 
value of services provided, their use is particularly vulnerable to 
abuse. They can be used to manipulate provider payment levels and can 
be used to inappropriately affect the flow of Medicare and Medicaid 
reimbursable business. We are not confident that we could create a safe 
harbor where we would be reasonably certain that any individual 
incentive plan qualifying for protection would be non-abusive.
    We also believe that withhold arrangements present additional 
problems. We are concerned that in some cases providers subject to a 
withhold may be submitting false claims to the Medicare and Medicaid 
programs. If the provider does not ultimately receive the withheld 
amount or does not have a reasonable expectation of receiving it, and 
includes the full amount of the potential fee on the claim form, he or 
she has misrepresented the amount of his or her fee and stands to be 
overpaid by the Medicare or Medicaid programs. For example, if a 
provider's agreed upon fee is $100 but the health plan has a 20 percent 
withhold in place, he or she is only assured of receiving $80 in 
payment for the services provided. If that provider submits a claim to 
the Medicare program for $100 and is paid $80, that provider will have 
received full payment from the Medicare program unless he or she also 
receives the withheld amount. The net effect is the same as an express 
waiver of coinsurance.
    In some cases involving withholds, there is little likelihood that 
the payment amounts withheld will actually be made to providers. We are 
unwilling to protect any practice that may result in the submission of 
false or improper claims to the programs.
    Comment: Some commenters objected to the fact that this safe harbor 
provision does not recognize compensation based on reasonable and 
customary allowances, such as a discount from usual charges.
    Response: We believe that reasonable and customary or usual charges 
have no fixed meaning and are subject to change at the provider's 
discretion and, therefore, subject to manipulation and abuse. We 
believe it is necessary to have a fixed and identifiable list of 
charges and services in order to be able to determine compliance with 
the terms of the safe harbor. If the provider had a list of his or her 
reasonable and customary or usual charges that was incorporated as a 
part of the agreement with the health plan, and the agreement specified 
that the agreed upon payment rate would be 80 percent of the charges on 
the list, we believe that would be acceptable under the terms of the 
safe harbor because the price for each service would be a fixed and 
readily ascertainable amount. Of course, it would be the reduced amount 
that is the provider's charge for services to the plan's enrollees, not 
the reasonable and customary or usual charge, and that reduced amount 
would be required to be submitted on any claims or requests for payment 
to the Medicare or Medicaid programs for services rendered to plan 
enrollees.
    Comment: Some commenters objected to the prohibition against 
submitting a claim in excess of the fee schedule because it prohibits 
plans or intermediaries that operate by negotiating discounts with 
providers and marking up the fees to the purchaser. This is the PPO's 
mechanism for defraying its costs. They indicated that such 
arrangements should be allowed because fees are still less than what 
the purchaser would otherwise pay. Specifically, commenters stated that 
the safe harbor should cover fees to providers that are a percentage of 
charges billed by the contracting provider and are attributable to the 
PPO's marketing services to third party payers.
    Response: We believe any arrangements that set fees based on the 
volume or value of services provided to patients are subject to abuse 
and therefore, we decline blanket protection for them. We have seen 
instances where such payments are really only thinly disguised attempts 
to pay for referrals. Moreover, there is also no guarantee that the 
marked-up charges submitted to the Medicare and Medicaid programs would 
be any lower than the provider's usual charges to the programs. Thus, 
there is no guarantee that the programs will benefit from allowing such 
arrangements. We believe that there are enough other options a PPO can 
employ to cover its administrative or marketing costs. The PPO can 
include such costs in the premiums charged to plan enrollees or in fees 
charged to insurers or employers where the PPO administers the plan for 
such entities. The PPO is also free to enter into separate contracts 
with providers for management services. Of course, in order to qualify 
for safe harbor protection, such contracts would have to meet the terms 
of the safe harbor on management or personal services contracts. We 
also wish to emphasize that by not protecting such payment mechanisms 
under the safe harbor, we do not prohibit them, as the commenters 
believe. The failure to fall within a safe harbor means only that they 
are subject to the anti-kickback statute in precisely the same manner 
that they were prior to the issuance of the safe harbor.
    Comment: Some commenters opposed the regulation's ``sole purpose'' 
requirement as being inconsistent with the structures of managed care 
plans. These commenters argued that providers qualifying for the safe 
harbors should be allowed to contribute activities such as pre-
enrollment screening, utilization review and quality assurance 
services.
    Response: Our intent in creating the safe harbor for price 
reduction agreements was to protect only those discounts given by 
contract health care providers for the items and services they furnish 
to enrollees. In order to ensure that we can determine whether the 
discounts given by providers comply with all of the requirements of the 
safe harbor, it is necessary to have a separate agreement that covers 
only the discounted arrangements that fall within the scope of the safe 
harbor. We have not prohibited managed care entities from entering into 
separate agreements with providers for other activities such as 
utilization review, pre-enrollment screening or even marketing 
activities. However, contracts for such activities will be scrutinized 
separately 

[[Page 2133]]
and will only be afforded safe harbor protection if they meet the 
requirements of the existing management and personal services safe 
harbor.
    We are unwilling to expand the price reduction safe harbor to cover 
these activities because, as we noted in the preamble to the interim 
final rule, we have observed that some HMOs have abused their 
contractual relationships with medical groups where individuals in the 
groups have conducted abusive or illegal activities on behalf of the 
HMO. For instance, various contract health plans have engaged in pre-
enrollment screening in order to deny or discourage relatively sick 
beneficiaries from enrolling. Such activities in at least one case 
resulted in a criminal conviction. Additionally, it is easy to 
manipulate agreements for the provision of utilization review services 
and other activities to make payments to reward providers for certain 
actions or to provide additional reimbursement to certain providers in 
violation of the anti-kickback statute. For these reasons, we believe 
the standards of the management and personal services safe harbor 
should continue to be applied to personal services contracts between 
managed care entities and contract health care providers.
    Comment: A number of commenters wanted the OIG to protect volume-
sensitive fee schedules, subject to ``possible pricing adjustments,'' 
if the schedule is stated in the contract and not increased during its 
term. These commenters would like to render higher payment to providers 
who service a greater number of managed care patients to ensure access 
to care.
    Response: We decline to protect volume-sensitive fee schedules. We 
have found that volume-sensitive reimbursement levels are often 
extremely abusive. These types of schedules offer increased incentives 
for providers to overutilize, since the payments they receive will be 
higher if they provide more services to more patients. We are not sure 
what one of the commenters meant specifically by the term ``possible 
pricing adjustments,'' but we are concerned that any such adjustments 
could create a referral-driven mechanism that would not serve the 
interests of the programs. We believe that other mechanisms exist 
through which health plans may ensure that providers give adequate 
coverage to patients or through which plans could reimburse providers 
who agree to treat a larger number of plan enrollees. For example, 
plans could require that providers agree to treat minimum numbers of 
enrollees and set the amount of compensation based on that number. 
Alternatively, providers could agree to treat all plan enrollees who 
need services up to a certain number, with higher reimbursement levels 
for larger numbers of patients.
    Comment: Several commenters took exception to the one-year term 
minimum requirement, contending that it excludes common contract terms, 
such as reciprocal termination clauses and inhibits plans, that may 
need to contract with a particular provider for less than one year. 
Other commenters argued that the requirement unduly restricts HMOs and 
does not allow for alterations based on changed circumstances. These 
commenters asserted that a change during the contract year in the 
percentage of fee schedule an HMO will pay is not a means of inducing 
referrals of patients enrolled in a plan.
    Response: We have found that reciprocal termination clauses can 
result in parties engaging in ``sham'' contracts whereby they terminate 
the contract and renegotiate terms to gain more favorable financial 
positions. Alternatively, they may terminate contracts in order to 
enter into contracts with more favorable financial terms with other 
providers. These renegotiations may affect the flow of Medicare or 
Medicaid reimbursable business. We believe it is necessary for the 
contracts to have a fixed term of at least one year in order to avoid 
such manipulations. We have adopted a one-year term for all of the safe 
harbor provisions involving contracts. The commenters have not 
demonstrated any reasons why managed care contracts necessitate a 
different length. Accordingly, if parties alter contractual terms based 
on purportedly changed circumstances, that alteration will not enjoy 
safe harbor protection. Termination ``for cause'' clauses drafted in 
compliance with Internal Revenue Service or other legal or regulatory 
requirements should not jeopardize safe harbor status if the purpose of 
the termination clause is to comply with these requirements and not to 
facilitate renegotiation of contract terms. If a contract is terminated 
in accordance with a legally enforceable termination clause, the 
failure to renew the contract would indicate that the termination was 
effectuated for a legitimate business purpose. As to other types of 
termination clauses, the OIG will examine such conduct on a case-by-
case basis to assess whether it is abusive and harmful.
    We acknowledge that health care providers may enter into short-term 
service contracts for legitimate business reasons and not because of 
referral opportunities. However, we cannot ensure that only legitimate 
short-term contracts will be covered if we delete the one-year 
requirement. We would also note that the one-year term does not refer 
to the length of time that services will be necessarily provided, but 
rather to the length of time within which the fees for the services 
covered by the agreement may not be changed. So long as the contract 
terms are not altered within a one-year period, an agreement that is 
performed in less than one year will meet the one-year requirement in 
the safe harbor provision.
    Comment: Some commenters requested that the price reductions 
allowed under the safe harbor should be limited to a specific amount, 
e.g., a Medicare-approved rate or a percentage. They claimed that this 
restriction is necessary to prevent providers from accepting below-cost 
prices and increasing prices for non-managed care Medicare patients and 
others.
    Response: We understand that providers negotiate discounted prices 
with health plans in order to increase the number of patients in their 
practices. Providers may expect that they can make up for the 
reductions in their charges by providing services to a greater number 
of patients. Generally, providers may anticipate a certain number of 
new patients as a result of entering into a contract with a managed 
care plan. However, the commenters raise a valid concern that the price 
reductions given, if great enough, may shift the burden of the price 
reduction to others by resulting in increased prices for non-managed 
care Medicare patients. We have specifically addressed that concern in 
the safe harbor by including a prohibition against cost-shifting onto 
the Medicare or State health care programs. Therefore, we are not 
convinced that setting limitations on the amount of a discount a 
provider may offer is necessary to prevent abuse. We also believe that 
the wide variations in providers' rates and costs make identifying a 
fixed ``below-cost'' point virtually impossible. We would have to 
assess a provider's entire billing practice to determine whether, in a 
given case, services were offered at rates below actual cost.
    Comment: A number of commenters contended that managed care plans 
cannot reasonably ensure that its contract providers are not submitting 
claims which violate the contract's terms or claims that exceed the fee 
schedule. According to these commenters, Medicare should recoup the 
amounts erroneously paid to the provider rather than deprive both the 
provider and the plan of safe harbor protection.

[[Page 2134]]

    Response: We believe it is appropriate to condition the granting of 
safe harbor protection on compliance by both plans and providers. 
Managed care health plans have an ongoing relationship with contract 
health care providers that includes monitoring and utilization review 
of the services provided to plan enrollees. This relationship is 
different from the usual relationship between buyers and sellers. 
Because of this special, ongoing relationship, health plans have a 
greater ability to monitor and ensure compliance with the requirements 
of the safe harbor regarding the submission of claims to the Medicare 
or Medicaid programs. Unless plans are held accountable in some way for 
the propriety of claims submitted to the programs, they will have no 
interest in ensuring the accuracy of those claims.
    We also believe that health plans have available to them several 
ways to monitor or ensure compliance. For example, plans may require 
that the plan submit all claims to the Medicare or Medicaid programs. 
Alternatively, as part of their contracts with providers, plans have 
the ability to require providers to furnish copies of claims submitted 
to the programs for plan enrollees or to allow a review of their 
billing records. Plans can include as a contract term the requirement 
to submit program claims according to the agreed upon fee schedule and 
provide for termination of the contract for non-compliance. We would 
also expect plans to report to the Medicare or Medicaid programs any 
contract-related violations of which they become aware so the programs 
can take appropriate steps to deal with the improper billing, including 
recovery of any overpayments made to the provider. We would consider 
the actions taken by the health plan in deciding whether any action was 
warranted under the anti-kickback statute.
    Comment: Several commenters wrote that the price reduction safe 
harbor imposes unnecessary and impractical standards regarding advance 
disclosure of covered fees and services, fee schedules and cost 
shifting that will impede negotiations and increase costs. These 
commenters urged the OIG to permit other methods of describing covered 
items or services, such as incorporation by reference of benefit 
summaries.
    Response: We are uncertain how the requirement that the agreement 
spell out the agreed-upon fees will result in an increase in costs or 
will impede negotiations between health plans and providers. This safe 
harbor merely requires that the agreement specify in writing what the 
parties have already agreed upon, i.e., the items and services that 
will be furnished to plan enrollees and the prices that the provider 
will charge for them. We have no objections if the parties wish to 
reference the covered items and services and the schedule of fees for 
those services in an attachment to the contract. However, those 
attachments must clearly indicate the specific amounts that will be 
paid to the provider for each of the covered items and services he or 
she furnishes to plan enrollees in order to comply with the safe 
harbor. General summaries of plan benefit coverage and references to 
percentages of usual charges will not suffice. We reserve the right to 
closely scrutinize these attachments to ensure that the parties have 
adequately identified these items or services. We believe it is 
important for both the providers and the plans to know what the 
contract covers and the amounts they are entitled to bill the plan, the 
Medicare and Medicaid programs and the program beneficiaries.
    Comment: One commenter objected to the safe harbor requirements on 
the grounds that managed care contracts with providers rarely establish 
fees for services covered by others nor do they specify billing 
procedures for services not billable to the managed care plan.
    Response: We believe that the commenter has misconstrued the safe 
harbor's requirements. The safe harbor does not broaden the scope of 
managed care plans' coverage to services covered by other plans nor 
does it require a price reduction agreement between a managed care plan 
and a provider to establish fees for services provided by others or for 
services not billable to the plan. The agreement need only identify 
those services that the provider will be paid for by the plan and only 
those services that are covered by the plan and provided to plan 
enrollees.

IV. Additional Information

A. Regulatory Impact Statement

    The Office of Management and Budget (OMB) has reviewed this revised 
final rule in accordance with the provisions of Executive Order 12866. 
As indicated in the original safe harbor provisions published on July 
29, 1991 and the interim final rule for these safe harbors published on 
November 5, 1992, the safe harbor provisions set forth in this 
rulemaking are designed to permit individuals and entities to freely 
engage in business practices and arrangements that encourage 
competition, innovation and economy. In doing so, these regulations 
impose no requirements on any party. Health care providers and others 
may voluntarily seek to comply with these provisions so that they have 
the assurance that their business practices are not subject to any 
enforcement action under the anti-kickback statute. As such, we believe 
that the economic impact of these regulations is minimal and have no 
effect on the economy or on Federal or State expenditures.
    In addition, we generally prepare a regulatory flexibility analysis 
that is consistent with the Regulatory Flexibility Act (5 U.S.C. 601-
612). We believe that the majority of health care providers and 
practitioners do not engage in illegal remuneration schemes, and that 
the aggregate economic impact of this provision should, in effect, be 
minimal, affecting only those who have chosen to engage in prohibited 
payment schemes in violation of the statutory intent. As indicated 
above, this revised final rule serves to clarify various aspects of the 
safe harbor provisions originally published on November 5, 1992 to 
enable entities to more easily immunize themselves from potential 
criminal and administrative sanctions, and to eliminate potential 
barriers to the provision of coordinated health care under the Medicare 
and State health care programs. As a result, we have determined, and 
the Secretary certifies, that this final rule will not have a 
significant economic impact on a number of small business entities, and 
we have, therefore, not prepared a regulatory flexibility analysis.

B. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, agencies are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
OMB for review and approval. In order to fairly evaluate whether an 
information collection should be approved by OMB, section 3506(c)(2)(A) 
of the Paperwork Reduction Act of 1995 requires that we solicit 
comments on the following issues:
     Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
     The accuracy of the agency's estimate of the information 
collection burden;
     The quality, utility and clarity of the information to be 
collected; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    As a result, we are soliciting public comment on the information 
collection requirements being set forth in sections 

[[Page 2135]]
1001.952(m)(1) (ii), (iii) and (iv) of these regulations.
    Under the safe harbor for price reductions offered to health plans, 
if a health plan is an HMO, competitive medical plan, health care 
prepayment plan, prepaid health plan or other health plan that has 
executed a contract or agreement with HCFA or a State health care 
program to receive payment for enrollees on a reasonable cost or 
similar basis, the health plan and the contract health care provider 
must comply with four standards. One of those standards is that the 
plan must fully and accurately report the amount it has paid the 
contract health care provider under the agreement for the covered items 
and services furnished to enrollees on the applicable cost report or 
other claim form filed with the Department or the State health care 
program (Sec. 1001.952(m)(1)(ii)).
    Similarly, if a health plan is not described in section 
1001.952(m)(1) (i) and (ii) of the regulations, and the contract health 
care provider is not paid on an at-risk, capitated basis, both the plan 
and contract provider must, among the six standards set forth, fully 
and accurately report any cost report filed with Medicare or a State 
health care program the fee schedule amounts charged in accordance with 
the agreement (Sec. 1001.952(m)(1)(iii)).
    In addition, under sections 1001.952(m)(1) (iii) and (iv), both the 
health plan and the provider, upon request, must report to the Medicare 
or State health care program the terms of the agreement and amounts 
paid in accordance with the agreement.
    We estimate that the current burden associated with the submitting 
the data would be minimal, i.e., less than one hour per request. 
Specifically, we anticipate that any data request will not involve the 
creation of any new documents or the calculation of new figures by 
entities. Rather, we would be seeking only copies of those agreements 
that have already been executed by entities and those amounts paid to 
individual providers that are already maintained for general business 
and tax purposes. Since most plans maintain such information on 
electronic data bases and have these contracts on file, we believe such 
requests can be produced and provided in less than one hour's time. 
Further, we believe that only a very small number of plans and 
providers--less than 3 percent of the nation's health care plans and 
contract providers--would be potentially impacted by this request. 
Accordingly, we estimate that the total number of requests will be no 
more than 10 to 12 per year since they will be made only where there is 
a question of whether a specific plan or provider has violated the 
statute and claims immunity based on these safe harbor regulations. 
Based on an estimate of less than one dozen requests per year, the 
estimated total burden on these entities will be under 20 hours.
    This information collection and recordkeeping requirement is not 
effective until it has been approved by OMB. A notice will be published 
in the Federal Register when approval is obtained. As indicated in the 
INFORMATION CONTACT section at the beginning of this preamble, 
organizations and individuals wishing to submit comments on this 
information collection and recordkeeping requirement should direct them 
to the Office of Inspector General, Office of Management and Policy, 
Room 5550, Cohen Building, Washington, D.C. 20201, Attention: Joel 
Schaer, Regulations Officer.

C. Department of Justice Review

    In accordance with the provisions of Public Law 100-93, these 
regulations have been developed in consultation with the Department of 
Justice.

List of Subjects in 42 CFR Part 1001

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

TITLE 42--PUBLIC HEALTH

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

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

    1. The authority citation for part 1001 is revised to read as 
follows:

    Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7b, 1395u(j), 
1395u(k), 1395y(e), and 1395hh.

    2. Section 1001.952 is amended by republishing the introductory 
text of both paragraph (k) and (k)(1) and revising paragraphs 
(k)(1)(iii), (l), and (m) to read as follows:


Sec. 1001.952  Exceptions.

* * * * *
    (k) Waiver of beneficiary coinsurance and deductible amounts. As 
used in section 1128B of the Act, ``remuneration'' does not include any 
reduction or waiver of a Medicare or a State health care program 
beneficiary's obligation to pay coinsurance or deductible amounts as 
long as all of the standards are met within either of the following two 
categories of health care providers:
    (1) If the coinsurance or deductible amounts are owed to a hospital 
for inpatient hospital services for which Medicare pays under the 
prospective payment system, the hospital must comply with all of the 
following three standards--
* * * * *
    (iii) The hospital's offer to reduce or waive the coinsurance or 
deductible amounts must not be made as part of a price reduction 
agreement between a hospital and a third-party payer (including a 
health plan as defined in paragraph (l)(2) of this section), unless the 
agreement is part of a contract for the furnishing of items or services 
to a beneficiary of a Medicare supplemental policy issued under the 
terms of section 1882(t)(1) of the Act.
* * * * *
    (l) Increased coverage, reduced cost-sharing amounts, or reduced 
premium amounts offered by health plans. (1) As used in section 1128B 
of the Act, ``remuneration'' does not include the additional coverage 
of any item or service offered by a health plan to an enrollee or the 
reduction of some or all of the enrollee's obligation to pay the health 
plan or a contract health care provider for cost-sharing amounts (such 
as coinsurance, deductible, or copayment amounts) or for premium 
amounts attributable to items or services covered by the health plan, 
the Medicare program, or a State health care program, as long as the 
health plan complies with all of the standards within one of the 
following two categories of health plans:
    (i) If the health plan is a risk-based health maintenance 
organization, competitive medical plan, prepaid health plan, or other 
health plan under contract with HCFA or a State health care program and 
operating in accordance with section 1876(g) or 1903(m) of the Act, 
under a Federal statutory demonstration authority, or under other 
Federal statutory or regulatory authority, it must offer the same 
increased coverage or reduced cost-sharing or premium amounts to all 
Medicare or State health care program enrollees covered by the contract 
unless otherwise approved by HCFA or by a State health care program.
    (ii) If the health plan is a health maintenance organization, 
competitive medical plan, health care prepayment plan, prepaid health 
plan or other health plan that has executed a contract or agreement 
with HCFA or with a State health care program to receive payment 

[[Page 2136]]
for enrollees on a reasonable cost or similar basis, it must comply 
with both of the following two standards--
    (A) The health plan must offer the same increased coverage or 
reduced cost-sharing or premium amounts to all Medicare or State health 
care program enrollees covered by the contract or agreement unless 
otherwise approved by HCFA or by a State health care program; and
    (B) The health plan must not claim the costs of the increased 
coverage or the reduced cost-sharing or premium amounts as a bad debt 
for payment purposes under Medicare or a State health care program or 
otherwise shift the burden of the increased coverage or reduced cost-
sharing or premium amounts to the extent that increased payments are 
claimed from Medicare or a State health care program.
    (2) For purposes of paragraph (l) of this section, the terms--
    Contract health care provider means an individual or entity under 
contract with a health plan to furnish items or services to enrollees 
who are covered by the health plan, Medicare, or a State health care 
program.
    Enrollee means an individual who has entered into a contractual 
relationship with a health plan (or on whose behalf an employer, or 
other private or governmental entity has entered into such a 
relationship) under which the individual is entitled to receive 
specified health care items and services, or insurance coverage for 
such items and services, in return for payment of a premium or a fee.
    Health plan means an entity that furnishes or arranges under 
agreement with contract health care providers for the furnishing of 
items or services to enrollees, or furnishes insurance coverage for the 
provision of such items and services, in exchange for a premium or a 
fee, where such entity:
    (i) Operates in accordance with a contract, agreement or statutory 
demonstration authority approved by HCFA or a State health care 
program;
    (ii) Charges a premium and its premium structure is regulated under 
a State insurance statute or a State enabling statute governing health 
maintenance organizations or preferred provider organizations;
    (iii) Is an employer, if the enrollees of the plan are current or 
retired employees, or is a union welfare fund, if the enrollees of the 
plan are union members; or
    (iv) Is licensed in the State, is under contract with an employer, 
union welfare fund, or a company furnishing health insurance coverage 
as described in conditions (ii) and (iii) of this definition, and is 
paid a fee for the administration of the plan which reflects the fair 
market value of those services.
    (m) Price reductions offered to health plans. (1) As used in 
section 1128B of the Act, ``remuneration'' does not include a reduction 
in price a contract health care provider offers to a health plan in 
accordance with the terms of a written agreement between the contract 
health care provider and the health plan for the sole purpose of 
furnishing to enrollees items or services that are covered by the 
health plan, Medicare, or a State health care program, as long as both 
the health plan and contract health care provider comply with all of 
the applicable standards within one of the following four categories of 
health plans:
    (i) If the health plan is a risk-based health maintenance 
organization, competitive medical plan, or prepaid health plan under 
contract with HCFA or a State agency and operating in accordance with 
section 1876(g) or 1903(m) of the Act, under a Federal statutory 
demonstration authority, or under other Federal statutory or regulatory 
authority, the contract health care provider must not claim payment in 
any form from the Department or the State agency for items or services 
furnished in accordance with the agreement except as approved by HCFA 
or the State health care program, or otherwise shift the burden of such 
an agreement to the extent that increased payments are claimed from 
Medicare or a State health care program.
    (ii) If the health plan is a health maintenance organization, 
competitive medical plan, health care prepayment plan, prepaid health 
plan, or other health plan that has executed a contract or agreement 
with HCFA or a State health care program to receive payment for 
enrollees on a reasonable cost or similar basis, the health plan and 
contract health care provider must comply with all of the following 
four standards--
    (A) The term of the agreement between the health plan and the 
contract health care provider must be for not less than one year;
    (B) The agreement between the health plan and the contract health 
care provider must specify in advance the covered items and services to 
be furnished to enrollees, and the methodology for computing the 
payment to the contract health care provider;
    (C) The health plan must fully and accurately report, on the 
applicable cost report or other claim form filed with the Department or 
the State health care program, the amount it has paid the contract 
health care provider under the agreement for the covered items and 
services furnished to enrollees; and
    (D) The contract health care provider must not claim payment in any 
form from the Department or the State health care program for items or 
services furnished in accordance with the agreement except as approved 
by HCFA or the State health care program, or otherwise shift the burden 
of such an agreement to the extent that increased payments are claimed 
from Medicare or a State health care program.
    (iii) If the health plan is not described in paragraphs (m)(1)(i) 
or (m)(1)(ii) of this section and the contract health care provider is 
not paid on an at-risk, capitated basis, both the health plan and 
contract health care provider must comply with all of the following six 
standards--
    (A) The term of the agreement between the health plan and the 
contract health care provider must be for not less than one year;
    (B) The agreement between the health plan and the contract health 
care provider must specify in advance the covered items and services to 
be furnished to enrollees, which party is to file claims or requests 
for payment with Medicare or the State health care program for such 
items and services, and the schedule of fees the contract health care 
provider will charge for furnishing such items and services to 
enrollees;
    (C) The fee schedule contained in the agreement between the health 
plan and the contract health care provider must remain in effect 
throughout the term of the agreement, unless a fee increase results 
directly from a payment update authorized by Medicare or the State 
health care program;
    (D) The party submitting claims or requests for payment from 
Medicare or the State health care program for items and services 
furnished in accordance with the agreement must not claim or request 
payment for amounts in excess of the fee schedule;
    (E) The contract health care provider and the health plan must 
fully and accurately report on any cost report filed with Medicare or a 
State health care program the fee schedule amounts charged in 
accordance with the agreement and, upon request, will report to the 
Medicare or a State health care program the terms of the agreement and 
the amounts paid in accordance with the agreement; and
    (F) The party to the agreement, which does not have the 
responsibility under the agreement for filing claims or requests for 
payment, must not claim or 

[[Page 2137]]
request payment in any form from the Department or the State health 
care program for items or services furnished in accordance with the 
agreement, or otherwise shift the burden of such an agreement to the 
extent that increased payments are claimed from Medicare or a State 
health care program.
    (iv) If the health plan is not described in paragraphs (m)(1)(i) or 
(m)(1)(ii) of this section, and the contract health care provider is 
paid on an at-risk, capitated basis, both the health plan and contract 
health care provider must comply with all of the following five 
standards--
    (A) The term of the agreement between the health plan and the 
contract health provider must be for not less than one year;
    (B) The agreement between the health plan and the contract health 
provider must specify in advance the covered items and services to be 
furnished to enrollees and the total amount per enrollee (which may be 
expressed in a per month or other time period basis) the contract 
health care provider will be paid by the health plan for furnishing 
such items and services to enrollees and must set forth any copayments, 
if any, to be paid by enrollees to the contract health care provider 
for covered services;
    (C) The payment amount contained in the agreement between the 
health care plan and the contract health care provider must remain in 
effect throughout the term of the agreement;
    (D) The contract health care provider and the health plan must 
fully and accurately report to the Medicare and State health care 
program upon request, the terms of the agreement and the amounts paid 
in accordance with the agreement; and
    (E) The contract health care provider must not claim or request 
payment in any form from the Department, a State health care program or 
an enrollee (other than copayment amounts described in paragraph 
(m)(2)(iv)(B) of this section) and the health plan must not pay the 
contract care provider in excess of the amounts described in paragraph 
(m)(2)(iv)(B) of this section for items and services covered by the 
agreement.
    (2) For purposes of this paragraph, the terms contract health care 
provider, enrollee, and health plan have the same meaning as in 
paragraph (l)(2) of this section.

    Dated: June 21, 1995.
June Gibbs Brown,
Inspector General.

    Approved: September 12, 1995.
Donna E. Shalala,
Secretary, Department of Health and Human Services.
[FR Doc. 96-1073 Filed 1-24-96; 8:45 am]
BILLING CODE 4150-04-P